-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HZs4t0F3oqRaXo+5rLWDJxi5gm6h4MqT64qg/8MJCTJnG+7FbTYSAEjICcFykMk/ 9FJ3fr7bAxwVxI9/4ZLn+w== 0000940180-99-001099.txt : 19990920 0000940180-99-001099.hdr.sgml : 19990920 ACCESSION NUMBER: 0000940180-99-001099 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19990917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000736260 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-87271 FILM NUMBER: 99712890 BUSINESS ADDRESS: STREET 1: JOHN HANCOCK PLACE STREET 2: 200 CLARENDON STREET CITY: BOSTON STATE: MA ZIP: 02117 MAIL ADDRESS: STREET 1: JOHN HANCOCK PLACE STREET 2: 200 CLARENDON STREET CITY: BOSTON STATE: MA ZIP: 02117 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on , 1999. Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- JOHN HANCOCK FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) --------------- Delaware 6719 04-3483032 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification No.) incorporation or Classification Code organization) Number) John Hancock Place Boston, Massachusetts 02117 (617) 572-6000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Thomas E. Moloney Chief Financial Officer John Hancock Financial Services, Inc. John Hancock Place Boston, Massachusetts 02117 (617) 572-0600 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Wolcott B. Dunham, Jr., Esq. William J. Whelan III, Esq. Thomas M. Kelly, Esq. Cravath, Swaine & Moore Debevoise & Plimpton 825 Eighth Avenue 875 Third Avenue New York, NY 10019 New York, NY 10022 (212) 474-1000 (212) 909-6000 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Proposed Maximum Title of Each Class of Aggregate Amount of Securities to be Registered Offering Price (1) Registration Fee - ------------------------------------------------------------------------------ Common Stock, $.01 par value (2)........................ $2,040,000,000 $567,120 - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457. In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table. (2) Includes the Series A Junior Preferred Stock purchase rights associated with the Common Stock. --------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTE The prospectus relating to the shares of common stock to be used in connection with a United States and Canadian offering, the U.S. prospectus, is set forth following this page. The prospectus to be used in connection with a concurrent international offering, the international prospectus, will consist of the alternate page set forth following the U.S. prospectus and the balance of the pages included in the U.S. prospectus for which no alternate is provided. The U.S. prospectus and the international prospectus are identical except that they contain different front cover pages. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This preliminary prospectus + +is not an offer to sell these securities and we are not soliciting offers to + +buy these securities in any jurisdiction where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued , 2000 . Shares [JOHN HANCOCK LOGO APPEARS HERE] John Hancock Financial Services, Inc. COMMON STOCK ----------- This is an initial public offering of . shares of common stock of John Hancock Financial Services, Inc. The offering is being made in connection with the reorganization of John Hancock Mutual Life Insurance Company from a mutual life insurance company to a stock life insurance company in a process called a demutualization. In addition to these shares, an estimated . shares of our common stock will be issued to eligible policyholders of John Hancock Mutual Life Insurance Company in the reorganization. ----------- Prior to this offering there has been no public market for our common stock. We anticipate that the initial public offering price per share will be between $ . and $ . per share. ----------- We will apply to list our common stock on the New York Stock Exchange under the symbol "JHF". ----------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 12. ----------- PRICE $ . A SHARE -----------
Price Underwriting Proceeds to Discounts and to Public Commissions Company ------ ------------- -------- Per Share......................................... $ $ $ Total............................................. $ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. John Hancock Financial Services, Inc. has granted the underwriters the right to purchase up to an additional . shares to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on [ ] 2000. ----------- MORGAN STANLEY DEAN WITTER , 2000 TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 3 Risk Factors........................ 13 The Reorganization.................. 23 Use of Proceeds..................... 36 Stockholder Dividend Policy......... 37 Certain Information................. 38 Capitalization...................... 39 Selected Historical Financial Data.. 40 Unaudited Pro Forma Condensed Consolidated Financial Information........................ 45 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 54 Business............................ 93 Management.......................... 143
Page ---- Regulation......................... 152 Ownership of Common Stock.......... 160 Description of Capital Stock and Change-of-Control Related Provisions of Our Plan of Reorganization, Restated Certificate of Incorporation and By-Laws, Insurance Holding Company Laws, and Our Stockholder Rights Plan.............................. 161 Common Stock Eligible For Future Sale.............................. 166 Underwriters....................... 167 Legal Matters...................... 170 Experts............................ 170 Additional Information............. 170 Index to Consolidated Financial Statements........................ F-1 Opinion of Godfrey Perrott......... A-1
---------------- Until [ ], 2000, all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ---------------- The Plan of Reorganization governing our reorganization and our restated certificate of incorporation each prohibits: . any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock until two years after the effective date of the reorganization; and . without prior approval of our board of directors and the Massachusetts Commissioner of Insurance, any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock during the one year period following the two-year period described above. There is an exception to the foregoing prohibitions for acquisitions by a person that becomes a beneficial owner of 10% or more of our common stock as a result of our issuance of such common stock to such person as consideration in an acquisition of another entity that was initiated by us by authority of our board of directors. Any such acquisition initiated by us by authority of our board of directors would require the approval of the Massachusetts Commissioner of Insurance and the Commissioners of Insurance of California and Delaware, and, potentially, the New York Superintendent of Insurance. If any person acquires or offers to acquire 10% or more of the outstanding shares of our common stock in violation of our Plan of Reorganization, we and the Massachusetts Commissioner of Insurance would be entitled to injunctive relief. By virtue of these provisions of the Plan of Reorganization and our restated certificate of incorporation, John Hancock Financial Services, Inc. may not be subject to an acquisition by another company during the two years following the effective date of the reorganization and may only be subject to acquisition in the third year following the effective date of the reorganization with the approval of our board of directors and the Massachusetts Commissioner of Insurance. 2 PROSPECTUS SUMMARY [JOHN HANCOCK LOGO APPEARS HERE] AN INTRODUCTION We are a financial services company with a strong record of profitable growth John Hancock is one of the nation's leading financial services companies, providing a broad array of insurance and investment products and services to retail and institutional customers. By diversifying from traditional life insurance products to include investment-oriented savings products demanded by consumer and institutional markets, we have generated strong revenue and earnings growth. Our net income grew at a compound annual rate of [GRAPHIC] 21.3% from $207.2 million in 1994 to $448.5 million in 1998. Net income of $390.0 million for the six months ended June 30, 1999 grew 16.3% over net income of $335.3 million as of June 30, 1998. Our 1998 return on equity ("ROE") was 10.2%, calculated as net income divided by average equity excluding net unrealized investment gains and losses. We also evaluate our overall performance and base management's incentives on segment income. Total segment income differs from net income because it excludes items which management believes are not indicative of overall operating trends, including the effects of net realized investment gains and losses and unusual or non-recurring events and transactions. Total segment income grew at a compound annual rate of 15.0%, from $286.6 million in 1994 to $500.8 million in 1998. Total segment income of $324.1 million for the six months ended June 30, 1999 grew 24.4% over total segment income of $260.6 million for the six months ended June 30, 1998. Our 1998 total segment return on equity was 11.4%. The accompanying chart demonstrates our strong ROE as a result of our strategy of diversified products and distribution. Total assets under management grew to $130.5 billion as of June 30, 1999 up from $124.4 billion as of year-end 1998. In addition to product diversification, we have strategically expanded distribution channels to capture a broader share of the consumer market. Today's channels include career agents, broker/dealers, financial planners, banks, direct marketing and e-commerce. With our broad product diversity and distribution reach linked to the valuable John Hancock name, we believe we are positioned to continue our growth in revenue and profitability. Our brand is a key competitive asset The John Hancock brand is one of the most well recognized names in the financial services industry. We have used distinctive advertising strategies to expand our brand recognition both as a quality provider of insurance and as an expert in investment management. The very strong claims paying ratings we hold from each of the four major rating agencies further strengthen the John Hancock brand. We believe a strong brand and recognized financial strength are competitive advantages, and a key element of our strategy is to continue to enhance our brand and maintain our financial strength. 3 We operate in five segments We operate and report results in two retail and two institutional segments, as well as in a Corporate and Other Segment, as illustrated below. [JOHN HANCOCK LOGO APPEARS HERE] [CHART APPEARS HERE] Our retail products and distribution channels are diversified We recognize that different consumer groups have different financial planning needs and preferences. Our retail strategy of diversifying products and distribution, which has been in place for more than five years, is designed to meet these changing consumer needs. Demand for our variable life insurance and other asset gathering products has accelerated significantly. Today, sales of variable life insurance account for nearly 67% of our total life insurance sales. Sales of variable annuities represented more than 70% of our total annuity sales in 1998. Although sales of variable annuities have decreased relative to fixed annuities through the first six months of 1999, our total annuity sales have remained at the same level as the first six months of 1998. From 1996 through 1998, total long-term care insurance premium increased at a compound annual rate of 25% reaching $291.2 million. For the six months ended June 30, 1999, long-term care premiums increased 21.8% to $168.4 million. In 1998, net deposits and reinvestments of our mutual funds were $3.1 billion, and total mutual fund assets under management were $34.9 billion. So far in 1999, we, like many mutual fund companies, have experienced net redemptions. For the first six months of 1999, there were net redemptions of $1.4 billion attributable primarily to our financial industries and regional bank funds, the performance of which reflected weakness in these sectors. We have taken steps to restore growth in assets under management, including the development of new fund offerings and refocusing our sales organization on regional distributors. We have been pursuing diversification of distribution to address consumer preferences for selecting financial services and products through different channels. In addition to about 3,000 career agents, we sell through financial planners, broker/dealers, banks and direct channels including e-commerce. Over the past 3 1/2 years, an average of 50% of our total annuity sales, nearly 90% of our mutual fund sales and 38% of our life insurance 4 sales were made through alternative channels. With respect to life insurance sales, alternative channels include the M Financial Group, a national producer group of firms operating exclusively in the upper end of the wealth transfer and executive benefit markets. In addition to diversification of distribution, we are also making fundamental changes in our career agency system to improve productivity, reduce fixed costs and enhance service. As a key component of this strategy, in early 1999 we created a distribution subsidiary, Signator Financial Network, which will provide tailored financial planning tools and marketing support to further enable our current agents, as well as new, top-producing experienced agents, to sell products of multiple companies. Signator will also be making significant investments in agent training, expanded licensing and enhanced service and product support. Our institutional businesses are backed by a strong track record Our institutional segments offer investment products and services to retirement plans and institutional investors including 60 of the largest 100 U.S. corporate pension plans. Major products of our Guaranteed and Structured Financial Products Segment include a variety of GICs, funding agreements and other investment products. The Investment Management Segment offers investments in a variety of asset classes, including fixed maturity securities, equities, natural resources, collateralized bond obligations and mezzanine financings. We distribute institutional products through dedicated sales professionals, independent marketing specialists, consultants and investment banks. We have built our institutional asset management businesses on the foundation of our core investment expertise, including our global investment expertise. In addition to managing $48.2 billion of general account investments, we also managed advisory assets of $43.1 billion and separate account assets of $26.9 billion which back our variable product lines. We continue to work to enhance our collaborative approach across all retail and institutional product segments to streamline the development of new asset management products and services. OUR STRATEGY FOR THE FUTURE Our strategy is focused on continued growth in revenue and enhanced profitability across all our products and channels. Demutualization will support this strategy because, by converting from a mutual to a stockholder- owned company, we will have access to capital for acquisitions, which will, among other things, facilitate lowering unit costs and broadening distribution. As a stock company, we will also be better able to attract and retain talented staff. Our major strategic initiatives are: . Support and extend the John Hancock brand We will continue to commit the financial and creative resources necessary to ensure our brand leadership including, where appropriate, new sub-brands such as "Marketplace by John Hancock". . Meet changing customer needs through additional product choice To meet the needs of increasingly sophisticated consumers, we will continue to offer and enhance customized products for all of our retail and institutional product lines and services. . Expand distribution channel options for our customers Expansion of distribution will continue to be a key to our success. For example, our new Investors Partner Life subsidiary is an innovative vehicle to provide life insurance through broker/dealers. We have also recently acquired Essex Corporation, one of the nation's leading distributors of annuities through banks. 5 . Provide customized and superior distribution channel service We will continue our customized approach to supporting and servicing our distributors. . Expand in key international markets We recognize the increasingly global nature of the financial services business and intend to build on our presence in Canada and selected Asian markets, including China. . Build on our investment management strength We will build on our asset management capabilities, strong asset/liability management and financial engineering skills to expand both product offerings and fee-based asset management businesses. . Become more efficient We recognize the imperative to be an efficient provider of products, distribution and services. We have already taken significant steps to reduce costs and to further that aim we are assessing all major initiatives and have engaged outside consulting services to identify major savings opportunities. . Continue to invest in technology We expect to make significant investments in technology over the next several years to improve operational efficiency and enhance service. These initiatives include automated underwriting, digital signature processes and on-line shopping. 6 THE REORGANIZATION On August 31, 1999, the board of directors of John Hancock Mutual Life Insurance Company unanimously adopted the Plan of Reorganization, under which John Hancock Mutual Life Insurance Company would convert from a mutual life insurance company to a stock life insurance company and become a wholly-owned subsidiary of John Hancock Financial Services, Inc. Our reorganization is governed by the Massachusetts insurance law. The Massachusetts Commissioner of Insurance held a hearing on the Plan of Reorganization on November 17, 1999. At a special meeting of the policyholders of John Hancock Mutual Life Insurance Company held on November 30, 1999, the policyholders voted to approve the Plan of Reorganization. On [date of order], the Massachusetts Commissioner of Insurance issued an order approving the Plan of Reorganization. The unsatisfied conditions to the effectiveness of the Plan of Reorganization are the completion of this offering, the contribution of substantially all of the net proceeds of the offering to John Hancock Life Insurance Company, and the delivery to us by outside counsel of a legal opinion as to the tax consequences of the reorganization. The reorganization will become effective on the date of the closing of the offering. See "The Reorganization" and "Use of Proceeds." Under the Plan of Reorganization, policyholders' membership interests in John Hancock Mutual Life Insurance Company will be extinguished and in exchange eligible policyholders of John Hancock Mutual Life Insurance Company will receive shares of our common stock, policy credits or cash. See "The Reorganization--Payment of Consideration to Eligible Policyholders." Under the Plan of Reorganization, as of the effective date of the reorganization, John Hancock Life Insurance Company will be obligated to establish and operate a closed block for the benefit of the policies included therein. The policies included in the closed block are individual or joint traditional whole life insurance policies currently paying or expected to pay policy dividends and individual term life insurance policies which are in force on the effective date of the reorganization. The purpose of the closed block is to protect the policy dividend expectations of these policies after the reorganization. Unless the Massachusetts Commissioner of Insurance and, in certain circumstances, the New York Superintendent of Insurance, consent to an earlier termination, the closed block will continue in effect until the date none of the policies included in the closed block is in force. On the effective date of the reorganization, John Hancock Life Insurance Company will allocate assets to the closed block that are expected to produce cash flows which, together with anticipated revenues (principally premiums and investment income) from the policies included in the closed block, are expected to be sufficient to support those policies. The total cash flows are intended to be sufficient to provide for payment of policy benefits, taxes and direct asset acquisition and disposition costs, and for continuation of policy dividend scales payable in 1999, so long as the experience underlying such dividend scales continues. See "The Reorganization--Establishment and Operation of the Closed Block." 7 THE OFFERING Common stock offered........ . shares. Common stock outstanding after the offering......... . shares. Use of proceeds............. We expect the net proceeds of the offering to be approximately $ . million. All of the net proceeds (including any proceeds received pursuant to exercise of the underwriters' over-allotment option) other than the portion to be retained by John Hancock Financial Services, Inc., as described below, will be contributed to John Hancock Life Insurance Company and will, subject to a limited exception, be used to make cash payments to, and establish reserves with respect to policy credits for, eligible policyholders and to pay expenses related to the reorganization. We expect that the amount of net proceeds to be retained by John Hancock Financial Services, Inc. will be $200 million. We intend to use these net proceeds for general corporate purposes and to pay a dividend to our stockholders in the year following the effective date of the reorganization. However, provisions of our Plan of Reorganization may serve to reduce the amount retained to an amount less than $200 million, unless specific approval is received from the Massachusetts Commissioner of Insurance. If this amount is reduced, John Hancock Financial Services, Inc. may require additional funds, to be obtained through dividends from John Hancock Life Insurance Company or borrowings, in order to pay our first year stockholder dividend, if declared. Dividend policy............. Subject to our financial condition and declaration by our board of directors, we currently intend to pay regular annual cash dividends on our common stock. We currently intend to declare an initial annual cash dividend of $ . per share in [date]. See "Stockholder Dividend Policy." Proposed New York Stock Exchange symbol............ JHF Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to . shares of our common stock which the underwriters have the option to purchase from us to cover over- allotments. 8 SUMMARY HISTORICAL FINANCIAL DATA The following table sets forth certain summary historical consolidated financial data. The summary income statement data for each of the three years ended December 31, 1998 and balance sheet data as of December 31, 1998 and 1997 have been derived from our audited consolidated financial statements and notes thereto included elsewhere in this prospectus (the "Consolidated Financial Statements"). The following summary income statement data for the years ended December 31, 1995 and 1994 and balance sheet data as of December 31, 1996, 1995, and 1994 have been derived from our audited consolidated financial statements not included herein. The summary income statement data for the six months ended June 30, 1999 and 1998 and balance sheet data as of June 30, 1999 have been derived from our unaudited interim consolidated financial statements included in this prospectus. The summary balance sheet data as of June 30, 1998 has been derived from our unaudited interim consolidated financial statements not included herein. All unaudited interim consolidated financial data presented in the tables below reflect all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation of our consolidated financial position and results of operations for such periods. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. The following summary historical consolidated financial data has been prepared in accordance with generally accepted accounting principles ("GAAP"), except that the statutory data presented below has been prepared in accordance with applicable statutory accounting practices and was taken from our annual statements filed with insurance regulatory authorities. The following is a summary, and in order to fully understand our consolidated financial data, you should also read "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Consolidated Financial Statements and the notes thereto included elsewhere in this prospectus. In particular, those other sections of this prospectus contain information about the adoption of GAAP accounting standards and transactions affecting comparability of results of operations between periods that is not included in this summary.
For the Six Months Ended June 30, For the Year Ended December 31, ------------------ --------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (in millions) Income Statement Data: Revenues Premiums................ $1,438.3 $1,084.7 $2,197.9 $2,473.6 $2,922.5 $2,657.1 $2,473.6 Universal life and investment-type product charges................ 337.0 286.5 597.0 512.0 466.3 414.0 379.7 Net investment income... 1,716.9 1,633.0 3,330.7 3,190.7 3,223.1 3,099.4 2,910.7 Realized investment gains (losses), net.... 241.2 113.4 97.9 115.8 110.7 52.3 (79.4) Investment management revenues, commissions and other fees......... 336.9 327.2 659.7 554.7 751.3 660.0 588.7 Other revenue........... 14.3 7.2 18.8 99.5 230.9 248.3 194.7 -------- -------- -------- -------- -------- -------- -------- Total revenues......... 4,084.6 3,452.0 6,902.0 6,946.3 7,704.8 7,131.1 6,468.0 Benefits and expenses Benefits to policyholders.......... 2,445.3 1,968.4 4,152.0 4,303.1 4,676.7 4,226.5 3,925.2 Other operating costs and expenses........... 663.4 664.6 1,383.0 1,283.7 1,694.1 1,568.3 1,536.9 Amortization of deferred policy acquisition costs.................. 87.5 98.3 249.7 312.0 230.9 229.1 219.7 Dividends to policyholders.......... 247.0 231.7 473.2 457.8 435.1 496.5 416.6 -------- -------- -------- -------- -------- -------- -------- Total benefits and expenses.............. 3,443.2 2,963.0 6,257.9 6,356.6 7,036.8 6,520.4 6,098.4 -------- -------- -------- -------- -------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of accounting change................. 641.4 489.0 644.1 589.7 668.0 610.7 369.6 Income taxes............ 211.0 152.0 183.9 106.4 247.5 261.2 142.2 -------- -------- -------- -------- -------- -------- -------- Income before extraordinary item and cumulative effect of accounting change...... 430.4 337.0 460.2 483.3 420.5 349.5 227.4 Extraordinary item-- demutualization expenses, net of tax... (30.7) (1.7) (11.7) -- -- -- -- Cumulative effect of accounting change...... (9.7) -- -- -- -- -- (20.2) -------- -------- -------- -------- -------- -------- -------- Net income............. $ 390.0 $ 335.3 $ 448.5 $ 483.3 $ 420.5 $ 349.5 $ 207.2 ======== ======== ======== ======== ======== ======== ========
9
As of or for the Six Months Ended June 30, As of or for the Year Ended December 31, ------------------- ------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- --------- --------- (in millions) Balance Sheet Data: General account assets.. $54,983.1 $51,800.6 $52,000.1 $49,906.4 $48,420.6 $47,485.7 $43,778.2 Separate account assets................. 26,862.6 24,232.3 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8 Total assets............ 81,845.7 76,032.9 76,966.7 71,417.5 66,502.7 63,320.9 56,688.0 General account liabilities............ 49,184.8 46,173.8 46,416.9 44,667.7 43,265.9 42,770.6 40,224.6 Long-term debt.......... 576.3 658.8 602.7 543.3 1,037.0 934.3 605.4 Separate account liabilities............ 26,862.6 24,232.3 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8 Total liabilities....... 76,623.7 71,064.9 71,986.2 66,722.1 62,385.0 59,540.1 53,739.8 Policyholders' equity... 5,222.0 4,968.0 4,980.5 4,695.4 4,117.7 3,780.8 2,948.2 Statutory Data: Capital and surplus(1).. $ 3,758.9 $ 3,331.0 $ 3,388.7 $ 3,157.8 $ 2,856.1 $ 2,533.5 $ 2,330.0 Asset valuation reserve ("AVR")................ 1,217.6 1,278.6 1,316.9 1,191.0 1,088.4 1,035.6 852.8 --------- --------- --------- --------- --------- --------- --------- Capital and surplus plus AVR.................... $ 4,976.5 $ 4,609.6 $ 4,705.6 $ 4,348.8 $ 3,944.5 $ 3,569.1 $ 3,182.8 ========= ========= ========= ========= ========= ========= ========= Statutory net income.... $ 409.0 $ 196.4 $ 627.3 $ 414.0 $ 313.8 $ 340.8 $ 182.6
We evaluate segment performance and base management's incentives on after-tax operating income, which excludes the effect of net realized investment gains and losses and unusual or non-recurring events and transactions. Segment after- tax operating income is determined by adjusting GAAP net income for net realized investment gains and losses, including gains and losses on disposals of businesses, extraordinary items, and certain other items which management believes are not indicative of overall operating trends. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of segment after-tax operating income enhances the understanding of our results of operations by highlighting net income attributable to the normal, recurring operations of the business. However, segment after-tax operating income and total segment income are not a substitute for net income determined in accordance with GAAP. 10
For the Six Months Ended June For the Year Ended 30, December 31, -------------- ------------------------ 1999 1998 1998 1997 1996 ------ ------ ------- ------- ------ (in millions) Segment Data:(2) Segment after-tax operating income: Protection Segment................. $ 89.2 $ 84.3 $ 172.3 $ 158.1 $197.3 Asset Gathering Segment............ 61.7 58.0 111.1 93.3 55.7 ------ ------ ------- ------- ------ Total Retail..................... 150.9 142.3 283.4 251.4 253.0 Guaranteed and Structured Financial Products Segment.................. 120.6 76.3 145.7 138.5 155.4 Investment Management Segment...... 17.2 14.1 15.4 17.2 21.6 ------ ------ ------- ------- ------ Total Institutional.............. 137.8 90.4 161.1 155.7 177.0 Corporate and Other Segment........ 35.4 27.9 56.3 39.4 20.2 ------ ------ ------- ------- ------ Total segment income................. 324.1 260.6 500.8 446.5 450.2 After-tax adjustments: Realized investment gains, net..... 160.6 68.5 93.9 104.9 80.6 Class action lawsuit............... (39.1) -- (150.0) (112.5) (90.0) Restructuring charge............... (3.8) Benefit from pension participating contract modification............. -- -- -- 9.1 -- Surplus tax........................ (11.4) 7.9 15.5 35.3 (20.3) ------ ------ ------- ------- ------ Total after-tax adjustments...... 106.3 76.4 (40.6) 36.8 (29.7) ------ ------ ------- ------- ------ GAAP Reported: Income before extraordinary item and cumulative effect of accounting change................. 430.4 337.0 460.2 483.3 420.5 Extraordinary item-demutualization expenses, net of tax.............. (30.7) (1.7) (11.7) -- -- Cumulative effect of accounting change............................ (9.7) -- -- -- -- ------ ------ ------- ------- ------ Net income......................... $390.0 $335.3 $ 448.5 $ 483.3 $420.5 ====== ====== ======= ======= ======
- -------- (1) In accordance with accounting practices prescribed or permitted by the Massachusetts Division of Insurance, statutory capital and surplus includes $450.0 million in total principal amount of our surplus notes outstanding. (2) Our GAAP reported net income was significantly affected by net realized investment gains and losses and unusual or non-recurring events and transactions presented above as after-tax adjustments. In all periods, net realized investment gains and losses, including gains and losses on our disposed businesses, and the surplus tax have been excluded from segment income. We have been subject to the surplus tax imposed on mutual life insurance companies which disallows a portion of a mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, we will no longer be subject to surplus tax. During 1997, we entered into a court approved settlement relating to a class action lawsuit involving individual life insurance policies sold from 1979 through 1996, as specified elsewhere in this prospectus. In entering into the settlement, we specifically denied any wrongdoing. The reserve held in connection with the settlement to provide for relief to class members and for legal and administrative costs associated with the settlement amounted to $466.5 million, $436.6 million and $308.8 million at June 30, 1999, December 31, 1998 and December 31, 1997, respectively. Given the uncertainties associated with estimating the reserve, it is reasonably possible that the final cost of the settlement could differ materially from the amount previously provided. 11 During 1999, we recorded a $3.8 million after-tax restructuring charge in accordance with our plans to reduce the cost structure of our mutual fund operations. This charge primarily included accruals for severance and related benefits for staff reductions. The restructuring liability at June 30, 1999 was $5.9 million and is expected to be paid by March 2002. During 1997, a participating pension reinsurance contractholder requested the distribution of a portion of contract funds. At the time of the request, the contract stated that these funds were to be paid out over a specified number of years. However, we agreed to distribute a portion of the contractholder's funds in exchange for the right to retain the tax credits that resulted from the distribution. The contractual amendment resulted in the recognition of a $9.1 million after-tax gain. 12 RISK FACTORS An investment in our common stock involves a number of risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in shares of our common stock. Any of the risks described below could result in a significant or material adverse effect on our business, financial condition or results of operations, and a corresponding decline in the market price of our common stock. A significant downgrade in our ratings for claims-paying ability and financial strength may lead to policy and contract withdrawals and materially harm our ability to market our products. We believe ratings for claims paying ability and financial strength are one of the most important factors in maintaining a competitive position in the markets in which we do business. A significant downgrade in ratings, or the potential for such a downgrade, might: . result in our existing policyholders withdrawing the cash surrender value of their policies, which would require us to liquidate long-term assets, possibly at a loss; . cause potential new customers to select other companies from which to purchase their financial products or services; and . adversely affect our relationships with distributors of our products. In our institutional business, single premium annuities, GICs and funding agreements are significant products for our Guaranteed and Structured Financial Products Segment. The Department of Labor requires pension plans to purchase single premium annuities from the "safest available" insurer. Ratings are also generally an important consideration in the purchase of GICs and funding agreements by pension plans and other institutions. Accordingly, a ratings downgrade would materially harm our ability to sell single premium annuities, GICs and funding agreements in these markets. See "Business-- Ratings." Elimination of Federal tax benefits for our products and other changes in laws and regulations may adversely affect sales of our insurance and investment advisory products. The attractiveness to our customers of many of our products is due, in part, to favorable tax treatment. Changes to tax laws may affect the attractiveness of these products. From time to time, governments in the jurisdictions in which we do business, including particularly the United States Federal government, have considered proposals for tax law changes that could adversely affect our products. These proposals have included, for example, proposals to tax the undistributed increase in value of life insurance policies and proposals to eliminate or significantly reduce the Federal estate tax. The enactment of any such tax legislation would likely result in a significant reduction in sales of our currently tax-favored products. State insurance authorities supervise and regulate our business throughout the United States. State insurance laws and regulations are generally intended to protect policyholders, not holders of our common stock. These laws establish state insurance departments with broad powers to regulate many aspects of our insurance business. State legislatures and the National Association of Insurance Commissioners are continually re-examining existing insurance laws and regulations and may impose changes in the future that materially affect the manner in which we conduct our business and the products we may offer. State legislatures often consider other issues that may adversely affect our business, such as proposed community reinvestment legislation in California and other states that could cause us to allocate assets in a manner that results in lower returns or greater risks than we would otherwise choose. The U.S. Federal government does not directly regulate the insurance business. However, Federal legislation and administrative policies can significantly and adversely affect the insurance industry generally, and us in particular. These areas include pension and employee benefit plan regulation, financial services regulation, 13 taxation, and the regulation of securities products and transactions. Changes in the interpretations of existing laws and the passage of new legislation may intensify competition within the financial services industry or adversely affect our ability to sell new policies and our claims exposure on existing policies. Our variable life insurance and annuity businesses, our mutual fund business and our investment advisory business are subject to Federal, state and foreign securities laws and regulations. The laws and regulations governing these operations are primarily intended to protect investors in the securities markets or investment advisory or brokerage clients and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the conduct of business for failure to comply with such laws and regulations. Changes to these laws and regulations could have a material adverse effect on our investment advisory, broker/dealer or transfer agent operations and the profitability of our company as a whole. See "Regulation" for a detailed discussion of the regulations that are applicable to our business. As a holding company, we will depend on dividends from our subsidiaries and the Massachusetts insurance law may restrict the ability of John Hancock Life Insurance Company to pay dividends to us. After the effective date of the reorganization, John Hancock Financial Services, Inc. will be an insurance holding company. The assets of John Hancock Financial Services, Inc. will consist initially of 100% of the outstanding capital stock of John Hancock Life Insurance Company and a portion of the net proceeds of the offering. We will depend principally on dividends from John Hancock Life Insurance Company to satisfy our financial obligations, pay operating expenses and pay dividends to our stockholders. Following the reorganization, John Hancock Life Insurance Company will remain a Massachusetts domestic life insurer subject to Massachusetts law and regulated by the Massachusetts Division of Insurance. The Massachusetts insurance law limits how and when John Hancock Life Insurance Company can pay shareholder dividends. Following the reorganization, John Hancock Life Insurance Company may be commercially domiciled in New York and, if so, dividend payments may also be subject to New York's holding company act as well as Massachusetts law. If John Hancock Life Insurance Company is unable to pay shareholder dividends in the future, our ability to pay dividends to our stockholders and meet our cash obligations would be jeopardized. See "Stockholder Dividend Policy," "Regulation--Regulation of Dividends and Other Payments from Insurance Subsidiaries" and Note 10 to our Consolidated Financial Statements for more information on the legal limitations on the ability of John Hancock Life Insurance Company to pay dividends to us. We face increasing competition in our retail and institutional businesses from mutual fund companies, banks and investment management firms as well as from other insurance companies. We face strong and increasing competition in all our business lines. Our competitors include mutual fund companies, banks, investment management firms and other insurance companies, many of whom are larger, have greater financial and other resources, are regulated differently and offer alternative products or more competitive pricing than us. Recent industry consolidation, including acquisitions of insurance and other financial services companies in the United States by international companies, has resulted in larger competitors with even greater financial resources. This increasing competition may harm our ability to maintain or increase our profitability. In our retail businesses, we also compete for productive agents and other distributors. We believe that our success in competing for agents and distributors depends on factors such as our financial strength and on the services we provide to, and the relationships we develop, with these agents and distributors. We cannot guarantee that in the future we will be able to recruit and retain productive agents and distributors of our insurance, annuity and mutual fund products, and if we are not able to do so our sales and net income would suffer. See "Business--Protection Segment--Competition" and "Business--Asset Gathering Segment--Competition." We believe that investment returns and risk management are key factors to our growth in our guaranteed and structured financial products and institutional investment management businesses. We will not be able to accumulate and retain assets under management if our investment results underperform the market or the competition. Such underperformance would likely result in asset withdrawals and reduced sales. 14 Banks have an existing customer base for financial services products. Currently, there is legislation pending in the U.S. Congress that would have the effect, if enacted into law, of repealing or modifying federal laws that limit the ability of banks to engage in securities-related businesses and restrict banks from being affiliated with insurance companies. The ability of banks to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of our products by substantially increasing the number and financial strength of potential competitors. Banks may also pose increasing competition for our annuity business because, as a result of recent decisions of the Supreme Court and a number of Federal District Courts, national banks are now permitted to sell annuity products of life insurance companies in certain circumstances. See "Regulation--Federal Insurance Initiatives and Litigation." A decline or increased volatility in the securities markets, and other economic factors, may adversely affect our business, particularly our variable life insurance, mutual fund, variable annuity and investment management businesses. Fluctuations in the securities markets and other economic factors may adversely affect sales of our variable annuities and mutual funds, our variable life insurance policies and our institutional investment products. In particular, a protracted and/or steep decline in the stock or bond markets would likely reduce the popularity of these products. The level of volatility in the markets in which we invest and the overall investment returns earned in those markets also affect our profitability. In particular, our assets, our earnings and our ability to generate new sales in recent years have increased due to significant growth in the retirement- oriented investment market and uncommonly strong stock market appreciation, coupled with solid bond market appreciation spurred by declining interest rates. We cannot guarantee that these economic and market trends will continue, and if they do not, our net income, revenues and assets will likely decline significantly. Our life insurance sales are highly dependent on a third-party distribution relationship. We distribute our life insurance products through a variety of distribution channels, including our own internal sales force and independent producers and brokers. Certain independent producers and brokers have contributed significantly to our sales in recent years. In particular, we have a relationship with M Financial Holding, Inc. and its member firms (the "M Financial Group"), a national producer group founded in 1978 of approximately 100 life insurance producing firms with over 400 individual producers operating exclusively in the upper end of the wealth transfer and executive benefit markets. M Financial Group member firms have accounted for approximately 36% of our total life insurance sales on average over the past three and one-half years. We provide many services to M Financial Group producers and our relationship with the M Financial Group includes a reinsurance agreement under which M Life Insurance Company reinsures 50% of most of our policies that its members sell. During the first six months of 1999, and over the last three full years, we believe John Hancock has been either the first or second largest provider of products to the M Financial Group. However, there can be no assurance that our relationship with the M Financial Group will continue in its current form, and an interruption in this relationship could significantly reduce our life insurance sales and our net income. Interest rate volatility may adversely affect our profitability. Changes in interest rates affect many aspects of our business and can significantly affect our profitability. In periods of increasing interest rates, withdrawals of life insurance policies and fixed annuity contracts, including policy loans and surrenders, and transfers to separate account variable options may increase as policyholders choose to forego insurance protection and seek higher investment returns. Obtaining cash to satisfy these obligations may require us to liquidate fixed income investment assets at a time when the market prices for those assets are depressed because interest rates have increased. This may result in realized investment losses. Regardless of whether we realize an investment loss, these cash payments would result in a decrease in total invested assets, and a decrease in net income. Premature withdrawals may cause us to accelerate amortization of policy acquisition costs, which would also reduce our net income. As of June 30, 1999, we had approximately 15 $16.7 billion in cash values on individual life insurance policies in which policyholders have rights to policy loans. Moreover, as of June 30, 1999, approximately 50.1% of our invested assets consisted of private placement fixed maturity securities and mortgage loans, which are relatively illiquid investment classes. This concentration of investments in these asset classes increases the risk that we will incur losses if we need to sell assets to raise cash during a period of rising interest rates. Conversely, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, repayment of policy loans and increases in persistency, or a higher percentage of insurance policies remaining in force from year to year. During such a period, our investment earnings will be lower because the interest earnings on our fixed income investments likely will have declined in parallel with market interest rates. In addition, mortgages and bonds in our investment portfolio will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates, and we may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, during periods of declining interest rates, our profitability may suffer as the result of a decrease in the spread between interest rates credited to policyholders and returns on our investment portfolio. The profitability of our spread-based businesses depends in large part upon our ability to manage interest rate spreads, and the credit and other risks inherent in our investment portfolio. We cannot guarantee, however, that we will manage successfully our interest rate spreads or the potential negative impact of those risks. Our net income and revenues will suffer if customers surrender annuities and variable and universal life insurance policies or redeem shares of our open- end mutual funds. Surrenders of our annuities and variable and universal life insurance policies, and redemption of our open-end mutual fund shares, can result in losses and decreased revenues. Of our total assets under management for annuities, variable and universal life insurance policies, as of June 30, 1999, approximately 87% are not subject to any surrender penalties, and approximately 60.3% of total mutual fund assets under management are not subject to contingent deferred sales charges. The surrender charges that are imposed on our annuities and variable and universal life insurance policies typically decline over a period of years and ultimately expire after six or seven years. The deferred sales charges on our Class B open-end mutual fund shares typically decline to zero over a six-year period. Surrenders and redemptions could require us to dispose of assets earlier than we had planned, possibly at a loss. Redemptions of open-end mutual fund shares would decrease our assets under management, and thus decrease our mutual fund fee income. Moreover, surrenders and redemptions require faster amortization of the acquisition costs or commissions associated with the original sale of a product, thus reducing our net income. The independent directors of our variable series trust (VST) and of our mutual funds could reduce the compensation paid to us, or could terminate our contracts to manage the funds. Our VST and each of the mutual funds for which we act as adviser or sub- adviser is registered under the Investment Company Act and governed by a board of directors. The Investment Company Act requires that at least 40% of these directors be unaffiliated with us. The independent directors have the duty of annually renewing the contract with the adviser or sub-adviser to manage the fund. Under these contracts, we are paid advisory and management fees. Directors have a fiduciary duty to act in the best interests of the shareholders of the investment companies. Either the directors or the shareholders may terminate the advisory contract with us and move the assets to another adviser. They may also deem it to be in the best interests of shareholders to make decisions adverse to John Hancock Financial Services, Inc., including reducing the compensation paid to us or limiting our ability to transfer the contract. Should any of these events occur, they could reduce the net income of our retail variable life insurance and asset gathering businesses. 16 Under our Plan of Reorganization, we will be required to establish the "closed block," a special arrangement for the benefit of a group of our policyholders. We may have to fund deficiencies in our closed block, and any overfunding of the closed block will benefit only the holders of policies included in the closed block, not our stockholders. On the effective date of the reorganization, John Hancock Life Insurance Company will allocate assets to the "closed block," a special arrangement designed to protect the reasonable policy dividend expectations of a group of our policyholders. These assets are expected to produce cash flows which, together with anticipated revenues from the life insurance policies included in the closed block, are expected to be reasonably sufficient to support the policies included in the closed block. The policies included in the closed block are individual or joint traditional whole life insurance policies of John Hancock Mutual Life Insurance Company that are currently paying or expected to pay policy dividends, and individual term life insurance policies that are in force on the effective date of the reorganization. However, if the closed block assets, the cash flows generated by the closed block assets, and the anticipated revenues from the policies included in the closed block are not sufficient to support those policies, as required under the Plan of Reorganization, we will be required to fund the shortfall. Even if they are sufficient, we may choose, for business reasons, to support dividend payments on policies in the closed block with our general account funds. If we were to make substantial payments to the benefit of the closed block policies for either reason, less assets and net income would be available to our stockholders, and the market price of our common stock may decline. See "The Reorganization" for a description of the establishment and funding of the closed block and the policies included in the closed block. The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues from the closed block business will benefit only the holders of the policies in the closed block. To the extent the closed block has been overfunded, dividends payable in respect of the policies included in the closed block may be greater than they would be in the absence of a closed block. Any excess earnings or excess funding will be available for distribution over time to closed block policyholders but will not be available to our stockholders. There are a number of provisions of our Plan of Reorganization, our restated certificate of incorporation and by-laws, laws applicable to us, agreements that we have entered into with our senior management and our stockholder rights plan that will prevent or discourage takeovers and business combinations that our stockholders might otherwise consider to be in their best interest. The Plan of Reorganization governing our reorganization and our restated certificate of incorporation each prohibits: . any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock until two years after the effective date of the reorganization; and . without prior approval of our board of directors and the Massachusetts Commissioner of Insurance, any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock during the one year period following the two-year period described above. By virtue of these provisions of the Plan of Reorganization and our restated certificate of incorporation, John Hancock Financial Services, Inc. may not be subject to an acquisition by another company during the two years following the effective date of the reorganization and may only be subject to acquisition in the third year 17 following the effective date of the reorganization with the approval of our board of directors and the Massachusetts Commissioner of Insurance. Other anti-takeover measures that may deter or impede an acquisition of John Hancock Financial Services, Inc. include: . the Massachusetts, California, Delaware and, potentially, New York insurance holding company laws; . provisions of our restated certificate of incorporation and by-laws; . Section 203 of the Delaware General Corporation Law; . termination agreements with members of senior management; and . our stockholder rights plan. See "Description of Capital Stock and Change-of-Control Related Provisions of Our Plan of Reorganization, Restated Certificate of Incorporation and By- Laws, Insurance Holding Company Laws and our Stockholder Rights Plan" for a more complete summary of the antitakeover measures applicable to us. We will face losses if the claims on our insurance products, or reductions in rates of mortality on our annuity products, are greater than we projected. Our insurance and annuity products may be priced inadequately to support the amount of claims ultimately required to be paid or the longevity of our annuitants. The profitability of these products is based in large part on the accuracy of our pricing assumptions. Some of our relatively newer product offerings, including our long-term care insurance products, do not have the claims experience history of our traditional life insurance products. As a result, our ability to predict claims for these products is limited. Our results of operations depend significantly on the amount of claims paid under our insurance policies, and vary from period to period depending on the amount of claims incurred. Under some of our life insurance policies, we retain $10 million of mortality risk, or $20 million for a second-to-die policy. The number and magnitude of claims incurred in any period is outside of our control and material variances, including a small number of large claims, in any given period may adversely affect our net income and the price of our common stock. In addition, reductions in rates of mortality occur continuously, and we price our annuity products anticipating future improvement in longevity. However, medical research or new technology may produce longevity improvements that are greater than we have anticipated. We cannot guarantee that our actual claims or longevity experience will match the assumptions made in our pricing. If our actual claims experience is materially worse than assumed, or improvements in longevity are materially greater than anticipated, our profitability would be reduced. We may be adversely affected if our Year 2000 efforts are not successful. Any failure to identify all of our Year 2000 issues, or to complete our scheduled modifications and conversions in a timely and cost-effective manner, could disrupt our business. Year 2000 issues result from computer programs being written using two digits rather than four to define the applicable year and century. Many of our computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in an information technology ("IT") system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. In addition, non-IT systems including, but not limited to, security alarms, elevators and telephones are subject to malfunction due to their dependence on embedded technology such as microcontrollers for proper operation. The correction of our Year 2000 issues in IT and non-IT systems will be complex and costly. In addition, we cannot guarantee that the systems of other companies upon which we rely will be timely converted, or that a failure to convert by another company, or a 18 conversion that is incompatible with our systems, would not disrupt our business. If our Year 2000 issues were unresolved, potential consequences would include, among other possibilities, the inability to accurately and timely process claims, update customers' accounts; process financial transactions; bill customers; assess exposure to risks; determine liquidity requirements or report accurate data to management, customers, regulators and others; as well as business interruptions or shutdowns; financial losses; reputational harm; increased scrutiny by regulators; and litigation related to Year 2000 issues. We are attempting to limit the potential impact of the Year 2000 issue by monitoring the progress of our own Year 2000 project and those of our material business partners and by developing contingency plans. However, we cannot guarantee that we will be able to resolve all of our Year 2000 issues. Any critical unresolved Year 2000 issues could have a material adverse effect on our business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000." We face risks relating to our investment portfolio. The market value of our investments may fluctuate. As of June 30, 1999, 64.2% of our general account investment portfolio consisted of fixed maturity securities and 21.5% consisted of commercial and agricultural mortgages. The market values of these assets vary with changing economic and market conditions and interest rates. Defaults on fixed maturity securities in our portfolio may reduce our net income. Issuers of the fixed maturity securities that we own in our general account may fail to make scheduled payments of interest and principal on time or altogether. As of June 30, 1999 and December 31, 1998 and 1997, respectively, 64.2% ($30,980.2 million), 61.9% ($28,200.4 million) and 62.4% ($27,174.9 million) of our total invested assets consisted of fixed maturity securities, and approximately 8.1% ($3,927.3 million) as of June 30, 1999, 8.3% ($3,766.9 million) as of December 31, 1998 and 8.3% ($3,601.7 million) as of December 31, 1997, of our total invested assets consisted of below investment grade fixed maturity securities. Below investment grade securities generally provide higher expected returns, but also present increased potential for default. A major economic downturn could produce higher than average issuer defaults which could cause our investment returns and our net income to decline. Delinquencies and balloon payments on mortgage loans may adversely affect our profitability. Our mortgage loans face both delinquency and default risk. Mortgage loans of $10,373.7 million as of June 30, 1999 represented approximately 21.5% of our total invested assets. As of June 30 and March 31, 1999, loans that were either delinquent or in foreclosure totaled 0.61% and 0.89%, respectively, of our mortgage loan portfolio, compared to an industry average of 0.47% as of March 31, 1999, as reported by the American Council of Life Insurance. The delinquency rate of our mortgage loan portfolio may increase, resulting in investment losses greater than projected by us. As of June 30, 1999, approximately 91.1% of our mortgage portfolio had balloon payment maturity features, meaning that the loans do not fully amortize over the term of the loan and the unamortized principal amount is due at maturity of the loan. Where most or all of the principal is to be repaid at maturity, the amount of loss on a default is generally greater, as a percentage of the principal amount, than on amortizing mortgage loans that default. This high concentration of mortgages with balloon payment maturity features increases the likelihood and potential severity of losses in our mortgage portfolio. Privately placed fixed maturity securities and mortgage loans typically are significantly less liquid than public investments. The secondary market for private fixed maturity securities and mortgage loans is generally limited to qualified institutional buyers. As of June 30, 1999 these asset classes represented approximately 50.1% of the carrying value of our total invested assets. If we require significant amounts of cash at short notice, we may have difficulty selling these investments at attractive prices or in a timely manner or both. 19 Our "other invested assets" are subject to price volatility. While the investment assets included in our "other invested assets" category, primarily leases, private equity and independent power projects where we invest through joint ventures or partnerships, have performed unusually well over the past three years, their performance is highly contingent upon the economic performance of the underlying entities or assets. There can be no assurance that we will continue to earn income from our "other invested assets" at levels comparable to the past three years. The market price of our common stock may decline if persons receiving common stock as compensation in the reorganization sell their stock in the public market. Policyholders who receive shares in the reorganization will not be required to pay any cash purchase price for those shares, and can generally freely sell their shares in the public market after receiving those shares. The sale of substantial amounts of common stock in the public market, or the perception that such sales could occur, could harm prevailing market prices for our common stock. We believe the following factors may increase selling pressure on our common stock: . Some policyholders, in particular owners of larger policies, who do not elect to receive common stock compensation in the reorganization are nevertheless highly likely to receive common stock compensation because of limits on the amount of cash available for cash payments to eligible policyholders. See "The Reorganization--Payment of Consideration to Eligible Policyholders--Limit on Amounts Available for Cash Compensation." Those policyholders who did not elect to receive common stock may be especially likely to sell the shares of common stock they receive in the reorganization in order to realize cash proceeds. . We will provide a program for the public sale of our common stock, at prevailing market prices and without paying brokerage commissions or similar expenses, to allow each of our stockholders who owns 99 or fewer shares of common stock to sell those shares. This program will begin no sooner than the first business day after the six-month anniversary, and no later than the first business day after the twelve-month anniversary, of the effective date of the reorganization, and will continue for at least 90 days. Policyholders who receive 100 or more shares of common stock in the reorganization are not eligible for the commission-free sales program and therefore might not delay selling their shares until the commencement of that program. . Some policyholders may be fiduciaries of pension plans that are subject to ERISA. Those policyholders, particularly if they originally did not elect to receive common stock compensation, may determine that the exercise of their fiduciary duties requires them to sell promptly the shares of common stock received in the reorganization. We may experience volatility in net income due to changes in standards for accounting for derivatives. We may experience volatility in net income due to changes in standards for accounting for derivatives. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. The FASB recently deferred the effective date of SFAS No. 133 until 2001. SFAS No. 133 will require us to report all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on its intended use. Derivatives not used in hedging activities must be adjusted to fair value through earnings. If the derivative is a hedge, changes in the fair value of the derivative will either be offset in earnings against the change in the fair value of the hedged item or recognized in other comprehensive income until the hedged item affects earnings. The portion of a derivative's change in fair value that is not offset by the change in fair value of the hedged item will be recognized immediately in earnings. We anticipate that we will adopt SFAS No. 133 effective January 1, 2001. We are currently evaluating the effect of adoption and presently cannot predict its likely impact on our financial condition or results of operations. 20 Our United States insurance companies are subject to risk-based capital requirements and possible guaranty fund assessments. The National Association of Insurance Commissioners has established risk- based capital standards for life insurance companies as well as a model act to apply such standards at the state level. If an insurer's risk-based capital falls below specified levels, the insurer would be subject to different degrees of regulatory action depending upon the level. Possible regulatory actions range from requiring the insurer to propose actions to correct the risk-based capital deficiency to placing the insurer under regulatory control. If the risk-based capital level of any of our United States insurance company subsidiaries falls below the specified risk-based capital levels, we may be required to allocate additional capital to the subsidiary. All fifty states of the United States, the District of Columbia and Puerto Rico have insurance laws requiring companies licensed to do life or health insurance business within those jurisdictions to participate as members of the state's life and health insurance guaranty associations. These associations levy assessments on all member insurers based on the proportionate share of the premiums written by each member in the lines of business in which an impaired or insolvent insurer is engaged. While the amount of future assessments cannot be accurately predicted, we or John Hancock Life Insurance Company may be required to allocate funds to satisfy unanticipated assessments in the future. This may adversely affect our results of operations for the period when the assessment occurs. The National Association of Insurance Commissioners' codification of statutory accounting practices may adversely affect the statutory surplus of John Hancock Life Insurance Company. Proposed changes in states' statutory accounting practices for insurance companies may adversely affect the statutory surplus of John Hancock Life Insurance Company. In March 1998, the National Association of Insurance Commissioners adopted model statutory accounting practices, which are effective in 2001. The adoption of the new statutory accounting practices will likely change, to some extent, prescribed statutory accounting practices that we use to prepare our statutory financial statements. Statutory accounting practices determine, among other things, the amount of surplus of our insurance subsidiaries and thus determine, in part, the amount of funds available to pay dividends to us. Each state must adopt this model before it becomes the prescribed statutory basis of accounting for insurance companies domesticated in that state. Accordingly, before the new statutory accounting practices apply to John Hancock Life Insurance Company, the Massachusetts Division of Insurance must adopt the model. At this time the impact of any such changes on John Hancock Life Insurance Company is not expected to be material. However, work continues by insurance regulators, public accounting firms, and the insurance industry to finalize interpretations of the model. The ongoing implementation work could cause changes in final interpretations that could ultimately lead to an adverse effect on the statutory surplus or statutory net income of John Hancock Life Insurance Company. We may be unable to retain personnel who are key to our business. The success of our business is dependent, to a large extent, on our ability to attract and retain key employees, in particular our senior officers, experienced portfolio managers, mutual fund managers and sales executives. Competition for such persons is intense. In general, our employees are not subject to employment contracts or non-compete arrangements. We face risks from assumed reinsurance business in respect of personal accident insurance and the occupational accident component of workers compensation insurance. Through our group health insurance operations, which we sold in 1997, we entered into a number of reinsurance arrangements in respect of personal accident insurance and the occupational accident component of workers compensation insurance, a portion of which was originated through a pool managed by Unicover Managers, Inc. Under these arrangements, we both assumed risks as a reinsurer, and also passed 95% of these risks on to other companies. This business had originally been reinsured by a number of different companies, and has become the subject of wide-spread disputes. The disputes concern the placement of the business with 21 reinsurers and recovery of the reinsurance. We are engaged in disputes, including a number of arbitration proceedings, in respect of this business. We cannot predict the outcome of these disputes because we, like the other companies involved, are still in the fact-gathering and investigative stages. The risk to us is that the companies that reinsured the business from us may seek to avoid their reinsurance obligations. We believe that we have a reasonable legal position in this matter. However, if our reinsurers are successful in avoiding the liabilities under their reinsurance contracts, and we are not similarly successful in avoiding these liabilities under the business reinsured by us, or if we become subject to or determine to participate in a global settlement of these disputes, we may suffer losses which, should they arise, could have a material adverse effect on our financial condition or results of operations. Litigation and regulatory proceedings may result in financial losses, harm our reputation and divert management resources. We are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming us as a defendant ordinarily involves our activities as a provider of insurance protection, as well as an investment adviser, employer and taxpayer. In addition, state regulatory bodies, the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and other regulatory bodies regularly make inquiries and, from time to time, conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, and laws governing the activities of broker/dealers. However, litigation and investigations may arise in the future that result in financial losses, harm our reputation or require the dedication of significant management resources. On December 31, 1997 the United States District Court for the District of Massachusetts approved a settlement of a nationwide class action lawsuit against John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company and John Hancock Distributors, Inc. The lawsuit alleged various market conduct and sales practice-related matters. See "Business-- Legal Proceedings" for a more complete description of this lawsuit. We have established reserves based upon an estimate of the costs of the class action settlement. However, we are still in the early stages of the alternative dispute resolution phase of the settlement. The cost of the class action settlement may prove to be greater than we have estimated. In addition, other market conduct or sales practice-related litigation may arise in the future with respect to classes of policies or time periods not covered by the class action settlement. Accordingly, there can be no assurance that claims of the nature covered by the class action settlement will not arise in the future, or that if they do that they will not result in a material adverse effect on our business, financial condition or results of operations. We face unforeseen liabilities arising from our acquisitions and dispositions of businesses. We have engaged in numerous dispositions and acquisitions of businesses in the past, and expect to continue to do so in the future. The businesses we have sold include property and casualty insurance operations, broker/dealer operations and our group benefits operations. There could be unforeseen liabilities that arise out of the sold businesses or out of businesses that we acquire in the future. 22 THE REORGANIZATION In the following section, we provide a summary of the reorganization and of the Plan of Reorganization. The following is just a summary and is qualified by reference to the actual terms of the Plan of Reorganization. A copy of the Plan of Reorganization has been filed as an exhibit to the registration statement of which this prospectus forms a part. The Plan of Reorganization Adoption and Approval of the Plan of Reorganization The board of directors of John Hancock Mutual Life Insurance Company unanimously adopted the Plan of Reorganization on August 31, 1999. The principal feature of the Plan of Reorganization is the conversion of John Hancock Mutual Life Insurance Company from a mutual life insurance company to a stock life insurance company, a form of conversion known as "demutualization." Because John Hancock Mutual Life Insurance Company is an insurance company organized under the laws of Massachusetts, the reorganization is governed by Massachusetts law. Massachusetts law requires that the Plan of Reorganization be approved by the policyholders of John Hancock Mutual Life Insurance Company by a vote of two-thirds of the votes cast by those voting, and also by the Massachusetts Commissioner of Insurance. . The policyholders of John Hancock Mutual Life Insurance Company approved the Plan of Reorganization at a special meeting held on November 30, 1999. The vote at the special meeting was . votes in favor, . votes opposed. . The Massachusetts Commissioner of Insurance held a hearing on the Plan of Reorganization on November 17, 1999, and issued an order approving the Plan of Reorganization on [date]. In approving the Plan of Reorganization, the Massachusetts Commissioner of Insurance found that the Plan of Reorganization conforms to the requirements of the Massachusetts insurance law governing demutualization of domestic life insurance companies and is not prejudicial to policyholders or the insuring public. . The sole conditions to the effectiveness of the Plan of Reorganization that remain unsatisfied are the completion of the offering, the contribution of substantially all of the net proceeds of the offering to John Hancock Life Insurance Company, and the delivery to us by outside counsel of a legal opinion as to the tax consequences of the reorganization. Steps to the Reorganization The reorganization of John Hancock Mutual Life Insurance Company includes the following steps, all of which will occur on the effective date: . John Hancock Mutual Life Insurance Company will convert from a mutual life insurance company to a stock life insurance company and become a wholly owned subsidiary of John Hancock Financial Services, Inc., which is a holding company; . all membership interests of John Hancock Mutual Life Insurance Company's policyholders in John Hancock Mutual Life Insurance Company will be extinguished; . eligible policyholders of John Hancock Mutual Life Insurance Company will be entitled to receive shares of our common stock, cash or policy credits as compensation for the extinguishment of their John Hancock Mutual Life Insurance Company membership interests; . John Hancock Mutual Life Insurance Company will change its name to John Hancock Life Insurance Company; 23 . John Hancock Life Insurance Company will surrender to John Hancock Financial Services, Inc., and John Hancock Financial Services, Inc. will cancel, all of the common stock previously issued by John Hancock Financial Services, Inc. to John Hancock Mutual Life Insurance Company (given that John Hancock Financial Services, Inc. was originally established as a wholly-owned subsidiary of John Hancock Mutual Life Insurance Company); . John Hancock Life Insurance Company will issue to John Hancock Financial Services, Inc. shares of John Hancock Life Insurance Company common stock; . shares of our stock will be sold to the public pursuant to the offering; and . John Hancock Financial Services, Inc. will contribute to John Hancock Life Insurance Company all of the net proceeds from the offering, other than the portion to be retained by John Hancock Financial Services, Inc., as set forth in "Use of Proceeds." When the reorganization is complete, John Hancock Financial Services, Inc. will be a publicly held holding company. John Hancock Financial Services, Inc. will own 100% of the stock of John Hancock Life Insurance Company, and John Hancock Life Insurance Company will continue to own each of the subsidiaries that John Hancock Mutual Life Insurance Company owned prior to the reorganization, other than John Hancock Financial Services, Inc. 24 The following chart illustrates our corporate structure prior to and immediately following the reorganization. [CURRENT STRUCTURE APPEARS HERE] 25 Purposes of the Reorganization Our primary reason for converting to a stock company through demutualization is to improve our access to the capital markets in order to expand our business in a changing marketplace. Access to the capital markets will allow us to: . make acquisitions using stock as currency; . develop and grow business opportunities; . invest in new technology, customer service, new products and distribution channels; . reduce unit expenses through economies of scale made possible by growth; . increase financial flexibility to maintain financial ratings and stability; and . better attract, retain, and provide incentives to management in a fashion consistent with other stock life insurance companies. The holding company structure adopted as part of the reorganization should provide several benefits. This structure affords increased flexibility in raising additional debt and equity capital and provides the opportunity to pursue growth, either internally or through acquisitions, in John Hancock's current and future insurance and non-insurance businesses. We also expect that, in the future, the structure will increase flexibility in allocating capital and resources among the various subsidiaries of John Hancock Financial Services, Inc., and facilitate consolidation of administrative and other functions of our subsidiaries. The reorganization will also provide eligible policyholders with shares of common stock, cash or policy credits as compensation for the extinguishment of their otherwise illiquid membership interests in John Hancock Mutual Life Insurance Company. Effective Date The reorganization will become effective on the date of the closing of the offering. The Plan of Reorganization provides that the effective date will occur after the approval by the Massachusetts Commissioner of Insurance and the policyholders entitled to vote on the Plan of Reorganization, but on or before December 31, 2000. With the approval of the Massachusetts Commissioner of Insurance, the December 31, 2000 deadline may be extended for up to an additional six months. Additional Approvals The Plan of Reorganization was also subject to the review of the New York Superintendent of Insurance as to its fairness to New York policyholders. The reorganization is also subject to approval or exemption under the insurance holding company statutes of Delaware, Massachusetts and California, the domiciliary states of our insurance subsidiaries. We intend to apply for exemptions under each of these states' holding company statutes. We have also applied to the Department of Labor for certain prohibited transaction exemptions under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). A more complete description of this application is set forth under the heading "--ERISA Considerations". Payment of Consideration to Eligible Policyholders Amount and Form of Consideration Until the effective date of the reorganization, John Hancock Mutual Life Insurance Company is a mutual life insurance company owned by its policyholders. In connection with the reorganization, the membership interests of policyholders will be extinguished, and eligible policyholders will receive compensation in exchange for the extinguishment of their membership interests. Policyholders who are not "eligible policyholders" will not receive any compensation in the reorganization. 26 Policyholders eligible to receive compensation are those persons who own on the effective date of the reorganization a John Hancock Mutual Life Insurance Company voting policy that was in force on August 31, 1999 and on the December 31 before the effective date of the reorganization. Whether or not a policy is in force is determined based upon our records. In general, a policy is in force on a given day if it has been issued and is in effect, has not been surrendered or otherwise terminated, and notice of the insured's death has not been received by us. A policy is generally not in force until it is issued and is in effect. However, a policy is considered to be in force if we have received at our administrative office: (1) an application, complete on its face, together with all required underwriting information (including all required medical information); and (2) payment of the full initial premium (or such lesser amount required by our normal administrative procedures for coverage to become effective); provided that such policy is later issued in accordance with the terms of its application. The compensation will consist of a fixed component equal to 17 shares of common stock for each voting policy owned by an eligible policyholder, and a variable component of additional shares allocated, based on contributions to surplus, in respect of each participating policy eligible for a variable component owned by an eligible policyholder. The compensation will be in the form of either policy credits, cash or common stock. Policy credits are, depending on the type of policy, an increase in the cash value and death benefit, an increase in the account value, or crediting of policy dividends. The form of compensation will be determined as follows: Policy Credits. The following types of policies will be eligible solely for policy credits in order to preserve their tax status: . Individual retirement annuity contracts which are tax qualified under Section 408(b) of the Internal Revenue Code. . Individual tax sheltered annuity contracts under Section 403(b) of the Internal Revenue Code. . Individual annuity contracts issued directly to a plan participant pursuant to a tax qualified plan under Section 401(a) of the Internal Revenue Code. . Individual life insurance policies issued directly to a plan participant pursuant to a tax qualified plan under Section 401(a) of the Internal Revenue Code. Cash. The following types of policies will be eligible solely for cash: . Policies subject to a creditor's lien (other than a policy loan made by John Hancock) or bankruptcy proceeding. . Policies for which the mailing address of the policyholder on our records is located outside the United States (including states, territories or possessions). . Policies for which the mailing address of the policyholder on our records is one at which mail is undeliverable. All policyholders who are eligible for, but do not expressly elect, common stock will be assumed to prefer cash. Cash will be distributed to such policyholders to the extent available. See "--Limit on Amounts Available for Cash Compensation." Common Stock. Except for policies which are eligible solely for policy credits or cash, all eligible policies will be eligible for common stock. Common stock will be distributed to all such eligible policyholders who expressly elect common stock and to certain other eligible policyholders if the compensation for eligible policyholders who did not expressly elect common stock exceeds the limitation described under "--Limit on Amounts Available for Cash Compensation." 27 Calculation of Cash and Policy Credit Compensation Policyholders receiving cash or policy credits will receive an amount of cash or policy credits equal to the number of shares of common stock they are allocated in the reorganization multiplied by the greater of the price at which the common stock is sold in the offering and the average closing price of the stock for the first 20 trading days, subject to a maximum of 120% of the price at which the common stock is sold in the offering. Limit on Amounts Available for Cash Compensation There will be a limit to the amount of funds available to pay cash to eligible policyholders who do not elect stock. We currently estimate that cash in an amount sufficient to convert a total of 68.8 million shares allocated to policyholders not eligible for stock or who did not elect stock will be available to pay cash and fund policy credits. It is highly likely that the total funds available will not be sufficient to make cash payments to all eligible policyholders who prefer cash. Each policyholder who is eligible to receive common stock or cash will have an opportunity to elect common stock. If common stock is not elected by such policyholder, a preference for cash will be assumed. However, because there will be a limit to the amount of funds available to pay cash and fund policy credits, it is highly likely that the total funds available will not be sufficient to make cash payments to all eligible policyholders who wish to receive cash. In the event that the total available funds are not sufficient, the funds will be used first for cash and policy credits for eligible policyholders who are not eligible to receive common stock. When distributing cash to policyholders who have not elected stock, priority will generally be given to policyholders with smaller allocations. Specifically, priority will be given: First, to pay or credit cash or policy credits in connection with eligible policies that are eligible only for cash or policy credits; Second, to pay cash to all eligible policyholders who, with respect to policies that are eligible for stock or cash, are allocated the minimum allocation of 17 shares; and Third, to pay cash to all eligible policyholders who, with respect to policies that are eligible for stock or cash, are allocated a number of shares beginning with 18 and continuing to the highest level of share allocation possible at which cash preferences can be completely satisfied given the funds available. Eligible policyholders for whom cash is not available will receive common stock, regardless of any preference they may have for cash. The maximum number of allocated shares for which cash will be available will depend on a number of factors. These factors include the number of policyholders eligible for stock or cash, the size of the initial public offering, the initial public offering stock price, the average closing price of the stock during the first 20 trading days and the percentage of policyholders who elect to receive stock instead of cash. Based on preliminary estimates of these factors, we believe that cash will be available to honor cash preferences for policyholders allocated up to at least 65 shares. We cannot guarantee our ability to honor cash preferences up to this allocation level because of the number and complexity of these changeable factors. At the same time, it is possible that the allocation level for which cash will be available will be higher; however, this should be regarded as unlikely. Actuarial Opinion John Hancock Mutual Life Insurance Company retained Milliman & Robertson, Inc., an independent actuarial consulting firm, to advise it in connection with actuarial matters involved in the development of the Plan of Reorganization and the payment of consideration to eligible policyholders. The opinion of Godfrey Perrott, an independent consulting actuary associated with Milliman & Robertson, Inc., dated August 31, 1999, states (in reliance upon the matters described in such opinion) that the formula provided in the Plan of Reorganization to allocate the consideration to be given to eligible policyholders for the extinguishment of their 28 membership interests in John Hancock Mutual Life Insurance Company is fair and reasonable. A copy of the opinion is attached as Annex A to this prospectus. Establishment and Operation of the Closed Block Establishment of the Closed Block Under the Plan of Reorganization, as of the effective date, John Hancock Life Insurance Company will be obligated to create and operate the closed block for the benefit of the policies included therein. The policies included in the closed block are individual or joint traditional whole life insurance policies of John Hancock Mutual Life Insurance Company that are currently paying or expected to pay policy dividends, and individual term life insurance policies that are in force on the effective date of the reorganization. The purpose of the closed block is to protect the policy dividend expectations of these policies after the demutualization. Unless the Massachusetts Commissioner of Insurance and, in certain circumstances, the New York Superintendent of Insurance, consents to an earlier termination, the closed block will continue in effect until the date none of such policies is in force. On the effective date of the reorganization, John Hancock Life Insurance Company will allocate to the closed block assets that are expected to produce cash flows which, together with anticipated revenues from the policies included in the closed block, are expected to be reasonably sufficient to provide for payment of policy benefits, taxes, and direct asset acquisition and disposition costs, and for continuation of policy dividend scales payable in 1999, if the experience underlying such dividend scales continues. Effect of the Closed Block on our Results of Operations The closed block is a mechanism whereby we will separately account for the individual or joint life insurance policies of John Hancock Life Insurance Company included in the closed block on the effective date. We will include the contribution of the closed block in our financial statements, although it will be reported under a separate caption. We will reflect future income from the closed block business in our operating results over the period the closed block policies are in force. Many operating costs and expenses associated with the closed block business, which we will pay, are not included as closed block expenses, and therefore the contribution from the closed block will not accurately reflect the profitability of the closed block business. The assets allocated to the closed block and any cash flows provided by these assets will solely benefit the holders of policies included in the closed block. These assets will not revert to the benefit of John Hancock Life Insurance Company or John Hancock Financial Services, Inc. However, these closed block assets will be available to satisfy claims of John Hancock Life Insurance Company's creditors and of all John Hancock Life Insurance Company's policyholders in the same priority in liquidation as the other assets in John Hancock Life Insurance Company's general account. See Note 1 of Notes to "Unaudited Pro Forma Condensed Consolidated Financial Information" for a more detailed description of the manner in which the financial results of the closed block will affect the results of continuing operations of John Hancock Financial Services, Inc. For a description of the risks to stockholders arising out of the creation and operation of the closed block, see "Risk Factors--Under our Plan of Reorganization, we will be required to establish the "closed block," a special arrangement for the benefit of a group of our policyholders. We may have to fund deficiencies in our closed block, and any overfunding of the closed block will benefit only the holders of policies included in the closed block, not our stockholders. Effect of Closed Block Profitability on Holders of Closed Block Policies The excess of closed block liabilities over closed block assets at the effective date of the reorganization represents the expected future post-tax contribution from operation of the closed block. Under GAAP, this contribution may be recognized as income over the period the policies in the closed block remain in force. Actual cash flows from the assets allocated to the closed block and other experience relating to the closed block 29 business, in the aggregate, may be more favorable than we assumed in setting up the closed block. In that case, total policy dividends paid to closed block policyholders in future years will be greater than the total policy dividends that would have been paid to such policyholders if the policy dividend scales payable in 1999 had been continued without adjustment. Conversely, to the extent that such cash flows and other experience are, in the aggregate, less favorable than we assumed in setting up the closed block, total policy dividends paid to closed block policyholders in future years will be less than the total dividends that would have been paid to such policyholders if the policy dividend scales payable in 1999 had been continued unless, for competitive reasons, we chose to support dividend payments with our general account funds. In addition, if the assets allocated to the closed block, the cash flows therefrom and the revenues from the closed block business prove to be insufficient to pay the benefits guaranteed under the policies included in the closed block, John Hancock Life Insurance Company will be required to make payments from its general funds in an amount equal to the shortfall. We will fund the closed block to provide for payment of guaranteed benefits on such policies and for continuation of dividends paid under 1999 policy dividend scales (assuming the experience underlying such dividend scales continues). Therefore, we do not believe it will be necessary to use general funds to pay guaranteed benefits on closed block business unless the closed block business experiences very substantial adverse deviations in investment, mortality, persistency or other experience factors. Allocation of Closed Block Cash Flows and Expenses We will credit or charge to the closed block the insurance cash flows (such as premiums and policy benefits) and investment cash flows from the operations of the closed block as provided in the Plan of Reorganization. We will charge state and local taxes, federal income taxes and guaranty funds assessments in respect of the closed block business to the closed block in accordance with the tax sharing procedures set forth in the Plan of Reorganization. We will not charge to the closed block expenses (including investment management expenses) of operating and administering the closed block, other than direct asset acquisition and disposition costs and taxes. At the same time, assets which otherwise would have been allocated to the closed block had such operating and administrative expenses been chargeable to the closed block, will remain outside the closed block. Our operating results outside the closed block will include the investment results of such assets. Our operating results will also reflect the cost of increases in, and the benefit of decreases of, these closed block operating and administrative expenses. Reallocation of Closed Block Assets The Plan of Reorganization permits the borrowing of cash through our financing subsidiary, John Hancock Capital Corporation, at market rates of interest based on the proposed term of the borrowing. The Plan of Reorganization prohibits any other reallocation, transfer, borrowing or lending of assets between the closed block and other portions of John Hancock Life Insurance Company's general account, any of its separate accounts or to any affiliate of John Hancock Life Insurance Company without the approval of the Massachusetts Commissioner of Insurance. Policies not Included in the Closed Block Participating policies not included in the closed block will continue to be eligible for the payment of dividends after the reorganization to the same extent as prior to the reorganization. Closed Block Assets and Liabilities Closed Block Assets Under the Plan of Reorganization, certain assets will be allocated to the closed block. Based upon the allocations of specifically identified investment assets held by John Hancock Mutual Life Insurance Company as of June 30, 1999, assets with the following carrying values were allocated to the closed block as of June 30, 1999: 30
Carrying Value -------------- (in millions) Fixed maturity securities..................................... $4,481.2 Mortgage loans................................................ 1,936.1 Policy loans.................................................. 1,558.6 Other invested assets......................................... 12.5 -------- Total....................................................... $7,988.4 ========
Additional assets that would have been allocated to the closed block at June 30, 1999 if the closed block had been effective as of that date include cash and cash equivalents of $100.0 million, deferred policy acquisition costs of $921.9 million, accrued investment income of $132.0 million, reinsurance recoverable of $44.0 million, premiums and accounts receivable of $17.9 million, and other assets of $18.7 million. Closed Block Investment Policy The Plan of Reorganization requires that new investments for the closed block acquired on and after January 1, 1999 be made in accordance with the investment policy set forth in the Plan of Reorganization. The investment policy in the Plan of Reorganization requires that all new investments acquired with closed block cash flows shall consist only of: . ""Fixed Income Investments", which are fixed maturity securities, commercial mortgages, agricultural mortgages, short-term securities and cash; and . real estate, common stock, financial futures and interest rate options, currency swaps and certain other eligible assets. We will target acquisitions of fixed income investments to achieve a weighted average life of not less than five years and not more than ten years. In the future, however, we may target a weighted average life of less than five years if appropriate to reflect the remaining liabilities of the closed block. We will further manage such acquisitions so that the weighted average quality of the Fixed Income Investment portfolio is at least "Baa2" as rated by Moody's Investors Service or its equivalent. The closed block investment policy places a number of additional limitations on our acquisitions of closed block assets. These limitations include minimum ratings for fixed income investments, the maximum proportion of below investment grade fixed maturity securities and asset-backed securities, the maximum amount of securities of any issuer or industry, the maximum amount invested in commercial and agricultural mortgages, and the maximum amount of investments in jurisdictions other than the United States or Canada. The closed block investment policy may be changed only with the prior approval of the Massachusetts Commissioner of Insurance. Closed Block Liabilities Had the closed block been effective as of June 30, 1999, the policy liabilities and accruals associated with the closed block would have aggregated approximately $11,686.0 million. This amount would have included $10,936.9 million of future policy benefits and policyholders' funds, $378.7 million of dividends payable to policyholders, unpaid claims and claim expense reserves of $61.7 million, income taxes of $50.0 million and other liabilities of $258.7 million. See "Unaudited Pro Forma Condensed Consolidated Financial Information--Unaudited Pro Forma Condensed Consolidated Balance Sheet." The assets and liabilities allocated to the closed block will be recorded in our consolidated financial statements at their historical carrying values. The carrying values of the assets allocated to the closed block will be less than the carrying value of the closed block liabilities at the effective date of the reorganization. The excess of the closed block liabilities over the closed block assets at the effective date represents the estimated future post-tax contribution expected from the operation of the closed block, which will be recognized in our consolidated income over the period the policies in the closed block remain in force. 31 Actuarial Opinion Concerning the Sufficiency of Closed Block Assets John Hancock Mutual Life Insurance Company also retained Milliman & Robertson, Inc. to advise it in connection with actuarial matters involved in the establishment and operation of the closed block. The opinion of Godfrey Perrott, an independent consulting actuary associated with Milliman & Robertson, Inc., dated August 31, 1999, states (in reliance upon the matters described in such opinion) that the arrangement for establishment and operation of the closed block set forth in the Plan of Reorganization allocates assets to the closed block which are reasonably sufficient to enable the closed block to provide for the guaranteed benefits, certain expenses and taxes associated with closed block policies, and to provide for the continuation of the 1999 dividend scale if the experience underlying such scale continues. This opinion concerning the sufficiency of closed block assets is expressed in terms of statutory assets and liabilities and not in terms of assets and liabilities accounted for on a GAAP basis as shown in the GAAP presentation above and under "Unaudited Pro Forma Condensed Consolidated Financial Information." A copy of this opinion is attached as Annex A to this Prospectus. Commission-Free Sales Program Pursuant to the Plan of Reorganization, we will establish a commission-free sales program that will commence no sooner than the first business day after the six-month anniversary, and no later than the first business day after the twelve-month anniversary, of the effective date of the reorganization, and will continue for at least 90 days. We may extend the 90-day period with the approval of the Massachusetts Commissioner of Insurance. Under this program, each of our stockholders who owns 99 or fewer shares of our common stock on the record date for the commission-free sales program will have the opportunity at any time during the 90-day period to sell all, but not less than all, of those shares in one transaction at prevailing market prices without paying brokerage commissions or other similar expenses. We will also offer each eligible stockholder entitled to participate in the commission-free sales program the opportunity to purchase shares of common stock as necessary to increase their holdings to 100 share round lots without paying brokerage commissions or other similar expenses. This stock purchase program will occur simultaneously and in conjunction with the commission-free sales program. Limitations on Acquisitions of Our Common Stock The Plan of Reorganization governing our reorganization and our restated certificate of incorporation each prohibits: . any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock until two years after the effective date of the reorganization; and . without prior approval of our board of directors and the Massachusetts Commissioner of Insurance, any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock during the one year period following the two-year period described above. There is an exception to the foregoing prohibitions for acquisitions by a person that becomes a beneficial owner as a result of our issuance of such common stock to such person as consideration in an acquisition of another entity that was initiated by us by authority of our board of directors. Any such acquisition initiated by us by authority of our board of directors would require the approval of the Massachusetts Commissioner of Insurance and the Commissioners of Insurance of California and Delaware, and, potentially, the New York Superintendent of Insurance. If any person acquires or offers to acquire 10% or more of the outstanding shares of our common stock in violation of our Plan of Reorganization, we and the Massachusetts Commissioner of Insurance would be entitled to injunctive relief. By virtue of these provisions of the Plan of Reorganization and our restated certificate of incorporation, John Hancock Financial Services, Inc., may not be subject to an acquisition by another company during the two years following the effective date of the reorganization and may only be subject to an acquisition by another 32 company in the third year following the effective date of the reorganization with the approval of our Board of Directors and the Massachusetts Commissioner of Insurance. Limitations on Acquisition and Disposition of Securities by Officers and Directors Until one year after completion of the offering, we may not award any stock options or stock grants to any executive officer or director. Any common stock or securities convertible into common stock beneficially owned by an executive officer or director may not be sold for a period of at least two years following the offering; and common stock or securities convertible into common stock beneficially owned by an elected officer may not be sold for a period of at least one year following the offering, in each case except in the event of death or disability. Executive officers and directors and elected officers are also subject to the following restrictions on their ability to purchase any common stock following the offering: . executive officers and directors may not purchase or enter into any contract, agreement or other arrangement to purchase any of our common stock prior to the later of (1) the twenty-first day during which our common stock is publicly traded and (2) if applicable, the last day of any restricted trading period with respect to our common stock; and . elected officers may not purchase or enter into any contract, agreement or other arrangement to purchase any of our common stock prior to the later of (1) the second day during which our common stock is publicly traded and (2) if applicable, the last day of any restricted trading period with respect to our common stock. These limitations do not prevent us from issuing common stock (1) in connection with an employee stock ownership plan and/or other employee benefit plan established for the benefit of our employees and qualified under the Internal Revenue Code or (2) to match contributions by employees to any such plan. Further, we may issue shares of common stock pursuant to a stock incentive plan (other than to executive officers or directors during the first year after completion of the offering). Amendments to the Plan We may amend the Plan of Reorganization at any time before the effective date with the approval of the Massachusetts Commissioner of Insurance. The Plan of Reorganization cannot be amended after the effective date without the affirmative vote of at least three-quarters of the directors serving on the board of directors of John Hancock Financial Services, Inc. and the approval of the Massachusetts Commissioner of Insurance. The Massachusetts Commissioner of Insurance may condition her approval of any material amendment to the Plan of Reorganization, such as by requiring that a new public hearing be held. ERISA Considerations We provide a variety of fiduciary and other services to employee benefit plans that are also policyholders. The provision of such services may cause us to be a "party in interest" or "disqualified person," as such terms are defined in ERISA, and the Internal Revenue Code, with respect to such plans. Unless an exemption is obtained from the Department of Labor, certain transactions between parties in interest or disqualified persons and those plans are prohibited by ERISA and the Internal Revenue Code. We have applied to the Department of Labor for a prohibited transaction exemption under ERISA, which would, if granted, provide relief from the restrictions of ERISA and the Internal Revenue Code to permit eligible policyholders to receive common stock, cash or policy credits pursuant to the Plan of Reorganization. On [date], the Department of Labor published notice in the Federal Register of a proposed order granting the requested prohibited transaction exemption with respect to the payment of compensation under the Plan of Reorganization to eligible policyholders as to which we are a "party in interest" or "disqualified person." Such exemption would be subject to various conditions, including the implementation of the Plan of Reorganization 33 in accordance with procedural and substantive safeguards that are imposed under the Massachusetts demutualization law and supervised by the Massachusetts Commissioner of Insurance. Based upon discussions with the Department of Labor, we believe that the Department of Labor will issue an exemption prior to the effective date. However, there can be no assurance that the Department of Labor will take such action. If the Department of Labor does not issue the requested exemption prior to the effective date, we may, with the approval of the Massachusetts Commissioner of Insurance, either pay such consideration to eligible policyholders or delay such payment and place such consideration in an escrow or similar arrangement. Federal Income Tax Consequences to Policyholders It is a condition to the effectiveness of the Plan of Reorganization that we receive an opinion reconfirming as of the closing date the opinion we have received from our special tax counsel, Debevoise & Plimpton, to the effect that: . Policies issued by John Hancock Mutual Life Insurance Company prior to the effective date will not be treated as newly issued policies for any material federal income tax purpose as a result of the conversion of John Hancock Mutual Life Insurance Company from a mutual to a stock life insurance company under the Plan of Reorganization; . The crediting of consideration in the form of policy credits to tax sheltered annuities, individual retirement annuities or individual life insurance policies or annuity contracts issued to participants in qualified retirement plans will not adversely affect the tax-favored status of such policies and contracts under the Internal Revenue Code, will not be a taxable transaction to the holder and will not be treated as a contribution or distribution that will result in penalties to the holder; . Policyholders receiving solely common stock will not recognize gain or loss for federal income tax purposes as a result of the consummation of the Plan of Reorganization; and . The summary of principal federal income tax consequences to policyholders of the receipt of consideration under the Plan of Reorganization set forth under the heading "Federal Income Tax Consequences to Policyholders" in the information statement provided to policyholders is, to the extent it describes matters of law or legal consequences, and subject to the limitations and assumptions set forth in the policyholder information statement, an accurate summary in all material respects of the federal income tax consequences to policyholders of the consummation of the Plan of Reorganization. Federal Income Tax Consequences to the Company We have received an opinion from Debevoise & Plimpton, our special tax counsel, to the effect that: . No income, gain or loss will be recognized by John Hancock Financial Services, Inc. or John Hancock Mutual Life Insurance Company for federal income tax purposes as a result of John Hancock Mutual Life Insurance Company's conversion from a mutual to a stock life insurance company or the distribution of common stock to eligible policyholders in exchange for their membership interests in John Hancock Mutual Life Insurance Company; . Federal income tax attributes of John Hancock Mutual Life Insurance Company, including its tax basis and holding period of its assets, carryforwards of tax losses or other tax benefits (if any) and accounting methods should not be affected by its conversion from a mutual to a stock life insurance company; . The affiliated federal income tax group of which John Hancock Mutual Life Insurance Company is the common parent immediately before the reorganization will remain in existence and will continue to be able to file a consolidated federal income tax return, with John Hancock Financial Services, Inc. as the new common parent of the group and John Hancock Life Insurance Company as an eligible member for inclusion in the group; and 34 . The consummation of the Plan of Reorganization will not be deemed to result in any reinsurance arrangements for purposes of Section 848 of the Internal Revenue Code or the Treasury Regulations promulgated thereunder. Based on the opinions and advice of our special tax counsel, we believe that John Hancock Financial Services, Inc. will not realize significant income, gain or loss for federal income tax purposes as a result of John Hancock Mutual Life Insurance Company's conversion from a mutual to a stock life insurance company, the formation of John Hancock Financial Services, Inc. or the distribution of common stock to policyholders pursuant to the Plan of Reorganization. The opinions of special tax counsel described above are under the Internal Revenue Code, the regulations thereunder, and administrative interpretations thereof and judicial interpretations with respect thereto, all as in effect on the date hereof, and based on the accuracy of representations, statements and undertakings made by us. We have not sought a private letter ruling from the Internal Revenue Service regarding the federal income tax consequences of the consummation of the Plan of Reorganization. 35 USE OF PROCEEDS The following table summarizes the estimated use of the [$1,917.6] million total net proceeds of the offering (assuming the underwriters' over-allotment option is not exercised):
In Use of Proceeds: Millions ---------------- ---------- Cash contributed to John Hancock Life Insurance Company.......... $[1,717.6] Proceeds retained by John Hancock Financial Services, Inc. ...... [200.0] ---------- Total net proceeds............................................. $[1,917.6] ==========
Our net proceeds from the offering are estimated to be $[1,917.6] million (or $ . million if the underwriters exercise their over-allotment option in full) assuming that our common stock is offered at [$20.00] per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and the estimated expenses of the offering. We intend to contribute approximately $[1,717.6] million of net proceeds to John Hancock Life Insurance Company. The Plan of Reorganization requires us to contribute all of the net cash proceeds of the offering to John Hancock Life Insurance Company other than a working capital allowance of $50.0 million plus an amount determined by John Hancock Financial Services, Inc. to be reasonably necessary to provide for regular cash dividends to stockholders in the year following the effective date. We expect that the amount of net proceeds to be retained by John Hancock Financial Services, Inc. will total $200.0 million. John Hancock Financial Services, Inc. intends to use these net proceeds for general corporate purposes and to pay a dividend to the stockholders of John Hancock Financial Services, Inc. in the year following the effective date of the reorganization. However, provisions of our Plan of Reorganization may serve to reduce the amount retained to an amount less than $200.0 million, unless specific approval is received from the Massachusetts Commissioner of Insurance. If this amount is reduced, John Hancock Financial Services, Inc. may require additional funds, to be obtained through dividends from John Hancock Life Insurance Company or borrowings, in order to pay the first year stockholder dividend, if declared. In connection with the reorganization, John Hancock Life Insurance Company will require funds to satisfy the following needs, which will be satisfied with a combination of internal funds and cash contributed by John Hancock Financial Services, Inc. As of the date hereof: (1) $60.0 million is estimated to be required for the cost of a portion of the nonrecurring expenses of John Hancock Mutual Life Insurance Company directly related to the transaction; (2) $1,564.3 million is estimated to be used to make cash payments to eligible policyholders; and (3) $86.9 million is estimated to be necessary to establish reserves for policy credits to eligible policyholders. In addition to the shares of our common stock distributed in the offering, for which we will receive cash proceeds, many eligible policyholders will receive shares of common stock as compensation for extinguishment of their membership interests in the reorganization. Neither John Hancock Financial Services, Inc. nor John Hancock Life Insurance Company will receive any proceeds from the issuance of our common stock to eligible policyholders as compensation for the extinguishment of their membership interests in connection with the reorganization. 36 STOCKHOLDER DIVIDEND POLICY We currently intend to pay regular annual cash dividends on our common stock. We currently intend to declare an initial annual cash dividend of $ . per share in [date]. Although we intend to pay dividends, the declaration and payment of dividends is subject to the discretion of our board of directors. The declaration, payment and amount of dividends will be dependent upon our results of operations, financial condition, cash requirements, future prospects, regulatory and other restrictions on the payment of dividends by our subsidiaries and other factors deemed relevant by our board of directors. There can be no assurance that we will declare and pay any dividends. After the effective date of the reorganization, John Hancock Financial Services, Inc. will be an insurance holding company. The assets of John Hancock Financial Services, Inc. will consist initially of 100% of the outstanding capital stock of John Hancock Life Insurance Company and a portion of the net proceeds of the offering. As an insurance holding company, we will depend principally on dividends from John Hancock Life Insurance Company to satisfy our financial obligations, pay operating expenses and pay dividends to our stockholders (other than dividends, if any, in the first year following the effective date of the reorganization). If John Hancock Life Insurance Company is unable to pay stockholder dividends in the future, our ability to pay dividends to our stockholders and meet our cash obligations will be limited. The payment of dividends by John Hancock Life Insurance Company is subject to the discretion of its board of directors. In addition, the Massachusetts insurance law limits how and when John Hancock Life Insurance Company can pay stockholder dividends. After giving effect to the reorganization, John Hancock Life Insurance Company would be able to pay approximately $607.1 million in dividends in 1999 based on its 1998 statutory results without being subject to the restrictions on payment of extraordinary stockholder dividends. Following the reorganization, John Hancock Life Insurance Company may be commercially domiciled in New York and, if so, dividend payments may also be subject to New York's insurance holding company act as well as Massachusetts law. The payment of dividends by our other insurance subsidiaries also is limited by the laws of their respective jurisdictions of incorporation. See "Risk Factors--As a holding company, we will depend on dividends from our subsidiaries and the Massachusetts insurance law may restrict the ability of John Hancock Life Insurance Company to pay dividends to us", "Regulation--Regulation of Dividends and Other Payments from Insurance Subsidiaries" and Note 10 to our Consolidated Financial Statements. 37 CERTAIN INFORMATION This prospectus includes statistical data regarding the insurance, annuity and mutual fund industries. Statistical data regarding the individual life insurance industry are based on information obtained by A.M. Best Company ("A.M. Best"), an independent rating agency for the insurance industry. Statistical data regarding the group long-term care insurance, annuity, GIC and funding agreement industries are based on information reported to LIMRA International, Inc. ("LIMRA"), a financial services industry marketing research organization. LIMRA rankings are based on data provided by U.S. companies in connection with LIMRA-conducted surveys. . LIMRA group long-term care rankings are based on total in force premium . LIMRA individual annuity rankings are based on total sales. . LIMRA GIC, funding agreement and annuity data is based on annualized new deposits. Statistical data regarding the mutual fund industry is based on information included in publications of Financial Research Corporation ("FRC"), a mutual fund industry research and consulting firm. . FRC rankings used in this prospectus exclude short-term (cash equivalent) assets, and any funds closed to new sales, and total assets under management includes individual investor, institutional and retirement assets sold through all channels. Statistical information regarding the variable life insurance industry is based on the Tillinghast-Towers Perrin VALUE(R) Variable Life-IV Quarter 1998 Survey, conducted by Tillinghast-Towers Perrin, an actuarial firm ("Tillinghast"). Statistical information regarding the individual long-term care insurance industry is based on the 1998 Long-Term Care Individual and Group Association Top Writers Survey conducted by LifePlans, Inc., a long-term care insurance industry research and consulting firm. These industry sources generally indicate that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. While we believe this information to be reliable, we have not independently verified such data. Unless otherwise stated or the context otherwise requires, references in this prospectus to "we", "our", "us", or "John Hancock" refer to John Hancock Financial Services, Inc., together with its direct and indirect subsidiaries. When referring to periods prior to the effective date of the reorganization, the terms "we", "our", "us" and "John Hancock" refer to John Hancock Mutual Life Insurance Company together with its direct and indirect subsidiaries. 38 CAPITALIZATION The following table sets forth, as of June 30, 1999, (1) our actual consolidated capitalization and (2) our pro forma capitalization after giving effect to: . the reorganization and the issuance of [231,200,000] shares of common stock to eligible policyholders; . the sale of [102,000,000] shares of common stock in the offering at an initial public offering price of [$20.00] per share; and . the application of the estimated net proceeds from the offering as set forth under "Use of Proceeds," as if the reorganization and the offering had occurred as of June 30, 1999. The table has been prepared based on the terms of the Plan of Reorganization and should be read in conjunction with the Unaudited Pro Forma Condensed Consolidated Financial Information appearing elsewhere in this prospectus.
As of June 30, 1999 --------------------- Historical Pro Forma ---------- ---------- (in millions) Short-term debt....................................... $ 741.5 $ 741.5 Long-term debt........................................ 576.3 576.3 -------- ---------- Total debt........................................ 1,317.8 1,317.8 Equity: Common stock, $0.01 par value; 2,000,000,000 shares authorized; [333,200,000] shares issued and outstanding........................................ -- [3.3] Additional paid-in capital.......................... -- [5,292.6] Retained earnings................................... 5,087.1 -- Accumulated other comprehensive income.............. 134.9 134.9 -------- ---------- Total equity...................................... 5,222.0 [5,430.8] -------- ---------- Total capitalization............................ $6,539.8 $[6,748.6] ======== ==========
39 SELECTED HISTORICAL FINANCIAL DATA The following table sets forth certain selected historical consolidated financial data. The selected income statement data for each of the three years ended December 31, 1998 and balance sheet data as of December 31, 1998 and 1997 have been derived from our audited consolidated financial statements and notes thereto included elsewhere in this prospectus. The following selected income statement data for the years ended December 31, 1995 and 1994 and balance sheet data as of December 31, 1996, 1995, and 1994 have been derived from our audited consolidated financial statements not included herein. The selected income statement data for the six months ended June 30, 1999 and 1998 and balance sheet data as of June 30, 1999 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The selected balance sheet data as of June 30, 1998 has been derived from our unaudited interim consolidated financial statements not included herein. All unaudited interim consolidated financial data presented in the table below reflect all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation of our consolidated financial position and results of operations for such periods. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. The following selected consolidated financial data has been prepared in accordance with GAAP, except that the statutory data presented below has been prepared in accordance with applicable statutory accounting practices and was taken from our annual statements filed with insurance regulatory authorities. The following selected historical consolidated financial data should be read in conjunction with other information including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the notes thereto, included elsewhere in this prospectus.
For the Six Months Ended June 30, For the Year Ended December 31, -------------------- --------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 --------- --------- -------- -------- -------- -------- -------- (in millions) Income Statement Data:(1)(2) Revenues Premiums................ $ 1,438.3 $ 1,084.7 $2,197.9 $2,473.6 $2,922.5 $2,657.1 $2,473.6 Universal life and investment-type product charges................ 337.0 286.5 597.0 512.0 466.3 414.0 379.7 Net investment income... 1,716.9 1,633.0 3,330.7 3,190.7 3,223.1 3,099.4 2,910.7 Realized investment gains (losses), net.... 241.2 113.4 97.9 115.8 110.7 52.3 (79.4) Investment management revenues, commissions and other fees......... 336.9 327.2 659.7 554.7 751.3 660.0 588.7 Other revenue........... 14.3 7.2 18.8 99.5 230.9 248.3 194.7 --------- --------- -------- -------- -------- -------- -------- Total revenues......... 4,084.6 3,452.0 6,902.0 6,946.3 7,704.8 7,131.1 6,468.0 Benefits and expenses Benefits to policyholders.......... 2,445.3 1,968.4 4,152.0 4,303.1 4,676.7 4,226.5 3,925.2 Other operating costs and expenses........... 663.4 664.6 1,383.0 1,283.7 1,694.1 1,568.3 1,536.9 Amortization of deferred policy acquisition costs.................. 87.5 98.3 249.7 312.0 230.9 229.1 219.7 Dividends to policyholders.......... 247.0 231.7 473.2 457.8 435.1 496.5 416.6 --------- --------- -------- -------- -------- -------- -------- Total benefits and expenses.............. 3,443.2 2,963.0 6,257.9 6,356.6 7,036.8 6,520.4 6,098.4 --------- --------- -------- -------- -------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of accounting change................. 641.4 489.0 644.1 589.7 668.0 610.7 369.6 Income taxes............ 211.0 152.0 183.9 106.4 247.5 261.2 142.2 --------- --------- -------- -------- -------- -------- -------- Income before extraordinary item and cumulative effect of accounting change...... 430.4 337.0 460.2 483.3 420.5 349.5 227.4 Extraordinary item -- demutualization expenses, net of tax... (30.7) (1.7) (11.7) -- -- -- -- Cumulative effect of accounting change...... (9.7) -- -- -- -- -- (20.2) --------- --------- -------- -------- -------- -------- -------- Net income............. $ 390.0 $ 335.3 $ 448.5 $ 483.3 $ 420.5 $ 349.5 $ 207.2 ========= ========= ======== ======== ======== ======== ========
40
As of or for the Six Months Ended June 30, As of or for the Year Ended December 31, ------------------- ------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- --------- --------- (in millions) Balance Sheet Data: General account assets.. $54,983.1 $51,800.6 $52,000.1 $49,906.4 $48,420.6 $47,485.7 $43,778.2 Separate account assets................. 26,862.6 24,232.3 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8 Total assets............ 81,845.7 76,032.9 76,966.7 71,417.5 66,502.7 63,320.9 56,688.0 General account liabilities............ 49,184.8 46,173.8 46,416.9 44,667.7 43,265.9 42,770.6 40,224.6 Long-term debt.......... 576.3 658.8 602.7 543.3 1,037.0 934.3 605.4 Separate account liabilities............ 26,862.6 24,232.3 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8 Total liabilities....... 76,623.7 71,064.9 71,986.2 66,722.1 62,385.0 59,540.1 53,739.8 Policyholders' equity... 5,222.0 4,968.0 4,980.5 4,695.4 4,117.7 3,780.8 2,948.2 Statutory Data: Capital and surplus(3).. $ 3,758.9 $ 3,331.0 $ 3,388.7 $ 3,157.8 $ 2,856.1 $ 2,533.5 $ 2,330.0 Asset valuation reserve ("AVR")................ 1,217.6 1,278.6 1,316.9 1,191.0 1,088.4 1,035.6 852.8 --------- --------- --------- --------- --------- --------- --------- Capital and surplus plus AVR.................... $ 4,976.5 $ 4,609.6 $ 4,705.6 $ 4,348.8 $ 3,944.5 $ 3,569.1 $ 3,182.8 ========= ========= ========= ========= ========= ========= ========= Statutory net income.... $ 409.0 $ 196.4 $ 627.3 $ 414.0 $ 313.8 $ 340.8 $ 182.6
We evaluate segment performance and base management's incentives on after- tax operating income, which excludes the effect of net realized investment gains and losses and unusual or non-recurring events and transactions. Segment after-tax operating income is determined by adjusting GAAP net income for net realized investment gains and losses, including gains and losses on disposals of businesses, extraordinary items, and certain other items which we believe are not indicative of overall operating trends. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of segment after-tax operating income enhances the understanding of our results of operations by highlighting net income attributable to the normal, recurring operations of the business. However, segment after-tax operating income and total segment income are not a substitute for net income determined in accordance with GAAP.
For the Six Months For the Year Ended Ended June 30, December 31, ---------------- ----------------------------- 1999 1998 1998 1997 1996 ------- ------- ------------- ------- ------ (in millions) Segment Data:(4) Segment after-tax operating income: Protection Segment........... $ 89.2 $ 84.3 $ 172.3 $ 158.1 $197.3 Asset Gathering Segment...... 61.7 58.0 111.1 93.3 55.7 ------- ------- ------- ------- ------ Total Retail................. 150.9 142.3 283.4 251.4 253.0 Guaranteed and Structured Financial Products Segment.. 120.6 76.3 145.7 138.5 155.4 Investment Management Segment..................... 17.2 14.1 15.4 17.2 21.6 ------- ------- ------- ------- ------ Total Institutional.......... 137.8 90.4 161.1 155.7 177.0 Corporate and Other Segment.. 35.4 27.9 56.3 39.4 20.2 ------- ------- ------- ------- ------ Total segment income.......... 324.1 260.6 500.8 446.5 450.2 After-tax adjustments: Realized investment gains, net......................... 160.6 68.5 93.9 104.9 80.6 Class action lawsuit......... (39.1) -- (150.0) (112.5) (90.0) Restructuring charge......... (3.8) -- -- -- -- Benefit from pension participating contract modification................ -- -- -- 9.1 -- Surplus tax.................. (11.4) 7.9 15.5 35.3 (20.3) ------- ------- ------- ------- ------ Total after-tax adjustments.. 106.3 76.4 (40.6) 36.8 (29.7) ------- ------- ------- ------- ------ GAAP Reported: Income before extraordinary item and cumulative effect of accounting change........ 430.4 337.0 460.2 483.3 420.5 Extraordinary item- demutualization expenses, net of tax.................. (30.7) (1.7) (11.7) -- -- Cumulative effect of accounting change........... (9.7) -- -- -- -- ------- ------- ------- ------- ------ Net income................... $ 390.0 $ 335.3 $ 448.5 $ 483.3 $420.5 ======= ======= ======= ======= ======
41 - -------- (1) Prior to 1996, we prepared our financial statements in conformity with accounting practices prescribed or permitted by the Massachusetts Division of Insurance which accounting practices were considered to be GAAP for mutual life insurance companies. As of January 1, 1996, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 40, Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises and Statement of Financial Accounting Standards ("SFAS") No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long Duration Participating Policies. Interpretation No. 40 and SFAS No. 120 require mutual life insurance companies to adopt all applicable authoritative GAAP pronouncements in their general purpose financial statements. Accordingly, the financial information presented in the Selected Historical Financial Data for periods prior to 1996 has been derived from our financial information which has been retroactively restated to reflect the adoption of all applicable authoritative GAAP pronouncements. All such applicable pronouncements were adopted as of the effective date originally specified in each such pronouncement. The following sets forth the significant accounting pronouncements with effective dates subsequent to the earliest financial information presented herein, the effective dates of their adoption by us and, if applicable, a description of the accounting followed by us for periods presented herein prior to the effective date of such pronouncements. . SFAS No. 112, Employers' Accounting for Postemployment Benefits, was adopted for the year ended December 31, 1994 and subsequent years. For periods prior to the adoption of SFAS No. 112, we recognized postemployment benefits on a pay-as-you-go basis. . SFAS No. 114, Accounting by Creditors for Impairment of a Loan, was adopted for the year ended December 31, 1995 and subsequent years. For periods prior to the adoption of SFAS No. 114, we established a policy to record impairment losses for troubled loans based on discounted cash flows or the fair value of the collateral. The policy was substantially consistent with SFAS No. 114. The adoption of SFAS No. 114 did not have a material effect on the level of the allowances for losses on loans or on our consolidated results of operations or financial position. . SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, was adopted on a retroactive basis as of January 1, 1994 and subsequent years. . SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was adopted for the year ended December 31, 1996 and subsequent years. For periods prior to the adoption of SFAS No. 121, writedowns on impaired real estate were established if the undiscounted cash flows were less than the carrying value. In such cases, the asset was written down to the discounted cash flow amount. Real estate held for sale was carried at the lower of cost or fair value. Accordingly, there was no material effect on our financial statements as a result of the adoption of SFAS No. 121. . SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, was adopted for the year ended December 31, 1997, retroactive to December 31, 1994. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in financial statements. The segment data presented herein reflects the adoption of SFAS No. 131. (2) We completed a number of transactions which have affected the comparability of our results of operations. On March 31, 1999, we completed the sale of Unigard Security Insurance Company ("USIC") and John Hancock Insurance Co. of Bermuda Ltd. ("John Hancock Bermuda"). The sale of USIC was completed by entering into a 100% quota share reinsurance agreement with a third party reinsurer and then through a stock sale. We also sold 100% of the stock of John Hancock Bermuda, which offered reinsurance products and services. Assets and liabilities transferred in connection with both sales amounted to $381.0 million and $161.8 million, respectively. The sale of USIC resulted in an after-tax loss of $16.8 million. John Hancock Bermuda was sold for its net book value which resulted in the recognition of no gain or loss. 42 On February 28, 1997, we sold a major portion of our group insurance business to UNICARE Life & Health Insurance Company ("UNICARE"), a wholly- owned subsidiary of WellPoint Health Networks, Inc. ("WellPoint"). The business sold included our group accident and health business and related group life insurance business and three indirectly wholly-owned subsidiaries: Cost Care, Inc., Hancock Association Services Group and Tri- State Inc. Assets equal to liabilities of $686.7 million at February 28, 1997, subject to agreement on asset and liability values, were transferred to UNICARE in connection with the sale. The insurance business sold was transferred to UNICARE through a 100% coinsurance agreement. A pre-tax gain of $59.6 million was realized on the sale, comprised of a $33.9 million gain on the sale of the underlying business and a $25.7 million gain related to the curtailment of our pension and other postretirement benefit plans. The business sold primarily consisted of short duration contracts, and $.6 million, $8.5 million and $15.5 million of the gain was recognized in the six months ended June 30, 1999, and in 1998 and 1997, respectively, as the underlying claims were settled. The remaining gain realized on the sale of the underlying business of $9.3 million is being recognized over the remaining lives of the contracts in accordance with SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts. The $25.7 million curtailment gain was recognized in 1997. On November 29, 1996, we closed the sale of 95% of John Hancock Freedom Securities Corporation ("Freedom Securities"), a holding company, and its subsidiaries, primarily Tucker Anthony Incorporated and Sutro and Co., both broker/dealers. Net assets transferred were approximately $164.3 million and the sale resulted in the recognition of a $25.1 million pre-tax gain in 1996. We sold the remaining 5% of Freedom Securities during 1998 and recognized a pre-tax gain of $4.3 million. Effective July 1, 1996, John Hancock Property and Casualty Insurance Company ("JHP&C") and its wholly-owned subsidiary, John Hancock Indemnity Company ("Indemnity") each entered into a quota share reinsurance agreement with a third party reinsurer under which they ceded 100% of their loss, loss adjustment expense and unearned premium reserves at June 30, 1996, relating to continuing operations. Under the terms of the quota share reinsurance agreement, JHP&C cedes 100% of all continuing operations business written subsequent to June 30, 1996. Net assets transferred were approximately $12.0 million. No gain or loss was recognized on the transaction. On September 12, 1996, JHP&C sold 100% of the stock of Indemnity. Net assets transferred were approximately $6.0 million and the sale resulted in the recognition of a $6.0 million pre-tax gain. The disposed businesses' results of operations for each of the three years in the three-year period ended December 31, 1998 and for the six months ended June 30, 1999 and 1998 are presented below:
For the Six Months Ended For the Year Ended June 30, December 31, ------------- --------------------- 1999 1998 1998 1997 1996 ------ ----- ----- ------ -------- (in millions) Income Statement Data: Revenues Premiums............................. $ -- $ -- $ -- $100.7 $ 536.4 Net investment income................ 4.6 12.1 22.1 14.8 97.4 Realized investment (losses) gains, net................................. (28.9) 4.3 12.6 1.5 9.2 Investment management revenues, commissions and other fees.......... -- -- -- -- 301.0 Other revenue........................ .6 3.0 8.9 78.0 219.6 ------ ----- ----- ------ -------- Total revenues....................... (23.7) 19.4 43.6 195.0 1,163.6 Benefits and expenses Benefits to policyholders............ 34.8 10.7 16.8 112.4 481.6 Other operating costs and expenses... (7.2) -- -- 47.1 609.9 Amortization of deferred policy acquisition costs................... -- -- -- -- 6.3 Dividends to policyholders........... -- -- -- 2.3 15.2 ------ ----- ----- ------ -------- Total benefits and expenses.......... 27.6 10.7 16.8 161.8 1,113.0 ------ ----- ----- ------ -------- Income before income taxes........... (51.3) 8.7 26.8 33.2 50.6 Income taxes......................... (34.9) 1.5 3.2 9.1 17.5 ------ ----- ----- ------ -------- Net (loss) income.................... $(16.4) $ 7.2 $23.6 $ 24.1 $ 33.1 ====== ===== ===== ====== ========
43 (3) In accordance with accounting practices prescribed or permitted by the Massachusetts Division of Insurance, statutory capital and surplus includes $450.0 million in total principal amount of our surplus notes outstanding. (4) Our GAAP reported net income was significantly affected by net realized investment gains and losses and unusual or non-recurring events and transactions presented above as after-tax adjustments. In all periods, net realized investment gains and losses, including gains and losses on our disposed businesses, and the surplus tax have been excluded from segment income. We have been subject to the surplus tax imposed on mutual life insurance companies which disallows a portion of mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, we will no longer be subject to surplus tax. During 1997, we entered into a court approved settlement relating to a class action lawsuit involving individual life insurance policies sold from 1979 through 1996, as specified elsewhere in this prospectus. In entering into the settlement, we specifically denied any wrongdoing. The reserve held in connection with the settlement to provide for relief to class members and for legal and administrative costs associated with the settlement amounted to $466.5 million, $436.6 million and $308.8 million at June 30, 1999, December 31, 1998 and December 31, 1997, respectively. Given the uncertainties associated with estimating the reserve, it is reasonably possible that the final cost of the settlement could differ materially from the amount previously provided. During 1999, we recorded a $3.8 million after-tax restructuring charge in accordance with our plans to reduce the cost structure of our mutual fund operations. This charge primarily included accruals for severance and related benefits for staff reductions. The restructuring liability at June 30, 1999 was $5.9 million and is expected to be paid by March 2002. During 1997, a participating pension reinsurance contractholder requested the distribution of a portion of contract funds. At the time of the request, the contract stated that these funds were to be paid out over a specified number of years. However, we agreed to distribute a portion of the contractholder's funds in exchange for the right to retain the tax credits that resulted from the distribution. The contractual amendment resulted in the recognition of a $9.1 million after-tax gain. 44 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The unaudited pro forma condensed consolidated financial information presented below for John Hancock Financial Services, Inc. gives effect to (1) the reorganization, (2) the establishment of the closed block, (3) the sale of shares of common stock in the offering to the public, and (4) the application of the estimated net proceeds from the offering as set forth in "Use of Proceeds," as if the reorganization, the establishment of the closed block and the offering had occurred as of June 30, 1999, for purposes of the unaudited pro forma condensed consolidated balance sheet and as of January 1, 1998 for purposes of the unaudited pro forma condensed consolidated statements of income for the six months ended June 30, 1999 and the year ended December 31, 1998. The principal assumptions used in the pro forma information are as follows: (1) the pro forma closed block liabilities exceed the pro forma closed block assets as of June 30, 1999 by $2,463.1 million, (2) 102,000,000 shares of common stock are sold to investors in the offering at the initial public offering price of $20.00 per share, (3) 231,200,000 shares of common stock are allocated and issued to eligible policyholders under the Plan of Reorganization, (4) 68,800,000 shares of common stock are allocated but not issued to eligible policyholders who receive payments in the form of cash or policy credits at an assumed conversion price of $24.00 per share (which assumes conversion from shares to cash or policy credits at 120% of the initial public offering price) rather than in shares of common stock, and (5) a federal income tax rate of 35% is used to show the income tax effects of the pro forma adjustments. The pro forma information reflects gross and net proceeds of the offering of $2,040.0 million and $1,917.6 million, respectively. Of the estimated net proceeds, we have assumed that $200.0 million will be retained by John Hancock Financial Services, Inc. to be used for general corporate purposes and for payment of a dividend to our stockholders in the first year after the effective date of the reorganization, if any, and the remaining $1,717.6 million will be contributed to John Hancock Life Insurance Company. For purposes of the pro forma balance sheet, $88.0 million is estimated to be required for the cost of additional nonrecurring expenses related to the reorganization, $1,564.3 million is estimated to be used to make cash payments to eligible policyholders and $86.9 million is estimated to be necessary to support policy credits to eligible policyholders. Provisions of our Plan of Reorganization may serve to reduce the amount of net proceeds retained by John Hancock Financial Services, Inc. to an amount less than $200.0 million, unless specific approval is received from the Massachusetts Commissioner of Insurance. If this amount is so reduced, John Hancock Financial Services, Inc. may require additional funds, to be obtained through dividends from John Hancock Life Insurance Company or borrowings, in order to pay the first year stockholder dividend, if any. See "The Reorganization" and "Use of Proceeds." The pro forma information is based on available information and on assumptions management believes are reasonable. The pro forma information is provided for informational purposes only and should not be construed to be indicative of our consolidated financial position or our consolidated results of operations had these transactions been consummated on the dates assumed and does not in any way represent a projection or forecast of our consolidated financial position or consolidated results of operations for any future date or period. The pro forma information should be read in conjunction with our Consolidated Financial Statements and the accompanying notes included elsewhere in this prospectus and with the other information included in this prospectus including the information set forth under "The Reorganization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." 45 Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 1999 ----------------------------------------------------- Establishment of Closed Transaction Historical Block(1) (8) Adjustments Pro Forma (9) ---------- ------------- ----------- ------------- (in millions) Assets Investments: Fixed maturities........ $30,980.2 $(4,481.2) $26,499.0 Equity securities....... 1,103.2 1,103.2 Mortgage loans on real estate................. 10,373.7 (1,936.1) 8,437.6 Real estate............. 658.9 658.9 Policy loans............ 1,898.9 (1,558.6) 340.3 Short-term investments.. 642.9 642.9 Other invested assets... 1,101.1 (12.5) 1,088.6 --------- --------- --------- --------- Total investments....... 46,758.9 (7,988.4) 38,770.5 Cash and cash equivalents............. 1,511.8 (100.0) $(1,564.3)(2) 1,917.6 (3) (57.6)(6) 1,707.5 Accrued investment income.................. 629.7 (132.0) 497.7 Premiums and accounts receivable.............. 201.0 (17.9) 183.1 Deferred policy acquisition costs....... 2,899.4 (921.9) 1,977.5 Reinsurance recoverable.. 1,512.7 (44.0) 1,468.7 Other assets............. 1,469.6 (18.7) 1,450.9 Closed block assets...... 9,222.9 9,222.9 Separate account assets.. 26,862.6 26,862.6 --------- --------- --------- --------- Total Assets............ $81,845.7 $ -- $ 295.7 $82,141.4 ========= ========= ========= ========= Liabilities and Equity Liabilities: Future policy benefits.. $27,805.9 $(9,566.3) $ 86.9 (2) $18,326.5 Policyholders' funds.... 16,064.5 (1,370.6) 14,693.9 Unearned revenue........ 369.1 369.1 Unpaid claims and claim expense reserves....... 722.2 (61.7) 660.5 Dividends payable to policyholders.......... 418.6 (378.7) 39.9 Short-term debt......... 741.5 741.5 Long-term debt.......... 576.3 576.3 Income taxes............ 346.8 (50.0) 296.8 Other liabilities....... 2,716.2 (258.7) 2,457.5 Closed block liabilities............ 11,686.0 11,686.0 Separate account liabilities............ 26,862.6 26,862.6 --------- --------- --------- --------- Total Liabilities....... 76,623.7 -- 86.9 76,710.6 Equity: Common stock, $0.01 par value; 2 billion shares authorized; 333.2 million shares issued and outstanding........ 1.0 (3) 2.3 (4) 3.3 Additional paid-in capital................ 1,916.6 (3) 3,376.0 (4) 5,292.6 Retained earnings....... 5,087.1 (1,651.2)(2) (3,378.3)(4) (57.6)(6) -- Accumulated other comprehensive income... 134.9 134.9 --------- --------- --------- --------- Total Equity............ 5,222.0 208.8 5,430.8 --------- --------- --------- --------- Total Liabilities and Equity................. $81,845.7 $ -- $ 295.7 $82,141.4 ========= ========= ========= =========
See notes to unaudited pro forma condensed consolidated financial information. 46 Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Six Months Ended June 30, 1999 ---------------------------------------------------- Establishment of Closed Transaction Historical Block (1) Adjustments Pro Forma (9) ---------- ------------- ----------- ------------- (in millions, except per share amounts) Revenues: Premiums................. $1,438.3 $(501.9) $ 936.4 Universal life and investment-type product charges................. 337.0 337.0 Net investment income.... 1,716.9 (294.5) 1,422.4 Realized investment gains, net.............. 241.2 (10.3) 230.9 Investment management revenues, commissions, and other fees.......... 336.9 336.9 Other revenue............ 14.3 (0.1) 14.2 Contribution from the closed block............ 26.2 26.2 -------- ------- ------ ------- Total revenues......... 4,084.6 (780.6) 3,304.0 Benefits and expenses Benefits to policyholders........... 2,445.3 (528.8) 1,916.5 Other operating costs and expenses................ 663.4 (3.9) 659.5 Amortization of deferred policy acquisition costs................... 87.5 (35.0) 52.5 Dividends to policyholders........... 247.0 (212.9) 34.1 -------- ------- ------ ------- Total benefits and expenses.............. 3,443.2 (780.6) 2,662.6 -------- ------- ------ ------- Income before income taxes, extraordinary item and cumulative effect of accounting change......... 641.4 641.4 Income taxes............... 211.0 $(11.4)(5) 199.6 -------- ------- ------ ------- Income before extraordinary item and cumulative effect of accounting change (6).. $ 430.4 $ -- $ 11.4 $ 441.8 ======== ======= ====== ======= Income before extraordinary item and cumulative effect of accounting change per share..................... $ 1.33 ======= Shares used in calculating per share amount (7)...... 333.2 =======
See notes to unaudited pro forma condensed consolidated financial information. 47 Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Year Ended December 31, 1998 ---------------------------------------------- Establishment Pro of Closed Transaction Forma Historical Block (1) Adjustments (9) ---------- ------------- ----------- -------- (in millions, except per share amounts) Revenues Premiums....................... $2,197.9 $(1,031.4) $1,166.5 Universal life and investment- type product charges.......... 597.0 597.0 Net investment income.......... 3,330.7 (582.2) 2,748.5 Realized investment gains, net........................... 97.9 97.9 Investment management revenues, commissions, and other fees... 659.7 659.7 Other revenue.................. 18.8 18.8 Contribution from the closed block......................... 64.5 64.5 -------- --------- ------ -------- Total revenues............... 6,902.0 (1,549.1) 5,352.9 Benefits and expenses Benefits to policyholders...... 4,152.0 (1,027.8) 3,124.2 Other operating costs and expenses...................... 1,383.0 (7.9) 1,375.1 Amortization of deferred policy acquisition costs............. 249.7 (116.7) 133.0 Dividends to policyholders..... 473.2 (396.7) 76.5 -------- --------- ------ -------- Total benefits and expenses.. 6,257.9 (1,549.1) 4,708.8 -------- --------- ------ -------- Income before income taxes and extraordinary item.............. 644.1 644.1 Income taxes..................... 183.9 $ 15.5(5) 199.4 -------- --------- ------ -------- Income before extraordinary item (6)............................. $ 460.2 $ -- $(15.5) $ 444.7 ======== ========= ====== ======== Income before extraordinary item per share....................... $ 1.33 ======== Shares used in calculating per share amount (7)................ 333.2 ========
See notes to unaudited pro forma condensed consolidated financial information. 48 Notes to Unaudited Pro Forma Condensed Consolidated Financial Information (1) The Plan of Reorganization provides for the establishment of the closed block. See "The Reorganization--Establishment and Operation of the Closed Block" and "--Closed Block Assets and Liabilities." Under the Plan of Reorganization, as of the effective date of the reorganization, John Hancock Life Insurance Company will be obligated to create and operate the closed block for the benefit of the policies included therein. The policies included in the closed block are individual or joint traditional whole life insurance policies of John Hancock Mutual Life Insurance Company that are currently paying or expected to pay policy dividends, and individual term life insurance policies that are in force on the effective date of the reorganization. The closed block will include approximately 3.2 million policies. The purpose of the closed block is to protect the dividend expectations of the holders of the policies included in the closed block after demutualization. The establishment of the closed block, including the policy liabilities and the assets included therein, is subject to the review and approval of the Massachusetts Division of Insurance. Unless the Massachusetts Commissioner of Insurance and, in certain circumstances, the New York Superintendent of Insurance, consent to an earlier termination, the closed block will continue in effect until the date none of such policies is in force. On the effective date of the reorganization, John Hancock Mutual Life Insurance Company will allocate to the closed block assets that are expected to produce cash flows which, together with anticipated revenues from the closed block business (principally premiums and investment income), are reasonably sufficient to support the closed block business. The cash flows are intended to be sufficient to provide for payment of policy benefits, taxes and direct asset acquisition and disposition costs, and for continuation of policy dividend scales payable in 1999, so long as the experience underlying such dividend scales continues (including the portfolio yield of approximately 8%). The assets allocated to the closed block and any cash flows provided by these assets will solely benefit the holders of policies included in the closed block. The unaudited pro forma condensed consolidated statements of income reflect an allocation of revenues and expenses to the closed block based on estimates and assumptions that we believe are reasonable based on the Plan of Reorganization and gives effect to the establishment of the closed block as if the reorganization and the establishment of the closed block had occurred as of January 1, 1998. Premiums, benefits and expenses relating to the policies to be included in the closed block were derived from our actual records for the respective periods (such amounts were adjusted to exclude revenues and benefits relating to new business written during the year ended December 31, 1998 and the six-month period ended June 30, 1999, respectively, because after the reorganization, which for purposes of the pro forma income statements was assumed to have occurred as of January 1, 1998, new business will be written on policies and contracts outside of the closed block). Net investment income and realized gains were allocated to the closed block based on the composition of assets identified to fund the closed block and the expected yields on those assets. The contribution from the closed block reflected in the unaudited pro forma condensed consolidated statement of income is not necessarily indicative of the closed block's income had the closed block been established as of January 1, 1998 or of the closed block's expected income for any future period. The unaudited pro forma condensed consolidated balance sheet at June 30, 1999 gives effect to the reorganization, the establishment of the closed block and the initial public offering as if the reorganization, the establishment of the closed block and the initial public offering had occurred as of June 30, 1999. The unaudited pro forma condensed consolidated balance sheet reflects an allocation of assets necessary to fund the closed block liabilities. The closed block liabilities reflect the GAAP policyholder benefit reserves derived from our records for all policies to be included in the closed block under the Plan of Reorganization. Assets necessary to fund the closed block liabilities are determined based on actuarial cash flow models and related assumptions that we believe are reasonable and will be consistent with the funding allocation procedures of the Plan of Reorganization. Cash flow models are used to project all insurance cash flows from the policies included in the closed block, which include premiums plus interest on policy loans, less 49 Notes to Unaudited Pro Forma Condensed Consolidated Financial Information-- continued policy benefits, dividends and expenses. The actuarial cash flow models contain various assumptions which include mortality, persistency, expense and investment experience. After projecting the insurance cash flows, assets were initially identified so that cash flows from the assets (principal and income), together with insurance cash flows and assets purchased by reinvested cash would fund all closed block liabilities, assuming the experience underlying the 1999 dividend scales continues (including the portfolio yield of approximately 8%). The final funding and selection of assets included in the closed block is subject to the approval of the Massachusetts Division of Insurance. Actual cash flows from the assets allocated to the closed block and other experience relating to the closed block business, in the aggregate, may be more favorable than we assumed in setting up the closed block. In that case, total policy dividends paid to closed block policyholders in future years will be greater than the total policy dividends that would have been paid to such policyholders if the policy dividend scales payable in 1999 had been continued without adjustment. Conversely, to the extent that such cash flows and other experience are, in the aggregate, less favorable than we assumed in setting up the closed block, total policy dividends paid to closed block policyholders in future years will be less than the total dividends that would have been paid to such policyholders if the policy dividend scales payable in 1999 had been continued unless, for business reasons, we chose to support dividend payments with our general account funds. In addition, if the assets allocated to the closed block, the cash flows therefrom and the revenues from the closed block business prove to be insufficient to support the policies included in the closed block as required by the Plan of Reorganization, John Hancock Life Insurance Company will be required to make payments from its general funds in an amount equal to the shortfall. We will fund the closed block to provide for payment of guaranteed benefits on such policies and for continuation of dividends paid under 1999 policy dividend scales, assuming the experience underlying such dividend scales continues (including the portfolio yield of approximately 8%). Therefore, we do not believe it will be necessary to use general funds to pay guaranteed benefits on closed block business unless the closed block business experiences substantial adverse deviations in investment, mortality, persistency or other experience factors. Assets and liabilities allocated to the closed block on the unaudited pro forma condensed consolidated balance sheet are reflected at their June 30, 1999 GAAP values. The closed block will not be formed completely until the effective date of the reorganization and, accordingly, the actual assets and liabilities ultimately allocated to the closed block and their GAAP carrying values will not be known until such date. However, the allocation of assets and liabilities to the closed block as of the effective date of the reorganization is not expected to differ materially from the allocation reflected in the unaudited pro forma condensed consolidated balance sheet. The assumptions used for the pro forma financial information relating to the closed block include only those revenues, benefit payments, policyholder dividends, investment expenses and taxes considered in funding the closed block and exclude many costs and expenses associated with operating the closed block and administering the policies included therein, all of which will be paid by us. Federal income taxes applicable to the closed block, which will be funded in the closed block, are reflected as a component of federal income taxes. Because many operating costs and expenses associated with the closed block business, which we will pay, are not included as closed block expenses, the contribution from the closed block does not represent the historical or future profitability of the closed block business. Operating costs and expenses outside of the closed block associated with closed block business are reflected in our operating results outside of the closed block. The assets and liabilities allocated to the closed block will be recorded in our consolidated financial statements at their historical carrying values. The carrying value of the assets allocated to the closed block will be less than the carrying value of the closed block liabilities at the effective date of the reorganization. The excess of the closed block liabilities over the closed block assets at the effective date represents the estimated future post-tax contribution expected from the operation of the closed block, which will be recognized in our consolidated income over the period the policies in the closed block remain in force. 50 Notes to Unaudited Pro Forma Condensed Consolidated Financial Information-- continued Prior to the establishment of the closed block, the results from the underlying business were reported in various line items in our consolidated income statements, including premiums, net investment income and benefits to policyholders. As a result of the establishment of the closed block, these line items will reflect material reductions in reported amounts, as compared to years prior to the establishment of the closed block. These changes will have no effect on net income. The actual results of the closed block business are expected to be reflected as a single line item in our consolidated statements of income entitled, "Contribution from the closed block." In addition, all assets and liabilities allocated to the closed block are expected to be reported in our consolidated balance sheet separately under the captions, "Closed block assets" and "Closed block liabilities," respectively. (2) Represents (in millions): (i) Cash assumed to be paid to eligible policyholders who are eligible for but do not elect to receive common stock....................... $1,151.3 (ii) Cash payments assumed to be paid to eligible policyholders who must receive cash as consideration................................. 413.0 -------- Total assumed cash payments.................................... 1,564.3 (iii) Policy credits assumed to be provided to eligible policyholders................................................ 86.9 -------- Total.......................................................... $1,651.2 ========
(3) Represents gross proceeds of $2,040.0 million from the sale of 102,000,000 shares of common stock at an assumed initial offering price of $20.00 per share, less underwriting discounts and offering expenses of $122.4 million. (4) Represents the reclassification of the residual retained earnings ($3,378.3 million) of John Hancock Mutual Life Insurance Company to common stock ($2.3 million) and additional paid-in capital ($3,376.0 million) to reflect the conversion to a stock life insurance company. (5) Represents the elimination of the surplus tax for the six months ended June 30, 1999 and the year ended December 31, 1998, which is applicable only to mutual life insurance companies. (6) Non-recurring expenses related to the reorganization in total are estimated to be $142.0 million ($100.0 million after-tax). Approximately $36.0 million and $18.0 million of such expenses ($30.7 million and $11.7 million after-tax) were incurred on behalf of John Hancock Mutual Life Insurance Company and reported as extraordinary expenses in our consolidated statement of income for the six months ended June 30, 1999 and the year ended December 31, 1998, respectively. The estimated additional nonrecurring expenses of $88.0 million ($57.6 million after-tax) related to the reorganization, assumed to be incurred as of the date of the unaudited pro forma condensed consolidated balance sheet, were charged to equity. Such expenses will be reported as extraordinary charges. (7) The number of shares used in the calculation of unaudited pro forma income before extraordinary item per common share was determined as follows:
Number of Shares ----------- Shares allocated to eligible policyholders..................... 300,000,000 Less: shares allocated to eligible policyholders who receive cash or policy credits (a).................................... 68,800,000 ----------- Shares issued to eligible policyholders........................ 231,200,000 Shares issued in this offering................................. 102,000,000 ----------- Total outstanding shares of common stock....................... 333,200,000 ===========
51 Notes to Unaudited Pro Forma Condensed Consolidated Financial Information-- continued - -------- (a) Gives effect to (1) $1,151.3 million to pay cash to eligible policyholders who are eligible for but do not elect to receive stock, (2) cash in the amount of $413.0 million distributed to eligible policyholders who are not eligible to receive common stock and (3) $86.9 million of policy credits provided to eligible policyholders. The Plan of Reorganization provides that the amount of consideration paid in cash or provided as policy credits to an eligible policyholder will equal the number of shares allocated to such eligible policyholder multiplied by the greater of the initial public offering price or the average closing price of the common stock for the first twenty days for which it is traded, but not more than 120% of the initial public offering price. The above computation assumes conversion from shares to cash or policy credits is at 120% of the initial public offering price. The actual conversion price will be a function of the trading price of the common stock and therefore cannot be predicted. (8) The amortized cost, gross unrealized gains and losses, and estimated fair value of fixed maturity and preferred stock securities allocated to the closed block at June 30, 1999 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- (in millions) Held-to-Maturity: Corporate securities.............. $1,983.0 $98.1 $24.9 $2,056.2 Mortgage-backed securities........ 44.0 .8 .1 44.7 Obligations of states and political subdivisions........... 6.9 .1 -- 7.0 -------- ----- ----- -------- Total........................... $2,033.9 $99.0 $25.0 $2,107.9 ======== ===== ===== ========
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- (in millions) Available-for-Sale: Corporate securities............... $1,260.8 $31.7 $52.2 $1,240.3 Mortgage-backed securities......... 928.7 11.4 9.3 930.8 Obligations of states and political subdivisions...................... 73.1 3.4 1.6 74.9 Debt securities issued by foreign governments....................... 19.9 1.7 .7 20.9 U.S. Treasury securities and obligations of U.S. government corporations and agencies......... 35.6 .9 -- 36.5 Preferred stock securities......... 141.4 2.5 -- 143.9 -------- ----- ----- -------- Total............................ $2,459.5 $51.6 $63.8 $2,447.3 ======== ===== ===== ========
The amortized cost and fair value of fixed maturities at June 30, 1999 by contractual maturity, are shown below:
Amortized Fair Cost Value --------- -------- (in millions) Held-to-Maturity Due in one year or less.................................. $ 175.8 $ 179.9 Due after one year through five years.................... 705.6 727.5 Due after five years through ten years................... 533.5 549.7 Due after ten years...................................... 575.0 606.1 -------- -------- 1,989.9 2,063.2 Mortgage-backed securities............................... 44.0 44.7 -------- -------- Total.................................................. $2,033.9 $2,107.9 ======== ========
52 Notes to Unaudited Pro Forma Condensed Consolidated Financial Information-- continued
Amortized Fair Cost Value --------- -------- (in millions) Available-for-Sale: Due in one year or less.................................. $ 52.4 $ 53.6 Due after one year through five years.................... 300.8 302.6 Due after five years through ten years................... 464.7 465.2 Due after ten years...................................... 571.5 551.2 -------- -------- 1,389.4 1,372.6 Mortgage-backed securities............................... 928.7 930.8 Preferred stock securities............................... 141.4 143.9 -------- -------- Total.................................................. $2,459.5 $2,447.3 ======== ========
The following table sets forth the carrying value of mortgage loans on real estate allocated to the closed block as of June 30, 1999 by contractual maturity:
Principal Balance Maturing % of Total ----------------- ---------- (in millions) 1999............................................ $ 14.8 .8% 2000............................................ 110.4 5.7 2001............................................ 111.7 5.7 2002............................................ 145.9 7.5 2003............................................ 264.9 13.6 2004............................................ 164.4 8.4 2005............................................ 147.1 7.5 2006............................................ 181.1 9.3 2007............................................ 175.7 9.0 2008............................................ 191.0 9.8 Over 10 years................................... 443.2 22.7 -------- ----- 1,950.2 100.0% ===== Less allowance for loan losses.................. (14.1) -------- $1,936.1 ========
(9) The unaudited pro forma financial statements do not reflect the estimated fourth quarter charge to operations of $208.6 million (after-tax) anticipated in connection with the corporate account asset transfer (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Corporate Account Asset Transfer"). The charge has not been included in the unaudited pro forma financial statements because it is a non-recurring charge. 53 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis reviews our consolidated financial condition as of June 30, 1999 and December 31, 1998 and 1997, the consolidated results of operations for the six months ended June 30, 1999 and 1998 and the years ended December 31, 1998, 1997, and 1996 and, where appropriate, factors that may affect future financial performance. This discussion should be read in conjunction with the Selected Historical Financial Data, Unaudited Pro Forma Condensed Consolidated Financial Information, and the Consolidated Financial Statements and related notes included elsewhere in this prospectus. Forward-Looking Information Our narrative analysis contains forward-looking statements that are intended to enhance the reader's ability to assess our future financial performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as "may," "expects," "should" or similar expressions. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. The following uncertainties, among others, may have such an impact: changes in economic conditions, including changes in interest rates and the performance of financial markets; changes in domestic and foreign laws, regulations and taxes; competitive pressures on product pricing and services; industry consolidation; and the relative success and timing of our business strategies. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future events, or otherwise. Overview We are a leading financial services company providing a broad range of products and services in two major businesses: (1) the retail business, which offers insurance protection and asset gathering products and services primarily to retail consumers; and (2) the institutional business, which offers guaranteed and structured financial products and investment management products and services primarily to institutional customers. In addition, we have a Corporate and Other Segment. Our revenues are derived principally from: . premiums on individual life insurance, individual and group long-term care insurance, annuities with life contingencies, single premium annuity contracts and group life insurance; . product charges from variable and universal life insurance products and annuities; . asset management fees from mutual fund and institutional investment management products; . sales charges and commissions derived from sales of investment and insurance products and distribution fees; and . net investment income and realized investment gains on general account assets. Our expenses consist principally of insurance benefits provided to policyholders, interest credited on policyholders' general account balances, dividends to policyholders, other operating costs and expenses, which include commissions and general business expenses, net of expenses deferred, amortization of deferred policy acquisition costs, and premium and income taxes. Our profitability depends in large part upon: (1) the adequacy of our product pricing, which is primarily a function of competitive conditions, our ability to assess and manage trends in mortality and morbidity experience, our ability to generate investment earnings and our ability to maintain expenses in accordance with pricing 54 assumptions; (2) the amount of assets under management; and (3) the maintenance of our target spreads between the rate of earnings on our investments and credited rates on policyholders' general account balances. Our sales and financial results of our retail business over the last several years have been affected by general economic and industry trends. Variable products, including variable life insurance and variable annuities, have accounted for the majority of recent increases in total premiums and deposits for the insurance industry as a result of the strong equity market growth in recent years and the "baby boom" generation reaching its high-earnings years and seeking tax-advantaged investments to prepare for retirement. As sales of variable products have increased, sales of traditional life insurance products have experienced continued declines. With respect to our long-term care insurance products, premiums have increased due to the aging of the population and the expected inability of government entitlement programs to meet retirement needs. Deposits of our variable annuity products have increased at a compound annual rate of 18.4% from 1996 through 1998 and were $882.7 million in 1998. Moreover, deposits of our variable life insurance products have grown at a compound annual rate of 17.9% during this same period and were $810.8 million in 1998. Deposits and reinvestments of our mutual fund products have grown at an annual compound rate of 20.8% from 1996 through 1998 and were $8,427.2 million in 1998. Premiums on our individual and group long-term care insurance products have increased at a compound annual rate of 25.0% from 1996 through 1998, and were $291.2 million in 1998. More recently, premiums and deposits of our individual annuity products were consistent with the year ago period, totaling $711.3 million for the six months ended June 30, 1999. While variable annuity deposits declined, fixed annuity deposits increased 27.4% to $301.9 million for the six months ended June 30, 1999. Our variable life insurance product deposits for the six months ended June 30, 1999 have remained relatively consistent with those from the six months ended June 30, 1998 at $392.1 million, while premiums on our individual and group long-term care insurance increased 21.8%, to $168.3 million for the six months ended June 30, 1999. Primarily due to lower sales in our financial industries sector mutual funds, we had deposits and reinvestments of $2,402.0 million for the six months ended June 30, 1999 compared to $5,507.5 million for the six months ended June 30, 1998. Recent economic and industry trends also have affected the sales and financial results of our institutional business. Due to declining demand for general account GICs in the 401(k) plan market, deposits on our general account GICs have remained relatively level over the past three years and were $2,578.9 million in 1998. In response to such trends, we have created new products for the non-qualified institutional marketplace. Deposits of our guaranteed funding agreements to non-qualified institutional investors in the domestic and the international marketplace grew 103.0%, to $1,922.7 million for the six months ended June 30, 1999 and have grown at an average compound annual rate of 345.4% from 1996 through 1998. Premiums from single premium annuity contracts increased to $369.3 million for the six months ended June 30, 1999 from $28.6 million for the six months ended June 30, 1998, primarily due to the sale of one single premium annuity contract for $339.0 million. Moreover, our investment management services provided to domestic and international institutions have increased through our introduction of new products including collateralized bond obligations, mortgage securitizations, and sub-advisory services for mutual funds. Assets under management of our Investment Management Segment increased 8.9% to $43,163.6 million as of June 30, 1999 and have increased at a compound annual rate of 9.8% from 1996 through 1998. The Reorganization The board of directors of John Hancock Mutual Life Insurance Company adopted the Plan of Reorganization on August 31, 1999. Under the terms of the Plan of Reorganization, on the effective date of the reorganization, John Hancock Mutual Life Insurance Company would convert from a mutual life insurance company to a stock life insurance company and become a wholly owned subsidiary of John Hancock Financial Services, Inc., which is a holding company. 55 The reorganization would become effective on the date of the closing of the offering. The Plan of Reorganization provides that the effective date would occur after the approval by the Massachusetts Commissioner of Insurance and the policyholders entitled to vote on the Plan of Reorganization, but on or before December 31, 2000. With the approval of the Massachusetts Commissioner of Insurance, the December 31, 2000 deadline may be extended for up to an additional six months. Under the Plan of Reorganization, as of the effective date of the reorganization, John Hancock Mutual Life Insurance Company will be obligated to create and operate a closed block for the benefit of holders of certain individual insurance policies of John Hancock Mutual Life Insurance Company, as specified elsewhere in this prospectus. The purpose of the closed block is to protect the policy dividend expectations of the policies included in the closed block after demutualization. Unless the Massachusetts Commissioner of Insurance and, in certain circumstances, the New York Superintendent of Insurance, consent to an earlier termination, the closed block will continue in effect until the date none of such policies is in force. On the effective date, John Hancock Mutual Life Insurance Company will allocate to the closed block assets in an amount that is expected to produce cash flows which, together with anticipated revenues from policies included in the closed block, are reasonably sufficient to provide for payment of policy benefits, taxes and direct asset acquisition and disposal costs, and for continuation of policy dividend scales payable in 1999, so long as the experience underlying such dividend scales continues. The assets allocated to the closed block and any cash flows provided by these assets will solely benefit the holders of policies included in the closed block. The assets and liabilities allocated to the closed block will be recorded in our consolidated financial statements at their historical carrying values. The carrying value of the assets allocated to the closed block will be less than the carrying value of the closed block liabilities at the effective date of the reorganization. The excess of the closed block liabilities over the closed block assets at the effective date represents the estimated future post-tax contribution expected from the operation of the closed block, which will be recognized in our consolidated income over the period the policies in the closed block remain in force. Actual cash flows from the assets allocated to the closed block and other experience relating to the closed block business, in the aggregate, may be more favorable than we assumed in setting up the closed block. In that case, total policy dividends paid to closed block policyholders in future years will be greater than the total policy dividends that would have been paid to such policyholders if the policy dividend scales payable in 1999 had been continued without adjustment. Conversely, to the extent that such cash flows and other experience are, in the aggregate, less favorable than we assumed in setting up the closed block, total policy dividends paid to closed block policyholders in future years will be less than the total dividends that would have been paid to such policyholders if the policy dividend scales payable in 1999 had been continued without adjustment, unless we choose, for competitive reasons, to use our general account assets to support the dividends. In addition, if the assets allocated to the closed block, the cash flows therefrom and the revenues from the closed block business prove to be insufficient to pay the benefits guaranteed under the policies included in the closed block, John Hancock Life Insurance Company will be required to make payments from its general funds in an amount equal to the shortfall. We will fund the closed block to provide for payment of guaranteed benefits on such policies and for continuation of dividends paid under 1999 policy dividends scales, assuming the experience underlying such dividend scales continues. Therefore, we do not believe it will be necessary to use general funds to pay guaranteed benefits on closed block business unless the closed block business experiences substantial adverse deviations in investment, mortality, persistency or other experience factors. We estimate that costs relating to the demutualization, excluding costs relating to the offering, will be approximately $100.0 million, net of income taxes, of which $42.4 million was recognized through June 30, 1999. Demutualization expenses consist of printing and mailing costs and our aggregate cost of engaging independent accounting, actuarial, financial, investment banking, legal and other consultants to advise us. In addition, our costs include the costs of the staff and advisors of the Massachusetts Division of Insurance, the New York Insurance Department, and potentially other regulatory authorities as to the demutualization process and related matters. 56 Corporate Account Asset Transfer Background We will establish a "corporate account" as part of our Corporate and Other Segment to facilitate our capital management process. The corporate account will contain capital not allocated to support the operations of our business segments. Prior to our reorganization, we plan to transfer certain assets from the business segments to the corporate account. These assets include investments in certain subsidiaries and the home office real estate complex (collectively referred to as "corporate purpose assets"). Historically, we have allocated the investment performance or other earnings of corporate purpose assets among all of our business segments. However, as we proceed with our plan to convert to a stock life insurance company, we plan to centrally manage the performance of corporate purpose assets through the corporate account. Implications to Contractholders and Policyholders The asset transfer will directly affect group pension participating contractholders and participating individual life insurance policyholders because those contracts have participating features, under which crediting rates or dividends are affected directly by portfolio earnings. Our nonparticipating contracts have guaranteed crediting rates, dividends and other contract values that are unaffected by earnings on specific portfolio assets. We will compensate the group pension participating contractholders and participating individual life policyholders for the impact of the transfer as follows: Group Pension Participating Products. Certain group pension products have participating features, under which crediting rates and dividends are affected directly by portfolio earnings. Group pension participating contractholders participate in contract experience related to net investment income and realized capital gains and losses in the general account. Group pension participating contractholders will be compensated for transferred assets based on the fair value of the assets transferred. The difference between the fair value and carrying value of the assets transferred will be credited to pension participating contractholders through the crediting rates and dividends on their contracts. Participating Individual Life Insurance. As part of the reorganization, we plan to establish and operate a closed block for our participating individual life insurance business. The closed block will be established to support the continuation of policyholder dividend scales in effect for 1999, assuming continuation of the experience underlying those dividend scales. The assets included in the closed block will not include any corporate purpose assets. Moreover, our Plan of Reorganization contemplates that the fair value of corporate purpose assets will be included in the calculation of consideration payable to our participating individual life insurance policyholders upon our demutualization. As a result, our participating individual life policyholders are not expected to be impacted unfavorably by the transfer of the corporate purpose assets. Accounting and Timing We will account for the transfer of the corporate purpose assets between the business segments and the corporate account at historical cost. Because of the participating features of the group pension participating contracts, we believe that the transfer of corporate purpose assets from the segment is analogous to their sale from the segment. Group pension participating contractholders are entitled to receive the proceeds from assets sold from the segment. As a result, we will recognize an expense to increase our liability to group pension participating contractholders for their proportionate share of the appreciation of the corporate purpose assets transferred. For the other business segments, differences between the historical cost of the assets transferred and the fair value of amounts received by the business segments will be recorded as a capital adjustment by each segment. 57 We intend to execute the transfer during the fourth quarter of 1999 and estimate that the resulting charge to operations will approximate $208.6 million, net of tax. Transactions Affecting Comparability of Results of Operations--Disposed Businesses We have completed a number of transactions which have affected the comparability of our results of operations. On March 31, 1999, we completed the sale of Unigard Security Insurance Company ("USIC") and John Hancock Bermuda. The sale of USIC was completed by entering into a 100% quota share reinsurance agreement with a third party reinsurer and then through a stock sale. We also sold 100% of the stock of John Hancock Bermuda, which offered reinsurance products and services. Assets and liabilities transferred in connection with both sales amounted to $381.0 million and $161.8 million, respectively. The sale of USIC resulted in an after-tax loss of $16.8 million. John Hancock Bermuda was sold for its net book value which resulted in the recognition of no gain or loss. On February 28, 1997, we sold a major portion of our group insurance business to UNICARE, a wholly owned subsidiary of WellPoint. The business sold included our group accident and health business and related group life insurance business and three indirectly wholly-owned subsidiaries: Cost Care, Inc., Hancock Association Services Group and Tri-State, Inc. Assets equal to liabilities of $686.7 million as of February 28, 1997, subject to agreement on asset and liability values, were transferred to UNICARE in connection with the sale. The insurance business sold was transferred to UNICARE through a 100% coinsurance agreement. A pre-tax gain of $59.6 million was realized on the sale, comprised of $33.9 million gain on the sale of the underlying business and a $25.7 million gain related to the curtailment of our pension and other postretirement benefit plans. The business sold primarily consisted of short duration contracts, and $.6 million, $8.5 million and $15.5 million of the gain was recognized in the six months ended June 30, 1999, and in 1998 and 1997, respectively, as the underlying claims were settled. The remaining gain realized on the sale of the underlying business of $9.3 million is being recognized over the remaining lives of the contracts in accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts." The $25.7 million curtailment gain was recognized in 1997. On November 29, 1996, we closed the sale of 95% of Freedom Securities, a holding company, and its subsidiaries, primarily Tucker Anthony Incorporated and Sutro and Co., both broker/dealers. Net assets transferred were $164.3 million and the sale resulted in the recognition of a $25.1 million pre-tax gain in 1996. We sold the remaining 5% of Freedom Securities during the second quarter of 1998 and recognized a pre-tax gain of $4.3 million. Effective July 1, 1996, JHP&C and its wholly owned subsidiary, Indemnity, each entered into a quota share reinsurance agreement with a third party reinsurer under which they ceded 100% of their loss, loss adjustment expense and unearned premium reserves at June 30, 1996 relating to continuing operations. Under the terms of the quota share reinsurance agreement, JHP&C cedes 100% of all continuing operations business written subsequent to June 30, 1996. Net assets transferred to the reinsurer were approximately $12.0 million. No gain or loss was recognized on the transaction. On September 12, 1996, JHP&C sold 100% of the stock of Indemnity. Net assets transferred to the purchaser were approximately $6.0 million and the sale resulted in the recognition of a $6.0 million pre-tax gain. In order to enhance comparability, the following discussion of our results of operations is supplemented, where appropriate, by financial information of the disposed businesses in each period presented. The financial information of the disposed businesses is presented for informational purposes only. 58 Results of Operations The table below presents the results of operations of our ongoing businesses, disposed businesses, and consolidated financial information for the six months ended June 30, 1999 and 1998.
For the Six Months Ended June 30, --------------------------------------------------------------------- 1999 1998 ---------------------------------- ---------------------------------- Ongoing Disposed Ongoing Disposed Businesses Businesses Consolidated Businesses Businesses Consolidated ---------- ---------- ------------ ---------- ---------- ------------ (in millions) Revenues Premiums.............. $1,438.3 $ -- $1,438.3 $1,084.7 $ -- $1,084.7 Universal life and investment-type product charges...... 337.0 -- 337.0 286.5 -- 286.5 Net investment income............... 1,712.3 4.6 1,716.9 1,620.9 12.1 1,633.0 Realized investment gains (losses), net.. 270.1 (28.9) 241.2 109.1 4.3 113.4 Investment management revenues, commissions, and other fees........... 336.9 -- 336.9 327.2 -- 327.2 Other revenue......... 13.7 .6 14.3 4.2 3.0 7.2 -------- ------ -------- -------- ----- -------- Total revenues...... 4,108.3 (23.7) 4,084.6 3,432.6 19.4 3,452.0 Benefits and expenses Benefits to policyholders........ 2,410.5 34.8 2,445.3 1,957.7 10.7 1,968.4 Other operating costs and expenses......... 670.6 (7.2) 663.4 664.6 -- 664.6 Amortization of deferred policy acquisition costs.... 87.5 -- 87.5 98.3 -- 98.3 Dividends to policyholders........ 247.0 -- 247.0 231.7 -- 231.7 -------- ------ -------- -------- ----- -------- Total benefits and expenses........... 3,415.6 27.6 3,443.2 2,952.3 10.7 2,963.0 -------- ------ -------- -------- ----- -------- Income before income taxes, extraordinary item and cumulative effect of accounting change................. 692.7 (51.3) 641.4 480.3 8.7 489.0 Income taxes............ 245.9 (34.9) 211.0 150.5 1.5 152.0 -------- ------ -------- -------- ----- -------- Income before extraordinary item and cumulative effect of accounting change...... 446.8 (16.4) 430.4 329.8 7.2 337.0 Extraordinary item-- demutualization expenses, net of tax... (30.7) -- (30.7) (1.7) -- (1.7) Cumulative effect of accounting change...... (9.7) -- (9.7) -- -- -- -------- ------ -------- -------- ----- -------- Net income.............. $ 406.4 $(16.4) $ 390.0 $ 328.1 $ 7.2 $ 335.3 ======== ====== ======== ======== ===== ========
59 The table below presents the results of operations of our ongoing businesses, disposed businesses, and consolidated financial information for the years ended 1998, 1997 and 1996.
For the Year Ended December 31, -------------------------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------------------- ---------------------------------- ---------------------------------- Ongoing Disposed Ongoing Disposed Ongoing Disposed Businesses Businesses Consolidated Businesses Businesses Consolidated Businesses Businesses Consolidated ---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- ------------ (in millions) Revenues Premiums........ $2,197.9 $ -- $2,197.9 $2,372.9 $100.7 $2,473.6 $2,386.1 $ 536.4 $2,922.5 Universal life and investment- type product charges........ 597.0 -- 597.0 512.0 -- 512.0 466.3 -- 466.3 Net investment income......... 3,308.6 22.1 3,330.7 3,175.9 14.8 3,190.7 3,125.7 97.4 3,223.1 Realized investment gains, net..... 85.3 12.6 97.9 114.3 1.5 115.8 101.5 9.2 110.7 Investment management revenues, commissions, and other fees........... 659.7 -- 659.7 554.7 -- 554.7 450.3 301.0 751.3 Other revenue... 9.9 8.9 18.8 21.5 78.0 99.5 11.3 219.6 230.9 -------- ----- -------- -------- ------ -------- -------- ------- -------- Total revenues.. 6,858.4 43.6 6,902.0 6,751.3 195.0 6,946.3 6,541.2 1,163.6 7,704.8 Benefits and expenses Benefits to policyholders.. 4,135.2 16.8 4,152.0 4,190.7 112.4 4,303.1 4,195.1 481.6 4,676.7 Other operating costs and expenses....... 1,383.0 -- 1,383.0 1,236.6 47.1 1,283.7 1,084.2 609.9 1,694.1 Amortization of deferred policy acquisition costs.......... 249.7 -- 249.7 312.0 -- 312.0 224.6 6.3 230.9 Dividends to policyholders.. 473.2 -- 473.2 455.5 2.3 457.8 419.9 15.2 435.1 -------- ----- -------- -------- ------ -------- -------- ------- -------- Total benefits and expenses... 6,241.1 16.8 6,257.9 6,194.8 161.8 6,356.6 5,923.8 1,113.0 7,036.8 -------- ----- -------- -------- ------ -------- -------- ------- -------- Income before income taxes and extraordinary item............ 617.3 26.8 644.1 556.5 33.2 589.7 617.4 50.6 668.0 Income taxes..... 180.7 3.2 183.9 97.3 9.1 106.4 230.0 17.5 247.5 -------- ----- -------- -------- ------ -------- -------- ------- -------- Income before extraordinary item............ 436.6 23.6 460.2 459.2 24.1 483.3 387.4 33.1 420.5 Extraordinary item-- demutualization expenses, net of tax............. (11.7) -- (11.7) -- -- -- -- -- -- -------- ----- -------- -------- ------ -------- -------- ------- -------- Net income....... $ 424.9 $23.6 $ 448.5 $ 459.2 $ 24.1 $ 483.3 $ 387.4 $ 33.1 $ 420.5 ======== ===== ======== ======== ====== ======== ======== ======= ========
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Consolidated income before income taxes, extraordinary item and cumulative effect of accounting change of $641.4 million for the six months ended June 30, 1999 increased by $152.4 million, or 31.2%, as compared to consolidated income before income taxes and extraordinary item of $489.0 million for the six months ended June 30, 1998. The increase was primarily attributable to increases in income before taxes, extraordinary item and cumulative effect of accounting change of $181.6 million in the Guaranteed and Structured Financial Products Segment, $62.4 million in the Protection Segment, and $5.8 million in the Investment Management Segment. These increases were offset by decreases of $87.4 million in the Corporate and Other Segment and $10.0 million in the Asset Gathering Segment. The increase in the Guaranteed and Structured Financial Products Segment was 60 primarily attributable to higher realized investment gains on sales of real estate due to the program to sell more than 150 of the properties in our real estate portfolio and improved interest margins on spread-based products. The increase in the Protection Segment was primarily due to higher realized investment gains on real estate, higher fee income on variable life insurance products, and lower amortization of deferred policy acquisition costs. The increase in the Investment Management Segment was primarily due to higher investment advisory fees earned resulting from growth in assets under management. Corporate and Other Segment income declined primarily due to the recognition of a $60.2 million charge in connection with the class action lawsuit settlement. The decrease in the Asset Gathering Segment was due primarily to lower investment advisory fees earned from our mutual fund operations due to lower assets under management. Ongoing Businesses. Premium revenue from ongoing businesses was $1,438.3 million for the six months ended June 30, 1999, an increase of $353.6 million, or 32.6%, from $1,084.7 million for the six months ended June 30, 1998. The increase was primarily due to a $340.7 million increase in premiums on single premium annuity contracts in the Guaranteed and Structured Financial Products Segment, including the sale of one contract for $339.0 million, and a $26.7 million increase in the Protection Segment for premiums on individual long- term care insurance products. Universal life and investment-type product charges from ongoing businesses were $337.0 million for the six months ended June 30, 1999, an increase of $50.5 million, or 17.6%, from $286.5 million for the six months ended June 30, 1998. These product charges consist primarily of cost of insurance fees on our universal life insurance and variable life insurance products and mortality and expense fees on our variable annuity products. The increase was primarily due to a higher amount of cost of insurance fees resulting from growth in the average amount of variable life insurance in force and higher average variable annuity separate account liabilities. Investment-type product charges in the Guaranteed and Structured Financial Products Segment also increased as a result of higher sales of single premium annuity contracts and separate account GICs. Net investment income from ongoing businesses was $1,712.3 million for the six months ended June 30, 1999, an increase of $91.4 million, or 5.6%, from $1,620.9 million for the six months ended June 30, 1998. The increase was primarily the result of an increase in average invested assets, which increased $3,304.6 million, or 7.7%, to $46,410.6 million for the six months ended June 30, 1999, as compared to $43,106.0 million for the six months ended June 30, 1998. The net yield on average invested assets was 7.38% and 7.52% for the six months ended June 30, 1999 and 1998, respectively. This decrease was primarily due to the general decline in market interest rates and lower depreciation expense on real estate in 1998, which resulted from suspending depreciation on real estate properties held for sale. Net realized gains on investments from ongoing businesses were $270.1 million for the six months ended June 30, 1999, an increase of $161.0 million, or 147.6%, from $109.1 million for the six months ended June 30, 1998. The increase was primarily the result of increased gains on sales of real estate due to the program initiated in 1998 to sell more than 150 of the properties in our real estate portfolio in order to take advantage of the strong real estate market and reduce our general account investment in real estate. Realized gains on sales of real estate increased $161.3 million to $175.6 million for the six months ended June 30, 1999 from $14.3 million for the six months ended June 30, 1998. Investment management revenues, commissions, and other fees from ongoing businesses were $336.9 million for the six months ended June 30, 1999, an increase of $9.7 million, or 3.0%, from $327.2 million for the six months ended June 30, 1998. The increase was primarily the result of higher commissions earned of $13.0 million as a result of our acquisition of the Essex Corporation, a distributor of annuities and mutual funds through banks, in January 1999. Institutional investment advisory fees increased $8.2 million, or 15.4%, for the six months ended June 30, 1999 due to growth in average institutional assets under management, which increased 15.7% to $40,783.0 million for the six months ended June 30, 1999. Partially offsetting these increases, mutual funds advisory fees declined $7.5 million for the six months ended June 30, 1999 compared to the six months ended June 30, 1998 primarily due to lower sales and higher redemptions along with a decline in the average 61 investment advisory fee rate, primarily because fixed income assets, which bear a lower advisory fee than equity assets, as a percentage of total assets, increased. Other revenue from ongoing businesses increased $9.5 million to $13.7 million for the six months ended June 30, 1999 from $4.2 million for the six months ended June 30, 1998, primarily due to proceeds received, representing the reimbursement of benefits to policyholders previously paid, from the liquidation of Confederation Life Insurance Company, an insolvent Canadian insurer. The Maritime Life Assurance Company had acquired the business giving rise to these benefits from Confederation Life Insurance Company in 1995. Benefits to policyholders from ongoing businesses were $2,410.5 million for the six months ended June 30, 1999, an increase of $452.8 million, or 23.1%, from $1,957.7 million for the six months ended June 30, 1998. The increase was primarily due to a $350.8 million increase in benefits due to higher sales of single premium group annuity contracts, a $48.6 million increase in benefits related to the settlement of a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996 and a $32.4 million increase in benefits on individual long-term care insurance products, resulting from higher sales. Other operating costs and expenses from ongoing businesses were $670.6 million for the six months ended June 30, 1999, an increase of $6.0 million, or 0.9%, from $664.6 million for the six months ended June 30, 1998. Other operating costs and expenses consist primarily of commissions and operating expenses, net of deferrals. The increase was primarily due to higher amortization of mutual fund deferred selling commissions due to higher redemptions and increased interest expense in the Investment Management Segment due to the formation of a collateralized bond obligation during the second quarter of 1998. This increase was partially offset by cost reductions in mutual fund operations. Amortization of deferred policy acquisition costs from ongoing businesses was $87.5 million for the six months ended June 30, 1999, a decrease of $10.8 million, or 11.0%, from $98.3 million for the six months ended June 30, 1998. The decrease was primarily due to lower amortization expense for non- traditional life insurance products and annuity products in 1999, resulting from revised projections of estimated gross profits. Dividends to policyholders from ongoing businesses were $247.0 million for the six months ended June 30, 1999, an increase of $15.3 million, or 6.6%, from $231.7 million for the six months ended June 30, 1998. The increase primarily resulted from normal growth in dividends on traditional life insurance products. Income taxes from ongoing businesses were $245.9 million for the six months ended June 30, 1999, compared to $150.5 million for the six months ended June 30, 1998. Our effective tax rate from ongoing businesses before the surplus tax, demutualization expenses and cumulative effect of accounting change was 33.9% and 33.0% for the six months ended June 30, 1999 and 1998, respectively. We have been subject to the surplus tax (add-on tax) imposed on mutual life insurance companies which disallows a portion of a mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, we will no longer be subject to the surplus tax. Extraordinary expenses from ongoing businesses, net of tax, were $30.7 million and $1.7 million for the six months ended June 30, 1999 and 1998, respectively. These expenses were comprised of direct non-recurring costs specifically related to our reorganization. These costs primarily consist of fees of the regulators' advisors, and our financial, legal, actuarial and accounting advisors. Cumulative effect of accounting change, net of tax, was $9.7 million for the six months ended June 30, 1999. During 1999, we adopted Statement of Position 98-5, Reporting the Cost of Start-up Activities, which requires that start-up costs capitalized prior to January 1, 1999 be written off and any future start-up costs be expensed as incurred. We wrote off the unamortized balance of capitalized start-up costs related to our closed-end mutual funds in the six months ended June 30, 1999. 62 Disposed Businesses. Revenues from disposed businesses decreased $43.1 million and benefits and expenses from disposed businesses increased $16.9 million for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998 due to the previously described disposals. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Consolidated income before income taxes and extraordinary item of $644.1 million for the year ended December 31, 1998 increased by $54.4 million, or 9.2%, as compared to consolidated income before income taxes and extraordinary item of $589.7 million for the year ended December 31, 1997. The increase was primarily attributable to increases in income before income taxes and extraordinary item of $43.6 million in the Asset Gathering Segment, $20.2 million in the Guaranteed and Structured Financial Products Segment, and $3.1 million in the Protection Segment. These increases were offset by decreases of $8.5 million in the Corporate and Other Segment and $4.0 million in the Investment Management Segment. The increase in the Asset Gathering Segment was primarily attributable to growth in investment management revenues, commissions, and other fees, investment-type product charges, and net investment income, all due to growth in assets under management, primarily due to net sales. The increase in the Guaranteed and Structured Financial Products Segment was primarily due to improved interest margins on spread-based products and growth in general account assets. The increase in the Protection Segment was primarily due to higher fee income from cost of insurance and separate account charges on variable life insurance products and lower amortization of deferred policy acquisition costs, partially offset by higher operating expenses. Corporate and Other Segment income declined due to the disposal of businesses previously described. The decrease in the Investment Management Segment was due primarily to reduced advisory fees on timber assets and higher operating expenses due to growth in operations. Ongoing Businesses. Premium revenue from ongoing businesses was $2,197.9 million for 1998, a decrease of $175.0 million, or 7.4%, from $2,372.9 million in 1997. The decrease was primarily due to a decline in premiums of $107.6 million resulting from the termination of our participation in the Federal Employers Group Life Insurance Program (the "FEGLI Program") in the Corporate and Other Segment and a $79.6 million decrease in single premium annuity contract premiums in the Guaranteed and Structured Financial Products Segment. The decline in premiums due to the termination of our participation in the FEGLI Program has little effect on earnings, as the decline in premiums is completely offset by corresponding decreases in benefits to policyholders. Traditional life insurance premiums in the Protection Segment decreased $38.0 million primarily due to term insurance premiums ceded under a reinsurance contract entered into during 1998. These decreases were partially offset by higher premiums of individual long-term care insurance of $43.3 million, an increase of 24.7%. Universal life and investment-type product charges from ongoing businesses were $597.0 million for 1998, an increase of $85.0 million, or 16.6%, from $512.0 million in 1997. The increase was primarily the result of growth in account values of variable life insurance products due to additional deposits and market appreciation. The average amount of variable life insurance in force increased 12.7% to $49,364.1 million in 1998 from $43,791.7 million in 1997. Average variable annuity separate account liabilities increased 28.9% to $5,736.0 million in 1998 compared to $4,450.0 million in 1997. Net investment income from ongoing businesses was $3,308.6 million for 1998, an increase of $132.7 million, or 4.2%, from $3,175.9 million in 1997. The increase was primarily the result of an increase in average invested assets related to ongoing businesses due to continued sales among all segments. Average invested assets related to ongoing businesses increased $1,711.0 million, or 4.1%, to $43,418.1 million for 1998, as compared to $41,707.1 million in 1997. The net yield on average invested assets increased to 7.62% in 1998 from 7.61% in 1997. The increase was primarily due to increased investments in leveraged leases and lower depreciation expense on real estate, which resulted from suspending depreciation on real estate properties held for sale during 1998. Net realized gains on investments from ongoing businesses were $85.3 million for 1998, a decrease of $29.0 million, or 25.4%, from $114.3 million in 1997. The decrease was primarily due to additional provisions for 63 losses of $142.0 million on mortgage loans, real estate, and other invested assets, partially offset by higher gains on sales of common stock and real estate. During 1998 we initiated a program to sell more than 150 properties in our real estate portfolio. Once we identify a property to be sold, it is held for sale and valued at the lower of cost or fair value less costs to sell. Realized gains on sales of common stock were $82.0 million in 1998, as compared to $6.2 million in 1997. Realized gains on sales of real estate were $48.5 million in 1998, as compared to $18.3 million in 1997. Investment management revenues, commissions, and other fees from ongoing businesses were $659.7 million, an increase of $105.0 million, or 18.9%, from $554.7 million in 1997. This increase was primarily the result of higher underwriting and distribution fees earned of $64.1 million, higher investment advisory fees earned of $39.0 million, and higher shareholder service and other fees earned of $6.7 million primarily in the Asset Gathering Segment. The increases primarily reflect a higher level of average assets under management, which increased 15.6% to $69,960.2 million in 1998 from $60,513.7 million in 1997. Other revenue from ongoing businesses was $9.9 million in 1998, a decrease of $11.6 million, or 54.0%, from $21.5 million reported in 1997. Of the decrease, $4.4 million was due to lower conversion fee income resulting from the termination of our participation in the FEGLI Program. Conversion fee income is earned when an insured in the FEGLI Program purchases insurance directly from us. Benefits to policyholders from ongoing businesses were $4,135.2 million for 1998, a decrease of $55.5 million, or 1.3%, from $4,190.7 million in 1997. This decrease primarily resulted from a $107.0 million decline in benefits related to the termination of the FEGLI Program and a $83.6 million decline in benefits primarily resulting from lower sales of single premium annuity contracts. These decreases were partially offset by a $77.3 million increase in benefits related to the settlement of a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996 and higher benefits on non-traditional life insurance and individual long-term care insurance products due to increased sales. Other operating costs and expenses from ongoing businesses were $1,383.0 million for 1998, an increase of $146.4 million, or 11.8%, from $1,236.6 million for 1997. The increase was primarily due to higher compensation and related costs and administrative expenses of approximately $60.6 million related to mutual fund and institutional investment management operations as a result of continued growth in those businesses and additional expenses of $47.2 million related to the operation, management, and enhancement of our information systems. Commissions increased from 1997 as a result of higher sales of mutual fund and non-traditional life insurance products. These increases were partially offset by lower expenses of $19.6 million in 1998, as compared to 1997, related to the settlement of a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996. Amortization of deferred policy acquisition costs from ongoing businesses was $249.7 million for 1998, a decrease of $62.3 million, or 20.0%, from $312.0 million for 1997. The decrease was primarily the result of higher amortization expense in 1997 for non-traditional life insurance products resulting from revised projections of estimated gross profits. Dividends to policyholders from ongoing businesses were $473.2 million in 1998, an increase of $17.7 million, or 3.9%, from $455.5 million in 1997. The increase primarily resulted from normal growth in dividends on traditional life insurance products, partially offset by a reduction in participating group annuity contract payments. Income taxes from ongoing businesses were $180.7 million in 1998, compared to $97.3 million for 1997. Our effective tax rate from ongoing businesses before the surplus tax and demutualization expenses was 31.8% in 1998, as compared to 23.8% in 1997. The increase in the effective tax rate was due primarily to the development of tax planning strategies to use $51.0 million of net loss carryforwards in 1997. 64 Extraordinary expenses of $11.7 million, net of tax, for 1998 were comprised of direct non-recurring costs specifically related to our reorganization. These costs primarily consist of fees of our financial, legal, actuarial, and accounting advisors. Disposed Businesses. Revenues from disposed businesses decreased $151.4 million and benefits and expenses from disposed businesses decreased $145.0 million from 1997 to 1998 due to the previously described disposals. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Consolidated income before income taxes was $589.7 million for the year ended December 31, 1997, a decrease of $78.3 million, or 11.7%, as compared to consolidated income before income taxes of $668.0 million for the year ended December 31, 1996. The decrease was primarily attributable to decreases in income before income taxes of $59.6 million in the Corporate and Other Segment, $37.4 million in the Guaranteed and Structured Financial Products Segment, $26.7 million in the Protection Segment, and $7.0 million in the Investment Management Segment. These decreases were partially offset by an increase of $52.4 million in the Asset Gathering Segment. The decrease in the Corporate and Other Segment was primarily attributable to an increase of $34.6 million in benefits to policyholders and expenses incurred related to the settlement of a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996, as specified elsewhere in this prospectus. The decrease in the Guaranteed and Structured Financial Products Segment was primarily due to a decline in interest margins on spread-based products. The decrease in the Protection Segment was primarily due to higher amortization of deferred policy acquisition costs. Income before income taxes in the Investment Management Segment declined primarily due to losses on hedging transactions not qualifying for hedge accounting treatment resulting from a decline in U.S. Treasury rates. The increase in income before income taxes in the Asset Gathering Segment was due to growth in investment management revenues, commissions, and other fees, investment-type product charges, and net investment income, all due to growth in assets under management. Ongoing Businesses. Premium revenue from ongoing businesses was $2,372.9 million for 1997, a decrease of $13.2 million, or .6%, from $2,386.1 million for 1996. The decrease was primarily due to a $158.6 million decrease in premiums on conversion annuities and single premium annuity contracts in the Guaranteed and Structured Financial Products Segment. A conversion annuity is a participating group annuity contract that has been converted to a non- participating annuity. Such a decline in sales has little effect on earnings, as the decreased premiums are offset by corresponding decreases in benefits to policyholders. The decrease was largely offset by higher premiums among most products. Individual long-term care insurance premiums increased $51.0 million, or 41.0%; group life insurance premiums increased $36.3 million, or 19.4%; and single premium immediate annuities with life contingencies increased $32.0 million, or 139.1%. Universal life and investment-type product charges from ongoing businesses were $512.0 million for 1997, an increase of $45.7 million, or 9.8%, from $466.3 million in 1996. The increase was primarily due to a higher amount of cost of insurance fees resulting from growth in the average amount of variable life insurance in force, which increased 12.8% to $43,791.7 million in 1997 from $38,827.6 million in 1996. Average variable annuity separate account liabilities increased 27.8% to $4,450.0 million in 1997 compared to $3,481.9 million in 1996. Net investment income from ongoing businesses was $3,175.9 million for 1997, an increase of $50.2 million, or 1.6%, from $3,125.7 million for 1996. The increase was primarily the result of an increase in average invested assets related to ongoing businesses of $1,590.5 million, or 4.0% to $41,707.1 million for 1997, as compared to $40,116.6 million for 1996. The net yield on average invested assets decreased to 7.61% in 1997 from 7.79% in 1996. The decrease was primarily due to the general decline in market interest rates. Net realized gains on investments from ongoing businesses were $114.3 million for 1997, an increase of $12.8 million, or 12.6%, from $101.5 million in 1996. The increase was primarily due to higher gains on sales of mortgage loans and real estate, partially offset by lower gains on sales of common and preferred stock. Net 65 realized gains on sales of mortgage loans were $8.4 million in 1997, as compared to a loss of $64.2 million in 1996. Realized gains on sales of real estate were $18.3 million in 1997, as compared to a loss of $20.1 million in 1996. Realized gains on sales of common and preferred stock were $6.2 million and $10.5 million, in 1997, as compared to $77.1 million and $25.3 million in 1996, respectively. Investment management revenues, commissions, and other fees from ongoing businesses were $554.7 million, an increase of $104.4 million, or 23.2%, from $450.3 million in 1996. This increase was primarily the result of higher underwriting and distribution fees earned of $59.4 million and higher investment advisory fees earned of $51.5 million. The increases primarily reflect a higher level of average assets under management which increased 21.8% to $60,513.7 million in 1997 from $49,683.5 million in 1996. Benefits to policyholders from ongoing businesses were $4,190.7 million for 1997, a decrease of $4.4 million, or .1%, from $4,195.1 million for 1996. The decrease resulted from a $194.1 million decrease in benefits in the Guaranteed and Structured Financial Products Segment primarily due to lower sales of conversion annuities and single premium group annuity contracts, largely offset by increases due to higher sales in almost all other product lines. Other operating costs and expenses from ongoing businesses were $1,236.6 million for 1997, an increase of $152.4 million, or 14.1%, from $1,084.2 million for 1997. The increase was primarily due to higher compensation and related costs and administrative expenses of approximately $67.3 million related to our mutual funds and institutional investment management operations as a result of continued growth and higher expenses of $15.8 million in 1997, as compared to 1996, related to the settlement of a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996. In addition, commissions increased primarily due to higher amortization of deferred selling commissions on mutual fund products and increased sales in almost all other product lines. Amortization of deferred policy acquisition costs from ongoing businesses was $312.0 million for 1997, an increase of $87.4 million, or 38.9%, from $224.6 million for 1996. The increase was primarily the result of higher amortization expense in 1997 for traditional life insurance products resulting from revised projections of estimated gross margins based upon changes in estimated future expense levels and higher amortization for non-traditional life insurance products due to revised projections of estimated gross profits. Dividends to policyholders from ongoing businesses were $455.5 million in 1997, an increase of $35.6 million, or 8.5%, from $419.9 million in 1996. The increase primarily resulted from normal growth in dividends on traditional life insurance products and an increase in participating group annuity contract payments. Income taxes from ongoing businesses were $97.3 million in 1997, compared to $230.0 million for 1996. Our effective tax rate before the surplus tax was 23.8% in 1997, as compared to 34.0% in 1996. The decrease in the effective tax rate was due primarily to the development of tax planning strategies to use $51.0 million of net loss carryforwards in 1997. Disposed Businesses. Revenues from disposed businesses were $195.0 million for 1997, a decrease of $968.6 million, or 83.2%, from $1,163.6 million for 1996. Benefits and expenses from disposed businesses were $161.8 million for 1997, a decrease of $951.2 million, or 85.5%, from $1,113.0 million for 1996. These decreases were due to the previously described disposals. Results of Operations by Segment We evaluate segment performance and base management's incentives on after- tax operating income, which excludes the effect of net realized investment gains and losses and unusual or non-recurring events and transactions. Segment after-tax operating income is determined by adjusting GAAP net income for net realized investment gains and losses, including gains and losses on disposals of businesses, extraordinary items, and certain other items which we believe are not indicative of overall operating trends. While these items may be 66 significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of after-tax operating income enhances the understanding of our results of operations by highlighting net income attributable to the normal, recurring operations of the business. However, after-tax operating income is not a substitute for net income determined in accordance with GAAP. A discussion of the adjustments to GAAP reported income, many of which affect each operating segment, follows. A reconciliation of after-tax operating income, as adjusted, to GAAP reported net income precedes each segment discussion.
For the Six Months Ended For the Year Ended June 30, December 31, -------------- ---------------------- 1999 1998 1998 1997 1996 ------ ------ ------ ------ ------ (in millions) Segment after-tax operating income: Protection Segment................... $ 89.2 $ 84.3 $172.3 $158.1 $197.3 Asset Gathering Segment.............. 61.7 58.0 111.1 93.3 55.7 ------ ------ ------ ------ ------ Total Retail....................... 150.9 142.3 283.4 251.4 253.0 Guaranteed and Structured Financial Products Segment.................... 120.6 76.3 145.7 138.5 155.4 Investment Management Segment........ 17.2 14.1 15.4 17.2 21.6 ------ ------ ------ ------ ------ Total Institutional................ 137.8 90.4 161.1 155.7 177.0 Corporate and Other Segment.......... 35.4 27.9 56.3 39.4 20.2 ------ ------ ------ ------ ------ Total after-tax operating income... 324.1 260.6 500.8 446.5 450.2 After-tax adjustments: Realized investment gains, net....... 160.6 68.5 93.9 104.9 80.6 Class action lawsuit................. (39.1) -- (150.0) (112.5) (90.0) Restructuring charge................. (3.8) -- -- -- -- Benefit from pension participating contract modification............... -- -- -- 9.1 -- Surplus tax.......................... (11.4) 7.9 15.5 35.3 (20.3) ------ ------ ------ ------ ------ Total after-tax adjustments........ 106.3 76.4 (40.6) 36.8 (29.7) ------ ------ ------ ------ ------ GAAP Reported: Income before extraordinary item and cumulative effect of accounting change.............................. 430.4 337.0 460.2 483.3 420.5 Extraordinary item-demutualization expenses, net of tax................ (30.7) (1.7) (11.7) -- -- Cumulative effect of accounting change.............................. (9.7) -- -- -- -- ------ ------ ------ ------ ------ Net income......................... $390.0 $335.3 $448.5 $483.3 $420.5 ====== ====== ====== ====== ======
Adjustments to GAAP Reported Net Income Our GAAP reported net income was significantly affected by net realized investment gains and losses and unusual or non-recurring events and transactions presented above as after-tax adjustments. In all periods, net realized investment gains and losses, including gains and losses on our disposed businesses, and the surplus tax have been excluded from operating income. We have been subject to the surplus tax imposed on mutual life insurance companies which disallows a portion of mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, we will no longer be subject to surplus tax. During 1997, we entered into a court approved settlement relating to a class action lawsuit involving individual life insurance policies sold from 1979 through 1996, as specified elsewhere in this prospectus. In entering into the settlement, we specifically denied any wrongdoing. The reserve held in connection with the settlement to provide for relief to class members and for legal and administrative costs associated with the settlement amounted to $466.5 million, $436.6 million and $308.8 million at June 30, 1999, December 31, 1998 67 and December 31, 1997, respectively. Given the uncertainties associated with estimating the reserve, it is reasonably possible that the final cost of the settlement could differ materially from the amount previously provided. During the first six months of 1999, we recorded a $3.8 million after-tax restructuring charge in accordance with our plans to reduce the cost structure of our mutual fund operations. This charge primarily included accruals for severance and related benefits for staff reductions. The restructuring liability at June 30, 1999 was $5.9 million and is expected to be paid by March 2002. During 1997, a participating pension reinsurance contractholder requested the distribution of a portion of contract funds. At the time of the request, the contract stated that these funds were to be paid out over a specified number of years. However, we agreed to distribute a portion of the contractholder's funds in exchange for the right to retain the tax credits that resulted from the distribution. The contractual amendment resulted in the recognition of a $9.1 million after-tax gain. Segment Allocations We allocate surplus to the segments in amounts sufficient to support the associated liabilities of each segment and to maintain capital levels consistent with the overall business segment and corporate strategies. Allocations of net investment income are based on the amount of assets allocated to each segment. Other costs and operating expenses are allocated to each segment based on a review of the nature of such costs, cost allocations utilizing time studies, and other allocation methodologies. 68 Retail-Protection Segment The following table presents certain summary financial data relating to the Protection Segment for the periods indicated.
For the Six Months Ended For the Year Ended June 30, December 31, -------------------------- ---------------------------- 1999 1998 1998 1997 1996 ------------ ------------ -------- -------- -------- (in millions) Operating Results: Revenues Premiums.............. $ 704.7 $ 670.6 $1,351.4 $1,343.0 $1,286.8 Universal life and investment-type product charges...... 177.4 155.4 333.3 288.8 268.8 Net investment income............... 516.2 508.2 1,063.9 983.4 947.1 Other revenue......... 3.5 2.6 10.6 16.6 14.9 ------------ ------------ -------- -------- -------- Total revenues...... 1,401.8 1,336.8 2,759.2 2,631.8 2,517.6 Benefits and expenses Benefits to policyholders........ 799.7 729.6 1,493.8 1,399.1 1,341.7 Other operating costs and expenses......... 189.3 214.3 442.4 375.7 349.2 Amortization of deferred policy acquisition costs.... 56.4 62.1 153.9 224.7 160.7 Dividends to policyholders........ 228.0 212.7 422.8 395.9 371.1 ------------ ------------ -------- -------- -------- Total benefits and expenses........... 1,273.4 1,218.7 2,512.9 2,395.4 2,222.7 ------------ ------------ -------- -------- -------- Pre-tax operating income................. 128.4 118.1 246.3 236.4 294.9 Income taxes............ 39.2 33.8 74.0 78.3 97.6 ------------ ------------ -------- -------- -------- After-tax operating income................. 89.2 84.3 172.3 158.1 197.3 After-tax adjustments: Realized investment gains, net........... 77.5 41.4 49.2 53.5 32.8 Surplus tax........... (3.6) 5.9 11.7 16.9 (5.7) ------------ ------------ -------- -------- -------- Total after-tax adjustments........ 73.9 47.3 60.9 70.4 27.1 ------------ ------------ -------- -------- -------- GAAP Reported: Income before extraordinary item... 163.1 131.6 233.2 228.5 224.4 Extraordinary item- demutualization expenses, net of tax.................. (19.7) (1.2) (7.9) -- -- ------------ ------------ -------- -------- -------- Net income.......... $ 143.4 $ 130.4 $ 225.3 $ 228.5 $ 224.4 ============ ============ ======== ======== ======== Other Data: After-tax operating income Non-traditional life (variable life and universal life) $ 48.1 $ 35.3 $ 74.6 $ 38.6 $ 38.8 Traditional life...... 28.1 35.5 73.0 97.9 146.8 Individual long-term care................. 9.5 9.9 16.4 15.9 7.3 Group long-term care.. 5.0 3.5 7.8 8.4 5.3 Other................. (1.5) .1 .5 (2.7) (.9) Statutory premiums(1) Variable life......... $ 392.1 $ 418.8 $ 810.8 $ 670.8 $ 583.4 Universal life(2)..... 51.6 356.4 436.8 141.8 302.7 Traditional life...... 512.2 524.7 1,051.3 1,071.7 1,068.5 Individual long-term care................. 120.2 92.5 199.8 156.6 94.7 Group long-term care.. 38.8 35.4 72.7 69.6 62.3
69 - -------- (1) Statutory data have been derived from the annual statements of John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, Investors Partner Life (formerly John Hancock Life Insurance Company of America), and John Hancock Reassurance Company Ltd. as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. (2) Includes bank owned life insurance premiums of $310.0 million for the six months ended June 30, 1998, and $340.0 million, $65.0 million, and $255.0 million for the years ended 1998, 1997 and 1996, respectively. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 After-tax operating income was $89.2 million for the six months ended June 30, 1999, an increase of $4.9 million, or 5.8%, from $84.3 million for the six months ended June 30, 1998. Non-traditional life insurance after-tax operating income increased $12.8 million, or 36.3%, primarily due to increases in universal life and investment-type product charges due to growth in variable life insurance in force resulting from sales and market appreciation and lower amortization expense on deferred policy acquisition costs due to revised projections of estimated gross profits. Traditional life insurance after-tax operating income decreased $7.4 million, or 20.8%, primarily due to an increase in benefits to policyholders including higher death claims and higher dividends. Individual long-term care insurance after-tax operating income decreased $.4 million, or 4.0%, primarily due to unfavorable persistency, partially offset by favorable claims experience. Group long-term care insurance after-tax operating income increased by $1.5 million, or 42.9%, primarily due to higher net investment income and favorable claims experience. Total revenues were $1,401.8 million for the six months ended June 30, 1999, an increase of $65.0 million, or 4.9%, from $1,336.8 million for the six months ended June 30, 1998. Premiums increased $34.1 million, or 5.1%, primarily due to an increase in individual long-term care insurance premiums, which increased $26.7 million, or 25.9%. Universal life and investment-type product charges consist primarily of cost of insurance fees and separate account fees and were $177.4 million for the six months ended June 30, 1999, an increase of $22.0 million, or 14.2%, from $155.4 million for the six months ended June 30, 1998. The increase was primarily due to higher cost of insurance fees resulting from growth in the average amount of variable life insurance in force, which increased 10.5% to $54,403.2 million for the six months ended June 30, 1999 from $49,231.6 million for the six months ended June 30, 1998. Net investment income increased $8.0 million, or 1.6%, primarily due to an increase in the segment's average invested assets, partially offset by a slight decline in the average investment yield, partially due to the sale of real estate, which generally yielded higher returns than fixed maturity investments. Total benefits and expenses were $1,273.4 million for the six months ended June 30, 1999, an increase of $54.7 million, or 4.5%, from $1,218.7 million for the six months ended June 30, 1998. Benefits to policyholders increased $70.1 million, or 9.6%, primarily due to a $32.4 million increase in benefits to policyholders on individual long-term care insurance products, due to higher sales, and a $25.9 million increase in benefits on traditional life insurance products due to higher death benefits. Other operating costs and expenses decreased $25.0 million, or 11.7%, to $189.3 million for the six months ended June 30, 1999 from $214.3 million for the six months ended June 30, 1998 primarily due to lower interest expense on prior year taxes, partially offset by higher commissions on non-traditional life insurance and individual long-term care insurance products due to higher sales. Amortization of deferred policy acquisition costs of $56.4 million for the six months ended June 30, 1999 decreased $5.7 million, or 9.2%, from $62.1 million for the six months ended June 30, 1998. The decrease was primarily due to lower amortization expense in 1999 resulting from revised projections of estimated gross profits based upon changes in estimated future interest margins and mortality margins on non-traditional life insurance products. Dividends to policyholders increased $15.3 million, or 7.2%, primarily due to normal growth of dividends on traditional life insurance products. The segment's effective tax rate was 30.5% and 28.6% for the six months ended June 30, 1999 and 1998, respectively. The increase was due to higher nondeductible premiums paid on company owned life insurance. 70 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 After-tax operating income was $172.3 million in 1998, an increase of $14.2 million, or 9.0% from $158.1 million in 1997. Non-traditional life insurance after-tax operating income increased $36.0 million, or 93.3%, to $74.6 million in 1998 from $38.6 million in 1997. This increase was primarily due to higher product charges on variable life insurance resulting from increased sales and market appreciation. This increase also was due to lower amortization expense of deferred policy acquisition costs in 1998 compared to 1997 that resulted from revised projections of estimated gross profits. Traditional life insurance after-tax operating income declined by $24.9 million, or 25.4%, primarily due to higher operating expenses incurred for the operation, management and enhancement of our information systems. Individual long-term care insurance after-tax operating income increased $.5 million, or 3.1%, to $16.4 million in 1998 from $15.9 million in 1997, primarily due to favorable claims experience partially offset by unfavorable persistency. Group long-term care insurance after-tax operating income declined by $.6 million, or 7.1%, primarily due to unfavorable persistency. Total revenues were $2,759.2 million in 1998, an increase of $127.4 million, or 4.8%, from $2,631.8 million in 1997. Premiums increased $8.4 million, or .6%, from 1997 primarily due to an increase in individual long-term care insurance premiums of $43.3 million, or 24.7%, partially offset by a decrease in traditional life insurance premiums of $38.0 million, or 3.5%. The decrease in traditional life insurance premiums was primarily due to $34.5 million of term insurance premiums, primarily related to policies issued from 1986 to 1995, which were ceded under a reinsurance contract entered into during 1998. Universal life and investment-type product charges increased $44.5 million, or 15.4%, to $333.3 million in 1998 from $288.8 million in 1997. Cost of insurance fees increased primarily due to growth in the average amount of variable life insurance in force, which increased 12.7% to $49,364.1 million in 1998 from $43,791.7 million in 1997. Fees earned on separate account products increased as a result of the strong stock market returns experienced during the year. Net investment income increased by $80.5 million, or 8.2%, compared to 1997, primarily reflecting an increase in the segment's invested assets. Other revenue decreased $6.0 million in 1998 primarily due to lower conversion fee income of $4.4 million resulting from the termination of our participation in the FEGLI Program. Total benefits and expenses were $2,512.9 million in 1998, an increase of $117.5 million, or 4.9%, from $2,395.4 million in 1997. This increase was primarily due to a $85.6 million increase in benefits to policyholders on non- traditional life insurance and individual long-term care insurance products. Benefits on non-traditional life insurance products increased $51.8 million, or 32.3%, primarily due to interest credited on the average total account balance on universal life insurance, which increased 33.1% to $1,186.8 million for 1998 from $891.5 million for 1997, due to sales of new contracts. Benefits on individual long-term care insurance products increased $33.8 million, or 28.4%, due to sales of new contracts and higher than expected persistency of insurance in force. These increases were partially offset by favorable mortality and persistency on traditional life and non-traditional life insurance products. Other operating costs and expenses increased $66.7 million, or 17.8%, to $442.4 million in 1998 from $375.7 million in 1997. The increase was primarily due to higher expenses incurred for the operation, management, and enhancement of our information systems and increased commissions resulting from higher sales of non-traditional life insurance products. Amortization of deferred policy acquisition costs of $153.9 million for 1998 decreased $70.8 million, or 31.5%, from $224.7 million for 1997 primarily due to higher amortization expense recorded in 1997 that resulted from revised projections of estimated gross profits based upon changes in estimated future expense levels. Dividends to policyholders increased $26.9 million, or 6.8%, due primarily to normal growth of dividends on traditional life insurance products. The segment's effective tax rate declined to 30.0% in 1998, from 33.1% in 1997 due to nondeductible losses arising in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 After-tax operating income was $158.1 million in 1997, a decrease of $39.2 million, or 19.9%, from $197.3 million in 1996. Non-traditional life insurance after-tax operating income decreased $.2 million, or .5% to $38.6 million in 1997 from $38.8 million in 1996 primarily due to higher amortization expense of deferred policy acquisition costs in 1997 that resulted from revised projections of estimated gross profits. This decrease was 71 partially offset by higher product charges on variable life insurance products resulting from increased sales and market appreciation. Traditional life insurance after-tax operating income declined $48.9 million primarily due to higher amortization expense on deferred policy acquisition costs that resulted from revised projections of estimated gross profits based on changes in estimated future expense levels and higher dividends, partially offset by favorable mortality experience. Individual long-term care insurance after-tax operating income increased $8.6 million to $15.9 million in 1997 from $7.3 million in 1996 primarily due to higher sales. Group long-term care insurance after-tax operating income increased by $3.1 million primarily due to favorable persistency. Total revenues increased $114.2 million, or 4.5%, to $2,631.8 million in 1997 from $2,517.6 million in 1996. This increase was due primarily to individual long-term care premiums, which increased $51.0 million, or 41.0%, to $175.2 million. Universal life and investment-type product charges increased $20.0 million, or 7.4%, from 1996, primarily due to a higher amount of cost of insurance fees resulting from growth in the average amount of variable life insurance in force, which increased 12.8% to $43,791.7 million in 1997 from $38,827.6 million in 1996. Net investment income increased by $36.3 million, or 3.8%, compared to 1996, primarily due to an increase in the segment's invested assets. Total benefits and expenses were $2,395.4 million in 1997, an increase of $172.7 million, or 7.8%, from $2,222.7 million in 1996. Benefits to policyholders were $1,399.1 million in 1997, an increase of $57.4 million, or 4.3%, from $1,341.7 million in 1996. This increase was due primarily to a $36.6 million increase in benefits to policyholders on individual long-term care insurance products due to increased sales, and higher benefits on non- traditional life insurance products which increased $13.7 million, or 9.4%. Benefits on non-traditional life insurance products increased primarily due to a higher average total account balance on universal life insurance, which increased 28.0% to $891.5 million in 1997 from $696.3 million for 1996, resulting in increased interest credited. These increases were partially offset by favorable mortality in traditional life insurance products. Other operating costs and expenses were $375.7 million in 1997, an increase of $26.5 million, or 7.6%, from $349.2 million in 1996. The increase was primarily due to increased commissions on non-traditional life insurance and individual long-term care insurance products, due to higher sales, partially offset by higher expense allowances received under reinsurance agreements resulting from higher sales of the reinsured term life insurance products. Amortization of deferred policy acquisition costs of $224.7 million in 1997 increased $64.0 million, or 39.8%, from $160.7 million for 1996 primarily due to higher amortization expense recorded in 1997 that resulted from revised projections of estimated gross profits based upon changes in estimated future expense levels. Dividends to policyholders increased $24.8 million, or 6.7%, due primarily to normal growth in dividends on traditional life insurance products. The segment's effective tax rate was 33.1% in 1997 and 1996. 72 Retail-Asset Gathering Segment The following table presents certain summary financial data relating to the Asset Gathering Segment for the periods indicated.
For the Six Months Ended For the Year Ended June 30, December 31, -------------------------- ------------------------------ 1999 1998 1998 1997 1996 ------------ ------------ --------- --------- --------- (in millions) Operating Results: Revenues Premiums.............. $ 5.3 $ 14.2 $ 19.8 $ 55.0 $ 23.0 Investment-type product charges...... 57.4 49.8 99.9 82.7 67.3 Net investment income............... 187.5 185.3 378.0 353.3 320.0 Investment management revenues, commissions, and other fees........... 269.3 260.5 516.8 412.4 310.4 Other revenue (expense)............ 1.2 3.7 0.8 1.5 (0.6) ------------ ------------ --------- --------- --------- Total revenues...... 520.7 513.5 1,015.3 904.9 720.1 Benefits and expenses Benefits to policyholders........ 145.3 144.2 296.3 314.5 259.9 Other operating costs and expenses......... 261.2 249.9 504.9 416.2 339.2 Amortization of deferred policy acquisition costs.... 23.2 28.3 46.8 38.9 33.6 Dividends to policyholders........ 0.1 0.1 0.1 0.1 0.1 ------------ ------------ --------- --------- --------- Total benefits and expenses........... 429.8 422.5 848.1 769.7 632.8 ------------ ------------ --------- --------- --------- Pre-tax operating income................. 90.9 91.0 167.2 135.2 87.3 Income taxes............ 29.2 33.0 56.1 41.9 31.6 ------------ ------------ --------- --------- --------- After-tax operating income................. 61.7 58.0 111.1 93.3 55.7 After-tax adjustments: Realized investment gains, net........... 5.3 7.8 12.0 4.4 1.4 Restructuring charge, net.................. (3.8) -- -- -- -- Surplus tax........... (0.6) 0.1 0.3 0.3 (1.0) ------------ ------------ --------- --------- --------- Total after-tax adjustments........ 0.9 7.9 12.3 4.7 0.4 ------------ ------------ --------- --------- --------- GAAP Reported: Income before extraordinary item and cumulative effect of accounting change............... 62.6 65.9 123.4 98.0 56.1 Extraordinary item- demutualization expenses, net of tax.................. (4.0) (0.3) (1.8) -- -- Cumulative effect of accounting change.... (9.6) -- -- -- -- ------------ ------------ --------- --------- --------- Net income.......... $ 49.0 $ 65.6 $ 121.6 $ 98.0 $ 56.1 ============ ============ ========= ========= ========= Other Data: After-tax operating income Annuity............... $ 33.2 $ 27.7 $ 53.2 $ 45.7 $ 32.5 Mutual funds.......... 27.5 29.9 57.0 46.8 22.2 Other................. 1.0 0.4 0.9 0.8 1.0 Annuity premiums and deposits(1) Fixed................. $ 301.9 $ 237.0 $ 360.6 $ 692.6 $ 652.2 Variable.............. 409.4 473.4 882.7 745.9 629.3 Mutual fund assets under management, end of period................. $ 34,225.9 $ 36,202.4 $34,945.2 $31,402.0 $23,298.6
73 - -------- (1) Statutory data have been derived from the annual statements of John Hancock Mutual Life Insurance Company and John Hancock Variable Life Insurance Company, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 After-tax operating income was $61.7 million for the six months ended June 30, 1999, an increase of $3.7 million, or 6.4%, from $58.0 million for the six months ended June 30, 1998. Annuity after-tax operating income increased $5.5 million, or 19.9%, primarily due to increases in variable annuity product charges resulting from sales and market appreciation in account balances and change in deferred policy acquisition costs due to revised projections of estimated gross profits. Mutual fund after-tax operating income decreased $2.4 million, or 8.0%, primarily due to lower assets under management, partially offset by a decline in operating expenses. Other after-tax operating income increased $.6 million as a result of our acquisition of the Essex Corporation, a distributor of annuities and mutual funds through banks, in January 1999. Total revenues increased $7.2 million, or 1.4%, to $520.7 million for the six months ended June 30, 1999 from $513.5 million for the six months ended June 30, 1998. Premiums decreased $8.9 million, or 62.7%, due to lower sales of immediate fixed annuities with life contingencies. Investment-type product charges increased $7.6 million, or 15.3%, due to growth in average variable annuity separate account liabilities. Average variable annuity separate account liabilities increased 20.9% to $6,718.8 million for the six months ended June 30, 1999 from $5,557.4 million for the six months ended June 30, 1998. Mortality and expense fees as a percentage of average account balances were 1.40% and 1.38% for the six months ended June 30, 1999 and 1998, respectively. Net investment income increased $2.2 million, or 1.2%, as a result of a higher level of invested assets backing fixed annuity products partially offset by a decrease in the average investment yield on invested assets backing fixed annuity products. The average investment yield on invested assets backing fixed annuity products was 7.61% and 7.72% for the six months ended June 30, 1999 and 1998, respectively. The decrease reflects lower market interest rates on new fixed income investments. Investment management revenues, commissions, and other fees increased $8.8 million, or 3.4%, to $269.3 million for the six months ended June 30, 1999 from $260.5 million for the six months ended June 30, 1998. Average mutual fund assets under management increased $578.5 million, or 1.7%, to $34,380.7 million for the six months ended June 30, 1999 from $33,802.2 million for the six months June 30, 1998 primarily due to market appreciation. However, total mutual fund assets under management decreased $719.3 million from December 31, 1998 to June 30, 1999 as net redemptions were $1,381.5 million for the six months ended June 30, 1999 compared to net sales of $3,105.0 million for the six months ended June 30, 1998. Investment advisory fees were $100.5 million for the six months ended June 30, 1999 compared to $105.7 million for the six months ended June 30, 1998. Investment advisory fees were .59% and .63% of average mutual fund assets under management for the six months ended June 30, 1999 and June 30, 1998, respectively. The decline in the investment advisory fee rate occurred primarily because fixed income assets, which bear a lower advisory fee than equity assets, increased as a percentage of total assets. Underwriting and distribution fees increased $11.2 million, or 8.3%, to $146.0 million for the six months ended June 30, 1999 from $134.8 million for the six months ended June 30, 1998, primarily due to our acquisition of the Essex Corporation. Commission revenue on new mutual fund sales declined but was offset by higher surrender charges on redemptions. Shareholder service and other fees were $22.8 million for the six months ended June 30, 1999 compared to $20.0 million for the six months ended June 30, 1998, reflecting an increase in the average number of customer accounts. Total benefits and expenses increased $7.3 million, or 1.7%, to $429.8 million for the six months ended June 30, 1999 from $422.5 million for the six months ended June 30, 1998. Benefits to policyholders increased $1.1 million, or 0.8%, primarily due to a decrease in interest credited on fixed annuity account balances which was $132.4 million for the six months ended June 30, 1999 compared to $137.3 million for the six months ended June 30, 1998. The decrease was primarily due to a decline in the average interest credited rate on fixed annuity account balances to 5.57% for the six months ended June 30, 1999 from 5.94% for the six months ended June 74 30, 1998. The decrease in the average interest credited rate was offset by higher average fixed annuity account balances of $4,856.8 million, as compared to $4,731.2 million, for the six months ended June 30, 1999 and 1998, respectively. The average interest credited rate pattern is dependent upon the general trend of market interest rates, frequency of credited rate resets and business mix. Deferred fixed annuities' interest credited rates generally are reset annually on the policy anniversary. Other operating costs and expenses increased $11.3 million, or 4.5%, to $261.2 million for the six months ended June 30, 1999 from $249.9 million for the six months ended June 30, 1998. The increase was primarily due to higher amortization of mutual fund deferred selling commissions, resulting from higher redemptions, and higher commissions on fixed annuity products due to increased sales. This increase was partially offset by a decrease in compensation expense related to our mutual fund operations. Amortization of deferred policy acquisition costs decreased $5.1 million, or 18.0%, primarily due to lower amortization during the six months ended 1999 resulting from revised projections of estimated gross profits based upon changes in estimated future interest margins and variable annuity product charges. The segment's effective tax rate declined to 32.1% from 36.3% for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998, primarily due to higher investments in affordable housing and higher foreign taxes paid for the six months ended June 30, 1999. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 After-tax operating income was $111.1 million in 1998, an increase of $17.8 million, or 19.1% from $93.3 million in 1997. Annuity after-tax operating income increased $7.5 million, or 16.4%, primarily due to higher variable annuity product charges resulting from higher sales and market appreciation on account balances. This increase also was due to higher investment spread in 1998 primarily due to an increase in average invested assets backing fixed annuity products. Mutual fund after-tax operating income increased $10.2 million, or 21.8%, to $57.0 million in 1998 from $46.8 million in 1997 primarily due to an increase in advisory and distribution fees as a result of growth in assets under management due to net sales. Total revenues increased $110.4 million, or 12.2%, to $1,015.3 million in 1998 from $904.9 million in 1997. Premiums decreased $35.2 million, or 64.0%, due to decreased sales of immediate fixed annuities with life contingencies. Premiums in 1997 include $44.8 million of sales of immediate fixed annuities with life contingencies. Investment-type product charges were $99.9 million, an increase of $17.2 million, or 20.8%, as compared to $82.7 million in 1997. The increase was due to growth in average variable annuity separate account liabilities, which were $5,736.0 million in 1998 compared to $4,450.0 million in 1997, an increase of 28.9%. Variable annuity deposits grew 18.3% to $882.7 million in 1998 from $745.9 million in 1997. Mortality and expense fees as a percentage of average account balances were 1.37% and 1.38% in 1998 and 1997, respectively. Net investment income increased by $24.7 million, or 7.0%, in 1998 compared to 1997 as a result of a higher level of invested assets backing fixed annuity products partially offset by a decrease in the average investment yield on invested assets backing fixed annuity products. The average investment yield on invested assets backing fixed annuity products was 7.91% in 1998, compared to 7.98% in 1997. This decrease reflects lower market interest rates on new investments. Investment management revenues, commissions, and other fees increased $104.4 million, or 25.3%, in 1998. Average mutual fund assets under management increased to $34,230.0 million in 1998 from $27,009.2 million in 1997 due to net sales of approximately $3,107.2 million in 1998, and market appreciation. Investment advisory fees were $208.4 million in 1998 compared to $173.7 million in 1997, reflecting a higher level of average mutual fund assets under management. Investment advisory fees were .62% and .64% of average mutual fund assets under management in 1998 and 1997, respectively. The decline in the investment advisory fee rate reflected an increase in institutional assets under management of $1,120.7 million, or 24.5%, to $5,696.5 million from $4,575.8 million in 1997. Institutional assets under management generally have a lower advisory fee rate than retail assets under management. Underwriting and distribution fees increased $64.1 million, or 31.6%, to $266.7 million in 1998 from $202.6 million in 1997, primarily due to higher asset levels of mutual funds. Shareholder service and other fees were $41.7 million in 1998 compared to $36.2 million in 1997, reflecting an increase in the average number of customer accounts. 75 Total benefits and expenses increased $78.4 million, or 10.2%, to $848.1 million in 1998 from $769.7 million in 1997, reflecting the growth in annuity and mutual fund assets under management. Benefits to policyholders decreased $18.2 million in 1998, primarily resulting from a $35.2 million decrease in premiums of immediate fixed annuities with life contingencies. This decrease was partially offset by an increase in interest credited on fixed annuity account balances which was $278.7 million in 1998 compared to $263.7 million in 1997. The increase was due to an increase in the average interest credited rate on fixed annuity account balances which was 5.96% in 1998, compared to 5.90% in 1997, and higher average fixed annuity account balances during 1998 of $4,673.2 million, as compared to $4,468.9 million during 1997. Other operating costs and expenses were $504.9 million in 1998, an increase of $88.7 million, or 21.3%, from $416.2 million in 1997. The increase was primarily due to an increase in compensation and related costs and administrative expenses incurred to support sales and marketing of mutual fund products and higher amortization of deferred selling commissions on mutual fund products. The increase was partially offset by lower commissions on fixed annuity products due to a decline in sales. Amortization of deferred policy acquisition costs of $46.8 million for 1998 increased $7.9 million from $38.9 million in 1997 primarily due to higher profits. The segment's effective tax rate increased to 33.6% in 1998 from 31.0% in 1997, primarily due to a state tax benefit provided to Massachusetts domiciled investment management companies in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 After-tax operating income was $93.3 million in 1997, an increase of $37.6 million, or 67.5%, from $55.7 million in 1996. Annuity after-tax operating income increased $13.2 million primarily due to variable annuity product charges resulting from higher sales and market appreciation. In addition, investment spread increased in 1997 from 1996 due primarily to an increase in average invested assets backing fixed annuity products. Mutual fund after-tax operating income increased $24.6 million, or 110.8%, to $46.8 million in 1997 from $22.2 million in 1996 primarily due to an increase in advisory and distribution fees as a result of growth in assets under management due to net sales and market appreciation. Total revenues increased $184.8 million, or 25.7%, to $904.9 million in 1997 from $720.1 million in 1996, principally the result of an increase in annuity and mutual fund assets under management. Premiums increased $32.0 million, or 139.1%, due to higher sales of immediate fixed annuities with life contingencies. Investment-type product charges were $82.7 million, an increase of $15.4 million, or 22.9%, as compared to $67.3 million in 1996 due primarily to growth in 1997 in variable annuity separate account liabilities. Average variable annuity separate account liabilities were $4,450.0 million in 1997 compared to $3,481.9 million in 1996, an increase of 27.8%. Variable annuity deposits grew 18.5% during 1997 compared to 1996. Mortality and expense fees as a percentage of average variable annuity account balances were 1.38% and 1.35% in 1997 and 1996, respectively, reflecting minimal changes in the levels of fees charged. Net investment income increased by $33.3 million, or 10.4%, in 1997 compared to 1996 primarily as a result of the higher level of average invested assets due to sales of fixed annuity products, partially offset by a lower average investment yield on these assets of 7.98% in 1997, compared to 8.14% in 1996. The decrease reflects lower market interest rates on new investments. Investment management revenues, commissions, and other fees increased $102.0 million, or 32.9%, in 1997. Average mutual fund assets under management increased to $27,009.2 million in 1997 from $20,824.5 million in 1996 due to net sales of approximately $3,134.8 million in 1997, as well as strong market appreciation. Investment advisory fees were $173.7 million in 1997 compared to $132.2 million in 1996. The $41.5 million increase primarily reflects a higher level of average mutual fund assets under management. Investment advisory fees were .64% of average assets under management in 1997 and 1996. Underwriting and distribution fees were $202.6 million in 1997 compared to $143.2 million in 1996. The increase of $59.4 million reflects the higher asset levels of mutual funds and increased sales. Shareholder service and other fees were $36.2 million in 1997 compared to $35.1 million in 1996. Total benefits and expenses increased $136.9 million, or 21.6%, to $769.7 million in 1997 from $632.8 million in 1996. Benefits to policyholders increased $54.6 million, or 21.0%, in 1997, primarily resulting from a $32.0 million increase in premiums of immediate fixed annuities with life contingencies. Interest credited on 76 fixed annuity account balances was $263.7 million in 1997, an increase of $25.2 million, or 10.6%, from $238.5 million in 1996. The increase was due to an increase in average fixed annuity account balances of $528.4 million during 1997, to $4,468.9 million as compared to $3,940.5 million during 1996. The average interest credited rate was 5.90% in 1997 compared to 6.05% in 1996. The decrease in the average interest credited rate was primarily due to the general decline of market interest rates. Other operating costs and expenses were $416.2 million in 1997, an increase of $77.0 million, or 22.7%, from $339.2 million in 1996. The increase was primarily due to an increase in compensation and related costs and administrative expenses incurred to support sales and marketing of mutual fund products and higher amortization of deferred selling commissions on mutual fund products. Amortization of deferred policy acquisition costs increased $5.3 million to $38.9 million in 1997 primarily due to higher profits. The segment's effective tax rate decreased to 31.0% in 1997 as compared to 36.2% in 1996, primarily due to a state tax benefit provided to Massachusetts domiciled investment management companies in 1997. Institutional-Guaranteed and Structured Financial Products Segment The following table presents certain summary financial data relating to the Guaranteed and Structured Financial Products Segment for the periods indicated.
For the Six Months Ended For the Year Ended June 30, December 31, --------------------- ---------------------------- 1999 1998 1998 1997 1996 ---------- --------- -------- -------- -------- (in millions) Operating Results: Revenues Premiums................. $ 382.0 $ 36.3 $ 121.4 $ 201.0 $ 359.6 Investment-type product charges................. 45.0 33.7 71.4 68.7 68.5 Net investment income.... 837.1 772.4 1,576.3 1,545.2 1,608.5 Realized investment losses.................. (1.7) (6.1) (37.7) (0.6) -- Other revenue (expense).. 0.8 0.3 (0.2) 0.1 (0.9) ---------- -------- -------- -------- -------- Total revenues......... 1,263.2 836.6 1,731.2 1,814.4 2,035.7 Benefits and expenses Benefits to policyholders........... 1,031.9 681.1 1,411.5 1,495.1 1,675.3 Other operating costs and expenses................ 48.7 50.7 92.6 81.0 88.5 Amortization of deferred policy acquisition costs................... 0.7 1.9 3.7 5.2 5.7 Dividends to policyholders........... 8.0 7.5 20.8 41.4 31.2 ---------- -------- -------- -------- -------- Total benefits and expenses.............. 1,089.3 741.2 1,528.6 1,622.7 1,800.7 ---------- -------- -------- -------- -------- Pre-tax operating income... 173.9 95.4 202.6 191.7 235.0 Income taxes............... 53.3 19.1 56.9 53.2 79.6 ---------- -------- -------- -------- -------- After-tax operating income.................... 120.6 76.3 145.7 138.5 155.4 After-tax adjustments: Realized investment gains, net.............. 80.8 8.2 17.2 4.8 9.9 Surplus tax.............. (3.2) 1.0 2.0 5.5 (2.3) Benefit from pension participating contract modification............ -- -- -- 9.1 -- ---------- -------- -------- -------- -------- Total after-tax adjustments........... 77.6 9.2 19.2 19.4 7.6 ---------- -------- -------- -------- -------- GAAP Reported: Income before extraordinary item...... 198.2 85.5 164.9 157.9 163.0 Extraordinary item- demutualization expenses, net of tax.... (5.8) (0.2) (1.5) -- -- ---------- -------- -------- -------- -------- Net income............. $ 192.4 $ 85.3 $ 163.4 $ 157.9 $ 163.0 ========== ======== ======== ======== ========
77
For the Six Months Ended For the Year Ended June 30, December 31, ------------------- -------------------------- 1999 1998 1998 1997 1996 --------- --------- -------- -------- -------- (in millions) Other Data: After-tax operating income Spread-based products......... $ 100.8 $ 50.0 $ 117.5 $ 103.0 $ 129.1 Fee-based products............ 19.8 26.3 28.2 35.5 26.3 Statutory premiums and deposits (1) Spread-based products GICs and funding agreements................. $ 3,083.8 $ 2,479.1 $4,995.0 $2,643.7 $2,767.3 Single premium annuities.... 369.3 28.6 111.8 193.7 247.2 Fee-based products Participating contracts and conversion annuity contracts.................. 306.9 298.3 566.7 703.8 716.4 Separate account GICs....... 469.7 323.3 459.9 456.0 563.5 Other separate account contracts.................. 30.7 54.6 145.6 195.0 213.7
- -------- (1) Statutory data have been derived from the annual statement of John Hancock Mutual Life Insurance Company, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 After-tax operating income was $120.6 million for the six months ended June 30, 1999, an increase of $44.3 million, or 58.1%, from $76.3 million for the six months ended June 30, 1998. Spread-based products' after-tax operating income increased $50.8 million, or 101.6%, primarily due to higher investment spread as a result of an increase in average invested assets backing spread- based products and the receipt of $14.7 million of past due interest on a defaulted fixed maturity investment. Fee-based products' after-tax income decreased $6.5 million, or 24.7%, primarily due to lower taxes on capital gains credited to contractholders in 1999. Total revenues increased $426.6 million, or 51.0%, to $1,263.2 million for the six months ended June 30, 1999 from $836.6 million for the six months ended June 30, 1998, primarily due to a $340.7 million increase in premiums of single premium annuity contracts. During the second quarter of 1999, we sold one single premium annuity contract for $339.0 million. Investment-type product charges increased $11.3 million, or 33.5%, primarily due to higher sales of single premium group annuity contracts and higher product charges from separate account GICs due to higher average account balances resulting from sales. Investment-type product charges were .71% and .54% of average fee- based policy reserves for the six months ended June 30, 1999 and 1998, respectively. The increase primarily reflects higher expense charges on participating contracts and the recognition of fees upon the sale of single premium annuity contracts and separate accounts GICs. Net investment income increased $64.7 million, or 8.4%, to $837.1 million for the six months ended June 30, 1999 from $772.4 million for the six months ended June 30, 1998, primarily as a result of a higher level of average invested assets backing spread-based products. Average invested assets backing spread-based products increased $2,104.4 million, or 13.8%, to $17,304.8 million for the six months ended June 30, 1999. The average investment yield on these invested assets was 8.26% for the six months ended June 30, 1999, compared to 8.22% for the six months ended June 30, 1998. Net investment income also increased due to the receipt of $14.7 million of past due interest on a defaulted fixed maturity investment. Realized investment losses decreased $4.4 million, or 72.1%, primarily due to a narrowing of interest rate spreads in 1999 on mortgage- backed securities and corporate bonds relative to U.S. Treasury securities, resulting in higher prices upon the sale of the securities. Total benefits and expenses increased $348.1 million, or 47.0%, to $1,089.3 million for the six months ended June 30, 1999 from $741.2 million for the six months ended June 30, 1998, primarily due to a $350.8 million increase in benefits to policyholders as a result of increased sales of single premium annuity contracts. Benefits 78 to policyholders also includes interest credited on account balances for spread-based products, which was $539.3 million for the six months ended June 30, 1999, an increase of $14.4 million, or 2.7%, from $524.9 million for the six months ended June 30, 1998. The increase in interest credited was primarily due to an increase in average account balances for spread-based products, which increased 11.0%, partially offset by a decline in the average interest credited rate on account balances for spread-based products, which was 6.79% for the six months ended June 30, 1999 compared to 7.33% for the six months ended June 30, 1998. The decline in the average interest credited rate on account balances for spread-based products was due to sales of GICs and funding agreements with lower average interest crediting rates. Other operating costs and expenses decreased $2.0 million, or 3.9%, primarily due to lower guaranty fund assessments. Dividends increased $0.5 million, or 6.7%, reflecting a higher level of distributable surplus in participating contractholders accounts. The segment's effective tax rate increased to 30.6% for the six months ended June 30, 1999 from 20.0% for the six months ended June 30, 1998, primarily due to lower taxes on capital gains credited to contractholders in 1999. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 After-tax operating income was $145.7 million in 1998, an increase of $7.2 million, or 5.2% from $138.5 million in 1997. Spread-based products' after-tax operating income increased $14.5 million, or 14.1%, primarily due to a decline in the average interest credited rate partially offset by deposit growth from sales of funding agreements. Fee-based products' after-tax operating income decreased $7.3 million to $28.2 million in 1998 from $35.5 million in 1997 primarily due to an increase in operating expenses while average fee-based assets under management remained nearly level. Total revenues decreased $83.2 million, or 4.6%, to $1,731.2 million in 1998 from $1,814.4 million in 1997, due primarily to a $79.6 million decrease in premiums primarily resulting from lower sales of single premium annuity contracts. Investment-type product charges were $71.4 million for 1998, an increase of $2.7 million, or 3.9%, primarily reflecting higher amortization of deferred profits on single premium group annuity and terminal funding annuity contracts, and were .59% and .58% of average fee-based policy reserves in 1998 and 1997, respectively. Net investment income increased $31.1 million, or 2.0%, in 1998 compared to 1997, primarily as a result of a higher level of average invested assets backing spread-based products, partially offset by a decline in average investment yield on these invested assets. Average invested assets backing spread-based products increased $325.1 million, or 2.2% to $15,151.8 million in 1998 from $14,826.7 million in 1997. The average investment yield on these invested assets was 8.18% in 1998 compared to 8.37% in 1997. The decrease in the average investment yield was primarily due to lower market interest rates during 1998. Realized investment losses were $37.7 million for 1998, an increase of $37.1 million from realized investment losses of $0.6 million for 1997. The increase primarily resulted from a widening of interest rate spreads on mortgage-backed securities and corporate bonds relative to U.S. Treasury securities, resulting in lower prices upon the sale of the securities. Total benefits and expenses decreased $94.1 million, or 5.8%, to $1,528.6 million in 1998 from $1,622.7 million in 1997. The decrease was due primarily to an $83.6 million decrease in benefits to policyholders primarily resulting from lower sales of single premium annuity contracts. Interest credited on account balances for spread-based products was $1,049.1 million in 1998, a decrease of $29.7 million, or 2.8%, from $1,078.8 million in 1997. The decrease was due largely to a decline in the average interest credited rate on account balances for spread-based products, which was 7.21% in 1998 compared to 7.50% in 1997. The decrease in the average interest credited rate was primarily due to the general decline of market interest rates, resulting in new GIC and funding agreement liabilities which have a lower average interest credited rate. Other operating costs and expenses were $92.6 million in 1998, an increase of $11.6 million, or 14.3%, from $81.0 million in 1997. The increase was primarily due to higher guaranty fund assessments and continuing investments in technology for administrative systems. Dividends of $20.8 million in 1998, decreased $20.6 million, or 49.8%, from $41.4 million for 1997. Dividends in 1997 included $25.9 million resulting from contract modifications and conversions. Excluding dividends on contract modifications and conversions, dividends were $20.2 million for 1998 and $15.5 million in 1997. The increase in recurring dividends primarily resulted from appreciation of equity securities. The segment's effective tax rate was 28.1% in 1998, as compared to 27.8% in 1997. 79 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 After-tax operating income was $138.5 million in 1997, a decrease of $16.9 million, or 10.9% from $155.4 million in 1996. Spread-based products' after- tax operating income decreased $26.1 million, or 20.2%, primarily due to lower investment spread due to a decline in the average investment yield being greater than the decline in the average interest credited rate. Fee-based products' after-tax operating income increased $9.2 million to $35.5 million in 1997 from $26.3 million in 1996 primarily due to a decrease in operating expenses resulting from a reduction of interest payable on prior year taxes. Total revenues decreased $221.3 million, or 10.9%, to $1,814.4 million in 1997 from $2,035.7 million in 1996. The decrease was due primarily to a $158.6 million decrease in premiums as a result of a $94.9 million decline in sales of conversion annuities and a $49.4 million decline in sales of single premium annuity and terminal funding contracts. A conversion annuity is a participating group annuity contract that has been converted to a non- participating annuity. Such a decline in sales has little effect on earnings, as the decreased premiums are offset by corresponding decreases in benefits to policyholders. Investment-type product charges were $68.7 million for 1997, an increase of $.2 million, or .3%, from $68.5 million for 1996. Net investment income decreased $63.3 million, or 3.9%, in 1997 compared to 1996, primarily the result of a decrease in the average investment yield on invested assets backing spread-based products. The average investment yield on these invested assets was 8.37% in 1997, as compared to 8.93% in 1996, reflecting the reinvestment of proceeds from higher yielding fixed maturities into relatively lower yielding securities. Average invested assets backing spread-based products increased $262.6 million, or 1.8%, to $14,826.7 million in 1997 from $14,564.1 million in 1996. Total benefits and expenses decreased $178.0 million, or 9.9%, to $1,622.7 million in 1997 from $1,800.7 million in 1996. The decrease was due primarily to a $180.2 million decrease in benefits to policyholders as a result of lower sales of conversion annuities and single premium annuity contracts. Interest credited on account balances for spread-based products was $1,078.8 million in 1997, a decrease of $7.3 million, or .7% from $1,086.1 million in 1996. The decrease was primarily due to a decline in the average interest credited rate on account balances for spread-based products which was 7.50% in 1997 compared to 7.64% in 1996, reflecting the maturity of GIC liabilities with a higher average interest credited rate than new GIC and funding agreement liabilities issued in 1997. Other operating costs decreased $7.5 million, or 8.5%, to $81.0 million in 1997, from $88.5 million in 1996 primarily due to a reduction of interest payable on prior year taxes. Dividends increased $10.2 million, or 32.7%, for 1997 primarily as a result of contract conversions and modifications. Excluding dividends on contract conversions and modifications, dividends to policyholders were $15.5 million for 1997, and $17.9 million for 1996, reflecting the lower level of average invested assets for participating contracts. The segment's effective tax rate was 27.8% in 1997, as compared to 33.9% in 1996. The decline in the effective tax rate was primarily due to higher affordable housing tax credits and higher foreign tax credits in 1997. 80 Institutional-Investment Management Segment The following table presents certain summary financial data relating to the Investment Management Segment for the periods indicated.
For the Six Months Ended For the Year Ended June 30, December 31, -------------------------- ------------------------------- 1999 1998 1998 1997 1996 ------------ ------------ --------- --------- --------- (in millions) Operating Results: Revenues Net investment income............... $ 23.6 $ 6.9 $ 24.1 $ 4.0 $ 3.4 Realized investment gains (losses), net.. -- 7.8 (4.4) (4.0) -- Investment management revenues, commissions, and other fees........... 65.0 56.9 123.8 118.3 109.4 Other revenue......... 0.7 0.6 0.4 0.2 0.6 ------------ ------------ --------- --------- --------- Total revenues...... 89.3 72.2 143.9 118.5 113.4 Benefits and expenses Operating expenses.... 60.5 48.2 117.8 88.4 76.3 ------------ ------------ --------- --------- --------- Total benefits and expenses........... 60.5 48.2 117.8 88.4 76.3 ------------ ------------ --------- --------- --------- Pre-tax operating income................. 28.8 24.0 26.1 30.1 37.1 Income taxes............ 11.6 9.9 10.7 12.9 15.5 ------------ ------------ --------- --------- --------- After-tax operating income................. 17.2 14.1 15.4 17.2 21.6 After-tax adjustments: Realized investment gains, net........... 0.7 0.0 0.1 0.1 0.1 ------------ ------------ --------- --------- --------- GAAP Reported: Income before cumulative effect of accounting change.... 17.9 14.1 15.5 17.3 21.7 Cumulative effect of accounting change.... (0.1) -- -- -- -- ------------ ------------ --------- --------- --------- Net income.............. $ 17.8 $ 14.1 $ 15.5 $ 17.3 $ 21.7 ============ ============ ========= ========= ========= Other Data: Assets under management, end of period (1)...... $ 43,163.6 $ 37,021.9 $39,637.7 $34,361.5 $32,884.5
- -------- (1) Includes general account cash and invested assets of $82.5 million and $68.4 million as of June 30, 1999 and 1998, respectively, and $88.1 million, $66.0 million, and $54.5 million as of December 31, 1998, 1997, and 1996, respectively. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 After-tax operating income was $17.2 million for the six months ended June 30, 1999, an increase of $3.1 million, or 22.0%, from $14.1 million for the six months ended June 30, 1998. The increase was primarily due to higher investment advisory fees earned resulting from an increase in average assets under management, partially offset by higher interest expense from a collateralized bond obligation formed in 1998. Total revenues increased $17.1 million, or 23.7%, to $89.3 million for the six months ended June 30, 1999 from $72.2 million for the six months ended June 30, 1998. Net investment income increased $16.7 million, or 242.0%, resulting from a higher level of average invested assets due to the formation of a collateralized bond obligation in 1998. Investment management revenues, commissions, and other fees increased $8.1 million, or 14.2%, to $65.0 million for the six months ended June 30, 1999 from $56.9 million for the six months ended June 30, 1998, primarily due to an increase in investment advisory fees, which increased $8.2 million, or 15.4%, to $61.2 million. The increase in investment advisory fees was a result of a higher level of average assets under 81 management, which increased $5,549.0 million, or 15.7% to $40,783.0 million for the six months ended June 30, 1999. Investment advisory fees were both .30% of average advisory assets under management for the six months ended June 30, 1999 and 1998. Mortgage origination and servicing fees were $3.8 million for the six months ended June 30, 1999 and 1998. Realized investment gains were $7.8 million for the six months ended June 30, 1998 as a result of a mortgage securitization in 1998. Operating expenses were $60.5 million for the six months ended June 30, 1999, an increase of $12.3 million, or 25.5%, from $48.2 million for the six months ended June 30, 1998. The increase was primarily due to an increase in interest expense and other expenses in connection with the collateralized bond obligation. Operating expenses were both .22% of average advisory assets under management for the six months ended June 30, 1999 and 1998. The segment's effective tax rate was 40.3% and 41.3% for the six months ended June 30, 1999 and 1998, respectively. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 After-tax operating income was $15.4 million in 1998, a decrease of $1.8 million, or 10.5%, from $17.2 million in 1997 primarily due to higher investment advisory fees earned on timber assets under management in 1997 resulting from strong market appreciation, partially offset by higher operating expenses resulting from the formation of a collateralized bond obligation in 1998. Total revenues increased $25.4 million, or 21.4%, to $143.9 million in 1998 from $118.5 million in 1997. Net investment income was $24.1 million in 1998, an increase of $20.1 million from $4.0 million for 1997. The increase in net investment income was due to an increase in the average loans held for sale and a higher level of average invested assets due to the formation of a collateralized bond obligation. Average loans held for sale in 1998 were $106.2 million, compared to $20.7 million in 1997. Investment management revenues, commissions, and other fees increased $5.5 million, or 4.6%, in 1998. Average advisory assets under management increased $2,225.7 million, or 6.6%, to $35,730.2 million in 1998 from $33,504.5 million in 1997, primarily due to market appreciation in 1998. Investment advisory fees were $115.3 million in 1998 compared to $111.0 million in 1997 primarily due to a higher level of average advisory assets under management. Investment advisory fees were .32% and .33% of average advisory assets under management in 1998 and 1997, respectively. Mortgage origination and servicing fees were $8.5 million in 1998 compared to $7.3 million in 1997. Realized investment losses were $4.4 million in 1998 compared to $4.0 million in 1997. The increase primarily resulted from a widening of interest rate spreads on mortgage loans held for sale, partially offset by gains on loan sales. Operating expenses were $117.8 million in 1998, an increase of $29.4 million, or 33.3%, from $88.4 million in 1997. The increase was due primarily to $13.9 million of interest and other expenses in connection with the collateralized bond obligation. In addition, operating expenses increased $5.8 million due to financing an increased average balance of loans held for sale. Operating expenses were .24% and .23% of average advisory assets under management in 1998 and 1997, respectively. The segment's effective tax rate declined to 41.0% in 1998 from 42.9% in 1997 primarily due to lower state tax payments in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 After-tax operating income was $17.2 million in 1997, a decrease of $4.4 million from $21.6 million, or 20.4%, in 1996 primarily due to realized investment losses of $4.0 million on short sale transactions resulting from a decline in U.S. Treasury rates. Investment advisory fees increased as a result of higher assets under management. The increase was partially offset by higher operating expenses resulting from higher compensation and related costs due to expanded operations. Total revenues increased $5.1 million, or 4.5%, to $118.5 million in 1997 from $113.4 million in 1997. Net investment income was $4.0 million in 1997 compared to $3.4 million for 1996. Investment management revenues, commissions, and other fees increased $8.9 million, or 8.1%, in 1997. Average advisory assets under management increased $4,645.5 million, or 16.1%, to $33,504.5 million in 1997 from $28,859.0 million in 1996 82 primarily due to market appreciation in 1997. Investment advisory fees were $111.0 million in 1997 compared to $101.0 million in 1996, primarily reflecting a higher level of average assets under management. Investment advisory fees were .33% and .35% of average advisory assets under management in 1997 and 1996, respectively. Mortgage origination and servicing fees were $7.3 million in 1997 compared to $8.4 million in 1996. Realized investment losses were $4.0 million in 1997, due to losses from a decline in U.S. Treasury rates. Operating expenses were $88.4 million in 1997, an increase of $12.1 million, or 15.8%, from $76.3 million in 1996. The increase was primarily due to increased compensation and related costs which resulted from expanded operations. The segment's effective tax rate increased to 42.9% in 1997 from 41.8% in 1996 primarily due to lower state tax payments in 1997. Corporate and Other Segment The following table presents certain summary financial data relating to the Corporate and Other Segment for the periods indicated.
For the Six Months Ended For the Year Ended June 30, December 31, ------------- ---------------------- 1999 1998 1998 1997 1996 ------ ----- ------ ------ ------ (in millions) Operating Results: After-tax operating income (loss): International insurance operations..... $ 10.1 $12.4 $ 25.3 $ 8.3 $ 8.8 Corporate operations................... 25.4 9.4 8.7 (32.0) (18.2) Non-core businesses.................... (0.1) 6.1 22.3 63.1 29.6 ------ ----- ------ ------ ------ Total................................ 35.4 27.9 56.3 39.4 20.2 After-tax adjustments: Realized investment gains, net......... (3.7) 11.1 15.4 42.1 36.4 Class action lawsuit................... (39.1) -- (150.0) (112.5) (90.0) Surplus tax............................ (4.0) 0.9 1.5 12.6 (11.3) ------ ----- ------ ------ ------ Total after-tax adjustments.......... (46.8) 12.0 (133.1) (57.8) (64.9) ------ ----- ------ ------ ------ GAAP Reported: (Loss) income before extraordinary item.................................. (11.4) 39.9 (76.8) (18.4) (44.7) Extraordinary item--demutualization expenses, net of tax.................. (1.2) -- (0.5) -- -- ------ ----- ------ ------ ------ Net (loss) income........................ $(12.6) $39.9 $(77.3) $(18.4) $(44.7) ====== ===== ====== ====== ======
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 After-tax operating income from international insurance operations was $10.1 million for the six months ended June 30, 1999, a decrease of $2.3 million, or 18.5%, from $12.4 million for the six months ended June 30, 1998. This decrease was primarily due to a decline in net investment income due to changes in portfolio composition, partially offset by an increase in segregated fund product charges, due to growth in assets under management. After-tax operating income from corporate operations was $25.4 million for the six months ended June 30, 1999, an increase of $16.0 million, or 170.2%, from $9.4 million for the six months ended June 30, 1998. The increase primarily resulted from higher net investment income due to a higher level of corporate purpose assets and an increase in group life insurance after-tax operating income resulting from favorable mortality experience. After-tax operating loss from non-core businesses was $.1 million for the six months ended June 30, 1999, a decrease of $6.2 million from the six months ended June 30, 1998. The decrease was primarily due to lower 83 net investment income resulting from a decrease in average invested assets due to the previously described disposals. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 and Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 After-tax operating income from international insurance operations was $25.3 million for 1998, an increase of $17.0 million from $8.3 million for 1997. The increase in after-tax operating income primarily resulted from continued growth in our Canadian operations' segregated assets, which resulted in higher product charges, which increased $20.5 million, or 29.3%, from 1997. The increase was primarily due to growth in segregated assets under management which were $1,988.1 million in 1998, an increase of 30.4% from $1,524.9 million in 1997. After-tax operating income from international insurance operations was $8.3 million for 1997, a decrease of $.5 million from $8.8 million for 1996. After-tax operating income from corporate operations was $8.7 million in 1998, an increase of $40.7 million from after-tax operating loss of $32.0 million in 1997. The increase primarily resulted from higher net investment income of $32.9 million on corporate assets. Unallocated corporate overhead and expenses associated with the disposed businesses declined $8.0 million during 1998. After-tax operating loss from corporate operations was $32.0 million in 1997 compared to $18.2 million in 1996. The increase in loss was due to higher net investment income on intercompany assets backing participating group annuity contracts. Because income associated with these assets is eliminated within corporate operations during consolidation, higher net investment income from these assets results in a higher recorded loss in this segment. After-tax operating income from non-core businesses was $22.3 million in 1998, a decrease of $40.8 million from $63.1 million in 1997. The decrease was due primarily to the development of tax planning strategies to use $51.0 million of net loss carryforwards in 1997. After-tax operating income from non-core businesses was $63.1 million in 1997, an increase of $33.5 million from 1996. The increase was due to the previously described use of net loss carryforwards and disposals. Liquidity and Capital Resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of business operations. Historically, our principal cash flow sources have been premiums, deposits and charges on policies and contracts, investment income, maturing investments, and proceeds from sales of investment assets. In addition to the need for cash flow to meet operating expenses, our liquidity requirements relate principally to the liabilities associated with our various life insurance, annuity, and structured investment products, and to the funding of investments in new products, processes, and technologies. Our product liabilities include the payment of benefits under life insurance, annuity and structured investment products and the payment of policy surrenders, withdrawals and policy loans. After the effective date of the reorganization, John Hancock Financial Services, Inc. will be an insurance holding company. The assets of John Hancock Financial Services Inc. will initially consist of the outstanding capital stock of John Hancock Life Insurance Company and a portion of the net proceeds of the offering. We expect that the amount of net proceeds to be retained by John Hancock Financial Services, Inc. will be $200.0 million. However, provisions of our Plan of Reorganization may serve to reduce the amount retained to an amount less than $200.0 million, unless specific approval is received from the Massachusetts Commissioner of Insurance. Our sources of cash will be dividends from our subsidiaries and investment returns on the invested net proceeds of the offering retained by us. State insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval. The ability of John Hancock Life Insurance Company, our primary operating subsidiary, to pay shareholder dividends is and will continue to be subject to restrictions set forth in the insurance laws and regulations of Massachusetts, its domiciliary state. The Massachusetts insurance law limits how and when John Hancock Life Insurance Company can pay shareholder dividends. After giving effect to the reorganization, John Hancock Life Insurance Company 84 would be able to pay approximately $607.1 million in dividends in 1999 based on 1998 statutory results without being subject to the restrictions on payment of extraordinary dividends contained in the Massachusetts Insurance Law. Following the reorganization, John Hancock Life Insurance Company may be commercially domiciled in New York. If so, dividend payments may also be subject to New York's insurance holding company act as well as Massachusetts law. We currently do not expect such regulatory requirements to impair our ability to meet our liquidity and capital needs. However, we can give no assurance that we will declare or pay dividends. See "Stockholder Dividend Policy." We maintain investment programs generally intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer lives, such as life insurance and certain pension products, are matched with assets having similar estimated lives such as mortgage loans, long-term bonds, and private placement bonds. Shorter-term liabilities are matched with investments such as short and medium-term fixed maturities. In addition, highly liquid, high quality short-term U.S. Treasury securities and other liquid investment grade fixed maturities are held to fund normal operating expenses, surrenders, withdrawals and development and maintenance expenses associated with new products and technologies. As more fully discussed under "Business--General Account Investments," the liquidity of our insurance operations is also related to the overall quality of our investments. As of June 30, 1999, $26,432.8 million, or 87.1% of the fixed maturity securities held by us and rated by S&P or the National Association of Insurance Commissioners were rated investment grade (BBB or higher by S&P or 1 or 2 by the National Association of Insurance Commissioners). The remaining $3,927.3 million of fixed maturity investments were rated non-investment grade. We employ an asset/liability management approach tailored to the specific requirements of each of our product lines. Each product line has an investment strategy based on the specific characteristics of the liabilities in the product line. As part of this approach, we develop investment policies and operating guidelines for each portfolio based upon the return objectives, risk tolerance, liquidity, and tax and regulatory requirements of the underlying products and business segments. During 1999, we began to classify new purchases of fixed maturity securities and equity securities that support our multi-manager funding agreement product, a funding agreement with a variable rate that is periodically reset, as trading securities. Changes in the fair value of these securities are recognized in income. At June 30, 1999, our portfolio of trading securities supporting our multi-manager product was $582.4 million. Net cash provided by operating activities was $770.8 million and $786.6 million for the six months ended June 30, 1999 and 1998, respectively. Net cash provided by operating activities was $1,328.9 million, $1,438.3 million, and $1,892.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. The decrease in the six months ended June 30, 1999 resulted primarily from an increase in purchases of trading securities, partially offset by a decrease in benefits paid to policyholders. The decrease in 1998 resulted primarily from an increase in benefits paid to policyholders in 1998 as compared to 1997. The decrease in 1997 as compared to 1996 was due primarily to lower premiums collected, partially offset by lower benefits paid to policyholders and lower operating expenses in 1997 as compared to 1996. Net cash used in investing activities was $2,603.2 million and $887.3 million for the six months ended June 30, 1999 and 1998, respectively. Net cash used in investing activities was $1,339.1 million, $1,295.3 million and $1,183.3 million for the years ended December 31, 1998, 1997, and 1996, respectively. The increase in net cash used in the six months ended June 30, 1999 resulted primarily from a decrease in sales of fixed maturities. In 1998 and 1997, the increase in net cash used resulted primarily from an increase in purchases of fixed maturities, partially offset by fixed maturity securities maturing or being sold. Net cash provided by financing activities was $1,467.8 million and $562.8 million for the six months ended June 30, 1999 and 1998, respectively. Net cash provided by (used in) financing activities was $850.0 million, ($792.4) million and $40.6 million, for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in the six months ended June 30, 1999 resulted primarily from cash received from deposits on universal 85 life insurance and investment-type contracts which exceeded cash payments made on withdrawals of such contracts by $1,180.5 million. The increase in 1998 resulted primarily from cash received from deposits on universal life insurance and investment-type contracts which exceeded cash payments made on withdrawals of such contracts by $1,010.7 million. The decrease in 1997 primarily resulted from cash payments made on withdrawals from investment-type contracts that exceeded cash received from deposits on such contracts by $668.9 million. Cash flow requirements also are supported by committed lines of credit totaling $1,000.0 million, $500.0 million of which expires on July 29, 2000 and $500.0 million of which expires June 30, 2001. The syndicated lines of credit are available for general liquidity needs, capital expansion, and acquisitions. The committed syndicated lines of credit contain covenants that, among other provisions, require maintenance of certain levels of policyholders' equity. To date, we have not borrowed any amounts under the lines of credit. As of June 30, 1999, we had $1,317.8 million of debt outstanding consisting of $703.9 million of commercial paper borrowings, $447.0 million of surplus notes, and $166.9 million of other notes payable. A primary liquidity concern with respect to life insurance and annuity products is the risk of early policyholder and contractholder withdrawal. We closely evaluate and manage this risk. The following table summarizes our annuity policy reserves and deposit fund liabilities for the contractholder's ability to withdraw funds for the indicated periods:
As of June 30, As of December 31, --------------- -------------------------------- 1999 1998 1997 --------------- --------------- --------------- Amount % Amount % Amount % --------- ----- --------- ----- --------- ----- (dollars in millions) Not subject to discretionary withdrawal provisions...... $16,202.3 61.7% $15,383.4 62.4% $14,670.1 62.6% Subject to discretionary withdrawal adjustment: With market value adjustment............... 1,279.5 4.9 792.9 3.2 1,215.6 5.2 At contract value......... 4,063.7 15.5 4,010.7 16.3 3,693.6 15.8 Subject to discretionary withdrawal at contract value less surrender charge..................... 4,711.5 17.9 4,462.8 18.1 3,851.7 16.4 --------- ----- --------- ----- --------- ----- Total annuity reserves and deposit funds liability.... $26,257.0 100.0% $24,649.8 100.0% $23,431.0 100.0% ========= ===== ========= ===== ========= =====
Individual life insurance policies are less susceptible to withdrawal than are annuity contracts because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. As indicated in the table above, there is a substantial percentage of annuity reserves and deposit fund liabilities that are not subject to withdrawal. As a matter of policy, we seek to include provisions limiting withdrawal rights from general account institutional structured investment products. These include GICs and funding agreements sold to plan sponsors where the contract prohibits the contractholder from making withdrawals other than on a scheduled maturity date. Individual life insurance policies (other than term life insurance policies) increase in cash values over their lives. Policyholders have the right to borrow from us an amount generally up to the cash value of their policy at any time. As of June 30, 1999, we had approximately $16.7 billion in cash values in which policyholders have rights to policy loans. The majority of cash values eligible for policy loans are at variable interest rates which are reset annually on the policy anniversary. Moreover, a portion of our fixed interest rate policy loans have features that provide for reduced crediting rates on the portion of cash values loaned. The amount of policy loans has remained consistent over the past three years, at approximately $1.9 billion. The risk-based capital standards for life insurance companies, as prescribed by the National Association of Insurance Commissioners, establish a risk-based capital ratio comparing adjusted surplus to required surplus for each of our United States domiciled insurance subsidiaries. If the risk-based capital ratio falls outside of 86 acceptable ranges, regulatory action may be taken ranging from increased information requirements to mandatory control by the domiciliary insurance department. The risk-based capital ratios of all our insurance subsidiaries as of December 31, 1998, were above the ranges that would require regulatory action. We maintain reinsurance programs designed to protect against large or unusual losses. Based on our review of our reinsurers' financial statements and reputations in the reinsurance marketplace, we believe that our reinsurers are financially sound, and, therefore, that we have no significant exposure to uncollectable reinsurance. See "Business--Protection Segment--Reinsurance" See "Risk Factors--We face risks from assumed reinsurance business in respect of personal accident insurance and the occupational accident component of workers compensation insurance" for a discussion of potential exposures to unrecoverable reinsurance. Given the historical cash flow of our subsidiaries and current financial results, management believes that the cash flow from the operating activities over the next year will provide sufficient liquidity for our operations, as well as to satisfy debt service obligations and to pay other operating expenses. Although we anticipate that we will be able to meet our cash requirements, we can give no assurances in this regard. Year 2000 We are executing our plan to address the impact of the Year 2000 issues that result from computer programs being written using two digits to reflect the year rather than four to define the applicable year and century. Historically, the first two digits were hardcoded to save memory. Many of our computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in an information technology (IT) system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, cause settlement of trades to fail, lead to incomplete or inaccurate accounting, recording or processing trades in securities, or engage in similar normal business activities. In addition, non- IT systems including, but not limited to, security alarms, elevators and telephones are subject to malfunction due to their dependence on embedded technology such as microcontrollers for proper operation. As described, the Year 2000 project presents a number of challenges for financial institutions since the correction of Year 2000 issues in IT and non-IT systems will be complex and costly for the entire industry. We began to address the Year 2000 project as early as 1994. Our plan to address the Year 2000 Project includes an awareness campaign, an assessment period, a renovation stage, validation work and an implementation of company solutions. The continuous awareness campaign serves several purposes: defining the problem, gaining executive level support and sponsorship, establishing a team and overall strategy, and assessing existing information system management resources. Additionally, the awareness campaign establishes an education process to ensure that all employees are aware of the Year 2000 issue and knowledgeable of their role in securing solutions. The assessment phase, which was completed for both IT and non-IT systems as of April 1998, included the identification, inventory, analysis, and prioritization of IT and non-IT systems and processes to determine their conversion or replacement. Those systems which, in the event of a Year 2000 failure, would have the greatest impact on our operations were deemed to be mission critical and prioritized accordingly. The systems which, in the event of a Year 2000 failure, would cause minimal disruption to our operations were classified as non-mission critical. The renovation stage reflects the conversion, validation, replacement, or elimination of selected platforms, applications, databases and utilities, including the modification of applicable interfaces. Additionally, the renovation stage includes performance, functionality, and regression testing and implementation. The renovation phase for mission critical systems has been completed. Similarly, most of the non-mission critical systems have been renovated and the remaining systems are expected to be renovated by the third quarter of 1999. 87 The validation phase consists of the compliance testing of renovated systems. The validation phase for mission critical systems has been completed. Similarly, the majority of non-mission critical systems have been validated and the remaining systems are expected to be validated by the third quarter of 1999. We will use our testing facilities through the remainder of 1999 to perform special functional testing. Special functional testing includes testing, as required, with material third parties and industry groups and performing reviews of "dry run" of year-end activities. Finally, the implementation phase involves the actual implementation of converted or replaced platforms, applications, databases, utilities, interfaces, and contingency planning. Mission critical systems and most non- mission critical systems have been implemented. The few remaining non-mission critical systems are expected to be implemented by the third quarter of 1999. We face the risk that one or more of our business partners or customers with whom we have a material relationship will not be able to interact with our systems due to the third party's failure to resolve its own Year 2000 issues, including those associated with its own external relationships. We have completed an inventory of third party relationships and prioritized each third party relationship based upon the potential business impact, available alternatives, and cost of substitution. In the case of mission-critical business partners, such as banks, financial intermediaries (such as exchanges), mutual fund companies and recordkeepers, IT vendors, telecommunication providers and other utilities, financial market data providers, trading counterparties, depositories, clearing agencies and clearing houses, we are engaged in discussions with the third parties and are obtaining detailed information as to those companies' Year 2000 plans and states of readiness. Scheduled testing of our material relationships with third parties is underway. It is anticipated that testing with material business partners will continue through much of 1999. However, there is no guarantee that the systems of other companies that our systems rely on will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with our systems, would not have material adverse effect on us. The costs of the Year 2000 project consist of internal IT personnel and external costs such as consultants, programmers, replacement software, and hardware. The costs of the Year 2000 project are expensed as incurred. The project is funded partially through a reallocation of resources from discretionary projects. Through June 30, 1999, we have incurred and expensed approximately $15.3 million in related payroll costs for our internal IT personnel on the project. The estimated range of remaining internal IT personnel costs of the project is approximately $2.5 to $3.5 million. Through June 30, 1999, we have incurred and expensed approximately $48 million in external costs for the project. The estimated range of remaining external costs of the project is approximately $23.5 to $24.8 million. The total costs of the Year 2000 project, based on management's best estimates, include approximately $18 million in internal IT personnel, $7.4 million in the external modification of software, $34.2 million for external solution providers, $19.4 million in replacement costs of non-compliant IT systems and $12.6 million in oversight, test facilities and other expenses. Accordingly, the estimated range of total costs of the Year 2000 project, internal and external, is approximately $90 to $95 million. However, there can be no guarantee that these estimates will be achieved and actual results could materially differ from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Our total Year 2000 project costs include the estimated impact of external solution providers and are based on presently available information. It is documented in trade publications that the Year 2000 issue in foreign countries is not being as actively addressed as in the United States. Accordingly, it is expected that our facilities based outside the United States face higher degrees of Year 2000 related risks. In addition, we have thousands of individual and business customers that hold insurance policies, annuities and other financial products of ours. Nearly all products sold by us contain date sensitive data, examples of which are policy expiration dates, birth dates, premium payment dates. Finally, the regulated nature of our industry exposes us to potential supervisory or enforcement actions relating to Year 2000 issues. 88 If our Year 2000 issues were unresolved, potential consequences would include, among other possibilities, the inability to accurately and timely process claims, update customers' accounts, process financial transactions bill customers, assess exposure to risks, determine liquidity requirements or report accurate data to management, customers, regulators, and others, as well as business interruptions or shutdowns, including, in the case of third party financial intermediaries such as stock exchanges and clearing agents, failed trade settlements, inability to trade in certain markets and disruption of funding flows; financial losses; reputational harm; increased scrutiny by regulators; and litigation related to Year 2000 issues. We are attempting to limit the potential impact of the Year 2000 by monitoring the progress of our own Year 2000 project and those of our material business partners and by developing contingency plans. However, we cannot guarantee that we will be able to resolve all of our Year 2000 issues. Any critical unresolved Year 2000 issues, however, could have a material adverse effect on our results of operations, liquidity or financial condition. Our contingency planning initiative related to the Year 2000 project is underway. The plan is addressing our readiness as well as that of material business partners on whom we depend. Our contingency plans are being designed to keep each business unit's operations functioning in the event of a failure or delay due to the Year 2000 record format and date calculation changes. Contingency plans are being constructed based on the foundation of extensive business resumption plans that we have maintained and updated periodically, which outline responses to situations that may affect critical business functions. These plans also provide emergency operations guidance, which defines a documented order of actions to respond to problems. These extensive business resumption plans are being enhanced to cover Year 2000 situations. Quantitative and Qualitative Information About Market Risk Market Risk Exposures and Risk Management Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. Our primary market risk exposures are to changes in interest rates, although we have certain exposures to changes in equity prices and foreign currency exchange rates. The active management of market risk is integral to our operations. We may use the following approaches to manage our exposure to market risk within defined tolerance ranges: (1) rebalance our existing asset or liability portfolios; (2) change the character of future investments purchased; or (3) use derivative instruments to modify the market risk characteristics of existing assets or liabilities or assets expected to be purchased. There have been no material changes in market risk exposures during the period from January 1, 1999 to June 30, 1999 that affect the quantitative and qualitative disclosures presented for the year ended December 31, 1998. Interest Rate Risk Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. This risk arises from many of our primary activities, as we invest substantial funds in interest-sensitive assets and also have interest sensitive liabilities, primarily in our Protection, Asset Gathering, and Guaranteed and Structured Financial Products Segments. We seek to earn returns that enhance our ability to offer competitive rates and prices to customers while contributing to attractive and stable profits and long-term capital growth. Accordingly, our investment decisions and objectives are a function of the underlying risks and product profiles of each primary business operation. In addition, we diversify our product portfolio offerings to include products that contain features that will protect us against fluctuations in interest rates. Those features include adjustable crediting rates, policy surrender charges, and market value adjustments on liquidations. We manage the interest rate risk inherent in our assets relative to the interest rate risk inherent in our liabilities. One of the measures we use to quantify this exposure is duration. Duration measures the sensitivity of the fair value of assets and liabilities to changes in interest rates. For example, if interest rates increase by 100 basis points, the fair value of an asset with a duration of 5 years is expected to decrease in value by approximately 5%. As of December 31, 1998, the difference between the pre-tax asset and liability duration on 89 our duration managed portfolio was 0.5 years. This positive duration gap indicates that the fair value of our assets is somewhat more sensitive to interest rate movements than the fair value of our liabilities. To calculate duration, we project asset and liability cash flows, and discount them to a net present value basis using a risk-free market rate adjusted for credit quality, sector attributes, liquidity, and other specific risks. Duration is calculated by revaluing these cash flows at an alternative level of interest rates, and determining the percentage change in fair value from the base case. Based upon the information and assumptions we use in our duration calculation and in effect as of December 31, 1998, we estimate that a 100 basis point immediate, parallel increase in interest rates ("rate shock") would decrease the net fair value of our duration managed assets and liabilities by approximately $200.1 million. For other products, such as whole life insurance, term life insurance, and single premium deferred annuities, the liability cash flow is less predictable, and a duration-matching strategy is less reliable and manageable. For these products, we manage interest rate risk based on modeling which considers the target average life, maturities, crediting rates, and assumptions of policyholder behavior. As of December 31, 1998, the fair value of assets supporting liabilities managed under this modeling was $25,914.9 million. A rate shock (as defined above) would decrease the fair value of these assets by $861.0 million. We also utilize various derivative financial instruments to manage our exposure to fluctuations in interest rates, including interest rate swaps, interest rate futures, interest rate caps, interest rate floors, and interest rate swaptions. Interest rate swaps are used primarily to more closely match the interest rate characteristics of assets and liabilities. We use a common variation of interest rate swaps, constant maturity treasury ("CMT") swaps, to hedge our exposure to floating rate, fixed maturity liability contracts. Interest rate futures contracts are used to hedge changes in interest rates subsequent to the issuance of an insurance liability (i.e., GIC) but prior to the purchase of a supporting asset, or during periods of warehousing assets in anticipation of a near term liability sale. We also use interest rate futures to periodically rebalance our duration-managed accounts. We use interest rate caps to hedge embedded caps on floating-rate assets and to manage the risk associated with a sudden rise in interest rates. Similar to interest rate caps, we also use interest rate floors. These contracts are used to hedge a sudden decline in interest rates during the premium contribution "window" on our GICs or to hedge guaranteed minimum crediting rates in certain contracts. Interest rate swaptions are used to hedge premium contribution risk and withdrawal risk associated with fixed liability contracts. We also seek to reduce prepayment risk due to changes in interest rates in individual investments. We believe that we can assess credit risk better than interest rate movements. We limit our exposure to investments which are not call protected, which means they are not prepayable without penalty prior to maturity at the option of the issuer, or we require incremental yield to compensate for the risk that the option will be exercised. Examples of investments we limit because of the option risk are residential mortgage- backed securities. We assess option risk in all investments and, when taken, price accordingly. Our exposure to credit risk is the risk of loss from a counterparty failing to perform the terms of the contract. We continually monitor our position and the credit ratings of the counterparties to these derivative instruments. To limit exposure associated with counterparty nonperformance on interest rate swap, cap, floor, and swaption agreements, we enter into master netting agreements with our counterparties. We believe the risk of incurring losses due to nonperformance by our counterparties is remote and that such losses, if any, would be immaterial. Futures contracts trade on organized exchanges and, therefore, have minimal credit risk. 90 The table below shows the interest rate sensitivity of our interest rate derivatives measured in terms of fair value. These exposures will change as a result of ongoing portfolio and risk management activities.
As of December 31, 1998 ---------------------------------------------------------- Fair Value ----------------------------------- Weighted Notional Average Term -100 Basis As of +100 Basis Amount (Years) Point Change 12/31/98 Point Change --------- ------------ ------------ -------- ------------ (in millions, except for Weighted Average Term) Interest rate swaps..... $ 7,968.3 9.5 $(232.9) $(175.1) $(82.7) CMT swaps............... 609.7 2.5 0.5 (0.2) 1.8 Futures Contracts (1)... 1,675.3 -- (54.8) (4.0) 52.0 Interest Rate Caps...... 209.4 4.8 2.8 3.6 4.7 Interest Rate Floors.... 125.0 5.8 0.8 0.7 0.2 Swaptions............... 30.0 26.4 (1.2) (1.9) (3.7) --------- ------- ------- ------ Totals................ $10,617.7 $(284.8) $(176.9) $(27.7) ========= ======= ======= ======
- -------- (1) Represents the notional value on open contracts as of December 31, 1998. As of December 31, 1998, the aggregate fair value of debt was $1,082.2 million. A 100 basis point, immediate, parallel decrease in interest rates would increase the fair value of debt by approximately $59.9 million. The selection of a 100 basis point immediate, parallel increase or decrease in interest rates is a hypothetical rate scenario used to demonstrate potential risk. While a 100 basis point immediate, parallel increase or decrease does not represent our view of future market changes, it is a near term reasonably possible hypothetical change that illustrates the potential impact of such events. While these fair value measurements provide a representation of interest rate sensitivity, they are based on our portfolio exposures at a point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio transactions in response to new business, management's assessment of changing market conditions and available investment opportunities. Equity Risk Equity risk is the risk that we will incur economic losses due to adverse changes in a particular common stock. In order to reduce our exposure to market fluctuations on some equity securities, we use equity collar agreements. These equity collar agreements limit the market value fluctuations on equity securities. As of December 31, 1998, the fair value of our equity securities was $1,063.7 million. The fair value of our equity collar agreements as of December 31, 1998 was $28.6 million. A 15% decline in the value of the equity securities including the equity collar agreements would result in an unrealized loss of $145.8 million. Foreign Currency Risk Foreign currency risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. This risk arises from our international operations and certain foreign currency-denominated funding agreements issued to non-qualified institutional investors in the international market. We also have fixed income securities that are denominated in foreign currencies; however, we use derivatives to hedge the foreign currency risk of these securities (both interest payments and the final maturity payment). At December 31, 1998, the fair value of our foreign currency denominated fixed maturity securities was $388.4 million. We use currency swap agreements of the same currency to hedge the foreign exchange risk related to our investments in securities denominated in foreign currencies. The fair value of our currency swap agreements at December 31, 1998 was ($19.5) million. 91 We estimate that as of December 31, 1998, a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we are exposed including the currency swap agreements would result in no change to the net fair value of our foreign currency denominated instruments identified above. The selection of a 10% immediate unfavorable change in all currency exchange rates should not be construed as a prediction by us of future market events but rather as an illustration of the potential impact of such an event. The largest individual currency exposure is to the Canadian dollar/U.S. dollar. The modeling technique we use to calculate our exposure does not take into account correlation among foreign currency exchange rates or correlation among various markets. Our actual experience may differ from the results noted above due to the correlation assumptions utilized or if events occur that were not included in the methodology, such as significant liquidity or market events. Effects of Inflation We do not believe that inflation has had a material effect on our consolidated operations except insofar as inflation may affect interest rates. See "Risk Factors--We face risks relating to our investment portfolio." 92 BUSINESS Founded in 1862, John Hancock today is one of the nation's leading financial services companies, providing a broad array of insurance and investment products and services to retail and institutional customers, primarily in North America. We operate our business in five segments. Two segments primarily serve retail customers, and two segments serve institutional customers. Our fifth segment is the Corporate and Other Segment. Our retail segments are the Protection Segment and the Asset Gathering Segment. The Protection Segment offers variable life, universal life, whole life, term life, and individual and group long-term care insurance products. The Asset Gathering Segment offers variable and fixed, deferred and immediate annuities, and mutual funds. Our retail business also includes our retail distribution and customer service operations. In 1998, we were one of the ten largest writers of individual life insurance in the U.S. (according to the 1999 A.M. Best's Sales Studies rankings for Total Direct Premiums Written), and were the seventh largest writer of individual variable universal life insurance (according to data published by Tillinghast). We believe we are among the top five writers of individual long- term care insurance, and, based on total in force premiums, the top provider of group long-term care insurance, in the U.S. As of December 31, 1998, we were the 29th largest individual annuity company, based on LIMRA sales data, and our mutual fund subsidiary ranked 26th among U.S. asset managers in terms of total long-term, open end assets under management (according to data published by Financial Research Corporation). Our institutional segments are the Guaranteed and Structured Financial Products Segment and the Investment Management Segment. The Guaranteed and Structured Financial Products Segment offers a wide variety of spread-based and fee-based investment products and services, most of which provide the customer with some form of guaranteed return. The Investment Management Segment consists of investment management services and products marketed to institutions. This business is primarily fee-based and investment management products generally do not offer guarantees. Our expertise in both the Guaranteed and Structured Financial Products Segment and the Investment Management Segment has its roots in our long history of managing the assets in our general account. Our general account assets are available to meet all general corporate obligations, including the financial guarantees of our underlying insurance and investment products. Our investment operations emphasize strong credit analysis and transaction origination capabilities. For many years we have maintained, through our general account as well as our separate account products, an expertise in providing guaranteed products for U.S. pension plans, and in private domestic fixed income investing. Over the past two decades we have also gained a reputation as a manager of funds held in separate accounts for institutional clients. Separate account assets are generally dedicated to and managed in accordance with specific investment contracts and are generally not available to satisfy general account obligations. Our specialties in this market include fixed maturity securities, equities, natural resources, collateralized bond obligations and mezzanine financings, mostly managed for U.S. pension plan sponsors. Our principal executive offices are located at John Hancock Place, Boston, Massachusetts 02117. Protection Segment Overview Through our Protection Segment, we offer a variety of non-traditional and traditional life insurance products and individual and group long-term care insurance products. Our non-traditional life insurance products include variable life and universal life insurance. Our traditional life insurance products include whole life insurance and term life insurance. Protection products are distributed through multiple distribution channels, including our 93 career agency system, which we are integrating into our newly formed distribution subsidiary, Signator Financial Network ("Signator"), M Financial Group, independent broker/dealers, a private label arrangement, banks and directly to consumers. The Protection Segment has traditionally been our largest business segment, contributing 36.5% and 40.9% of consolidated operating revenues and 27.5% and 34.4% of consolidated after-tax operating income in the first six months of 1999 and in the full year 1998, respectively. The Protection Segment has achieved the following financial results for the periods indicated:
As of or for the Six Months Ended As of or for the Year Ended December 31, June 30, ------------------------------------------- 1999 1998 1997 1996 -------------- ------------- ------------- ------------- (in millions) Sales (new premiums and deposits): Non-traditional life (1) Variable life......... $ 68.6 $ 157.4 $ 115.2 $ 96.2 Universal life........ 9.2 56.2 25.8 5.4 Traditional life (1) Whole life............ 13.0 20.0 33.4 52.4 Term life............. 11.8 22.9 12.8 11.1 Individual long-term care................... 31.8 56.8 55.0 46.3 Group long-term care (2).................... 2.0 3.8 5.9 6.3 --------- ------------- ------------- ------------- Total............... $ 136.4 $ 317.1 $ 248.1 $ 217.7 ========= ============= ============= ============= Operating revenues: (3) Non-traditional life.... $ 253.0 $ 488.1 $ 409.5 $ 374.9 Traditional life........ 942.9 1,921.2 1,930.0 1,918.4 Individual long-term care................... 148.6 246.7 193.7 138.3 Group long-term care.... 53.0 94.2 87.5 74.9 Other................... 4.3 9.0 11.1 11.1 --------- ------------- ------------- ------------- Total............... $ 1,401.8 $ 2,759.2 $ 2,631.8 $ 2,517.6 ========= ============= ============= ============= Segment after-tax operating income: (3) Non-traditional life.... $ 48.1 $ 74.6 $ 38.6 $ 38.8 Traditional life........ 28.1 73.0 97.9 146.8 Individual long-term care................... 9.5 16.4 15.9 7.3 Group long-term care.... 5.0 7.8 8.4 5.3 Other................... (1.5) 0.5 (2.7) (0.9) --------- ------------- ------------- ------------- Total............... $ 89.2 $ 172.3 $ 158.1 $ 197.3 ========= ============= ============= ============= Assets: Non-traditional life.... $ 9,297.8 $ 8,713.2 $ 7,091.6 $ 5,619.2 Traditional life........ 16,675.0 16,412.4 15,753.0 15,313.1 Individual long-term care................... 891.3 754.8 582.0 388.2 Group long-term care.... 459.7 400.2 345.7 236.2 Other................... 29.1 23.2 21.1 8.1 Intra-segment eliminations........... (649.1) (600.1) (619.5) (533.0) --------- ------------- ------------- ------------- Total............... $26,703.8 $ 25,703.7 $ 23,173.9 $ 21,031.8 ========= ============= ============= =============
94 - -------- (1) Individual life insurance sales exclude (a) excess premiums, which are premiums that build cash value but do not purchase face amounts of insurance on variable life and universal life insurance products and (b) premiums on corporate owned life insurance and bank owned life insurance policies covering more than 200 lives. Sales include 10% of single premium payments on universal and whole life insurance products. (2) Group long-term care sales include only sales made to new employer groups initially effective in the year. Re-enrollments on existing accounts, sales constituting increased coverage to existing insureds, sales to non- employer groups and sales to new employees added to a group are excluded. (3) Excluded from the segment financial results are net realized investment gains and losses and non-recurring or unusual items. See Note 6 and Note 12 to our Unaudited Interim Consolidated Financial Statements and Audited Consolidated Financial Statements, respectively, for a reconciliation of amounts reported for operating segments to amounts reported in those financial statements. Products and Markets We have built a broad life insurance product portfolio that covers nearly all product categories. The following chart shows the product categories where we are actively selling at least one, if not more, products.
Separate General Account Account ----------------------------------------------------- Product Term Whole Universal Variable Category Life Life Life Life - ------------------------------------------------------------------------------- Single life insurance X X X X - ------------------------------------------------------------------------------- Joint or second-to-die life insurance X X X - ------------------------------------------------------------------------------- Corporate and bank owned life insurance X X
Individual Life Insurance. We believe there are two distinct groups of consumers for our individual life insurance products: relationship-oriented consumers and self-directed consumers. Relationship-oriented consumers are generally those in the high and upper middle income markets. They typically have complex buying needs and are willing to pay a price premium to be served personally by professional advisors. Self-directed consumers typically have simpler product needs, are more price sensitive and are more likely to initiate their own insurance purchases as protection needs arise. We market our variable, universal and whole life insurance products to relationship- oriented consumers. We market our term life insurance products to relationship-oriented consumers, as well as to self-directed consumers. In the past several years, our life insurance sales growth has come principally from sales of variable and universal life insurance, while sales of whole life insurance have declined. By diversifying from traditional life insurance products to the investment-oriented savings products demanded by today's consumer, we have generated strong business and earnings growth. . Variable Life Insurance. Our primary variable life insurance product is variable universal life insurance. This product provides life insurance coverage and an investment return linked to an underlying portfolio of investments chosen by the policyholder. Our sales of variable life insurance have grown at a compound annual rate of 28% from 1996 through 1998. For the first six months of 1999, our sales of variable life insurance increased 25% over the same period in 1998. Our variable life insurance product portfolio includes joint (second-to-die) and corporate owned life insurance products, as well as single life policies. Second- to-die products are typically used for estate planning purposes and insure two lives rather than one, with the policy proceeds paid after the death of both insured individuals. Corporate owned life insurance products are sold to corporations to fund special deferred compensation plans and benefit programs for key employees. We were among the first insurance companies to offer variable life insurance products, beginning in 1980, and we believe the 95 length of our experience in this market is a competitive strength. Variable life insurance policies represented 67% of our individual life insurance sales in the first six months of 1999, compared to an average of 61% over the past three full years. Our current variable life insurance products offer the policyholder a broad array of choices with respect to both investment options and also fund managers through our Variable Series Trust (VST). As of June 30, 1999, the VST included 23 fund options and 15 fund managers, offering a broad range of domestic equity, fixed income and international investment styles from retail and institutional managers. Offerings include both John Hancock and non-John Hancock funds. . Universal Life Insurance. Our universal life insurance products provide life insurance coverage and a cash value that increases based on a credited interest rate which is periodically reset. These policies generally permit policyholders to use any increase in cash value to vary the amount of insurance coverage and the timing and amount of premium payments. Our universal life insurance product portfolio also includes bank owned life insurance products which are sold to banks to fund post- retirement employee benefit plan liabilities. We participate in the bank owned life insurance market selectively, as special sales opportunities arise. For the first six months of 1999, sales of universal life insurance policies declined 41% compared to the same period of 1998. From 1996 through 1998, our sales of universal life insurance products grew at a compound annual rate of 323%. Universal life insurance policies represented 9% of our individual life insurance sales in the first six months of 1999, compared to an average of 14% over the past three full years. . Traditional Life Insurance Products. Our traditional life insurance products include single life and joint life (second-to-die) whole life insurance, and term life insurance. Participating whole life insurance combines a death benefit with a cash value that generally increases gradually in amount over a period of years, and typically pays a policy dividend. Term life insurance provides only a death benefit, does not build up cash value, and does not pay a dividend. Whole life insurance products represented 8%, and term life insurance products represented 9%, of our individual life insurance sales in 1998. For the first six months of 1999, our whole life insurance sales increased by 40% as compared to the same period of 1998. From 1996 through 1998, our whole life insurance sales declined at a 38% compound annual rate, as demand shifted to our variable and universal life insurance products. For the first six months of 1999, our term life insurance sales increased by 14% over the same period of 1998. From 1996 through 1998, sales of our term life insurance products grew at a compound annual rate of 44%. Traditional life insurance policies represented 25% of our average individual life insurance sales over the past three full years. 96 The following table illustrates, for the periods indicated, total statutory premiums and deposits, which is the premium we report on the annual statements we file with insurance regulators, life insurance in force and GAAP reserves for our individual life insurance products. In addition to premium from sales of new policies, which we refer to as "sales," statutory premiums and deposits includes revenues from renewals of policies, 10% of single premium payments, and premiums from reinsurance assumed by us. We deduct from this measure the premiums that we cede to our reinsurers. Statutory premiums and deposits differ from GAAP premiums because GAAP requires that premiums on variable and universal life insurance products be accounted for using deposit accounting. Deposit accounting excludes from revenue the premiums received on these products and generally shows the fees earned from the products as revenues. Individual Life Insurance Selected Financial Data
As of or for the As of or for the Year Ended Six Months December 31, Ended June -------------------------------- 30, 1999 1998 1997 1996 ---------- ---------- ---------- ---------- (in millions) Total statutory premiums and deposits: Variable life..................... $ 392.1 $ 810.8 $ 670.8 $ 583.4 Universal life(1)................. 51.6 436.8 141.8 302.7 Traditional life.................. 512.2 1,051.3 1,071.7 1,068.5 ---------- ---------- ---------- ---------- Total........................... $ 955.9 $ 2,298.9 $ 1,884.3 $ 1,954.6 ========== ========== ========== ========== Life insurance in force: Variable life..................... $ 54,403.2 $ 52,552.9 $ 46,175.3 $ 41,408.1 Universal life.................... 8,685.6 8,511.0 6,967.2 6,491.8 Traditional life.................. 55,082.4 52,122.6 61,772.3 65,704.8 ---------- ---------- ---------- ---------- Total........................... $118,171.2 $113,186.5 $114,914.8 $113,604.7 ========== ========== ========== ========== GAAP Reserves: Variable life..................... $ 326.5 $ 464.4 $ 225.1 $ 184.6 Universal life.................... 1,996.9 1,750.4 1,470.7 1,359.1 Traditional life.................. 9,576.7 9,386.0 9,046.4 8,717.3 ---------- ---------- ---------- ---------- Total........................... $ 11,900.1 $ 11,600.8 $ 10,742.2 $ 10,261.0 ========== ========== ========== ==========
- -------- (1) Includes bank owned life insurance premiums of $340.0 million, $65.0 million and $255.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. There were no bank owned life insurance premiums for the first six months of 1999. Long-Term Care Insurance. We are one of the few insurance companies that offers both individual and group long-term care insurance. We entered the individual long-term care insurance market in 1987 and the group long-term care insurance market in 1988. In 1998, we believe that we were the market leader for group long-term care insurance, with a 26% share of total premiums according to data reported by LIMRA. In 1998, we were among the top five writers of individual long-term care insurance according to data published by LifePlans, Inc. Our long-term care insurance products provide protection against the large and escalating costs of home health care, assisted living, and nursing home care. With the aging population, the expected inability of government entitlement programs to meet retirement needs, and a growing public awareness of long-term care insurance, we believe there is excellent growth potential for the long-term care insurance market. In addition to our core distribution channels, which include our Signator/career agent channel, brokers/dealers and banks, we 97 expect to derive sales growth from alternative distribution methods, such as private label arrangements where our products are sold through other insurers' sales forces. Our long-term care insurance products are reimbursement products, which provide benefits only for documented nursing home or health care expenses. These products are sold on a guaranteed renewable basis, meaning that we are required to renew the policies each year as long as the premium is paid. However, this also gives us the ability to reset the price of the product prospectively, if needed. Our claims history on these products has been favorable. . Individual Long-Term Care Insurance. Our individual long-term care insurance products are sold to pre-retirement and retired customers. For the first six months of 1999, our sales of individual long-term care insurance products were $31.8 million, an increase of 20% over the same period in 1998. From 1996 through 1998, our sales of individual long- term care insurance products increased at a compound annual rate of 11%. The following table illustrates for the periods indicated, first year premium, total premium and reserves for our individual long-term care insurance products. First year premium represents total premiums earned during the first year of the policy for all new individual long-term care insurance business. Individual Long-Term Care Insurance Selected Financial Data
As of or for the As of or for the Year Ended Six Months December 31, Ended June 30, -------------------- 1999 1998 1997 1996 ---------------- ------ ------ ------ (in millions) First year premium..................... $ 33.6 $ 57.2 $ 56.0 $ 44.6 Total premium.......................... 129.6 218.5 175.2 124.2 Reserves............................... 557.0 473.4 340.9 237.3
. Group Long-Term Care Insurance. Our group long-term care insurance products are sold through employer-sponsored plans to employees and retirees, and their eligible relatives. The insured, not the employer, generally pays the premium for this insurance. Following selection of one of our plans by an employer, we market our products directly to the employee base. The principal market for our group long-term care insurance products is companies with over 7,500 employees and retirees. We also pursue smaller employers with 500 or more employees and retirees in selected industries. Our sales of group long-term care insurance for the first six months of 1999 were $2.0 million, an increase of 67% over the same period in 1998. From 1996 through 1998, although we remained the market leader based on in force premium, our sales of group long-term care insurance products declined at a compound annual rate of 23%. The following table illustrates for the periods indicated first year premium, total premium and reserves for our group long-term care insurance products. First year premium represents total premiums earned during the first year of the policy for all new group long-term care insurance business, including employer and non-employer groups, and new employees added to a group. Group Long-Term Care Insurance Selected Financial Data
As of or for the As of or for the Year Ended Six Months December 31, Ended June 30, -------------------- 1999 1998 1997 1996 ---------------- ------ ------ ------ (in millions) First year premium..................... $ 4.2 $ 5.5 $ 7.1 $ 9.3 Total premium.......................... 38.8 72.7 69.6 62.3 Reserves............................... 305.3 275.2 219.9 170.7
98 Distribution We employ multiple distribution channels, both owned and non-owned, to sell our protection products. Typically we employ separate sales efforts for each product. However, we also attempt to optimize our distributor relationships by selling complementary products where the needs of the consumer call for them. The Protection Segment's distribution channels include the following: Signator. We are making fundamental changes in our career agency system to improve productivity, reduce fixed costs and enhance service. To enable our career agents to provide more sophisticated financial planning services as well as a broader range of financial products, we are making a significant investment in agent education and training, expanding licensing requirements and enhancing our service and product support capability. A key component of this strategy was the creation in early 1999 of Signator, a separate distribution subsidiary. Signator will provide highly tailored financial planning tools and market support and will further enable our agents to sell products of multiple companies. This new subsidiary is structured to enable us to recruit, develop and retain top producers. As of June 30, 1999, the major producers within Signator included 49 managerial agencies owned by us and 96 independent general agencies, as well as insurance brokers. Combined, the Signator system includes approximately 3,000 registered and licensed representatives. We believe that over time Signator will enable us to continue growing revenues, while reducing unit expenses. M Financial Group. M Financial Group is a national producer group founded in 1978 of approximately 100 life insurance producing firms with over 400 individual producers operating exclusively in the upper end of the wealth transfer and executive benefit markets. We believe John Hancock has been either the first or second largest provider of life insurance products to the M Financial Group in each of the past three years, although the member firms also sell the products of other prominent U.S. life insurance companies. We have jointly developed a proprietary life insurance product line with M Financial Group to meet the distinct requirements of its producers. We also offer four proprietary investment options of M Fund, Inc. on all variable life insurance products sold by M Financial Group members, in addition to the investment options supported by the VST. In addition to these proprietary products, we provide a number of exclusive services to M Financial Group members, including a deferred compensation plan, dedicated sales, underwriting and service teams and participation in special marketing events, as well as M Financial Group sponsored systems and technology initiatives. In addition, M Life Insurance Company shares the insurance risk, through reinsurance, on 50% of most of our policies that its members sell. These products and services and this reinsurance arrangement serve to align M Financial Group producers' incentives with ours. The business generated by M Financial Group producers has experienced lower termination or non-renewal (referred to in the industry as "lapse") and mortality rates than the industry average. Over the six months ended June 30, 1999 and the past three full years, sales originated through the M Financial Group relationship have accounted for approximately 36% of our average annual life insurance sales. In 1998, these sales included $39.4 million of large corporate owned life insurance policies. Independent Broker/Dealers. We have selling agreements for individual long- term care insurance products with over 20 independent broker/dealer organizations. In 1998, we launched Investors Partner Life Insurance Company, a wholly-owned subsidiary, to work with independent broker/dealers in offering tailored life insurance products to high income clients. In addition, our sales through Signator include some life insurance sold by broker/dealers. Direct distribution. We have developed a direct distribution unit, operating under the "MarketPlace by John Hancock" brand, to complement our traditional sales efforts. Through this unit, we sell term life insurance and variable annuities over the telephone, through direct mail and over the Internet, directly to consumers. We currently sell fully underwritten and simplified issue term insurance products and a simplified, no load, no surrender charge variable annuity. Term insurance products are marketed via direct response television, targeted direct mail and over the Internet. Consumers can call a toll-free number or go directly to our web site to get 99 information, obtain a quote or start an application. We have built a call center and a streamlined application, payment and issue process to support this distribution channel. Our e-commerce initiatives include the launch of a John Hancock Internet web site that allows consumers to collect product information, get a quote, and apply for insurance directly on-line. We have also entered into strategic relationships with Quotesmith.com, Inc., Insweb Corporation, Intuit's Quicken(R) InsureMarket(R) site and Women.com Networks LLC. In late 1998, we signed a two-year agreement with Microsoft Corporation which provides us with interactive banner advertisements appearing at the MSN network of Internet services. These advertisements have direct electronic links to our web site. The agreement establishes us as MSN's premier life insurance sponsor for a minimum of one year. Banks. We offer a full line of life and individual long-term care insurance products through banks that have established an insurance sales force. Group sales force. Group long-term care insurance products are marketed by a dedicated sales force located in major cities around the country. The sales force works closely with consultants, brokers, and other intermediaries to generate sales and grow existing accounts. Private label arrangements. We have launched, during the second quarter of 1999, an individual long-term care product which is being sold through another insurer under a private label arrangement. We anticipate entering into more of these private label arrangements with respect to various products. Signator, the M Financial Group, our independent broker/dealer channel and the bank channel are aimed at relationship-oriented consumers. The direct distribution channel targets self-directed consumers. 100 The table below shows Protection Segment sales by distribution channel for the periods indicated. Individual life insurance sales exclude excess premiums, which are premiums that build cash value but do not purchase any additional face amount of insurance, on variable life and universal life insurance products and premiums on corporate owned life insurance and bank owned life insurance policies covering more than 200 lives. Sales include 10% of single premium payments on universal life and whole life insurance policies. Group long-term care sales include only sales made to new employer groups initially effective in the year. Re-enrollments on existing accounts, sales constituting increased coverage to existing insureds, and sales to non- employer groups and new employees added to a group are excluded. Protection Segment Sales by Distribution Channel
Six Months Ended For the Year Ended December 31, June 30, -------------------------------- 1999 1998 1997 1996 ---------- ---------- ---------- ---------- (in millions) Signator: (1) Individual life.................... $ 64.3 $ 132.9 $ 117.9 $ 129.2 Individual long-term care.......... 28.1 50.7 49.2 41.8 M Financial Group: Individual life.................... 33.6 117.8 68.5 35.9 Individual long-term care.......... -- .1 -- -- Independent Broker/Dealers: Individual long-term care.......... 3.2 5.7 5.8 4.5 Direct Distribution: Individual life.................... 3.8 4.8 .7 -- Banks: Individual life.................... .6 .5 -- -- Individual long-term care.......... .3 .2 .1 -- Dedicated Sales Force: Group long-term care............... 2.0 3.8 5.9 6.3 Other: Individual life.................... .3 .5 .1 -- Individual long-term care.......... .1 .2 -- -- Total: Individual life.................... $102.6 $ 256.5 $ 187.2 $ 165.1 Individual long-term care.......... 31.8 56.8 55.0 46.3 Group long-term care............... 2.0 3.8 5.9 6.3
- -------- (1) Sales originated through independent broker/dealers and reported within the Signator channel were 21% of total Signator individual life insurance sales, before deduction of excess premiums but after exclusion of cases with over 200 lives, for the six months ended June 30, 1999 and 25%, 19% and 8% for 1998, 1997 and 1996, respectively. For individual long-term care insurance for each of these four periods, 1% of total Signator sales were originated through independent broker/dealers. Also reported in the Signator channel are sales originated through independent insurance brokers, which accounted for 33% of total Signator individual life insurance sales, before deduction of excess premiums but after exclusion of cases with over 200 lives, for the six months ended June 30, 1999, and 23%, 17% and 23% for 1998, 1997 and 1996, respectively. For individual long-term care insurance, 21% of total Signator channel sales for the six months ended June 30, 1999 were originated through independent insurance brokers, and 18%, 17% and 18% for 1998, 1997 and 1996, respectively. 101 Underwriting Insurance underwriting involves a determination of the type and amount of risk that an insurer is willing to accept. Underwriting also determines the amount and type of reinsurance levels appropriate for a particular type of risk. By utilizing reinsurance, we can limit our risk and improve product pricing. Our underwriting standards for life insurance are intended to result in the issuance of policies that produce mortality experience consistent with the assumptions used in product pricing. For individual long-term care products, we use separate but similar underwriting criteria appropriate to the morbidity risks insured. Our overall profitability depends to a large extent on the degree to which our mortality and/or morbidity experience matches our pricing assumptions. For life insurance, our underwriting is based on our historical mortality experience, as well as the experience of the insurance industry and of the general population. We continually compare our underwriting standards against the industry to mitigate our exposure to higher risk business and to stay abreast of industry trends. Our life and long-term care insurance underwriters evaluate policy applications on the basis of the information provided by the applicant and others. We use a variety of methods to evaluate certain policy applications, such as those where the size of the policy is large, or the applicant is an older individual or has a known medical impairment or is engaged in a hazardous occupation or hobby. Group long-term care underwriting is conducted on both the employer group level and the individual level. Our group long-term care corporate customers generally offer their employees the opportunity to purchase coverage on a "guaranteed-issue" basis, meaning that all employees are eligible for insurance coverage, and offer individually underwritten coverage to family members. We rely on our experience in underwriting large groups in order to set prices that take into account the underwriting arrangements, the general health conditions of the corporate customers' employees, the specifics of the negotiated plan design, and other demographic and morbidity trends. Group products are written on a guaranteed renewable basis, which permits repricing if necessary. Our corporate owned and bank owned life insurance policies covering multiple lives are issued on a guaranteed issue basis, where the amount of insurance issued per life on a guaranteed basis is related to the total number of lives being covered and the particular need that the product is being purchased for. Guaranteed issue underwriting applies to employees actively at work, and product pricing reflects the additional guaranteed issue underwriting risk. Reserves We establish and report liabilities for future policy benefits on our balance sheet to meet the obligations under our insurance policies and contracts. Our liability for variable life insurance and universal life insurance policies and contracts is equal to the cumulative account balances. Cumulative account balances include deposits plus credited interest less expense and mortality charges and withdrawals. Future policy benefits for our traditional life, individual long-term care and group long-term care insurance policies are calculated based on a set of actuarial assumptions that we establish and maintain throughout the lives of the policies. Our assumptions include investment yields, mortality, morbidity and expenses. Competition We face significant competition in all our retail protection businesses. Our competitors include other large and highly rated insurance carriers. Some competitors have penetrated more markets and have greater resources than us. Many competitors offer similar products and use similar distribution channels. In the e-commerce arena, 102 we also face competition from internet start-up companies and traditional competitors that have established internet platforms. We believe that we distinguish ourselves from our competitors through the combination of: . our strong financial ratings; . our strong and reputable brand; . our broad range of competitive and innovative products; . the variety of our distribution channels; . the depth of our experience as one of the first companies to offer variable life insurance, individual long-term care insurance and group long-term care insurance; . the quality of the support we provide to the distributors of our products; and . our dedication to customer service. Competition also exists for agents and other distributors of insurance products. Much of this competition is based on the pricing of products and the agent or distributor compensation structure. We believe that our competitive strengths coupled with the advantages of our new Signator network will enable us to compete successfully to attract and retain top quality agents and distributors. We also support agents' and distributors' needs by providing sophisticated tax, estate and business planning support, and also by designing proprietary products (for example, the products developed for sale through M Financial Group producers). We continuously provide technology upgrades and enhanced agent training, and strive to improve service. Reinsurance We reinsure portions of the risks we assume for our protection products. The maximum amount of individual ordinary life insurance retained by us on any life is $10.0 million under an individual policy and $20.0 million under a second-to-die policy. By entering into reinsurance agreements with a diverse group of highly rated reinsurers, we seek to control our exposure to losses. Our reinsurance, however, does not discharge our legal obligations to pay policy claims on the policies reinsured. As a result, we enter into reinsurance agreements only with highly rated reinsurers. Nevertheless, there can be no assurance that all our reinsurers will pay the claims we make against them. As discussed below, one of our principal reinsurers, RGA Reinsurance Company ("RGA"), has recently been downgraded by several rating agencies. Failure of a reinsurer to pay a claim could adversely affect our business, financial condition or results of operations. We have several major life reinsurance arrangements, including agreements with four reinsurers (The Lincoln National Life Insurance Company, Transamerica Occidental Life Insurance Company, RGA and Life Reassurance Corporation of America) that transfers a total of 80% of the risk arising from our indeterminate premium term life insurance policies. We also have a reinsurance agreement with M Life Insurance Company, an affiliate of the M Financial Group, under which M Life Insurance Company reinsures 50% of most of our policies that its members sell. Under the terms of this agreement, we continue to hold the assets backing the reserves on the risks reinsured. M Life Insurance Company is assigned an NR-1 classification by A.M. Best, a rating which is primarily assigned to small companies for which A.M. Best does not have sufficient financial information required to assign rating opinions. To review the claims-paying ability and financial strength of M Life Insurance Company, we review semi-annual financial information provided to us by M Life Insurance Company, and hold semi-annual meetings with its management to review operations, marketing, reinsurance and financial issues. We also review the annual audited financial reports of the parent company of M Life Insurance Company. For amounts in excess of $400,000 per policy that would otherwise be reinsured by M Life Insurance Company, we have entered into reinsurance agreements with The Lincoln National Life Insurance Company and RGA. The total amount of reinsurance premiums paid in 1998 by the individual life insurance line of business to reinsurers amounted to $244.3 million. At December 31, 1998 we had reinsured $33,517.7 million in face amount 103 of insurance, representing 23% of our total face amount of $146,704.3 million. Our five principal unaffiliated life reinsurers are listed below, along with the reinsurance recoverable, on a statutory basis, the face amount of life insurance in force reinsured as of December 31, 1998, and their respective A.M. Best ratings as of August 31, 1999:
Face Amount of Life A.M. Reinsurance Insurance Best Reinsurer Recoverable In-Force Rating --------- ----------- ----------- ------ (in millions) RGA Reinsurance Company................ $25.1 $6,297.0 B++ The Lincoln National Life Insurance Company................ 22.1 5,990.7 A Life Reassurance Corporation of America................ 21.3 5,692.4 A+ Transamerica Occidental Life Insurance Company................ 16.9 4,532.4 A+ M Life Insurance Company................ 3.8 5,682.5 NR-1
On August 11, 1999 A.M. Best announced that it had downgraded its rating of RGA to B++ from A+ and placed the rating under review with negative implications. A.M. Best reported that the action followed a request filed by RGA's majority shareholder and one of their largest reinsurance clients, General American Life Insurance Company ("General American"), with the Missouri Department of Insurance that General American be placed under voluntary administrative supervision. According to A.M. Best, such supervision would enable General American to not face immediate contractual obligations related to its block of funding agreements. While A.M. Best downgraded its rating of RGA, it stated that it assigned a higher rating to RGA than it did to General American because RGA is not in default and because A.M. Best believes that demands on the liquidity of RGA are likely to be less onerous while General American remains under regulatory protection. Other rating agencies have similarly downgraded their ratings of RGA. Moody's announced on August 9, 1999 that it had downgraded RGA's insurance financial strength rating from A3 to Ba1 and on August 12, 1999, from Ba1 to Ba3. On August 10, 1999, Standard & Poor's announced that it had lowered its financial strength rating of RGA from AA to BB and placed RGA on credit watch with negative implications. Despite these developments, we have not experienced any failure to receive payment from RGA under the terms of our reinsurance agreements. There can be no assurance that RGA will continue to pay in full and in a timely manner the claims that we make against them in accordance with terms of these agreements. However, even if RGA failed to pay our claims in full, we do not believe that our exposure to RGA would be material. On August 26, 1999, Metropolitan Life Insurance Company and GenAmerica Corporation, the parent company of General American Life Insurance Company and its subsidiaries, including RGA, announced a definitive agreement whereby Metropolitan Life Insurance Company (rated A+ by A.M. Best) has agreed to acquire GenAmerica Corporation for $1.2 billion in cash. Our individual long-term care business unit has entered into a coinsurance agreement with London Life International Reinsurance Company of Barbados. The amount of reinsurance premium paid by us in the first six months of 1999 and in 1998 under these agreements was $9.4 million and $18.7 million, respectively. As of December 31, 1998, there was, on a statutory basis, $51.1 million of total reinsurance recoverable under this agreement. Asset Gathering Segment Overview Through our Asset Gathering Segment, we offer individual annuities, mutual fund products and investment management services. Individual annuities include variable and fixed annuities, both immediate and deferred. Mutual fund products primarily consist of open-end mutual funds and closed-end funds. Open-end mutual funds are subject to redemption at any time by investors. After their initial public offering, the shares of closed-end funds are not subject to redemption, and accordingly represent a more stable base of assets than open-end funds. As of June 30, 1999, 73% of our mutual fund assets under management were invested in open-end mutual funds. Our investment management services include retirement services, offered principally to 401(k) plans, and the management of institutional pools of capital. We distribute these products and services through Signator, independent broker/dealers, banks, directly to state lottery commissions and, both directly and through pension consultants, to retirement plan sponsors. In this segment, we also include the results of Signator, of John Hancock Signature Services, our servicing subsidiary, of First Signature Bank & Trust Company, our limited-service 104 banking subsidiary, and of Essex Corporation, one of the nation's largest intermediaries between banks and product manufacturers for annuities. The Asset Gathering Segment contributed 13.6% and 15.0% of consolidated operating revenues and 19.0% and 22.2% of consolidated after-tax operating income in the first six months of 1999 and in the full year 1998, respectively. The Asset Gathering Segment has achieved the following financial results for the periods indicated:
As of or for the Six Months As of or for the Year Ended Ended June December 31, 30, ------------------------------ 1999 1998 1997 1996 ---------- --------- --------- -------- (in millions) Sales: Variable annuities (1)............ $ 409.4 $ 882.7 $ 745.9 $ 629.3 Fixed annuities (1)............... 311.1 377.8 714.0 672.1 John Hancock Funds (2)............ 2,155.9 6,797.7 7,442.3 5,150.3 --------- --------- --------- -------- Total........................... $ 2,876.4 $ 8,058.2 $ 8,902.2 $6,451.7 ========= ========= ========= ======== Operating revenues: (3) Variable annuities (1)............ $ 54.4 $ 94.1 $ 76.3 $ 69.3 Fixed annuities (1)............... 189.5 390.1 400.5 328.9 John Hancock Funds (4)............ 230.5 467.2 377.9 276.5 Signator Investors (formerly John Hancock Distributors, Inc.)...... 93.8 169.0 112.2 41.9 John Hancock Signature Services... 49.7 102.2 101.7 27.7 Other............................. 15.9 10.8 10.8 10.3 Eliminations...................... (113.1) (218.1) (174.5) (34.5) --------- --------- --------- -------- Total........................... $ 520.7 $ 1,015.3 $ 904.9 $ 720.1 ========= ========= ========= ======== Segment after-tax operating income: (3) Variable annuities................ $ 10.5 $ 18.3 $ 8.3 $ 3.6 Fixed annuities................... 22.7 34.9 37.4 28.9 John Hancock Funds................ 28.2 54.8 45.6 27.8 Signator Investors (formerly John Hancock Distributors, Inc.)...... 0.5 1.5 1.2 1.3 John Hancock Signature Services... (1.2) 0.7 0.0 (6.9) Other............................. 1.0 0.9 0.8 1.0 --------- --------- --------- -------- Total........................... $ 61.7 $ 111.1 $ 93.3 $ 55.7 ========= ========= ========= ======== Assets: Variable annuities................ $ 7,384.5 $ 6,820.5 $ 5,360.0 $4,194.3 Fixed annuities................... 5,551.4 5,140.4 5,042.5 4,505.9 John Hancock Funds................ 560.3 502.1 467.3 372.2 Signator Investors (formerly John Hancock Distributors, Inc.)...... 15.5 13.2 12.4 11.4 John Hancock Signature Services... 24.7 26.7 22.3 16.3 Other............................. 199.4 212.8 165.8 172.1 --------- --------- --------- -------- Total........................... $13,735.8 $12,715.7 $11,070.3 $9,272.2 ========= ========= ========= ======== Assets Under Management: Variable annuities................ $ 7,103.1 $ 6,569.6 $ 5,125.6 $3,983.8 Fixed annuities................... 5,161.8 4,867.4 4,777.8 4,252.6 John Hancock Funds (5)............ 34,225.9 34,945.2 31,402.0 23,298.6
105 - -------- (1) Represents statutory annual statement values. Statutory revenues include premiums and deposits on variable and fixed annuities. Statutory premiums and deposits differ from GAAP premiums because GAAP requires that variable and certain fixed annuity products be accounted for using deposit accounting. Deposit accounting excludes from revenue the premiums and deposits received on these products. (2) Mutual fund and institutional asset sales are defined as new inflows of funds from investors into our investment products. Sales of retail money market products are not included. Sales of mutual fund products are recorded on the trade date. Sales of institutional investment products are recorded on the date a firm commitment is established. (3) Excluded from the segment financial results are net realized investment gains and losses and non-recurring or unusual items. See Note 6 and Note 12 to our Unaudited Interim Consolidated Financial Statements and Audited Consolidated Financial Statements, respectively, for a reconciliation of amounts reported for operating segments to amounts reported in those financial statements. (4) Includes $3.6 million, $5.8 million, $7.7 million and $6.9 million of revenue from management of our general account assets for the six months ended June 30, 1999 and for the years 1998, 1997 and 1996, respectively. (5) Includes $2.6 billion, $2.6 billion, $2.3 billion, and $2.1 billion of our general account assets as of June 30, 1999 and December 31, 1998, 1997 and 1996, respectively. Products and Markets Annuities We offer variable and fixed, immediate and deferred, annuities to a broad range of consumers through multiple distribution channels. Variable annuities are separate account products, where the contractholder bears the investment risk and has the right to allocate his or her funds among various separate investment subaccounts. Our major source of revenues from variable annuities is mortality and expense fees charged to the contractholder, generally determined as a percentage of the market value of the underlying assets under management. Fixed annuities are general account products, where we bear the investment risk as funds are invested in our general account and a stated interest rate is credited to the contractholders' accounts. Our major source of income from fixed annuities is the spread between the investment income earned on the underlying general account assets and the interest credited to contractholders' accounts. Annuities may be deferred, where assets accumulate until the contract is surrendered, the contractholder dies, or the contractholder begins receiving benefits under an annuity payout option; or immediate, where payments begin within one year of issue and continue for a fixed period of time or for life with or without a period certain. Annuities offer a tax-deferred means of accumulating savings for retirement needs, and provide a tax-efficient source of income in the payout period. We sell our annuity products primarily to members of two groups: forty to sixty year-olds seeking to accumulate assets for retirement, and people over sixty years old seeking to protect against outliving assets during retirement. Members of both groups typically have annual incomes of less than $100,000. Investment management skills are critical to the growth and profitability of our annuity business. In addition to variable annuity products that offer the same fund choices as our variable life insurance products, we also offer variable annuities that offer funds managed by our subsidiaries. As of June 30, 1999, over 90% of our variable annuity assets were managed by John Hancock Funds, our mutual fund subsidiary, and by Independence Investment Associates, Inc., our internal institutional equity manager. Our fixed annuity assets are also managed internally. The relative proportion of our total annuity sales represented by fixed and variable annuities is generally driven by the relative performance of the equity and fixed income markets. Fixed annuity deposits represented 52% of total annuity deposits in 1996, and, as interest rates declined, represented only 30% of total annuity deposits in 1998. However, as a result of strong equity markets, deposits of variable annuities grew from 48% of 106 total annuity deposits in 1996 to 70% of total annuity deposits in 1998. From 1996 through 1998, variable annuity deposits grew at a compound annual rate of 18% while fixed annuity deposits fell at a compound annual rate of 25%, as interest rates generally declined and the equity markets have generally been strong. During the first half of 1999, as interest rates have generally risen, fixed annuity deposits have increased as a proportion of total annuity sales, while variable annuity deposits have declined. In order to enhance our competitiveness in the variable annuity marketplace, we expect to introduce a new variable annuity product line in the fourth quarter of 1999 that will include features that are more responsive to demand in the broker dealer channel. We believe that this new variable annuity product will present an attractive offering in the evolving variable annuity marketplace. The following tables present certain information regarding our annuity reserve activity for the periods indicated: Annuity Reserve Activity
For the Six Months As of or for the Year Ended Ended December 31, June 30, ----------------------------- 1999 1998 1997 1996 --------- --------- -------- -------- (in millions) Variable Annuities: Reserves, beginning of period........ $ 6,660.4 $ 5,245.0 $4,092.3 $3,309.0 Deposits........................... 409.4 882.7 745.9 629.3 Interest credited and investment performance....................... 512.2 1,090.9 816.6 452.1 Surrenders and benefits............ (323.8) (467.4) (337.1) (238.8) Product charges.................... (54.0) (90.8) (72.7) (59.3) --------- --------- -------- -------- Reserves, end of period.............. $ 7,204.2 $ 6,660.4 $5,245.0 $4,092.3 ========= ========= ======== ======== Fixed Annuities: Reserves, beginning of period........ $ 4,591.3 $ 4,501.8 $4,083.0 $3,591.8 Premiums and deposits.............. 301.9 360.6 692.6 652.2 Interest credited.................. 118.4 245.0 228.1 208.0 Surrenders and benefits............ (263.1) (507.1) (492.0) (361.0) Product charges.................... (3.4) (9.0) (9.9) (8.0) --------- --------- -------- -------- Reserves, end of period.............. $ 4,745.1 $ 4,591.3 $4,501.8 $4,083.0 ========= ========= ======== ======== Total Annuities: Reserves, beginning of period........ $11,251.7 $ 9,746.8 $8,175.3 $6,900.8 Premiums and deposits.............. 711.3 1,243.3 1,438.5 1,281.5 Interest credited and investment performance....................... 630.6 1,335.9 1,044.7 660.1 Surrenders and benefits............ (586.9) (974.5) (829.1) (599.8) Product charges.................... (57.4) (99.8) (82.6) (67.3) --------- --------- -------- -------- Reserves, end of period.............. $11,949.3 $11,251.7 $9,746.8 $8,175.3 ========= ========= ======== ========
John Hancock Funds John Hancock Funds, our mutual fund subsidiary, had $34.2 billion in total assets under management as of June 30, 1999. We employ a team style in the management of our funds. These teams manage portfolios in accordance with a variety of specified strategies, which we believe gives us a competitive advantage over competitors, many of whom deploy only one style across a family of funds. As of June 30, 1999, our fixed income and equity research staffs included over 60 portfolio managers and analysts with an average of 15 years of experience. We are recruiting additional investment professionals to enhance our capabilities across both 107 fundamental and quantitative analysis and investment styles. This ongoing commitment to investment research further enables us to develop new products intended to strengthen our fund offerings, across a broad array of investment styles. Through John Hancock Funds we offer a variety of mutual fund products and related investment management services: . Mutual Funds. John Hancock Funds offers a broad array of open-end mutual funds and closed-end funds to a broad base of consumers across varying income levels. We also offer our mutual funds as investment options in variable annuities and variable life insurance products. Our product offerings cover both domestic and international equity and fixed-income markets. As of June 30, 1999, 66% of assets under management were invested in equity funds with the balance in fixed-income and money market funds. As of the same date, 30% of assets under management were invested in financial services sector funds. We have three principal sources of income from our mutual fund business: investment advisory fees; commission income; and Rule 12b-1 fees. We receive investment advisory fees for providing investment advisory and management services to the funds. Any changes in these fees must be approved by fund shareholders. Rule 12b-1 fee income consists of fees charged to cover the costs of distributing fund shares. We also receive a monthly management fee for shareholder and accounting services. Mutual fund investment advisory contracts, including the level of fees charged, are subject to the approval of the independent board members of the individual funds. Commission income consists of sales charges, also referred to as "loads," on our open-end funds. We offer three commission structures. Class A shares have a front-end load, in which sales charges are incurred as deposits are received. John Hancock Funds retains a portion of the front-end loads it receives but pays most of the amount to the broker/dealer firms that sell the funds' shares. Class B shares have a back-end or contingent load, in which sales charges are incurred only if redemptions are made within a time frame specified at the time of deposit. These charges decline to zero over time, typically a six year period. Class C shares do not have an upfront sales charge but they do have a back-end load for redemptions made within one year and ongoing annual expenses tend to be higher. Class B shares have been our highest selling class of mutual fund, representing 52% of deposits in the first six months of 1999 and the previous three full years. Class C shares have been offered on our funds since 1998. . Retirement Services. We offer mutual funds and services to 401(k) plan sponsors, primarily small- and mid-size companies, on either a full- service or on an unbundled basis. A third option is available to clients who want to choose John Hancock Funds on an investment-only basis. We also offer traditional IRA programs and a complete line of retirement products, including: SIMPLE IRA and SIMPLE 401(k) plans for companies with no more than 100 eligible employees and no other qualified plan; Simplified Employee Pensions for companies of any size, including self-employed persons, partnerships and corporations; and Roth IRA plans for individuals. Capturing retirement plan assets is an important focus of John Hancock Funds, as plan participants' contributions are typically long-term in nature and therefore represent a stable source of investment advisory fee income. As of June 30, 1999, our 401(k) and IRA assets under management were approximately $5.3 billion. The retirement services we provide help us to attract plan assets under management. . Institutional Pools of Capital. Through institutional funds and private accounts, John Hancock Funds manages assets for public pension plans, high net-worth individuals, corporate pension plans, pooled separate accounts, union pension plans, foundations and endowments. As of June 30, 1999, assets under management included $2.6 billion of our general account assets. 108 The following tables present certain information regarding the assets under management by John Hancock Funds for the periods indicated: Asset Flow Summary
For the Six For the Year Ended December Months Ended 31, June 30, ------------------------------- 1999 1998 1997 1996 ------------ --------- --------- --------- (in millions) Retail Mutual Funds: Assets under management, beginning of period(1)......... $29,248.7 $26,826.2 $19,244.5 $15,443.8 Deposits and reinvestments.... 2,079.8 6,242.8 6,178.3 5,013.1 Redemptions and withdrawals... (3,106.8) (4,412.8) (3,282.1) (2,375.0) Market appreciation........... 627.7 1,044.0 5,048.9 1,422.0 Fees.......................... (220.0) (451.5) (363.4) (259.4) --------- --------- --------- --------- Assets under management, end of period......................... $28,629.4 $29,248.7 $26,826.2 $19,244.5 ========= ========= ========= ========= Institutional Investment Management: Assets under management, beginning of period............ $ 5,696.5 $ 4,575.8 $ 4,054.1 $ 3,379.2 Deposits and reinvestments.... 322.2 2,184.4 811.9 758.6 Redemptions and withdrawals... (676.7) (907.2) (573.3) (464.3) Market appreciation (depreciation)............... 263.4 (132.4) 307.3 402.8 Fees.......................... (8.9) (24.1) (24.2) (22.2) --------- --------- --------- --------- Assets under management, end of period......................... $ 5,596.5 $ 5,696.5 $ 4,575.8 $ 4,054.1 ========= ========= ========= ========= Total: Assets under management, beginning of period............ $34,945.2 $31,402.0 $23,298.6 $18,823.0 Deposits and reinvestments.... 2,402.0 8,427.2 6,990.2 5,771.7 Redemptions and withdrawals... (3,783.5) (5,320.0) (3,855.4) (2,839.3) Market appreciation........... 891.1 911.6 5,356.2 1,824.8 Fees.......................... (228.9) (475.6) (387.6) (281.6) --------- --------- --------- --------- Assets under management, end of period......................... $34,225.9 $34,945.2 $31,402.0 $23,298.6 ========= ========= ========= =========
- -------- (1) Retail mutual fund assets under management includes $5.3 billion, $5.0 billion, $4.4 billion, and $3.5 billion in retirement plan assets for the six months ended June 30, 1999 and the years ended December 31, 1998, 1997 and 1996, respectively. For the first six months of 1999, John Hancock Funds experienced net redemptions of $1.4 billion primarily due to higher redemptions and sharply declining sales of its regional bank and financial services industries funds. Performance of these sector funds declined as did the underlying stocks in these industry categories. We have taken steps to boost sales, including the development of several new fund offerings, and refocusing the sales organization on regional broker/dealers and financial planners. Expenses have been cut to protect profit margins. 109 The following table sets forth the performance of our 10 largest retail open end mutual funds, as measured by net assets as of June 30, 1999. All of these mutual funds are managed by our affiliates. The historical performance of these funds is not an indicator of future performance. The table also sets forth the net assets of all other retail open end funds as a group, our variable annuity funds, our institutional funds and our closed end funds. Summary of Fund Performance As of June 30, 1999
One-Year Three-Year Five-Year Overall 10 Largest Class Type of Net Assets Annual Total Average Annual Average Annual Morningstar Open End Funds (1) Fund (in millions) Return Total Return Total Return Rating (Stars) (2) - -------------- ----- ------- ------------- ------------ -------------- -------------- ------------------ Regional Bank A Equity $ 1,404.8 (2.04)% 24.76% 22.80% 3 B 4,264.5 (2.65) 23.93 21.96 4 C 4.2 N/A N/A N/A N/A Financial Industries A Equity 794.7 (1.37) 21.91 N/A 3 B 2,572.6 (2.05) N/A N/A N/A C 3.3 N/A N/A N/A N/A Sovereign Investors A Equity 1,911.1 12.67 19.45 19.89 4 B 850.1 11.90 18.58 18.99 3 C 7.7 11.94 N/A N/A N/A Bond Fund A Income 1,264.7 1.79 7.01 7.88 4 B 236.5 1.11 6.27 7.17 3 C 21.8 N/A N/A N/A N/A Strategic Income A Income 539.6 2.53 9.34 10.07 3 B 623.1 1.86 8.60 9.31 4 C 24.2 1.81 N/A N/A N/A High Yield Bond A Income 282.6 (8.12) 7.29 7.81 1 B 839.2 (8.82) 6.56 7.04 2 C 30.2 (8.82) N/A N/A N/A Large Cap Value A Equity 478.5 15.70 26.05 24.73 4 B 628.3 14.85 25.11 23.82 4 C 8.2 14.80 N/A N/A N/A Core Equity A Equity 347.2 19.26 26.24 25.51 4 B 610.9 18.43 25.35 N/A 4 C 20.6 18.43 N/A N/A N/A Large Cap Growth A Equity 484.5 21.72 19.44 21.97 2 B 321.2 20.92 18.64 21.10 3 C 1.0 20.83 N/A N/A N/A Government Income A Income 570.8 2.01 6.79 N/A 3 B 189.8 1.31 5.98 6.33 2 C 0.0 N/A N/A N/A N/A Other Retail Open End Funds 5,504.5 --------- Total Retail Open End Funds 24,840.4 Variable Annuity Funds 322.9 Institutional Funds 851.4 Closed End Funds 2,488.9 Private Accounts and Other 5,722.3 (3) --------- Total $34,225.9 (3) =========
- -------- (1) Represents different classes of shares within each fund, based upon fee and expense computations. (2) Morningstar is an independent provider of financial information concerning mutual fund performance. According to Morningstar, a fund's 10 year return accounts for 50% of its overall rating score, its five year 110 return accounts for 30% and its three year return accounts for 20%. If only five years of history are available, the five year period is weighted 60% and the three year period is weighted 40%. If only three years of data are available, the three years are used alone. Funds scoring in the top 10% of their investment category receive 5 stars; funds scoring in the next 22.5% receive 4 stars; the next 35% receive 3 stars; those in the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (3) Includes $2.6 billion of our general account assets. The following table presents certain information regarding our investment management revenues, commissions and other fees earned by John Hancock Funds in the periods indicated. Investment Management Revenues, Commissions and Other Fees
For the Year Ended December 31, -------------------- For the Six Months Ended June 30, 1999 1998 1997 1996 ----------- ------ ------ ------ (in millions) Investment advisory fee income............... $101.3 $210.9 $173.7 $132.7 Commission income............................ 43.9 84.8 71.6 56.6 Rule 12b-1 fee income........................ 79.2 163.7 125.3 79.0 Shareholder and accounting service fee income...................................... 4.5 4.2 3.9 6.8 ------ ------ ------ ------ Total...................................... $228.9 $463.6 $374.5 $275.1 ====== ====== ====== ======
Distribution We sell our asset gathering products and services through multiple distribution channels, both owned and non-owned, including many of the channels described within the Protection Segment. Signator. Signator is the primary distribution channel for our variable annuities. We also sell fixed annuities and mutual funds through this entity. Broker/Dealers. Broker/dealers, which include regional and national brokerage firms and financial planners, are the primary distribution channel for our mutual funds. Broker/dealers also sell our fixed and variable annuities. We support this distribution channel with an internal network of wholesalers. These wholesalers meet directly with broker/dealers and financial planners and are supported by an extensive home office sales staff. Our recent distribution initiatives in this channel have included participation in alternative distribution programs, including: (1) wrap programs which package products under a single asset-based fee; (2) fund supermarkets, which distribute a menu of funds to consumers through a single brokerage account; and (3) subadvisory arrangements where we are hired to provide investment management services by other organizations involved in the packaging and distribution of mutual fund products. We also sell our 401(k) programs and other retirement programs through the broker/dealer channel. We employ a dedicated team of retirement plan wholesalers to sell products and services to this channel and are seeking to leverage these wholesalers to sell more retirement business directly to the small to mid-size 401(k) plan marketplace typically served by intermediaries. We have recently expanded our internal and external wholesaling capabilities and have expanded our telemarketing capabilities to better serve this channel. 111 Pension Consultants. We market investment management services to pension consultants nationwide who provide advisory services to plan sponsors. Marketing efforts are supported by dedicated client relationship officers who keep clients updated on portfolio performance information. Banks. Starting with sales of fixed annuities, we have expanded our offerings through banks to include mutual funds and variable annuities. Starting in 1998, we added additional products to our bank offerings. We believe we are well positioned to take advantage of the growth opportunity we see for multiple product offerings, coupled with added value marketing programs and customized service support for banks. Essex Corporation. In January 1999, we purchased Essex Corporation, one of the nation's largest intermediaries between banks and product manufacturers for annuities. Essex Corporation also serves as an intermediary in the distribution of mutual funds. Essex Corporation's primary source of income is commissions on sales of these products. Direct Distribution. We are currently offering a variable annuity through the direct distribution channel where customers may call a toll-free number and obtain an application to purchase the product. The table below shows Asset Gathering Segment sales by distribution channel for the periods indicated: Asset Gathering Segment Sales by Distribution Channel
For the Year Ended December 31, -------------------------- For the Six Months Ended June 30, 1999 1998 1997 1996 ----------- -------- -------- -------- (in millions) Broker/Dealers: Variable annuities..................... $ 55.9 $ 155.8 $ 62.8 $ 0.4 Fixed annuities........................ 8.1 29.3 50.8 27.9 Mutual funds........................... 1,417.9 4,826.3 4,987.9 3,839.8 Signator: Variable annuities..................... 341.3 709.7 678.4 628.9 Fixed annuities........................ 34.5 75.8 120.1 118.4 Mutual funds........................... 443.9 902.5 753.9 776.9 Pension consultants: Mutual funds........................... 207.3 885.9 1,562.5 456.1 Banks: Variable annuities..................... 8.7 14.2 3.3 -- Fixed annuities........................ 12.6 255.1 490.7 475.8 Mutual funds........................... 84.1 183.0 138.0 77.5 Essex (included with bank channel prior to 1999): Variable annuities..................... 2.8 -- -- -- Fixed annuities........................ 235.3 -- -- -- Mutual funds........................... 2.7 -- -- -- Direct distribution.................... 0.7 3.1 1.4 -- Other (1).............................. 20.6 17.5 52.4 50.0 -------- -------- -------- -------- Total................................ $2,876.4 $8,058.2 $8,902.2 $6,451.7 ======== ======== ======== ========
- -------- (1) Other includes single premium immediate annuities, including lottery- related payout contracts, and supplemental contracts involving life contingencies. 112 Reserves We establish and report liabilities for future policy benefits on our balance sheet to meet the obligations under our annuity contracts. Our liability for variable annuity contracts and deferred fixed annuity contracts is equal to the cumulative account balances. Cumulative account balances include deposits plus credited interest or investment earnings less expense and mortality charges, as applicable, and withdrawals. Future policy benefits on our immediate fixed annuity contracts are calculated based on a set of actuarial assumptions that we establish and maintain throughout the lives of the contracts. Competition We face substantial competition in all aspects of our asset gathering business. The annuity business is highly competitive. We compete with a large number of insurance companies, investment management firms, mutual fund companies, banks and others in the sale of annuities. We compete for mutual fund business with hundreds of fund companies. Many of our competitors in the mutual fund industry are larger, have been established for a longer period of time, offer less expensive products, have deeper penetration in key distribution channels and have more resources than us. Competition in the asset gathering business is based on several factors. These include investment performance and the ability to successfully penetrate distribution channels, to offer effective service to intermediaries and consumers, to develop products to meet the changing needs of various consumer segments, to charge competitive fees and to control expenses. We believe the Asset Gathering Segment is well positioned to increase assets under management in the face of this competition. Our competitive strengths include our ability to: . deliver strong investment performance, and enhance this performance by expanding the depth and breadth of fundamental research, portfolio management teams, and investment professionals; . develop new products and expand into new markets; and . provide excellent service to investors and distributors. Distribution and Service Organizations Within the Asset Gathering Segment, we also include our distribution company, Signator, and our servicing subsidiary, John Hancock Signature Services. Signator is the holding company for Signator Investors, Inc. and several insurance agencies. Signator Investors, Inc. representatives are able to offer securities products and financial advisory products and services to their clients, including not only John Hancock mutual funds and variable products, but also the products and services of other companies. John Hancock Signature Services combines and coordinates customer service functions for life insurance, annuity and mutual fund customers. The services provided by John Hancock Signature Services, Inc. include new business processing, contract change services, claims processing, premium collection and processing, billing, and preparation of annual or quarterly statements. Through this subsidiary, we seek to provide an integrated and comprehensive customer service function on a cost effective basis. This system permits a customer to have a single point of contact for most servicing needs. Banking Products and Services First Signature Bank & Trust Company is a limited-service bank, which accepts demand deposits but does not make commercial loans. It provides consumer banking products and services to our customers. First Signature Bank & Trust Company had $188.6 million in assets as of June 30, 1999. 113 Guaranteed and Structured Financial Products Segment Overview Through our Guaranteed and Structured Financial Products Segment, we offer a variety of products to qualified defined benefit and defined contribution retirement plans, as well as to other institutional buyers. A "defined benefit plan" is a retirement plan in which benefit payment obligations are specified by the plan document and where the contribution levels must adjust as necessary to fund these benefit obligations. In contrast to this, a "defined contribution plan" is a retirement plan in which the rules for making contributions to the plan are determined pursuant to a plan document and the ultimate benefit levels will adjust to reflect actual contributions and the investment earnings thereon. Our products include non-guaranteed, partially guaranteed and fully guaranteed general account and separate account investment options. We distribute these products through home office and regional sales representatives either directly to institutional buyers or indirectly through financial intermediaries, consultants and brokers. The Guaranteed and Structured Financial Products Segment contributed 32.9% and 25.6% of consolidated operating revenues and 37.2% and 29.1% of consolidated after-tax operating income in the six months ended June 30, 1999 and in the full year 1998, respectively. The segment has achieved the following financial results for the periods indicated.
As of or for the Six Months As of or for the Year Ended December 31, Ended June 30, ----------------------------------------- 1999 1998 1997 1996 ---------------- ------------- ------------- ------------- (in millions) Operating revenues: (1) Spread-based products... $ 1,066.1 $ 1,353.7 $ 1,433.6 $ 1,547.0 Fee-based products...... 197.1 377.5 380.8 488.7 --------- ------------- ------------- ------------- Total................. $ 1,263.2 $ 1,731.2 $ 1,814.4 $ 2,035.7 ========= ============= ============= ============= Segment after-tax operating income: (1) Spread-based products... $ 100.8 $ 117.5 $ 103.0 $ 129.1 Fee-based products...... 19.8 28.2 35.5 26.3 --------- ------------- ------------- ------------- Total................. $ 120.6 $ 145.7 $ 138.5 $ 155.4 ========= ============= ============= ============= Assets: Spread-based products... $19,331.3 $ 17,311.6 $ 16,100.4 $ 16,288.8 Fee-based products...... 12,556.5 12,003.6 12,009.6 11,772.4 --------- ------------- ------------- ------------- Total................. $31,887.8 $ 29,315.2 $ 28,110.0 $ 28,061.2 ========= ============= ============= ============= Assets Under Management: Spread-based products... $18,792.9 $ 16,808.6 $ 15,653.5 $ 15,827.4 Fee-based products...... 12,205.3 11,738.0 11,759.6 11,540.7 --------- ------------- ------------- ------------- Total................. $30,998.2 $ 28,546.6 $ 27,413.1 $ 27,368.1 ========= ============= ============= =============
- -------- (1) Excluded from the operating segment financial results are net realized investment gains and losses except for the multi-manager funding agreements and non-recurring or unusual items. See Note 6 and Note 12 to our Unaudited Interim Consolidated Financial Statements and Audited Consolidated Financial Statements, respectively, for a reconciliation of amounts reported for operating segments to amounts reported in those financial statements. 114 Products and Markets The Guaranteed and Structured Financial Products Segment offers spread-based products and fee-based products. Spread-Based Products. Our spread-based products provide a guaranteed rate of return to the customer. We derive earnings on these products primarily from the difference between the investment returns on the supporting assets and the guaranteed returns provided to customers. We refer to this difference as the "spread". Our spread-based products include: . General account GICs. GICs are guaranteed annuity contracts that pay a specified rate of return. GICs are primarily marketed to sponsors of tax-qualified retirement plans such as 401(k) plans. The rate of return on GICs can be a fixed rate or a floating rate based on an external market index. . Funding agreements. Funding agreements are also guaranteed contracts that pay a specified rate of return. However, funding agreements generally are issued to corporations, mutual funds and other institutional investors and, unlike GICs, are not typically used to fund retirement plans. The rate of return on funding agreements can be a fixed rate or a floating rate based on an external market index. . Single premium annuities. Single premium annuities are immediate or deferred annuities which commence payment at a specified time, typically retirement. The two most common types of annuities are the straight life annuity, which makes payments for the life of a retired annuitant, and the joint and survivor annuity, which continues to make payments to a spouse after the death of the annuitant. The following table illustrates for the periods indicated, statutory premiums and deposits, future policy benefits/account balances and assets under management for our spread-based products. Statutory premiums and deposits differ from GAAP premiums because GAAP requires that contributions to general account GICs and funding agreements be accounted for using deposit accounting. Deposit accounting excludes from revenue the contributions and deposits received on these products. Spread-Based Products Selected Financial Data
As of or for the Six Months As of or for the Year Ended December 31, Ended June 30, ----------------------------------------- 1999 1998 1997 1996 ---------------- ------------- ------------- ------------- (in millions) Statutory Premiums and Deposits: General account GICs.... $ 1,161.1 $ 2,578.9 $ 2,332.7 $ 2,564.8 Funding agreements...... 1,922.7 2,416.1 311.0 202.5 Single premium annuities.............. 369.3 111.8 193.7 247.2 --------- ------------- ------------- ------------- Total................. $ 3,453.1 $ 5,106.8 $ 2,837.4 $ 3,014.5 ========= ============= ============= ============= Future Policy Benefits/Account Balances: General account GICs.... $ 9,178.7 $ 9,743.3 $ 10,976.4 $ 11,707.7 Funding agreements...... 4,766.1 2,929.5 531.7 222.2 Single premium annuities.............. 3,503.3 3,182.3 3,131.0 2,994.7 --------- ------------- ------------- ------------- Total................. $17,448.1 $ 15,855.1 $ 14,639.1 $ 14,924.6 ========= ============= ============= ============= Assets Under Management: General account GICs.... $ 9,886.2 $ 10,329.2 $ 11,736.9 $ 12,416.0 Funding agreements...... 5,133.4 3,105.7 568.6 235.6 Single premium annuities.............. 3,773.3 3,373.7 3,348.0 3,175.8 --------- ------------- ------------- ------------- Total................. $18,792.9 $ 16,808.6 $ 15,653.5 $ 15,827.4 ========= ============= ============= =============
115 Fee-Based Products. Our fee-based products generally pass the investment results of invested assets through to the contractholder with no, or minimal, guarantees. We derive earnings on these products primarily from expense, risk and profit charges which are generally assessed on the basis of assets under management. Fee-based businesses provide relatively stable revenues and have lower capital requirements than do our spread-based businesses. Our fee-based products include: . General account participating pension fund-type products and conversion annuity contracts. These products are group annuities which pass investment results through to the contractholder, after expense, risk and profit charges. Annuity guarantees of these products are supported by asset requirements under which assets must be maintained at levels at least 5% above the annuity reserve. If the level of assets held under the contract falls below this threshold we may withdraw an amount equal to the annuity reserve and apply the assets to purchase a fully guaranteed annuity. . Separate account GICs. These products pass the investment results of a separate account through to the contractholder and contain only minimal guarantees. Contractholders may select from among flexible investment options provided by our various investment managers. Investment options may include a guaranteed tranche of a collateralized bond obligation offering originated by our Investment Management Segment. The separate account GIC business leverages the strong marketing relationships developed in our general account GIC business. . Guaranteed separate account annuities. These products are group annuities which offer customers an insured pension-funding program with a broad range of investment options, including both equity and fixed- income investment classes. The risk associated with providing these fully guaranteed annuities is mitigated by excess collateral maintenance requirements, which vary depending on the investment option selected. . Separate investment accounts. These are non-guaranteed group annuity contracts under which assets are held in a separate account. We typically use affiliated investment advisors to manage these assets. We may also use non-affiliated investment managers if the customer so requires. Because these products do not provide guarantees, new sales of separate investment accounts are reported in the Investment Management Segment. Existing agreements, however, continue to be reported in the Guaranteed and Structured Financial Products Segment because of customer relationships. 116 The following table illustrates, for the periods indicated, statutory premiums and deposits, future policy benefits/balances and assets under management for our fee-based products. Statutory premiums and deposits differ from GAAP premiums because GAAP requires that premiums on general account participating pension products, separate account GICs, separate account annuities and separate investment accounts be accounted for using deposit accounting. Deposit accounting excludes from revenue the contributions and deposits received on these products and generally shows the fees earned from the products as revenues. Fee-Based Products Selected Financial Data
As of or for the Six Months As of or for the Year Ended December 31, Ended June 30, ------------------------------------------- 1999 1998 1997 1996 ---------------- ------------- ------------- ------------- (in millions) Statutory Premiums and Deposits: General account participating pension fund-type products and conversion annuity contracts.............. $ 306.9 $ 566.7 $ 703.8 $ 716.4 Separate account GICs... 469.7 459.9 456.0 563.5 Guaranteed separate account annuities...... (30.5) (27.9) (70.4) 47.1 Separate investment accounts............... 61.2 173.5 265.4 166.6 --------- ------------- ------------- ------------- Total................. $ 807.3 $ 1,172.2 $ 1,354.8 $ 1,493.6 ========= ============= ============= ============= Future Policy Benefits/Account Balances: General account participating pension fund-type products and conversion annuity contracts.............. $ 3,131.9 $ 3,167.9 $ 3,338.2 $ 3,501.5 Separate account GICs... 3,637.8 3,333.6 3,305.0 3,192.0 Guaranteed separate account annuities...... 2,029.7 2,118.9 1,944.2 1,867.9 Separate investment accounts............... 2,548.4 2,463.1 2,285.1 2,383.5 --------- ------------- ------------- ------------- Total................. $11,347.8 $ 11,083.5 $ 10,872.5 $ 10,944.9 ========= ============= ============= ============= Assets Under Management: General account participating pension fund-type products and conversion annuity contracts.............. $ 3,492.8 $ 3,466.6 $ 3,651.8 $ 3,762.8 Separate account GICs... 4,071.0 3,644.5 3,799.7 3,491.8 Guaranteed separate account annuities...... 2,032.1 2,113.4 1,968.6 1,882.6 Separate investment accounts............... 2,609.4 2,513.5 2,339.5 2,403.5 --------- ------------- ------------- ------------- Total................. $12,205.3 $ 11,738.0 $ 11,759.6 $ 11,540.7 ========= ============= ============= =============
117 Markets. We offer our spread-based products and our fee-based products in a variety of markets. We emphasize a comprehensive understanding of each market in which we participate, and strive to create and maintain strong, consultative relationships with key buyers and intermediaries. By working closely with our customers to develop customized investment programs, we have been able to build a leading market share in several important markets, including general account GICs, funding agreements and separate account GICs. The following table provides a summary of our products and the markets in which they are sold.
Markets ----------------------------------------------------- Qualified Defined Qualified and Non- Contribution Qualified Defined Non-Qualified Products Plans Benefit Plans Institutional Market - ------------------------------------------------------------------------------- Spread-based - ------------------------------------------------------------------------------- General account GICs X - ------------------------------------------------------------------------------- Single premium annuities X X - ------------------------------------------------------------------------------- Funding agreements X - ------------------------------------------------------------------------------- Fee-based - ------------------------------------------------------------------------------- Separate account GICs X - ------------------------------------------------------------------------------- Guaranteed separate account annuities X - ------------------------------------------------------------------------------- General account participating pension fund-type products and conversion annuity products X - ------------------------------------------------------------------------------- Separate investment accounts X - -------------------------------------------------------------------------------
Industry sales of single premium annuities are driven primarily by pension plan terminations, which have been flat or have declined in recent years. Our sales of single premium annuities will generally follow this trend in the absence of a disproportionately large sale. In addition, due to declining demand for general account GICs in the 401(k) plan market, deposits on our general account GICs have remained relatively constant over the past three full years and during the six months ended June 30, 1999. In response to these trends, we have created new products for the non-qualified institutional marketplace. We intend to continue to capitalize on our risk-management and investment skills to attract funds with new products from new markets, while continuing to pursue opportunities in those parts of the U.S. pension market that are still expanding. In particular, beginning in 1998 we significantly expanded our marketing and product development efforts for funding agreements. We are now selling our products and services to defined contribution plans, banks, insurance companies, mutual funds, and other investors in the U.S. and have recently entered the European and Asian markets. . Qualified Defined Contribution Plans. We offer spread-based as well as fee-based products to sponsors or investment managers of qualified defined contribution plans. Our marketing efforts principally are directed toward mid- to large-sized plans with an average contract size of $7 million to $10 million. The general account GIC has been the predominant product issued in this market, primarily for use as the asset underlying the fixed income investment option of 401(k) plans. Both general account and separate account GICs sold in this market provide a feature which permits individual plan participants to redeem or transfer funds in their account at book value during the term of the contract. In the case of separate account GICs, gains and losses arising out of these book value redemptions are absorbed by the plan by means of prospective changes in the crediting rate, which is the rate at which the GIC fund balances increase in value under the terms of the GIC. 118 . Qualified and Non-Qualified Defined Benefit Plans. New sales to this market are primarily limited to single premium annuities and separate account annuities. Although traditionally a significant portion of this market, currently there is little demand for new general account participating pension products, as demand for these arrangements has largely been replaced by demand for unbundled services, such as non- insured arrangements. However, because the significant majority of our existing general account participating pension products business does not contain provisions allowing for termination of the agreement by the customer prior to the termination date specified in the agreement, this business provides a slowly decreasing but predictable source of earnings. The primary drivers of the single premium annuity market are plan terminations and plan spin-offs. In such instances, the plan sponsor transfers all its obligations under the plan to an insurer by paying a lump sum premium amount. Another type of single premium annuity, referred to as a terminal funding annuity, is sold to plan sponsors who wish to transfer the payment obligations with respect to individual retirees to an insurer. Because the Department of Labor has mandated that annuities be purchased only from the "safest available" insurer, plan sponsors restrict their purchases of single premium and terminal funding annuities almost exclusively to insurance companies with superior or excellent financial quality ratings. We believe that our strong financial ratings position us well to compete in this market. Separate account annuities are purchased by plan sponsors who wish to provide guaranteed retirement benefits for their retirees and control their asset allocation mix. The advantage of an insurer's guarantee for a plan sponsor is that the obligation to the retiree is removed from the employer's balance sheet, and the employer is no longer required to pay Pension Benefit Guaranty Corporation premiums in respect of such retiree. . Non-Qualified Institutional Market. We issue funding agreements to non- qualified institutional investors both in the domestic and the international marketplace. We have broadened our marketing and product development efforts in this market in response to declining demand for traditional general account GICs in the 401(k) plan market. Domestic purchasers of funding agreements include money market mutual funds, bank short-term investment funds, municipalities, bond funds and securities lending funds. Funding agreements sold in the United States tend to have guarantees that are based upon floating interest rate market indices. Funding agreements sold in the United States may also give the customer, or us, the right to terminate the contract on 30 to 90 days' notice. None of these funding agreements contain termination rights of less than 30 days. According to government and industry sources, as of December 31, 1998, the potential domestic non-qualified institutional market included over $500 billion in taxable, non- government only money market funds, over $175 billion in bank short- term funds and over $400 billion in securities lending accounts. International purchasers of funding agreements include pension funds, banks, mutual funds, and insurance companies located in Europe and Asia. For international funding agreements, interest rate guarantees are generally fixed and the liabilities are denominated predominantly in foreign currencies. These funding agreements (often accompanied by a currency swap) typically are issued to a non-affiliated conduit which issues publicly-traded medium-term notes. According to Capital NET Limited's MTNWare, there were nearly $550 billion of medium term notes issued in Europe in 1998. In general, medium-term note funding agreements do not give the contractholder the right to terminate prior to contractually stated maturity dates. Through June 30, 1999, we had issued approximately $4.9 billion of funding agreements, including approximately $2.1 billion in the domestic market and $2.8 billion internationally. Of our $2.1 billion of total domestic funding agreement liabilities, approximately $745 million contained a 90-day termination provision, and approximately $555 million contained a 30-day termination provision. The balance contained no early termination provisions of less than one year, and we are currently not selling 119 any funding agreements with less than one year termination provisions. Further, we are planning to exercise our termination rights on all funding agreements containing 30 or 90 day termination provisions. While there will be a cost associated with exercising our right to terminate under these agreements, we do not believe that this amount will be material. We believe that expansion into the domestic and international funding agreement markets presents good prospects for future growth. Moreover, diversification into these markets permits us to seek out the lowest cost of funds among diverse markets. Distribution We distribute our guaranteed and structured financial products through a variety of channels. General and separate account GICs are sold through our regional representatives to plan sponsors, or to GIC managers who represent plan sponsors. Funding agreements marketed in the United States are sold either directly or through brokers, and in the international market they are sold through investment banks in the form of medium-term notes. Annuities are sold through pension consultants who represent defined benefit plan sponsors or through brokers who receive a commission for sales of our products. We maintain an experienced sales staff that develops and maintains relationships with target customers, consultants, and other financial intermediaries. We believe that our consistent market presence over the past two decades has strengthened our relationships with a large segment of the customer base. Spread-Based Products Risk Management Because of the significant guarantees provided as part of our spread-based products, risk management is particularly important in this line of business. To facilitate risk management, we segregate and manage the assets supporting our spread-based products separately from the rest of our general account. Our risk management strategy is based on: . Managing interest rate exposure by closely matching the relative sensitivity of asset and liability values to interest rate changes, i.e. controlling the "duration mismatch" of assets and liabilities. We believe that our target duration mismatch of .05 years is considerably narrower than the standard in the industry. . Using sophisticated systems and processes to project cash flows for each asset and each liability and to measure with precision the sensitivity of assets and liabilities to interest rate changes. This measurement process provides risk managers with a more complete picture of our liability structure, the appropriateness of pricing and the overall soundness of the management of the account than do conventional accounting techniques alone. . Writing contracts that typically have a predictable maturity structure and do not have premature surrender or redemption provisions. This predictability allows us to invest a significant proportion of our assets in relatively illiquid asset classes, primarily private placement bonds and commercial mortgages, which have traditionally provided relatively attractive yields. . Managing the assets backing our domestic funding agreements with highly liquid liability structures (i.e., those with 30 or 90 day termination rights) in a dedicated separate account, where private placements are limited to less than 3% of the portfolio. . Monitoring all contribution and withdrawal activity in each contract to anticipate deviations from expected cash flows. Any such deviations form the basis for new cash flow projections and may trigger a change in portfolio hedging requirements. . Establishing working groups to facilitate interaction among our various business units, including portfolio management, sales management, risk management, financial management and the pricing staff. We believe frequent interaction and effective communication across the various business units have been key components of our successful risk management strategy. 120 Underwriting Spread-based products, particularly general account GICs and single premium annuities, are the products in this segment for which underwriting is most significant. General Account GICs. In developing pricing proposals for new contracts, our underwriters estimate both base-line cash flows and also likely variance from the base line due to plan participants reallocating assets from the "stable value" option of their defined contribution plan. Our underwriters utilize customized pricing models that generate plan-specific risk charges for each customer's book value payment provision. If these pricing models project the risk of losses exceeding customary thresholds, instead of rejecting the business, our underwriters can modify the proposal by suggesting the use of risk reduction techniques designed to shift some of the risk of redemptions back to the plan or to a third party. Single Premium Annuities. We underwrite immediate annuities using recent mortality experience and an assumption of continued improvement in annuitant longevity. We underwrite deferred annuities by analyzing not only mortality risk but also the expected time to retirement. Reserves We establish and report liabilities for contractholders' funds and future policy benefits to meet the obligations on our policies and contracts. Our liability for general account GICs, funding agreements, and fee-based products is equal to the cumulative account balances for these products. Cumulative account balances include deposits plus credited interest or investment earnings less expense charges and withdrawals. Future policy benefits for our single premium annuity contracts are calculated based on a set of actuarial assumptions that we establish and maintain throughout the lives of the contracts. Our assumptions include investment yields, mortality and the expected time to retirement. Competition Our Guaranteed and Structured Financial Products Segment operates in a variety of highly competitive institutional markets. Although a large number of companies offer these products, the market is concentrated. Five insurers, including John Hancock, issued approximately 40% of total GICs and funding agreements issued by U.S. insurance companies reporting to LIMRA in 1998; and five insurers, including John Hancock, issued more than 80% of total single premium annuities in 1998. Our competitors include a variety of well- recognized insurance companies, domestic and foreign banks and other institutional investment advisors, many of whom are larger and have greater resources than us. The recent entry of several new competitors, particularly foreign banks, has placed pressure on the pricing of some products, such as separate account GICs. We have, as a result, pursued a strategy of concentrating on higher value-added products and positioning our offerings over a wider variety of institutional markets. We believe that we are able to compete successfully in our markets as a result of our strong financial ratings, investment management expertise, national distribution, flexible product design and competitive pricing. Competition in this market is restricted almost exclusively to insurance companies with superior or excellent financial ratings. The requirement for strong financial ratings reduces pressure on margins by limiting the number of potential competitors and by lowering our cost of funds. Investment Management Segment Overview Through our Investment Management Segment, we provide investment management services to domestic and international institutions. While this segment includes primarily assets managed for third-party institutional clients, the investment professionals providing these services also manage assets underlying our general account 121 and separate account products. The Investment Management Segment attracts funds from corporate and public pension plan sponsors, banks, insurance companies, mutual funds, and other domestic and international institutions. Our total assets under management as of June 30, 1999 and December 31, 1998 were $130.5 billion and $124.4 billion, respectively, of which the Investment Management Segment represented 33.1% and 31.9%, respectively. The Investment Management Segment contributed $89.3 million of consolidated operating revenues and $17.2 million of consolidated after-tax operating income in the six months ended June 30, 1999. The Investment Management Segment has achieved the following financial results for the periods indicated:
As of or for the Six Months As of or for the Year Ended December 31, Ended June 30, ----------------------------------------- 1999 1998 1997 1996 ---------------- ------------- ------------- ------------- (in millions) Operating revenues (1).. $ 89.3 $ 143.9 $ 118.5 $ 113.4 Segment after-tax operating income (1)... $ 17.2 $ 15.4 $ 17.2 $ 21.6 Assets.................. $ 3,532.7 $ 3,439.6 $ 3,286.8 $ 2,465.2 Assets under management (2).................... $43,163.6 $ 39,637.7 $ 34,361.5 $ 32,884.5
- -------- (1) Excluded from the operating segment financial results are net realized investment gains and losses, except for gains or losses from mortgage securitization, and non-recurring or unusual items. See Note 6 and Note 12 to our Unaudited Interim Consolidated Financial Statements and Audited Consolidated Financial Statements, respectively, for a reconciliation of amounts reported for operating segments to amounts reported in those financial statements. (2) Includes $82.5 million, $88.1 million, $66.0 million, and $54.5 million of general account cash and invested assets as of June 30, 1999 and as of December 31, 1998, 1997 and 1996, respectively. Products and Markets The Investment Management Segment is primarily a fee-based investment advisory business in which we do not offer guarantees to our customers. We provide a variety of investment structures, such as investment advisory client portfolios, individually managed and pooled separate accounts, securitized portfolios, and registered investment company funds. We have recently added bond and mortgage securitizations, and mutual fund management capabilities. Our investment management expertise covers a wide range of private and publicly-traded asset classes and is based on fundamental research and disciplined, quantitatively-based analysis and asset-liability management. Our private fixed income, equity, real estate and alternative asset operations have strong credit analysis capabilities and deal origination expertise. These operations enjoy broad networks of relationships with intermediaries giving them early access to new investment opportunities. The capabilities of the Investment Management Segment include: Public Fixed Income and Equity Investments. Through our Independence Investment Associates subsidiaries we provide active stock and bond management to pension funds, endowments, and other institutions. We provide core, value, growth, medium-cap, balanced and market neutral investment strategies. We also offer international stock and bond management. In addition, we offer active, quantitative investment management services in the high quality fixed income markets, with a special emphasis on structuring and managing portfolios of mortgage-backed securities and Treasury securities combined, when appropriate, with various derivative strategies. Private Fixed Income, Equity and Alternative Asset Class Investments. We manage funds for external institutional clients investing in private fixed- income and equity securities and alternative asset classes. Our 122 strength is in private placement corporate securities, structured and innovative transactions and niche investment opportunities. Our recently completed offerings include a mezzanine fund investing primarily in subordinated debt with equity participation features and a collateralized bond obligation fund, which have been marketed domestically and overseas to banks, insurance companies, brokers and other clients outside of the pension market. We are the leading manager of equity timberland for large tax-exempt institutional investors, and are among the largest managers of equity farmland investments. In addition, we sponsor affordable housing investments that qualify for Federal tax credits. We have recently entered the business of commercial mortgage securitization. We now originate all mortgages in a standardized form so that they can be allocated to our own accounts, third parties or securitized as demand dictates. We also invest in independent power and renewable energy project investments on behalf of institutional clients. The following tables present certain information regarding the assets under management by the Investment Management Segment for the periods indicated: Total Assets Under Management By Asset Class
As of As of December 31, June 30, ----------------------------- 1999 1998 1997 1996 --------- --------- --------- --------- (in millions) Assets Under Management: (1) (2) Domestic equity and balanced........... $30,049.0 $25,699.0 $21,993.9 $21,423.0 International equity and balanced...... 2,656.0 2,340.0 1,927.1 1,885.0 Domestic fixed income.................. 6,099.0 7,265.5 6,760.1 6,489.6 International fixed income............. 256.3 286.6 166.9 130.4 Independent power generation........... 430.5 375.5 375.5 347.0 Timber................................. 3,234.3 3,255.0 2,819.0 2,326.0 Farmland............................... 356.0 328.0 253.0 229.0 --------- --------- --------- --------- Total................................ $43,081.1 $39,549.6 $34,295.5 $32,830.0 ========= ========= ========= =========
Asset Flow Summary
For the Six Months For the Year Ended Ended December 31, June 30, ------------------------------- 1999 1998 1997 1996 ---------- --------- --------- --------- (in millions) Assets Under Management: Assets under management, beginning of period (1) (3)..... $39,549.6 $34,295.5 $32,830.0 $27,006.0 Sales and reinvestments.......... 3,097.2 3,738.9 1,309.0 4,892.0 Redemptions and withdrawals...... (2,056.8) (4,916.8) (6,218.0) (3,447.0) Market appreciation.............. 2,491.1 6,432.0 6,374.5 4,379.0 --------- --------- --------- --------- Assets under management, end of period (1) (2).................. $43,081.1 $39,549.6 $34,295.5 $32,830.0 ========= ========= ========= =========
- -------- (1) Includes $1,427.5 million, $1,563.0 million, $1,411.2 million and $1,301.5 million of assets managed by subsidiaries for our general account in the six months ended June 30, 1999 and 1998, 1997 and 1996, respectively. (2) Does not include $82.5 million, $88.1 million, $66.0 million, and $54.5 million of general account cash and invested assets as of June 30, 1999 and December 31, 1998, 1997, and 1996, respectively. (3) Does not include $88.1 million, $66.0 million, $54.5 million and $45.1 million of general account cash and invested assets as of January 1, 1999, 1998, 1997 and 1996, respectively. 123 Distribution We sell our investment management products and services through multiple distribution channels. Marketing to pension funds, endowments, foundations and other institutional clients is conducted primarily by our experienced sales professionals and dedicated marketing and client relationship staff. Products are also offered through independent marketing specialists, consulting firms, and investment banking firms. Competition The institutional asset management industry is highly competitive, with over 23,000 registered investment advisers. Consolidation activity over the past three years has increased the concentration of competitors within certain asset classes, particularly in the timber and independent power generation asset classes. We compete with other investment management firms, insurance companies, banks and mutual fund companies, many of whom are larger and have greater resources than us. We believe the key bases for competition are investment performance and customer service. Our competitive strategy focuses on attracting assets through superior performance. Consistent with this strategy, we continually evaluate opportunities to develop internally, acquire, or divest investment management units and strive to improve our investment management products and services. In addition, we believe our leading role in non-traditional asset classes helps to create a distinct and competitively advantageous profile in the institutional asset management marketplace. Corporate and Other Segment Overview Our Corporate and Other Segment consists primarily of our international insurance operations, corporate operations, and non-core businesses that are either in the process of winding down (i.e., are in "run-off") or have been divested. This segment contributed approximately 14.8% of consolidated operating revenues and 10.9% of consolidated after-tax operating income in the six months ended June 30, 1999. The Corporate and Other Segment has achieved the following financial results for the periods indicated:
For the Six For the Year Ended Months Ended December 31, June 30, ------------------------------- 1999 1998 1997 1996 ------------ --------- --------- --------- (in millions) Operating revenues: (1) International insurance operations..................... $ 386.2 $ 744.9 $ 728.3 $ 711.9 Corporate operations............ 154.0 292.5 264.1 176.2 Non-core businesses............. 29.3 74.2 330.8 1,327.7 --------- --------- --------- --------- Total......................... $ 569.5 $ 1,111.6 $ 1,323.2 $ 2,215.8 ========= ========= ========= ========= Segment after-tax operating income: (1) International insurance operations..................... $ 10.1 $ 25.3 $ 8.3 $ 8.8 Corporate operations............ 25.4 8.7 (32.0) (18.2) Non-core businesses............. (0.1) 22.3 63.1 29.6 --------- --------- --------- --------- Total......................... $ 35.4 $ 56.3 $ 39.4 $ 20.2 ========= ========= ========= ========= Assets: International insurance operations..................... $ 5,780.9 $ 5,222.0 $ 4,828.1 $ 4,317.9 Corporate operations............ 3,859.0 3,494.0 3,745.7 3,173.5 Non-core businesses............. 1,331.5 1,894.8 2,013.4 2,406.4 Intra-segment eliminations...... (4,908.1) (4,818.3) (4,810.7) (4,225.5) --------- --------- --------- --------- Total......................... $ 6,063.3 $ 5,792.5 $ 5,776.5 $ 5,672.3 ========= ========= ========= =========
124 - -------- (1) Excluded from the segment financial results are net realized investment gains and losses and non-recurring or unusual items. See Note 6 and Note 12 to our Unaudited Interim Consolidated Financial Statements and Audited Consolidated Financial Statements, respectively, for a reconciliation of amounts reported for operating segments to amounts reported in those financial statements. International Insurance Operations Our international insurance operations include The Maritime Life Assurance Company, the ninth largest Canadian life insurance company based on total assets under management at year-end 1998. This company distributes a full range of individual life insurance and investment products and group life and health products through independent agencies, investment brokerage firms, and employee benefit brokers and consultants. In the first quarter of 1999, The Maritime Life Assurance Company agreed to purchase Aetna Canada Limited and its three business units: Individual Insurance Division; Employee Benefits Division; and Equinox Financial Group, Inc. The purchase price, which is subject to adjustment, is approximately $300 million. This acquisition will essentially double our Canadian business in terms of revenues and customers. We also offer individual life and group insurance and pension products through local affiliates doing business in five Southeast Asian countries. Working with an international network of over 40 insurers, we also coordinate and reinsure group life, health, disability and pension coverage for foreign and globally mobile employees of multinational companies in more than 45 countries. In 1999, we were invited to apply for a license to enter into a joint venture and begin doing business in China, providing us an early foothold in this emerging economy with its vast population. The license will be restricted initially to an as-yet unknown city or province. We anticipate commencing operations in China in 2000. Corporate Operations Corporate operations consist principally of (1) investment and treasury activities, and assets, investment income, interest expense and other expenses not specifically allocated to segments and (2) group life insurance operations. Our group life insurance business generated $116.9 million in premium in the six months ended June 30, 1999, and $234.5 million of premium in the full year 1998. Non-Core Businesses We have certain non-core businesses that have been divested or put in run- off, reflecting a strategic decision to focus on our retail and institutional businesses. Non-core businesses consist primarily of a portion of our group life and accident and health business and related subsidiaries that were sold in 1997, regional stock brokerage companies that were sold in 1996, run-off property and casualty reinsurance business and other small subsidiaries in various stages of running-off their operations. In 1992, we sold our individual disability income insurance block of business to Provident Life and Accident Insurance Company through a reinsurance arrangement. The reinsurance recoverable from Provident Life and Accident Insurance Company reported on our GAAP financial statements was $220.6 million as of December 31, 1998. General Account Investments General Account and Separate Accounts Our investments include our general account and numerous separate accounts. We manage our general account assets in investment segments that support specific classes of product liabilities. These investment segments permit us to implement investment policies that both support the financial characteristics of the underlying liabilities, and also provide returns on our invested capital. The investment segments also enable us to gauge the performance and profitability of our various businesses. 125 Separate account assets are managed in accordance with specific investment contracts. We generally do not bear any investment risks on assets held in separate accounts, but rather receive investment management fees based on levels of assets under management, measured at fair value, as well as mortality charges, policy administration fees and surrender charges. Generally, assets held in separate accounts are not available to satisfy general account obligations. Asset/Liability Risk Management Our primary investment objective is to maximize after-tax returns within acceptable risk parameters. We are exposed to two primary types of investment risk: . Credit risk, meaning uncertainties associated with the continued ability of an obligor to make timely payments of principal and interest; and . Interest rate risk, meaning changes in the market value of fixed maturity securities as interest rates change over time. Management of credit risk is central to our business and we devote considerable resources to the credit analysis underlying each investment acquisition. Our corporate bond management group employs a staff of highly specialized, experienced, and well-trained credit analysts. We rely on these analysts' ability to analyze complex private financing transactions and to acquire the investments needed to profitably fund our liability guarantees. In addition, when investing in private fixed maturity securities, we rely upon broad access to management information, negotiated protective covenants, call protection features and collateral protection. Our bond portfolio is reviewed on a continuous basis to assess the integrity of current quality ratings. As circumstances warrant, specific investments are "re-rated" with the adjusted quality ratings reflected in our investment system. All bonds are evaluated regularly against the following criteria: . material declines in the issuer's revenues or margins; . significant management or organizational changes; . significant uncertainty regarding the issuer's industry; . debt service coverage or cash flow ratios that fall below industry- specific thresholds; . violation of financial covenants; and . other business factors that relate to the issuer. Our records dating back to 1970 show that, on average, the default assumptions built into our investment and liability pricing models have been consistent with actual investment performance. We also apply a variety of strategies to minimize credit risk in our commercial mortgage loan portfolio. When considering the origination of new commercial mortgage loans, we review the cash flow fundamentals of the property, a physical assessment of the underlying security, a comprehensive market analysis, and industry lending practices. Upon completion of our due diligence investigation, we score each mortgage loan application against a number of qualitative and quantitative factors that we have developed and tested over many years of mortgage lending. We emphasize the acquisition of commercial mortgage loans on properties that are at, or near, full lease. Guidelines for new mortgage loans typically require a loan-to-value ratio of 75% or less at the time of origination. A portfolio management team is responsible for centralized monitoring of the portfolio, including receiving and analyzing current rent rolls and financial statements on a property-by- property basis. To assist in the risk management of our commercial mortgage portfolio, beginning in 1991 we undertook the development of an analytic database, the "Mortgage Investment Risk Analysis" system. This system is designed to screen our mortgage portfolio for likely default candidates. 126 We use a variety of techniques to control interest rate risk in our portfolio of assets and liabilities. In general, our risk management philosophy is to limit the net impact of interest rate changes on our assets and liabilities. Each investment segment holds bonds, mortgages, and other asset types that will satisfy the projected cash needs of its underlying liabilities. Where policyholder withdrawal options make it difficult to accurately forecast liability cash flows, and thus difficult to implement conventional asset/liability matching techniques based on interest rate sensitivity, we project asset and liability cash flows under a wide variety of possible economic scenarios. We use those cash flow projections to assess and control interest rate risk. Another important aspect of our asset-liability management efforts is the use of interest rate derivatives. We selectively apply derivative instruments, such as interest rate swaps and futures, to reduce the interest rate risk inherent in our portfolios. Overall Composition of the General Account The investment assets in our general account as of June 30, 1999 were generally of high quality and broadly diversified across asset classes and individual credits. As shown in the following table, the major categories of investment assets are fixed maturity securities, including bonds, redeemable preferred stock, asset- and mortgage-backed securities, and commercial and agricultural mortgage loans. The remainder of the general account is invested in cash and short-term investments, real estate, equity securities, and "other" invested assets. "Other" invested assets primarily include fixed income leases, private equity investments and independent power generation projects in joint venture and limited partnership form. In addition, policy loans are included in our general account. In the following discussion, we include the investment portfolio of our Canadian subsidiary, The Maritime Life Assurance Company. As of June 30, 1999, approximately 28% of The Maritime Life Assurance Company's invested assets consisted of government-insured mortgage loans and obligations of the Canadian federal government and provincial governments. General Account Invested Assets
As of December 31, ------------------------------------------------------------- As of June 30, 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) (in millions) Fixed maturity securities (1)......... $30,980.2 64.2% $28,200.4 61.9% $27,174.9 62.4% $25,733.6 60.2% Mortgage loans (2)...... 10,373.7 21.5 9,616.1 21.1 9,296.3 21.4 9,473.6 22.1 Real estate............. 658.9 1.4 1,483.2 3.2 2,035.6 4.7 2,160.6 5.1 Policy loans............ 1,898.9 3.9 1,879.7 4.1 1,855.6 4.3 1,846.5 4.3 Equity securities....... 1,103.2 2.3 1,063.7 2.3 953.6 2.2 828.1 1.9 Other invested assets... 1,101.1 2.3 1,254.6 2.7 831.6 1.9 887.8 2.1 Short-term investments.. 642.9 1.3 279.8 0.6 294.1 0.7 167.4 0.4 Cash and cash equivalents............ 1,511.8 3.1 1,876.4 4.1 1,036.6 2.4 1,686.0 3.9 --------- ----- --------- ----- --------- ----- --------- ----- Total invested assets............... $48,270.7 100.0% $45,653.9 100.0% $43,478.3 100.0% $42,783.6 100.0% ========= ===== ========= ===== ========= ===== ========= =====
- -------- (1) In addition to bonds, the fixed maturity security portfolio contains redeemable preferred stock with a carrying value of $620.1 million, $639.2 million, $546.2 million, and $300.9 million as of June 30, 1999 and December 31, 1998, 1997, and 1996, respectively. Carrying value is composed of investments categorized as "held-to-maturity," which are carried at amortized cost, and investments categorized as "available-for- sale," which are carried at fair value. The total fair value of our fixed maturity security portfolio was $31,234.1 million, $29,143.9 million, $28,028.6 million, and $26,335.2 million at June 30, 1999 and December 31, 1998, 1997, and 1996, respectively. (2) The fair value for our mortgage loan portfolio was $10,646.1 million, $10,204.4 million, $9,873.0 million, and $10,151.9 million as of June 30, 1999 and 1998, 1997, and 1996, respectively. 127 Consistent with the nature of our product liabilities, our assets are heavily oriented toward fixed maturity securities. We determine the allocation of our assets primarily on the basis of cash flow and return requirements of our products and secondarily by the level of investment risk. Description of Investment Assets The following table provides gross investment yields by asset categories for the periods indicated. The yield on fixed maturity securities and mortgage loans has declined over this period as we reinvested our cash in a declining interest rate environment. For example, over the three year period beginning January 1, 1996, the yield on the 10-year U.S. Treasury Note declined from 5.57% to 4.65%. General Account Yields by Asset Type
As of December 31, As of June 30, -------------------------------------------------------------- 1999 1998 1997 1996 -------------------- -------------------- -------------------- -------------------- Yield Amount Yield Amount Yield Amount Yield Amount ----- ------------- ----- ------------- ----- ------------- ----- ------------- (in millions) (in millions) (in millions) (in millions) Fixed maturity securities Gross income (1)........ 8.08% $ 1,195.0 7.98% $ 2,210.2 7.93% $ 2,097.3 8.26% $ 2,081.8 Ending assets........... 30,980.2 28,200.4 27,174.9 25,733.6 Equity securities Gross income (1)........ 3.11 16.9 1.85 18.7 3.12 27.8 2.83 22.1 Ending assets........... 1,103.2 1,063.7 953.6 828.1 Mortgage loans Gross income (1)........ 8.14 406.6 8.26 781.2 8.62 808.6 8.95 880.1 Ending assets........... 10,373.7 9,616.1 9,296.3 9,473.6 Real estate Gross income (1)........ 13.71 73.4 23.63 415.7 20.54 430.9 19.01 395.9 Ending assets........... 658.9 1,483.2 2,035.6 2,160.6 Policy loans Gross income (1)........ 5.81 54.8 5.99 111.9 5.82 107.7 5.89 109.2 Ending assets........... 1,898.9 1,879.7 1,855.6 1,846.5 Short-term investments and cash and cash equivalents Gross income (1)........ 4.41 47.5 2.60 45.3 4.50 71.7 4.53 65.1 Ending assets........... 2,154.7 2,156.2 1,330.7 1,853.4 Other invested assets Gross income (1)........ 9.96 58.7 17.38 181.3 16.81 144.5 19.28 158.7 Ending assets........... 1,101.1 1,254.6 831.6 887.8 Total gross income (1)................... 7.89 1,852.9 8.45 3,764.3 8.55 3,688.5 8.84 3,712.9 Less: investment expenses............... (136.0) (433.6) (497.8) (489.8) --------- --------- --------- --------- Net investment income.. 7.31% $ 1,716.9 7.47% $ 3,330.7 7.40% $ 3,190.7 7.67% $ 3,223.1 ========= ========= ========= =========
- -------- (1) Gross income before investment expenses. Fixed Maturity Securities. Our fixed maturity securities portfolio is predominantly comprised of low risk, investment grade, publicly and privately traded corporate bonds and senior tranches of asset-backed securities ("ABS") and mortgage-backed securities ("MBS"), with the balance invested in government bonds. Our fixed maturity securities portfolio also includes redeemable preferred stock. As of June 30, 1999, fixed maturity securities represented 64.2% of general account investment assets with a carrying value of $31.0 billion, roughly comprised 55% of public securities and 45% of private securities. Each year we direct the majority of our net cash inflows into investment grade fixed maturity securities. We typically invest between 10% and 15% of funds allocated to fixed maturity securities in below- investment-grade bonds, some of which include equity participations, such as warrants. Allocations are based on our assessment of relative value and the likelihood of enhancing risk-adjusted portfolio returns. While the general account has profited from the below-investment-grade asset class in the past, care is taken to manage its growth strategically by limiting its size relative to our net worth. 128 The following table shows the composition by issuer of our fixed maturity securities portfolio. Fixed Maturity Securities--By Issuer
As of December 31, As of June 30, ---------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Corporate securities.... $22,869.3 73.9% $21,479.6 76.1% $20,313.6 74.8% ABS/MBS................. 6,775.0 21.9 5,830.1 20.7 5,431.0 20.0 U.S. Treasury securities and obligations of U.S. government agencies.... 444.8 1.4 334.7 1.2 797.2 2.9 Debt securities issued by foreign governments............ 569.7 1.8 450.3 1.6 450.2 1.7 Obligations of states and political subdivisions........... 321.4 1.0 105.7 0.4 172.0 0.6 Other debt securities... 0.0 0.0 0.0 0.0 10.9 N/M --------- ----- --------- ----- --------- ----- Total................. $30,980.2 100.0% $28,200.4 100.0% $27,174.9 100.0% ========= ===== ========= ===== ========= =====
Our MBS and ABS holdings, in keeping with our investment philosophy of tightly managing interest rate risk, are heavily concentrated in commercial MBS where the underlying loans are largely call protected, which means they are not prepayable without penalty prior to maturity at the option of the issuer, rather than in residential MBS where the underlying loans have no call protection. By investing in MBS and ABS securities with relatively predictable repayments, we add high quality, liquid assets to our portfolios without incurring the risk of excessive cash flow in periods of low interest rates or a cash flow deficit in periods of high interest rates. We believe the portion of our MBS/ABS portfolio subject to prepayment risk as of December 31, 1998 was limited to 6.8% of our total MBS/ABS portfolio and 1.4% of our total fixed maturity securities holdings. The following table provides the scheduled maturities of our general account fixed maturity securities as of the dates indicated. The portfolio's maturity distributions are primarily a function of our liability composition, but also reflect where our investment managers see relative value. Fixed Maturity Securities--By Scheduled Maturities
As of December 31, As of June 30, ---------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Fixed Maturity Securities: Due in one year or less................. $ 1,801.8 5.8% $ 1,776.2 6.3% $ 1,646.5 6.1% Due after one year through five years... 6,913.8 22.3 6,604.6 23.4 7,034.2 25.9 Due after five years through ten years.... 7,660.6 24.7 6,258.1 22.2 6,299.3 23.2 Due after ten years... 7,829.0 25.3 7,731.4 27.4 6,763.9 24.8 --------- ----- --------- ----- --------- ----- Subtotal............ 24,205.2 78.1 22,370.3 79.3 21,743.9 80.0 Asset & Mortgaged- backed securities.... 6,775.0 21.9 5,830.1 20.7 5,431.0 20.0 --------- ----- --------- ----- --------- ----- Total Fixed Maturity Securities......... $30,980.2 100.0% $28,200.4 100.0% $27,174.9 100.0% ========= ===== ========= ===== ========= =====
The securities valuation office ("SVO") of the National Association of Insurance Commissioners evaluates all public and private bonds purchased as investments by insurance companies. The SVO assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating, and Category 6 is the 129 lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as S&P and Moody's (i.e., BBB-/Baa3 or higher), while Categories 3-6 are the equivalent of below-investment grade securities. SVO ratings are reviewed and may be revised no less frequently than annually. The following table sets forth the SVO ratings for our bond portfolio along with an equivalent S&P rating agency designation. The majority of our bonds are investment grade, with 87.1% invested in Category 1 and 2 securities as of June 30, 1999. As a percent of total invested assets, our below investment grade bonds, at 8.1% as of June 30, 1999, are higher than the American Council of Life Insurance ("ACLI") industry average of 4.8% as of December 31, 1998. This allocation reflects our strategy of avoiding the unpredictability of interest rate risk in favor of relying on our bond analysts' ability to better predict credit or default risk. Our bond analysts operate in an industry- based, team-oriented structure that permits the evaluation of a wide range of below investment grade offerings in a variety of industries. We believe this results in substantive input from all analysts and a well-diversified high yield portfolio. Category 6 bonds represent securities that were originally acquired as long term investments, but subsequently became distressed. The fair value of our category 6 bonds was $121.3 million as of June 30, 1999 and $181.2 million and $152.4 million as of December 31, 1998 and 1997, respectively. For the years ended December 31, 1998 and 1997, $31.2 million and $28.7 million of scheduled interest payments were not received on problem fixed maturity securities. Fixed Maturity Securities -- By Credit Quality
As of December 31, As of June 30, ------------------------------------------------------------- 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- SVO S&P Equivalent Carrying % of Carrying % of Carrying % of Carrying % of Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total Value (3) Total ---------- ----------------------- ------------- ----- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) (in millions) 1 AAA/AA/A............... $15,460.4 51.0% $14,157.7 51.3% $14,018.8 52.7% $13,157.0 51.7% 2 BBB.................... 10,972.4 36.1 9,636.6 35.0 9,008.2 33.8 9,284.7 36.5 3 BB..................... 2,759.4 9.1 2,688.5 9.8 2,369.5 8.9 1,863.3 7.3 4 B...................... 802.2 2.6 669.1 2.4 828.5 3.1 884.0 3.5 5 CCC and lower.......... 244.4 0.8 228.1 0.8 251.3 0.9 146.6 0.6 6 In or near default..... 121.3 0.4 181.2 0.7 152.4 0.6 97.1 0.4 --------- ----- --------- ----- --------- ----- --------- ----- Total.................. $30,360.1 100.0% $27,561.2 100.0% $26,628.7 100.0% $25,432.7 100.0% ========= ===== ========= ===== ========= ===== ========= =====
- -------- (1) With respect to securities that are awaiting an SVO rating, we have assigned a rating based on an analysis that we believe is equivalent to that used by the SVO. (2) Comparisons between SVO and S&P ratings are published by the National Association of Insurance Commissioners. (3) Does not include redeemable preferred stock with a carrying value of $620.1 million, $639.2 million, $546.2 million, and $300.9 million as of June 30, 1999 and December 31, 1998, 1997, and 1996, respectively. 130 The following table sets forth the credit quality of our public fixed maturity securities portfolio. As the public market has grown to include new asset classes such as securities issued in the Rule 144A market, which we classify as "public" securities, and ABS/MBS, our public fixed maturity securities portfolio has grown in both absolute and relative terms, from 45.7% of our fixed maturity securities portfolio, as of December 31, 1996, to 54.6%, as of June 30, 1999. Public Fixed Maturity Securities -- By Credit Quality
As of December 31, As of June 30, ------------------------------------------------------------- 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- SVO S&P Equivalent Carrying % of Carrying % of Carrying % of Carrying % of Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total Value (3) Total ---------- ----------------------- ------------- ----- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) (in millions) 1 AAA/AA/A............... $10,209.4 61.6% $ 8,687.8 62.5% $ 8,665.9 67.0% $ 7,856.3 67.5% 2 BBB.................... 4,574.3 27.6 3,565.1 25.6 2,941.7 22.7 2,959.8 25.5 3 BB..................... 1,508.2 9.1 1,425.3 10.2 1,086.5 8.4 630.1 5.4 4 B...................... 221.7 1.3 169.8 1.2 191.8 1.5 146.2 1.3 5 CCC and lower.......... 55.4 0.3 60.1 0.4 36.8 0.3 21.7 0.2 6 In or near default..... 10.2 0.1 16.4 0.1 11.0 0.1 5.8 0.1 --------- ----- --------- ----- --------- ----- --------- ----- Total.................. $16,579.2 100.0% $13,924.5 100.0% $12,933.7 100.0% $11,619.9 100.0% ========= ===== ========= ===== ========= ===== ========= =====
- -------- (1) With respect to securities that are awaiting an SVO rating, we have assigned a rating based on an analysis that we believe is equivalent to that used by the SVO. (2) Comparisons between SVO and S&P ratings are published by the National Association of Insurance Commissioners. (3) Does not include redeemable preferred stock with a carrying value of $214.6 million, $225.2 million, $161.6 million, and $62.4 million as of June 30, 1999 and December 31, 1998, 1997, and 1996, respectively. The following table sets forth the credit quality of our private fixed maturity securities portfolio. We invest in privately placed bonds to enhance the returns of our overall portfolio and to increase issuer diversification. We believe there are significantly higher risk-adjusted spreads to be obtained in the private placement market than in the public market. Over time the relative percentage of asset qualities has remained stable, with minor repositioning year-to-year reflecting our perception of relative value in the private placement market. Private Fixed Maturity Securities -- By Credit Quality
As of December 31, As of June 30, ------------------------------------------------------------- 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- SVO S&P Equivalent Carrying % of Carrying % of Carrying % of Carrying % of Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total Value (3) Total ---------- ----------------------- ------------- ----- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) (in millions) 1 AAA/AA/A............... $ 5,251.0 38.1% $ 5,469.9 40.1% $ 5,352.9 39.1% $ 5,300.7 38.4% 2 BBB.................... 6,398.1 46.4 6,071.5 44.5 6,066.5 44.3 6,324.9 45.8 3 BB..................... 1,251.2 9.1 1,263.2 9.3 1,283.0 9.4 1,233.2 8.9 4 B...................... 580.5 4.2 499.3 3.7 636.7 4.6 737.8 5.3 5 CCC and lower.......... 189.0 1.4 168.0 1.2 214.5 1.6 124.9 0.9 6 In or near default..... 111.1 0.8 164.8 1.2 141.4 1.0 91.3 0.7 --------- ----- --------- ----- --------- ----- --------- ----- Total.................. $13,780.9 100.0% $13,636.7 100.0% $13,695.0 100.0% $13,812.8 100.0% ========= ===== ========= ===== ========= ===== ========= =====
- -------- (1) With respect to securities that are awaiting an SVO rating, we have assigned a rating based on an analysis that we believe is equivalent to that used by the SVO. (2) Comparisons between SVO and S&P ratings are published by the National Association of Insurance Commissioners. (3) Does not include redeemable preferred stock with a carrying value of $405.5 million, $414.0 million, $384.5 million, and $238.5 million as of June 30, 1999 and December 31, 1998, 1997, and 1996, respectively. 131 The following tables detail the different industry classes that were represented in our bond portfolio as of the dates indicated. Our bond portfolio's industry diversification reflects our preference for corporate issuers and for issuers that rely on the private placement and Rule 144A markets. Our diversification tends to be fairly stable. Relative to insurance industry averages, we invest significantly less in MBS due to our aversion to prepayment and extension risk. Fixed Maturity Securities--By Industry Diversification
As of June 30, 1999 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Industry Class Value Total Value Total Value Total - -------------- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Manufacturing........... $ 1,193.2 7.1% $ 2,904.7 20.5% $ 4,097.9 13.3% Utilities............... 1,345.5 8.0 2,627.7 18.5 3,973.2 12.8 MBS..................... 3,952.6 23.4 5.2 0.0 3,957.8 12.8 ABS..................... 2,700.4 16.1 116.9 0.8 2,817.3 9.1 Bank & Finance.......... 1,795.3 10.7 1,596.9 11.3 3,392.2 10.9 Transportation.......... 1,020.2 6.1 1,156.8 8.2 2,177.0 7.0 Oil & Gas............... 1,656.3 9.9 1,094.7 7.7 2,751.0 8.9 Agri/Forestry/Mining.... 373.5 2.2 1,583.0 11.2 1,956.5 6.3 Government.............. 1,291.5 7.7 730.9 5.2 2,022.4 6.5 Services................ 463.2 2.8 998.4 7.0 1,461.6 4.7 Communications.......... 600.9 3.6 501.4 3.5 1,102.3 3.6 Trade................... 295.2 1.8 615.1 4.3 910.3 2.9 Other................... 106.0 0.6 254.7 1.8 360.7 1.2 --------- ----- --------- ----- --------- ----- Total Fixed Maturity Securities........... $16,793.8 100.0% $14,186.4 100.0% $30,980.2 100.0% ========= ===== ========= ===== ========= =====
As of December 31, 1998 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Industry Class Value Total Value Total Value Total - -------------- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Manufacturing........... $ 1,158.3 8.2% $ 2,897.1 20.5% $ 4,055.4 14.4% Utilities............... 1,381.3 9.8 2,743.0 19.5 4,124.3 14.6 MBS..................... 3,408.4 24.1 2.6 0.0 3,411.0 12.1 ABS..................... 2,126.5 15.0 292.6 2.1 2,419.1 8.6 Bank & Finance.......... 1,305.9 9.2 1,556.1 11.1 2,862.0 10.1 Transportation.......... 1,194.6 8.4 1,193.4 8.5 2,388.0 8.5 Oil & Gas............... 856.8 6.1 1,063.5 7.6 1,920.3 6.8 Agri/Forestry/Mining.... 377.3 2.7 1,435.3 10.2 1,812.6 6.4 Government.............. 1,027.4 7.3 687.1 4.9 1,714.5 6.1 Services................ 295.7 2.1 909.1 6.5 1,204.8 4.3 Communications.......... 519.4 3.7 478.7 3.4 998.1 3.5 Trade................... 280.7 2.0 598.2 4.3 878.9 3.1 Other................... 217.4 1.4 194.0 1.4 411.4 1.5 --------- ----- --------- ----- --------- ----- Total Fixed Maturity Securities........... $14,149.7 100.0% $14,050.7 100.0% $28,200.4 100.0% ========= ===== ========= ===== ========= =====
132
As of December 31, 1997 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Industry Class Value Total Value Total Value Total - -------------- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Manufacturing........... $ 868.9 6.6% $ 3,275.3 23.3% $ 4,144.2 15.3% Utilities............... 1,224.6 9.4 2,524.9 17.9 3,749.5 13.8 MBS..................... 3,035.6 23.2 4.3 0.0 3,039.9 11.2 ABS..................... 2,310.5 17.6 80.5 0.6 2,391.0 8.8 Bank & Finance.......... 1,100.2 8.4 1,580.6 11.2 2,680.8 9.9 Transportation.......... 1,028.0 7.9 1,180.1 8.4 2,208.1 8.1 Oil & Gas............... 552.1 4.2 1,131.7 8.0 1,683.8 6.2 Agri/Forestry/Mining.... 292.6 2.2 1,291.7 9.2 1,584.3 5.8 Government.............. 1,262.5 9.6 651.2 4.6 1,913.7 7.0 Services................ 239.1 1.8 940.7 6.7 1,179.8 4.3 Communications.......... 558.7 4.3 620.6 4.4 1,179.3 4.3 Trade................... 246.6 1.9 585.3 4.2 831.9 3.1 Other................... 375.9 2.9 212.7 1.5 588.6 2.2 --------- ----- --------- ----- --------- ----- Total Fixed Maturity Securities........... $13,095.3 100.0% $14,079.6 100.0% $27,174.9 100.0% ========= ===== ========= ===== ========= =====
The following tables provide additional detail on the composition of our MBS and ABS portfolios. As the securitized asset market has continued to expand in recent years, we have made use of this asset class selectively to add attractive risk-adjusted returns and furnish additional liquidity to our fixed maturity securities portfolios. For asset-liability management purposes we favor relatively stable cash flow structures such as those funded with commercial mortgages, auto loans and credit card receivables. Mortgage Backed Securities--By Type
As of June 30, 1999 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Commercial mortgage- backed securities...... $2,239.9 56.7% $0.1 2.0% $2,240.0 56.6% Residential collateralized mortgage obligations............ 679.5 17.2 5.1 98.0 684.6 17.3 Residential pass-through securities............. 1,033.2 26.1 -- -- 1,033.2 26.1 -------- ----- ---- ----- -------- ----- Total................. $3,952.6 100.0% $5.2 100.0% $3,957.8 100.0% ======== ===== ==== ===== ======== ===== As of December 31, 1998 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Commercial mortgage- backed securities...... $2,048.5 60.1% $2.6 100.0% $2,051.1 60.1% Residential collateralized mortgage obligations............ 307.1 9.0 -- 0.0 307.1 9.0 Residential pass-through securities............. 1,052.8 30.9 -- 0.0 1,052.8 30.9 -------- ----- ---- ----- -------- ----- Total................. $3,408.4 100.0% $2.6 100.0% $3,411.0 100.0% ======== ===== ==== ===== ======== =====
133
As of December 31, 1997 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Commercial mortgage- backed securities...... $1,596.7 52.6% $ 4.3 100.0% $1,601.0 52.7% Residential collateralized mortgage obligations............ 228.5 7.5 -- 0.0 228.5 7.5 Residential pass-through securities............. 1,210.4 39.9 -- 0.0 1,210.4 39.8 -------- ----- ------ ----- -------- ----- Total................. $3,035.6 100.0% $ 4.3 100.0% $3,039.9 100.0% ======== ===== ====== ===== ======== ===== Asset Backed Securities -- By Type As of June 30, 1999 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Credit card receivables............ $ 276.4 10.2% $ 0.3 0.2% $ 276.7 9.8% Auto loans.............. 925.5 34.3 0.6 0.5 926.1 32.9 Manufactured housing.... 108.9 4.0 -- 0.0 108.9 3.9 Home equity loans....... 105.4 3.9 -- 0.0 105.4 3.7 Collateralized bond obligations............ 382.0 14.1 0.0 0.0 382.0 13.6 Other................... 902.2 33.5 116.0 99.3 1,018.2 36.1 -------- ----- ------ ----- -------- ----- Total................. $2,700.4 100.0% $116.9 100.0% $2,817.3 100.0% ======== ===== ====== ===== ======== ===== As of December 31, 1998 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Credit card receivables............ $ 257.6 12.1% -- 0.0% $ 257.6 10.6% Auto loans.............. 839.7 39.5 $ 4.6 1.6 844.3 34.9 Manufactured housing.... 113.6 5.3 -- 0.0 113.6 4.7 Home equity loans....... 74.0 3.5 -- 0.0 74.0 3.1 Collateralized bond obligations............ 471.2 22.2 198.8 67.9 670.0 27.7 Other................... 370.4 17.4 89.2 30.5 459.6 19.0 -------- ----- ------ ----- -------- ----- Total................. $2,126.5 100.0% $292.6 100.0% $2,419.1 100.0% ======== ===== ====== ===== ======== ===== As of December 31, 1997 ------------------------------------------------------------- Publicly Traded Privately Traded Total ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) Credit card receivables............ $ 490.6 21.2% -- 0.0% $ 490.6 20.5% Auto loans.............. 937.1 40.6 $ 15.2 18.9 952.3 39.8 Manufactured housing.... 152.4 6.6 -- 0.0 152.4 6.4 Home equity loans....... 53.5 2.3 -- 0.0 53.5 2.2 Collateralized bond obligations............ 331.7 14.4 18.0 22.4 349.7 14.6 Other................... 345.2 14.9 47.3 58.7 392.5 16.5 -------- ----- ------ ----- -------- ----- Total................. $2,310.5 100.0% $ 80.5 100.0% $2,391.0 100.0% ======== ===== ====== ===== ======== =====
134 Mortgage Loans. As of June 30, 1999, we held mortgage loans with a carrying value of $10.4 billion, including $1.6 billion of agricultural loans and $0.9 billion of commercial loans managed by our Canadian subsidiary, The Maritime Life Assurance Company. The following table shows the distribution of our mortgage loan portfolio by property type as of the dates indicated. Our commercial mortgage loan portfolio consists primarily of non-recourse fixed-rate mortgages on fully, or nearly fully, leased commercial properties.
As of June 30, As of December 31, ---------------------------- ------------------------------------------------------------- 1999 1998 1997 1996 ---------------------------- ------------------- ------------------- ------------------- Number Carrying % of Carrying % of Carrying % of Carrying % of of Loans Value Total Value Total Value Total Value Total -------- ------------- ----- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) (in millions) Apartment............... 605 $ 2,437.5 23.5% $2,362.3 24.6% $2,476.7 26.7% $2,580.7 27.3% Office Buildings........ 276 2,370.5 22.9 2,260.5 23.5 1,889.2 20.3 1,995.7 21.1 Retail.................. 270 1,737.2 16.7 1,730.4 18.0 1,748.8 18.8 1,760.1 18.6 Agricultural............ 354 1,565.6 15.1 1,356.7 14.1 1,455.9 15.7 1,623.4 17.1 Industrial.............. 255 1,065.1 10.3 1,069.9 11.1 1,017.4 10.9 1,048.4 11.1 Hotels.................. 28 452.6 4.4 301.2 3.1 198.3 2.1 156.1 1.6 Multi-Family............ 441 107.0 1.0 104.9 1.1 84.9 0.9 20.5 0.2 Mixed Use............... 26 322.2 3.1 93.2 1.0 83.3 0.9 0.0 0.0 Other................... 67 316.0 3.0 337.0 3.5 341.8 3.7 288.7 3.0 ----- --------- ----- -------- ----- -------- ----- -------- ----- Total................. 2,322 $10,373.7 100.0% $9,616.1 100.0% $9,296.3 100.0% $9,473.6 100.0% ===== ========= ===== ======== ===== ======== ===== ======== ===== The following table shows the distribution of our mortgage loan portfolio by geographical region. Mortgage Loans -- By ACLI Region As of June 30, As of December 31, ---------------------------- ------------------------------------------------------------- 1999 1998 1997 1996 ---------------------------- ------------------- ------------------- ------------------- Number Carrying % of Carrying % of Carrying % of Carrying % of of Loans Value Total Value Total Value Total Value Total -------- ------------- ----- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) (in millions) East North Central...... 183 $ 1,155.8 11.1% $1,106.9 11.5% $ 803.2 8.6% $ 731.6 7.7% East South Central...... 33 157.6 1.5 157.4 1.6 157.5 1.7 123.2 1.3 Middle Atlantic......... 148 1,639.3 15.8 1,500.2 15.6 1,491.2 16.0 1,535.4 16.2 Mountain................ 117 367.3 3.5 381.2 4.0 410.2 4.4 419.8 4.4 New England............. 155 913.4 8.8 854.8 8.9 900.8 9.7 913.2 9.6 Pacific................. 331 2,136.7 20.7 1,885.0 19.6 1,817.3 19.5 2,017.2 21.4 South Atlantic.......... 227 1,870.6 18.0 1,648.3 17.1 1,557.8 16.8 1,504.0 15.9 West North Central...... 78 387.1 3.7 333.1 3.5 260.4 2.8 262.1 2.8 West South Central...... 183 692.6 6.7 645.6 6.7 653.9 7.0 590.5 6.2 Canada.................. 867 1,053.3 10.2 1,103.6 11.5 1,244.0 13.5 1,376.6 14.5 ----- --------- ----- -------- ----- -------- ----- -------- ----- Total................. 2,322 $10,373.7 100.0% $9,616.1 100.0% $9,296.3 100.0% $9,473.6 100.0% ===== ========= ===== ======== ===== ======== ===== ======== =====
135 The following table shows our commercial mortgage loan portfolio by loan size. Our commercial mortgage loan portfolio is highly diversified by borrower. As of June 30, 1999, over 49% of the portfolio was comprised of mortgage loans with principal balances of less than $10 million. Consistent with our diverse base of business, our mortgage loans are originated through affiliated field offices across the country and through a national network of mortgage correspondents. Commercial Mortgage Loan Portfolio -- By Loan Size
As of December 31, As of June 30, ---------------------------------------------- 1999 1998 1997 ---------------------- ---------------------- ---------------------- Number Number Number of Principal % of of Principal % of of Principal % of Loans Balance Total Loans Balance Total Loans Balance Total ------ --------- ----- ------ --------- ----- ------ --------- ----- (in millions) (in millions) (in millions) Under $5 million........ 1,403 $2,013.6 22.6% 1,779 $2,048.9 24.6% 1,555 $2,021.1 25.4% $5 million but less than $10 million....... 357 2,353.1 26.5 355 2,295.2 27.5 369 2,381.2 30.0 $10 million but less than $20 million....... 141 1,801.4 20.3 142 1,781.6 21.4 131 1,736.6 21.9 $20 million but less than $30 million....... 39 970.5 10.9 34 859.6 10.3 30 737.4 9.3 $30 million and over.... 28 1,753.0 19.7 24 1,351.0 16.2 20 1,060.3 13.4 ----- -------- ----- ----- -------- ----- ----- -------- ----- Total................. 1,968 $8,891.6 100.0% 2,334 $8,336.3 100.0% 2,105 $7,936.6 100.0% ===== ======== ===== ===== ======== ===== ===== ======== =====
The following table shows the distribution of maturities of our commercial mortgage loan portfolio. To accommodate our liability needs, we seek a reasonably diversified maturity structure for this portfolio. The table illustrates the trend toward longer maturity mortgages. This lengthening of the portfolio primarily reflects commercial borrowers taking advantage of declining interest rates by locking-in long-term financing. Commercial Mortgage Loan Maturities
As of December 31, As of June 30, ------------------------------------------------------------- 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- Principal Principal Principal Principal Balance % of Balance % of Balance % of Balance % of Maturing Total Maturing Total Maturing Total Maturing Total ------------- ----- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) (in millions) 1997.................... N/A N/A N/A N/A N/A N/A $ 840.2 10.6% 1998.................... N/A N/A N/A N/A $ 797.5 10.1% 827.1 10.4 1999.................... $ 317.5 3.6% $ 609.0 7.3% 673.5 8.5 690.0 8.7 2000.................... 734.0 8.3 736.2 8.8 859.2 10.8 878.5 11.0 2001.................... 678.7 7.6 691.8 8.3 834.2 10.5 902.4 11.3 2002.................... 697.2 7.8 767.8 9.2 844.2 10.6 588.6 7.4 2003.................... 853.6 9.6 859.5 10.3 598.3 7.6 602.3 7.6 2004.................... 611.0 6.9 443.0 5.3 509.1 6.4 447.6 5.6 2005.................... 697.1 7.8 698.3 8.4 637.3 8.0 612.4 7.7 2006.................... 639.9 7.2 429.0 5.2 420.5 5.3 456.7 5.7 2007.................... 508.7 5.7 507.7 6.1 517.3 6.5 159.0 2.0 After 2007.............. 3,153.9 35.5 2,594.0 31.1 1,245.5 15.7 952.9 12.0 -------- ----- -------- ----- -------- ----- -------- ----- Total................. $8,891.6 100.0% $8,336.3 100.0% $7,936.6 100.0% $7,957.7 100.0% ======== ===== ======== ===== ======== ===== ======== =====
136 The following table shows the percentages of our commercial loan portfolio that are delinquent but not in foreclosure, delinquent and in foreclosure, restructured and foreclosed. Commercial mortgage loans are classified as delinquent when they are 60 days or more past due as to the payment of interest or principal. Commercial mortgage loans are classified as restructured when they are in good standing, but the basic terms, such as interest rate or maturity date, have been modified as a result of a prior actual delinquency or an imminent delinquency. Although we have recorded higher levels of delinquencies and foreclosures in each of the periods shown, we believe our commercial mortgage portfolio has performed comparably to ACLI industry averages for delinquencies, restructurings and foreclosures in- process. With respect to delinquency we believe the higher rate is largely offset by our lower percentage of restructured loans, which we believe reflects different strategies for addressing problem loans. With respect to foreclosures, we believe the higher rate is a result of our philosophy of foreclosing on a property if foreclosure will result in the highest possible return. All foreclosure decisions are based on a thorough assessment of the property's quality and location and market conditions. The decision may also reflect a plan to invest additional capital in a property to make tenant improvements or renovations to secure a higher resale value at a later date. Following foreclosure, we rely on our real estate investment group's ability to manage foreclosed real estate for eventual return to investment real estate status or outright sale. Commercial Mortgage Loan Comparisons
As of December 31, As of March 31, -------------------------------------------------------------- 1999 (1) 1998 1997 1996 -------------------- -------------------- -------------------- -------------------- John John John John Hancock (2) ACLI (3) Hancock (1) ACLI (2) Hancock (1) ACLI (2) Hancock (1) ACLI (2) ----------- -------- ----------- -------- ----------- -------- ----------- -------- Delinquent, not in foreclosure..... 0.32% 0.16% 0.33% 0.17% 0.50% 0.32% 0.24% 0.69% Delinquent, in foreclosure......... 0.57 0.31 0.30 0.31 0.67 0.58 1.14 1.10 Restructured............ 2.99 2.85 2.88 3.02 4.20 4.61 5.77 6.81 ---- ---- ---- ---- ---- ---- ----- ---- Subtotal.............. 3.88 3.32 3.51 3.50 5.37 5.51 7.15 8.60 Loans foreclosed during period................. 0.01 0.07 0.64 0.44 1.58 0.84 3.03 1.01 ---- ---- ---- ---- ---- ---- ----- ---- Total................. 3.89% 3.39% 4.15% 3.94% 6.95% 6.35% 10.18% 9.61% ==== ==== ==== ==== ==== ==== ===== ====
- -------- (1) Most recent reporting period available. (2) Excludes data from The Maritime Life Assurance Company. (3) Source: ACLI Investment Bulletins entitled "Mortgage Loan Portfolio Profile" Numbers 1438, 1429, 1399, and 1367, dated May 26, 1999, March 4, 1999, March 9, 1998, and March 6, 1997, respectively. We use our internally developed Mortgage Investment Risk Analysis system to monitor the aggregate risk of our commercial mortgage loan portfolio. When a loan becomes more than 30 days delinquent, an assessment is made as to what course of action should be taken with the investment. In most instances, the loan is referred for foreclosure; however, in some circumstances we may decide that it is advantageous to restructure the loan. We will only restructure when we believe we will recapture lost income as markets improve. Delinquent and restructured loans are reviewed on a quarterly basis after consultation with the controller's department. Loan officers present an analysis of the problem loans, including a 10 year discounted cash flow analysis, that establishes a value for the property. A reserve is established based on the difference between the book value of the property and the agreed- upon market value. The following table shows our agricultural mortgage loan portfolio by its three major sectors: agribusiness, timber and production agriculture. Agribusiness is our largest agricultural sector and is a relatively stable segment of the food industry that includes suppliers, warehousers, processors, distributors, wholesalers, and retailers. Our 137 expertise in this area provides us with a specialized niche in the largest sector of manufactured goods in the United States. Our largest concentrations of agricultural mortgage loans are located in California and Maine, with the two states comprising 44% of our agricultural mortgage loan portfolio's holdings as of June 30, 1999. We are one of the largest lenders in the timber market and, in addition to managing timber investments for third parties, we have a small amount of timber loans in our general account. In 1998, we sold 70% of our production agriculture portfolio and are not actively pursuing new investments in this market sector. Agricultural Mortgage Loans--By Sector
As of June 30, As of December 31, ------------------- ------------------------------------------------------------- 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total Value Total ------------- ----- ------------- ----- ------------- ----- ------------- ----- (in millions) (in millions) (in millions) (in millions) Agribusiness............ $1,065.1 68.0% $ 958.7 70.7% $ 717.5 49.3% $ 695.6 42.8% Timber.................. 430.8 27.5 319.2 23.5 402.4 27.6 461.4 28.4 Production Agriculture.. 69.7 4.5 78.8 5.8 336.0 23.1 466.4 28.8 -------- ----- -------- ----- -------- ----- -------- ----- Total.................. $1,565.6 100.0% $1,356.7 100.0% $1,455.9 100.0% $1,623.4 100.0% ======== ===== ======== ===== ======== ===== ======== =====
Real Estate. We are currently nearing the completion of a comprehensive strategic sales initiative intended to liquidate approximately 90% of our current commercial real estate portfolio. This sales initiative is expected to be complete by year-end 1999. Upon completion of the sales program, it is expected that our headquarters in Boston, Massachusetts will be our predominant investment real estate holding. Our equity real estate holdings include properties originally acquired as investment real estate, foreclosed properties subsequently transferred to investment status, and recently foreclosed properties. As of June 30, 1999, our total real estate portfolio, with a carrying value of $658.9 million, represented, 1.4% of invested assets. The following table shows investment valuation allowances for our mortgage loan and real estate portfolios for the periods indicated: Investment Valuation Allowances
Real Mortgages Estate Total --------- ------ ------- (in millions) Year Ended December 31, 1996 Beginning Balance.................................. $204.2 $ 72.1 $ 276.3 Provision......................................... 26.7 5.7 32.4 Write-offs........................................ (88.9) (23.3) (112.2) ------ ------ ------- Ending balance.................................... $142.0 $ 54.5 $ 196.5 Valuation allowance as % of carrying value before reserves......................................... 1.5% 2.5% 1.7% 1997 Provision......................................... $ 19.5 $ 1.5 $ 21.0 Write-offs........................................ (34.2) (30.5) (64.7) ------ ------ ------- Ending balance.................................... $127.3 $ 25.5 $ 152.8 Valuation allowance as % of carrying value before reserves......................................... 1.4% 1.3% 1.3% 1998 Provision (1)..................................... $ 15.9 $ 97.0 $ 112.9 Write-offs........................................ (32.2) (10.5) (42.7) ------ ------ ------- Ending balance.................................... $111.0 $112.0 $ 223.0 Valuation allowance as % of carrying value before reserves......................................... 1.2% 7.0% 2.0%
138
Real Mortgages Estate Total --------- ------ ------ (in millions) Six Months Ended June 30, 1999 Provision............................................ $16.0 $17.3 $ 33.3 Write-offs........................................... (28.0) (38.8) (66.8) ----- ----- ------ Ending balance....................................... $99.0 $90.5 $189.5 Valuation allowance as % of carrying value before reserves............................................ 0.9% 12.1% 1.7%
- -------- (1) The increased amount in 1998 is primarily attributable to our commercial real estate disposition initiative, which resulted in a shortening of the expected holding period for the majority of all properties in our commercial real estate portfolio. The allowance for losses on mortgage loans on real estate and foreclosed real estate is maintained at a level that we believe to be adequate to absorb estimated probable credit losses. Our periodic evaluation of the adequacy of the allowance for losses is based on past experience, known and inherent risks, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying security, the general composition of the portfolio, current economic conditions and other factors. This evaluation is inherently subjective and is susceptible to significant changes and no assurance can be given that the allowances taken will in fact be adequate to cover all future losses or that additional valuation allowances or asset write-downs will not be required in the future. Policy Loans. As of June 30, 1999, our investment assets included $1,898.9 million in policy loans, nearly unchanged in absolute terms from outstanding levels as of December 31, 1998 and 1997. Policy loans are extended to our life insurance policyholders and are collateralized by the cash value of their insurance policies. The interest rates charged to policyholders on these loans are set forth in their policies and are approved by state insurance commissioners. These interest rates usually range from 5% to 8% for older policies, which typically have fixed interest rate provisions. For newer policies, which typically have variable interest rate provisions, interest rates are expressly based on external market indices. Interest rates charged on policy loans have generally exceeded the guaranteed interest rates credited on the underlying policies. Our gross investment income from policy loans amounted to $54.8 million, $111.9 million and $107.7 million in the first six months of 1999 and for the years ended December 31, 1998 and 1997, respectively. Equity Securities. As of June 30, 1999, we held $1,103.2 million of equity securities, including $817.0 million of common equity that was largely acquired through the equity participation features of below-investment-grade bonds or through recoveries on defaulted bonds. Other Invested Assets. Other invested assets totaled $1,101.1 million as of June 30, 1999, compared to $1,254.6 million as of December 31, 1998 and $831.6 million as of December 31, 1997. Total gross investment income from other invested assets totaled $58.7 million for the six months ended June 30, 1999, $181.3 million in 1998 and $144.5 million in 1997. Other invested assets primarily include leases, private equity, and independent power projects. Most of these investments are structured as joint ventures or partnership interests and are composed of a variety of underlying investment pools or assets such as real estate leases. This category also includes miscellaneous investments such as mineral rights and investments in process of settlement. Joint venture and partnership interests are generally accounted for under the equity method. The equity method requires increasing the asset's carrying value to recognize undistributed earnings, or reducing the asset's carrying value to reorganize distributed earnings and return of principal, in the underlying entities. The carrying value of this asset class, as well as the investment income it generates, is highly contingent upon the economic performance of the underlying entities or assets. Also included in this category are derivatives and other miscellaneous assets. 139 The following table shows other invested assets carrying value and income by type. Our real estate joint ventures were disposed of in 1999 as part of our comprehensive real estate sale previously discussed.
As of December 31, As of June 30, ------------------------------- 1999 1998 1997 --------------- --------------- --------------- Carrying Carrying Carrying Value Income Value Income Value Income -------- ------ -------- ------ -------- ------ (in millions) Real estate joint ventures... $ 0.0 $(0.4) $ 173.8 $ 5.8 $123.7 $ 13.5 Equity participations........ 51.1 7.7 72.3 11.5 35.4 8.5 Fixed Income/leases.......... 163.3 12.4 213.4 30.5 200.2 23.5 Equity or fund type limited partnerships................ 147.0 12.6 151.4 31.7 151.7 51.7 Oil & gas, power, etc........ 146.1 13.2 153.2 44.3 209.1 39.0 All other.................... 593.6 13.2 490.5 57.5 111.5 8.3 -------- ----- -------- ------ ------ ------ Total...................... $1,101.1 $58.7 $1,254.6 $181.3 $831.6 $144.5 ======== ===== ======== ====== ====== ======
Cash and Short-Term Investments. As of June 30, 1999, our short-term investments (including cash and cash-equivalents) totaled $2,154.7 million. Volatility in our annual short-term investment income reflects swings in our cash balances, as well as changes in short-term interest rates. As a general policy, we aim to minimize the opportunity cost of holding excess cash and short-term investments, while balancing our need to meet obligations to our policyholders and creditors, as well as to settle investment transactions. We invest short-term funds in commercial paper, certificates of deposit and other short-term instruments, subject to investment guidelines regarding issuer concentration, quality and maturity. We also have an active securities-lending program. Ratings Insurance companies are rated by rating agencies based upon factors relevant to policyholders. Ratings provide both industry participants and insurance consumers meaningful information on specific insurance companies. Higher ratings generally indicate financial stability and a strong ability to pay claims. John Hancock Mutual Life Insurance Company is rated A++ (Superior) by A.M. Best, AAA (Highest) by Duff and Phelps, AA+ (second highest rating) by S&P, and Aa2 (third highest rating) by Moody's. A.M. Best's ratings for insurance companies currently range from "A++" to "F," and some companies are not rated. A.M. Best publications indicate that "A++" and "A+" ratings are assigned to those companies that in A.M. Best's opinion have achieved superior overall performance when compared to the norms of the life insurance industry and generally have demonstrated a strong ability to meet their policyholder and other contractual obligations. Moody's rating for insurance companies currently range from "Aaa" to "C." S&P ratings for insurance companies range from "AAA" to "CC." In evaluating a company's financial and operating performance, Moody's and S&P review its profitability, leverage and liquidity as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its policy reserves and the experience and competency of its management. We believe that our strong ratings are an important factor in marketing our products to our distributors and customers, since ratings information is broadly disseminated and generally used throughout the industry. Our ratings reflect each rating agency's opinion of our financial strength, operating performance and ability to meet our obligations to policyholders, and are not evaluations directed toward the protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security, including our common stock. Properties Our home office consists of our 60-story landmark office tower and five other buildings located in Boston, Massachusetts. We own this facility and occupy approximately 50% of the 3.8 million gross square feet of space 140 in these buildings. In addition, we lease office space throughout the United States as needed for our operations, including for our sales force. We believe that our current facilities are adequate for our current and expected needs. Since 1987, we have entered into a series of lease agreements with a non- affiliated organization for the rental of furniture and equipment. The leases have a non-cancelable term of twelve months and an expected term of approximately nine years. Annual aggregate payments under these leases are approximately $8 million. Legal Proceedings We are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming us as a defendant ordinarily involves our activities as a provider of insurance protection products, as well as an investment adviser, employer and taxpayer. In addition, state regulatory bodies, the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and other regulatory bodies regularly make inquiries and, from time to time, conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, and laws governing the activities of broker/dealers. We do not believe that this litigation or any of these other matters that are currently pending, either individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations. Sales Practice Class Action Settlement Over the past several years, companies engaged in the life insurance business have faced extensive claims, including class-action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. On December 31, 1997, the United States District Court for the District of Massachusetts approved a settlement of a nationwide class action lawsuit regarding sales practices against John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company and John Hancock Distributors, Inc., Duhaime, et al. v. John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company and John Hancock Distributors, Inc. With certain limited exceptions, the class that is bound by the terms of the settlement includes persons and entities who at any time during the class period (January 1, 1979 through December 31, 1996) had an ownership interest in one or more of our whole life, universal life or variable life insurance policies (and certain annuities and mutual funds) issued during the class period. The lawsuit alleged various misrepresentations, including (1) misrepresentations that a limited number of out-of-pocket premium payments would keep a policy in force without further out-of-pocket premium payments, (2) misrepresentations concerning replacement of an existing insurance policy by surrendering (or borrowing or withdrawing cash surrender value from) an existing insurance policy in order to purchase a new policy, and (3) misrepresentations concerning the sale of life insurance solely or predominately as an investment, retirement or savings vehicle. We denied the allegations but agreed to settle the lawsuit because we believe the settlement to be fair, reasonable and in the best interest of our present and past policyholders. The settlement provides substantial benefits to the class, and allows us to continue to serve our customers' needs undistracted by disruptions caused by litigation. The settlement provides two main types of benefits to those persons and entities who decided not to opt out of the class, whom we refer to as "Class Members": General Policy Relief and Alternative Dispute Resolution. Class Members who did not affirmatively elect Alternative Dispute Resolution are entitled to General Policy Relief. The forms of General Policy Relief available include contributions to in force policies, premium loans at favorable rates, and enhancements to life insurance policies, annuities and mutual funds. Certain of these forms of General Policy Relief are yet to be fully implemented and final amounts to be paid over time will change. Class Members who believe that they were misled when they purchased their policy or that there was other wrongdoing in connection with the policy could submit a claim to the Alternative Dispute Resolution process. 141 Successful Alternative Dispute Resolution claimants are awarded relief in accordance with the nature and strength of their claims and based upon a formula approved by the court. This relief will be administered in a demutualization neutral manner, such that the timing associated with processing claims for relief will not cause Class Members to lose the value of demutualization compensation they would otherwise be eligible to receive under the Plan of Reorganization. The Alternative Dispute Resolution process is ongoing, and no guarantees can be made with regard to the total amount of relief which will be awarded to class members through this process. A third type of relief called Monthly Deduction Relief in the total, aggregate amount of $4 million has already been paid to class members with an ownership interest in eligible flexible variable and universal life insurance policies. Since the court has approved the settlement, all claims that have been asserted or could have been asserted in this lawsuit have been dismissed on the merits and with prejudice. None of these claims may hereafter be asserted by Class Members in any other lawsuit or proceeding. Harris Trust Litigation Since 1983, we have been involved in complex litigation known as Harris Trust and Savings Bank, as Trustee of Sperry Master Retirement Trust No. 2 v. John Hancock Mutual Life Insurance Company (S.D.N.Y. Civ. 83-5491), which raised the question of whether insurance company general account assets could be assets of a contractholder's plan under ERISA. The case was tried in 1997, but as of yet there is no final decision in the matter. Relying on the language of ERISA and Department of Labor interpretations, the insurance industry had believed that general account assets were not ERISA plan assets and had structured its business accordingly. In a 1993 ruling in our case, however, the Supreme Court decided against us and determined that certain funds held by us in connection with the general account group annuity contract issued to the Trustee of the Sperry Master Retirement Trust No. 2 were plan assets for ERISA purposes. Accordingly, the Supreme Court concluded that we were subject to ERISA's fiduciary rules in connection with those assets. Because the Supreme Court found that the funds associated with this group annuity contract were ERISA plan assets, the case was remanded to the district court for a determination of whether our handling of those assets violated ERISA. The plaintiff in this suit, the Trustee of Sperry Master Retirement Trust No. 2, claimed that John Hancock, as defendant, had violated ERISA's fiduciary rules in administering this group annuity contract. The plaintiff claimed the Sperry Master Retirement Trust No. 2 had been damaged by these alleged violations; however, the plaintiff did not specify the dollar amount of its damages. We deny that our actions have violated ERISA in any way. This case was tried before a judge, and we await his decision. The Supreme Court decision raised the possibility that common industry practices developed in reliance on the Department of Labor's position could give rise to significant retroactive liability under ERISA's fiduciary rules. Legislation enacted in 1996, however, addresses the difficulties created by the retroactive application of the Supreme Court's decision in the Harris Trust case and provides a grace period to permit insurance companies to bring their general account operations into compliance with ERISA and Department of Labor regulations. We expect that the Department of Labor's regulations will provide sufficient direction to enable us to eliminate the potential for Harris Trust liability in the future. However, the Harris Trust litigation itself is not affected by the new regulations, since the implementing legislation does not apply to litigation commenced before November 7, 1995. If we have an unfavorable ruling in the Harris Trust lawsuit, it would be limited to the Harris Trust contract, and it might require that John Hancock pay money damages to Harris Trust, as Trustee of the Sperry Master Retirement Trust No. 2. Employees As of June 30, 1999, we employed approximately 8,900 people. We believe our relations with our employees are satisfactory. 142 MANAGEMENT Directors and Executive Officers The following table lists our directors and executive officers, their ages and their positions as of September 1, 1999.
Name Age Position ---- --- -------- Stephen L. Brown........ 62 Chairman of the Board, Chief Executive Officer and Director Foster L. Aborn......... 65 Vice Chairman of the Board, Chief Investment Officer and Director David F. D'Alessandro... 48 President and Chief Operations Officer and Director Samuel W. Bodman........ 60 Director Joan T. Bok............. 69 Director I. MacAllister Booth.... 67 Director Wayne A. Budd........... 57 Director John M. Connors, Jr. ... 57 Director Robert E. Fast, Esq..... 64 Director Dr. Kathleen Foley Feldstein.............. 58 Director Nelson S. Gifford....... 69 Director Michael C. Hawley....... 61 Director Edward H. Linde......... 58 Director E. James Morton......... 72 Director Richard F. Syron........ 55 Director Robert J. Tarr, Jr. .... 55 Director Diane M. Capstaff....... 55 Executive Vice President Kathleen M. Graveline... 47 Executive Vice President Thomas E. Moloney....... 55 Chief Financial Officer Richard S. Scipione..... 62 General Counsel
The following is biographical information for our directors and executive officers: Stephen L. Brown has been Chairman and Chief Executive Officer of John Hancock Mutual Life Insurance Company since 1992 and a John Hancock Mutual Life Insurance Company director since 1982. He is a Fellow, Society of Actuaries, Enrolled Actuary under ERISA, member of American Academy of Actuaries and Chartered Life Underwriter, American College of Chartered Life Underwriters. He is a director of The Berkeley Financial Group and a former director of the Federal Reserve Bank of Boston. He chairs the Policy Committee of John Hancock Mutual Life Insurance Company. Foster L. Aborn has been Vice Chairman of the Board and Chief Investment Officer of John Hancock Mutual Life Insurance Company since 1992 and a John Hancock Mutual Life Insurance Company director since 1987. He is a director of John Hancock Subsidiaries, Inc., Independence Investment Associates, Inc., and The Berkeley Financial Group and Chairman of the Committee of Finance of the board of directors of John Hancock Mutual Life Insurance Company. David F. D'Alessandro has been President and Chief Operations Officer of John Hancock Mutual Life Insurance Company since 1998 and a John Hancock Mutual Life Insurance Company director since 1990. From 1988 to 1997 he was Senior Executive Vice President. He is Vice Chairman of the Executive Committee of the board of directors, Chairman of John Hancock Variable Life Insurance Company and a director of John Hancock Subsidiaries, Inc. and The Berkeley Financial Group. Samuel W. Bodman has been a John Hancock Mutual Life Insurance Company director since 1992. Mr. Bodman has been Chairman and Chief Executive Officer of Cabot Corporation, a manufacturer of specialty chemicals and materials, since 1987. He is a director of Cabot Oil & Gas Corporation, an oil and gas exploration company, Security Capital Group Incorporated, a global real estate management company, Thermo Electron 143 Corporation, a manufacturer of a broad range of biomedical and other products, and Westvaco Corporation, a paper and paperboard producer. He is Chairman of the Compensation Committee and a member of the Nominating and Corporate Governance Committee and Executive Committee of the board of directors of John Hancock Mutual Life Insurance Company. Joan T. Bok has been a John Hancock Mutual Life Insurance Company director since 1989. Ms. Bok has been Chairman of the Board of New England Electric System since 1984 and was elected Chairman Emeritus in 1998. She is a director of Avery Dennison Corporation, New England Electric System and Solutia Inc., a manufacturer of chemical-based materials. She is a member of the Committee of Finance and the Nominating and Corporate Governance Committee of the board of directors of John Hancock Mutual Life Insurance Company. I. MacAllister Booth has been a John Hancock Mutual Life Insurance Company director since 1992. Mr. Booth is the retired Chairman, President, Chief Executive Officer and a retired director of Polaroid Corporation. He is a director of State Street Bank and Western Digital Corporation, a manufacturer of disk drives. He is Chairman of the Committee on Ethics and Business Practices and a member of the Nominating and Corporate Governance Committee of the board of directors of John Hancock Mutual Life Insurance Company. Wayne A. Budd has been a John Hancock Mutual Life Insurance Company director since 1998. Mr. Budd has been the Group President, Bell Atlantic-New England, Bell Atlantic Corporation, since 1996. He is a director of BankBoston Corporation and Tosco Corporation, an independent marketer of petroleum products. Prior to 1996, he was a Senior Partner in the law firm of Goodwin, Proctor & Hoar. He is a member of the Audit Committee and Compensation Committee of the board of directors of John Hancock Mutual Life Insurance Company. John M. Connors, Jr. has been a John Hancock Mutual Life Insurance Company director since 1991. Mr. Connors has been the Chairman and Chief Executive Officer of Hill, Holliday, Connors, Cosmopulos, Inc., a full-service advertising agency, since 1968. He is a director of Geerlings & Wade, Inc., a direct marketer of premium wines, Lycos, Inc., an Internet company, and Saucony, Inc., a manufacturer of performance-oriented athletic shoes. Mr. Connors is also the Chairman of the board of directors for Partners Healthcare Systems, Inc., an integrated healthcare delivery system, and a trustee of Boston College. He is a member of the Committee on Ethics and Business Practices and Executive Committee of the board of directors of John Hancock Mutual Life Insurance Company. Robert E. Fast has been a John Hancock Mutual Life Insurance Company director since 1989. Mr. Fast is a Senior Partner in the law firm of Hale and Dorr, where he has been an attorney since 1962. He is a member of the Audit Committee and Committee on Ethics and Business Practices of the board of directors of John Hancock Mutual Life Insurance Company. Dr. Kathleen Foley Feldstein has been a John Hancock Mutual Life Insurance Company director since 1993. Dr. Feldstein has been the President of Economics Studies, Inc., a private economic consulting firm, since 1987. She is a director of Bank of America Corporation, BellSouth Corporation, a telecommunications company, Ionics Corporation, a water purification company, and Knight-Ridder Corporation, a newspaper publishing company. She is a member of the Compensation Committee of the board of directors of John Hancock Mutual Life Insurance Company. Nelson S. Gifford has been a John Hancock Mutual Life Insurance Company director since 1976. Mr. Gifford has been the Principal of Fleetwing Capital, a venture capital investment firm, since 1991. Prior to 1991, he was President, Chief Executive Officer and a director of Dennison Manufacturing Company, a stationery products, systems and packaging company. He is a trustee of NSTAR, a holding company for Massachusetts' utility companies, including Boston Edison Company. He is the Chairman of the Audit Committee and a member of the Committee of Finance and Executive Committee of the board of directors of John Hancock Mutual Life Insurance Company. 144 Michael C. Hawley has been a John Hancock Mutual Life Insurance Company director since 1995. Mr. Hawley was elected Chairman and Chief Executive Officer of The Gillette Company in April, 1999. Prior to this election, he had been President and Chief Operating Officer. He is a director of The Gillette Company and Texaco, Inc. He is a member of the Audit Committee and Compensation Committee of the board of directors of John Hancock Mutual Life Insurance Company. Edward H. Linde has been a John Hancock Mutual Life Insurance Company director since 1999. Mr. Linde has been President and Chief Executive Officer of Boston Properties, Inc., an owner and developer of office properties, since 1970. He is a member of the Committee of Finance of the board of directors of John Hancock Mutual Life Insurance Company. E. James Morton has been a John Hancock Mutual Life Insurance Company director since 1976. Mr. Morton is the Retired Chairman and Chief Executive Officer of John Hancock Mutual Life Insurance Company. He is a member of the Committee of Finance, Committee on Ethics and Business Practices and Nominating and Corporate Governance Committee of the board of directors of John Hancock Mutual Life Insurance Company. Richard F. Syron has been a John Hancock Mutual Life Insurance Company director since 1985. Mr. Syron is the President and Chief Executive Officer of Thermo Electron Corporation, a manufacturer of a broad range of biomedical and other products. Mr. Syron has served as a director of Thermo Electron Corporation since 1997. Mr. Syron is the former Chairman and Chief Executive Officer of the American Stock Exchange. From 1989 to 1994, he was the President and Chief Executive Officer of the Federal Reserve Bank of Boston. He is a member of the Compensation Committee and Executive Committee of the board of directors of John Hancock Mutual Life Insurance Company. Robert A. Tarr, Jr. has been a John Hancock Mutual Life Insurance Company director since 1996. Mr. Tarr is the former President, Chief Executive Officer and Chief Operating Officer of Harcourt General, Inc. (formerly General Cinema Corporation) and the Neiman Marcus Group, Inc. He is a director of Barney's New York, Inc., a retailer of men's and women's apparel and accessories, Hannaford Bros. Co., a multi-regional food retailer, Houghton Mifflin Company and Wesco International, Inc., a distributor of electrical products. He is a member of the Committee of Finance and a member of the Audit Committee of the board of directors of John Hancock Mutual Life Insurance Company. Diane M. Capstaff has been Executive Vice President of John Hancock Mutual Life Insurance Company since 1991. Kathleen M. Graveline has been Executive Vice President of John Hancock Mutual Life Insurance Company since 1999. From 1996 through 1999, she was Senior Vice President, Retail Sector, of John Hancock Mutual Life Insurance Company. Thomas E. Moloney has been Chief Financial Officer of John Hancock Mutual Life Insurance Company and John Hancock Subsidiaries, Inc. since 1992. He is the Chairman and a director of John Hancock Management Company, John Hancock Reassurance Co., Ltd. and John Hancock Signature Services. He is a director of The Berkeley Financial Group, John Hancock Realty Services Corp., John Hancock Subsidiaries, Inc., The Maritime Life Assurance Company and John Hancock Canadian Holdings Limited. Richard S. Scipione has been General Counsel of John Hancock Mutual Life Insurance Company since 1987. He is a director of Signator Investors, Inc. and The Berkeley Financial Group. Composition of Board and Committees The business of John Hancock Financial Services, Inc. will be managed under the direction of its board of directors. It is intended that the board of directors will initially be composed of 16 directors, 13 of whom will be independent directors. John Hancock Financial Services, Inc. will also establish the following standing committees: 145 Compensation Committee The Compensation Committee of John Hancock Financial Services, Inc. will be chosen by the board of directors from those members who are not officers of John Hancock Financial Services, Inc. The Compensation Committee will make recommendations to the board of directors regarding salaries and any supplemental employee compensation of the executive officers and act upon management's recommendations for salary and supplemental employee compensation for all other employees. The Compensation Committee will also act upon management's recommendations which require director action with respect to all employee pension and welfare benefit plans. The Audit Committee The Audit Committee of John Hancock Financial Services, Inc. will be chosen by the board of directors from those members who are not officers of John Hancock Financial Services, Inc. The Audit Committee will recommend to the board of directors the firm of independent certified public accountants to annually audit the books and records. The Audit Committee will review and report on the activities of the independent certified public accountants to the board of directors and review and advise the board of directors as to the adequacy of John Hancock Financial Services, Inc.'s system of internal accounting controls. Other Committees The board of directors may form such other committees of the board of directors as it deems appropriate. Compensation of Directors The compensation for our directors who are not officers or employees of John Hancock Mutual Life Insurance company consists of a $40,000 annual retainer plus a $1,500 attendance fee for each regular or special board meeting attended. These directors are also compensated for participation on committees. We anticipate that, following the reorganization, the directors of John Hancock Life Insurance Company will be, for the most part, identical to the directors of John Hancock Financial Services, Inc. However, at least one director of John Hancock Life Insurance Company will be an individual who is not a director or officer of John Hancock Financial Services, Inc. We do not currently plan to pay additional compensation to directors for also participating on the board of directors of John Hancock Financial Services, Inc. Compensation of Named Executive Officers The following table describes the compensation paid to our Chief Executive Officer and the four other most highly compensated executive officers for services rendered during the fiscal year ended December 31, 1998 (the "Named Executive Officers"). Summary Compensation Table
Long-Term Annual Compensation Compensation --------------------- ------------ Long-Term All Other Incentive Compensation Name and Position Year Salary Bonus (1) Plan (2) (3) - -------------------------- ---- ---------- ---------- ------------ ------------ S.L. Brown................ 1998 $1,000,000 $1,000,000 $899,941 $3,600 Chairman of the Board and Chief Executive Officer D.F. D'Alessandro......... 1998 600,000 420,000 554,605 3,600 President and Chief Operations Officer F.L. Aborn................ 1998 518,000 310,800 503,946 3,600 Vice Chairman of the Board and Chief Investment Officer T.E. Moloney.............. 1998 412,000 206,000 358,807 3,600 Chief Financial Officer R.S. Scipione............. 1998 355,000 177,500 311,627 3,600 General Counsel
- -------- (1) The amount in this column represents the annual incentive paid in 1999 for the prior performance year of 1998. 146 (2) This column reports long-term incentive awards received or deferred in 1998 for prior performance cycles. (3) The amounts in this column include employer contributions under the Investment Incentive Plan. This payment makes up the company match on base salary over the ERISA limitations as well as the match on deferred base salary. In 1998, there was a 4% company match on base salary over the 1998 ERISA limitations of $160,000 as well as the 4% match on deferred base salary. Total company match contributions for 1998 are capped at $10,000. Annual Incentive Compensation Plan Under the Incentive Compensation Plan for Employees ("ICP"), cash awards will be payable to eligible employees upon the achievement of corporate performance objectives established by the Directors Compensation Committee. Such cash awards will be stated as a percentage of the base salary payable to the eligible employee, with the range of targets for executive officers being from 55% to 100% of the officer's base salary. Actual amounts payable will be adjusted up or down for performance at or above targeted levels of performance. Amounts, if any, payable under the ICP are paid during the first quarter of the fiscal year immediately following the performance year. Generally, an eligible employee must be employed on the last day of the fiscal year in order to receive a payment under the ICP in respect of such fiscal year. However, in the event of an executive's death, disability or retirement, a pro-rated amount may be payable in accordance with administrative guidelines established by the Compensation Committee. Long Term Incentive Plan Members of the Policy Committee, each Senior Vice President or Vice President and such other Senior Officers of John Hancock Mutual Life Insurance Company, and officers of a subsidiary as may be selected by the committee responsible for administering the plan, are participants of the Long-Term Incentive Plan for Senior Executives (the "LTIP"). The LTIP operates during successive three-year periods (the "Performance Cycle"). At the beginning of the Performance Cycle each participant is awarded a number of Equity Rights determined by dividing his or her Target Award by 100. The Target Award is a percentage of salary established for each participant, with the range of Target Awards for executive officers ranging from 70% to 350%. Under the LTIP, the Compensation Committee of the board of directors establishes corporate performance objectives. If these objectives are achieved at target levels, each of the Equity Rights is worth $100, but such amount may be adjusted up (to a maximum of $300 per Equity Rights) or down depending on whether the goals have been exceeded or have not been met. For Messrs. Brown, Aborn, D'Alessandro and Moloney, beginning with the 1999 Performance Cycle, Equity Rights vest in one installment after five years. For most other participants, the Equity Rights vest in three installments, one-third at the end of the Performance Cycle and one-third on January 1 of each of the following two years. As Equity Rights vest, cash payments equal to the value of the Equity Rights will be made to participants unless a participant irrevocably elects to defer the payment until retirement or more than five years from the date of election. In the event of a participant's death, all Equity Rights for completed Performance Cycles which have not previously vested will vest and a pro rata share of the Equity Rights will vest based on the elapsed portion of any Performance Cycle in progress. In the event of a participant's retirement or disability, all Equity Rights for completed Performance Cycles which have not previously vested will vest under the normal vesting schedule and a pro rata share of the Equity Rights will vest based on the elapsed portion of any current Performance Cycle. For Messrs. Brown and Aborn, beginning with the 1999 Performance Cycle, in the event of normal retirement, all Equity Rights for completed Performance Cycles which have not previously vested shall vest under the normal vesting schedule and a full share of the Equity Rights for the current Performance Cycle will vest in one installment after five years. Additionally, participants may be entitled to hardship distributions if, in the opinion of the Compensation Committee, the participant has incurred a financial hardship. Participants who terminate employment, other than by retirement, disability or death, shall forfeit all non-vested Equity Rights. 147 The table immediately below presents the number of equity rights granted to each Named Executive Officer during 1998 and their potential value contingent upon performance over the 1998-2000 performance period. For purposes of section 162(m) of the Internal Revenue Code, the subsequent table presents the number of equity rights granted to each Named Executive Officer during 1999 and their potential value contingent upon performance over the 1999-2001 performance period. Long-Term Incentive Plan Table (Cycle 1998)
Estimated Future Payouts Number of Performance ------------------------- Name Equity Rights Period Target Maximum - ------------------------------------------- ------------- ----------- ------------ ------------ S.L. Brown................................. 10,000 98-99-00 $ 1,000,000 $ 3,000,000 D.F. D'Alessandro.......................... 6,000 98-99-00 600,000 1,800,000 F.L. Aborn................................. 4,403 98-99-00 440,300 1,320,900 T.E. Moloney............................... 2,884 98-99-00 288,400 865,200 R.S. Scipione.............................. 2,485 98-99-00 248,500 745,500 Long-Term Incentive Plan Table (Cycle 1999-2001) Estimated Future Payouts Number of Performance ------------------------- Name Equity Rights Period Target Maximum - ------------------------------------------- ------------- ----------- ------------ ------------ S.L. Brown................................. 33,000 99-00-01 $ 3,300,000 $ 9,900,000 D.F. D'Alessandro.......................... 20,000 99-00-01 2,000,000 6,000,000 F.L. Aborn................................. 10,360 99-00-01 1,036,000 3,108,000 T.E. Moloney............................... 8,240 99-00-01 824,000 2,472,000 R.S. Scipione.............................. 2,485 99-00-01 248,500 745,500
1999 Long-Term Stock Incentive Plan Under the 1999 Long Term Stock Incentive Plan, a committee responsible for administering the 1999 Long Term Stock Incentive Plan (the "Committee"), may from time to time grant eligible employees qualified or nonqualified stock options to purchase shares of common stock having an exercise price at least equal to the fair market value of a share of common stock on the effective date of the grant of such stock option. The Committee may also award employees the right to receive shares, a cash equivalent payment, or a combination of both which may be subject to forfeitability contingencies based on continued employment with us or on meeting performance criteria or both (the "Stock Awards"). The Long Term Stock Incentive Plan further provides that the Committee must consist of two or more members each of whom must be a "non- employee director" within the meaning of Rule 16b-3, as promulgated pursuant to the Exchange Act and Section 162(m) of the Code. The maximum number of shares of common stock that may be issued under the 1999 Long Term Stock Incentive Plan is 5.0% of the total number of shares of common stock that are outstanding following the initial public offering of common stock. The shares of common stock underlying any awards which are forfeited, canceled, reacquired by us, satisfied without the issuance of common stock or otherwise terminated (other than by exercise) shall be added back to the shares of common stock available for issuance under the 1999 Long Term Stock Incentive Plan. The maximum number of shares that may be granted as Stock Awards shall be 1.0% of total shares outstanding and the maximum number of shares available for use as incentive stock options shall be 4.0% of total shares outstanding. Additionally, the maximum number of shares that may be awarded to any participant shall be 1% of total shares outstanding. If there is a stock split, stock dividend, recapitalization or other relevant change affecting the outstanding shares of common stock, appropriate adjustments will be made in the number and kind of shares available for award under the 1999 Long Term Stock Incentive Plan in the future and the number and kind of shares as to which outstanding shares shall be exercisable. 148 The Committee may amend the 1999 Long Term Stock Incentive Plan, except that no amendment without the approval of our stockholders shall be made which would increase the number of shares available for issuance under the 1999 Long Term Stock Incentive Plan or cause the Long Term 1999 Stock Incentive Plan not to comply with Rule 16b-3 of the Exchange Act or Section 162(m) of the Code. The 1999 Long Term Stock Incentive Plan shall be effective as of the date approved by the board. No awards may be made under the 1999 Long Term Stock Incentive Plan after ten years from the date of approval or earlier termination of the 1999 Long Term Stock Incentive Plan by the board. In the event of a change in control, the Committee may provide for the acceleration of any time period relating to the exercise or realization of the award, provide for the purchase of the award upon the participant's request for an amount of cash or other property that could have been received upon the exercise or realization of the award had the award been currently exercisable or payable, adjust the terms of the award, cause the award to be assumed, or new rights substituted therefor, by another entity, or make such other provisions as the Committee may consider to be equitable and in our best interests. Under the Plan of Reorganization until one year after completion of the offering, we may not award any stock options or stock grants to any of our executive officers or directors. Federal Income Tax Aspects The following is a brief summary of the Federal income tax consequences of awards under the Long Term Stock Incentive Plan based on the Federal income tax laws in effect on the date hereof. This summary is not intended to be exhaustive and does not describe state or local tax consequences. No taxable income is realized by the grantee upon the grant or exercise of an Incentive Stock Option (an "ISO"). If a grantee does not sell the stock received upon the exercise of an ISO ("ISO Shares") for at least two years from the date of grant and one year from the date of exercise, when the ISO Shares are sold any gain or loss realized will be treated as long-term capital gain or loss. In such circumstances, no deduction will be allowed to the grantee's employer for Federal income tax purposes. If ISO Shares are disposed of prior to the expiration of the holding periods described above, the grantee generally will realize ordinary income at that time equal to the lesser of the excess of the fair market value of the shares at exercise over the price paid for such ISO Shares or the actual gain on the disposition. The grantee's employer will generally be entitled to deduct any such recognized amount. Any further gain or loss realized by the grantee will be taxed as short-term or long-term capital gain or loss. Subject to certain exceptions for disability or death, if an ISO is exercised more than three months following the termination of the grantee's employment, the ISO will generally be taxed as a nonqualified stock option. No income is realized by the grantee at the time a nonqualified stock option is granted. Generally upon exercise of a nonqualified stock option, the grantee will realize ordinary income in an amount equal to the difference between the price paid for the shares and the fair market value of the shares on the date of exercise. The grantee's employer will generally be entitled to a tax deduction in the same amount and at the time as the grantee recognizes ordinary income. Any appreciation or depreciation after the date of exercise will be treated as either short-term or long-term capital gain or loss, depending upon the length of time that the grantee has held the shares. Employment Continuation Agreements and Retention Arrangement Employment Continuation Agreements. We have entered into agreements with certain of our executive officers, including Messrs. Brown, Aborn, D'Alessandro, and Moloney, that provide for each executive's continued employment with us for a period of three years following the occurrence of a change of control. A change of control generally means a merger or other change in corporate structure after which the majority of our board members is no longer on our board or a majority of our shareholders are no longer shareholders. Under 149 these agreements, each eligible executive's terms and conditions of employment, including his rate of base salary, annual bonus opportunity and his title, position, duties and responsibilities, are not to be modified in a manner adverse to the executive following the change of control. If an eligible executive's employment is terminated by us within three years of a change of control without cause, or is terminated by the executive for good reason, we will provide the executive with certain benefits, including severance in an amount equal to three times the sum of the executive's annual Base Salary and target annual bonus amount. Cause is generally defined as the occurrence of one or more acts of intentional and willful misconduct that has an adverse effect on us. Good reason generally means the occurrence of one or more events that have an adverse effect on the executive's terms and conditions of employment, including a reduction in the executive's base salary or annual bonus opportunity, a material adverse change in the executive's duties and responsibilities, and the relocation of the executive's principal place of employment to a location more than 50 miles away from his prior place of employment. Additionally, if such a termination of employment occurs prior to the fourth calendar year beginning after the first grant made to the executive following an underwritten public offering of stock options, performance shares or any similar stock based awards, the severance amount will also include three times the long term incentive award granted to the executive with respect to most recent performance period commencing prior to the change of control. The severance amounts will also be payable if an executive's employment is terminated after the occurrence of certain enumerated events that are a prelude to a change of control, e.g., the commencement of a tender offer or a proxy contest or the signing of a merger agreement, and a change of control occurs within two years thereafter. The agreements also ensure that an executive who receives severance benefits will also receive various benefits and payments otherwise earned by or owing to the executive for his prior service. Such an executive will receive a pro- rated target bonus for the then current year, and pro-rated long term incentive amounts in respect of performance periods then in effect. Except as noted below, each such executive's retirement benefits will be calculated based on the service (but not the age) the executive would have attained or completed had the executive continued in our employ until the earlier of (1) the date the executive attains age 65 or (2) the third anniversary of his termination. In the event he becomes entitled to receive severance benefits under his agreement or if his employment terminates more than three years after a change of control, but under circumstances under which he would have been entitled to severance were the agreement then still in effect, Mr. D'Alessandro will be deemed to have worked until the earliest age at which he could retire and immediately commence receipt of his retirement benefits without actuarial reduction for early commencement. We will also make additional payments to any eligible executive who incurs any excise taxes in respect of the benefits and other payments provided to him under the agreement or otherwise on account of the change of control. The payments will be in an amount such that, after taking into account all applicable Federal, state and local taxes, the executive is able to retain an amount equal to the excise taxes that are imposed without regard to these additional payments. Retention Arrangement. In 1998, we established a special retention program for Mr. D'Alessandro to induce him to remain in our employ for the five calendar years ending December 31, 2002. The retention award was initially valued at two million dollars, or $400,000 per year of service during the retention period. This initial amount was treated as invested in surplus units. The value of these surplus units will be payable to Mr. D'Alessandro if he is still employed at the end of this five-year period. The value of the surplus units will also be paid if Mr. D'Alessandro's employment terminates prior to December 31, 2002 due to his death or disability or in certain circumstances following a change of control. 150 Retirement Plan The following table shows the estimated annual pension benefits payable to a covered participant at normal retirement age based on the final pay formula contained in our Pension Plan, a qualified defined-benefit plan. The benefits also include any pension amounts provided under our Non-Qualified Pension Plan due to benefit limitations imposed by ERISA. Pension Plan Table
Final Average Years of Plan Participation - ------------------------------------------------------------------------------- Pay 15 20 25 30 35 40 - ------------------------------------------------------------------------------- $ 300,000 $ 79,171 $105,562 $ 131,953 $ 158,343 $ 166,260 $ 174,178 - ------------------------------------------------------------------------------- $ 350,000 $ 92,671 $123,562 $ 154,453 $ 185,343 $ 194,610 $ 204,878 - ------------------------------------------------------------------------------- $ 400,000 $106,171 $141,562 $ 176,953 $ 212,343 $ 222,960 $ 233,578 - ------------------------------------------------------------------------------- $ 450,000 $119,671 $159,562 $ 199,453 $ 239,343 $ 251,310 $ 263,278 - ------------------------------------------------------------------------------- $ 500,000 $133,171 $177,562 $ 221,953 $ 266,343 $ 279,660 $ 292,978 - ------------------------------------------------------------------------------- $ 550,000 $146,671 $195,562 $ 244,453 $ 293,343 $ 308,010 $ 322,678 - ------------------------------------------------------------------------------- $ 600,000 $160,171 $213,562 $ 266,953 $ 320,343 $ 336,360 $ 352,378 - ------------------------------------------------------------------------------- $ 650,000 $173,671 $231,562 $ 289,453 $ 347,343 $ 364,710 $ 382,078 - ------------------------------------------------------------------------------- $ 700,000 $187,171 $249,562 $ 311,953 $ 374,343 $ 393,060 $ 411,778 - ------------------------------------------------------------------------------- $ 750,000 $200,671 $267,562 $ 334,453 $ 401,343 $ 421,410 $ 441,478 - ------------------------------------------------------------------------------- $ 800,000 $214,171 $285,562 $ 356,953 $ 438,343 $ 449,760 $ 471,178 - ------------------------------------------------------------------------------- $ 900,000 $241,171 $321,562 $ 401,953 $ 482,343 $ 506,460 $ 530,578 - ------------------------------------------------------------------------------- $1,000,000 $268,171 $357,562 $ 446,953 $ 536,343 $ 563,160 $ 589,978 - ------------------------------------------------------------------------------- $1,100,000 $295,171 $393,562 $ 491,953 $ 590,343 $ 619,860 $ 649,378 - ------------------------------------------------------------------------------- $1,200,000 $322,171 $429,562 $ 536,953 $ 644,343 $ 676,560 $ 708,778 - ------------------------------------------------------------------------------- $1,300,000 $349,171 $465,562 $ 581,953 $ 698,343 $ 733,260 $ 768,178 - ------------------------------------------------------------------------------- $1,400,000 $376,171 $501,562 $ 626,953 $ 752,343 $ 789,960 $ 827,578 - ------------------------------------------------------------------------------- $1,500,000 $403,171 $537,562 $ 671,953 $ 806,343 $ 846,660 $ 886,978 - ------------------------------------------------------------------------------- $1,600,000 $430,171 $573,562 $ 716,953 $ 860,343 $ 903,360 $ 946,378 - ------------------------------------------------------------------------------- $1,700,000 $457,171 $609,562 $ 761,953 $ 914,343 $ 960,060 $1,005,778 - ------------------------------------------------------------------------------- $1,900,000 $511,171 $681,562 $ 851,953 $1,022,343 $1,073,460 $1,124,578 - ------------------------------------------------------------------------------- $2,100,000 $565,171 $753,562 $ 941,953 $1,130,343 $1,186,860 $1,247,378 - ------------------------------------------------------------------------------- $2,300,000 $619,171 $825,562 $1,031,953 $1,238,343 $1,300,260 $1,370,178
The benefits shown in the above table are payable in the form of a straight life annuity. Benefits payable under the Pension Plan are not subject to offset for Social Security benefits. Compensation taken into account under the Pension Plan is the average monthly compensation paid to a participant during the consecutive 60-month period over the most recent 120-month period that produces the highest average compensation. For this purpose, compensation includes the total of base salary and bonus. 151 REGULATION General Our business is subject to extensive regulation at both the state and Federal level, including regulation under state insurance and Federal and state securities laws. State Insurance Regulation Our insurance subsidiaries are subject to supervision and regulation by the insurance authorities in each jurisdiction in which they transact business. Currently, we are licensed to transact business in all fifty states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands, and 12 Canadian provinces, and therefore are subject to regulation in all these jurisdictions. Most states have laws and regulations governing such issues as: what lines of business a company may engage in; underwriting practices, including a company's ability to request results of applicants' genetic tests; what premium rates may be charged in various lines of business; what products we may sell; mandating certain insurance benefits and policy forms; minimum rates for accumulation of cash values and maximum rates for policy loans; licensing of insurance companies and agents; advertising and marketing practices; statutory accounting and reporting requirements; reserve requirements and solvency standards; admitted statutory assets; the appropriate mix of investments; dividend payments; transactions with affiliates; and acquisitions of control. State insurance departments periodically review the business and operations of an insurance company by examining its financial condition and how its agents sell its products. Our insurance subsidiaries are also required to file various reports relating to their financial condition, including detailed annual financial statements. This is required in each jurisdiction where an insurance subsidiary is licensed. State insurance regulatory authorities and other state law enforcement agencies and attorneys general from time to time make inquiries concerning whether our insurance subsidiaries are in compliance with the regulations covering their businesses. We try to respond to such inquiries in an appropriate way and to take corrective action if warranted. The Massachusetts Division of Insurance is in the process of conducting a routine regulatory examination of John Hancock Mutual Life Insurance Company's financial statements for the years 1993 through 1997, and of the market conduct practices of John Hancock Mutual Life Insurance Company and John Hancock Variable Life Insurance Company. In addition, the Arizona, New Jersey and Vermont insurance departments have ongoing market conduct examinations involving John Hancock Mutual Life Insurance Company. We do not believe that the potential findings of these examinations will have a material impact on our business, financial condition or results of operations. State insurance regulators and the National Association of Insurance Commissioners are continually re-examining existing laws and regulations. Among other things, these laws and regulations may focus on insurance company investments and solvency issues, risk-adjusted capital guidelines, interpretations of existing laws, the development of new laws, the implementation of non-statutory guidelines and the circumstances under which dividends may be paid. For example, the National Association of Insurance Commissioners has recently promulgated proposed changes to statutory accounting standards. See "Risk Factors--The National Association of Insurance Commissioners' codification of statutory accounting practices may adversely affect the statutory surplus of John Hancock Life Insurance Company." These initiatives may be adopted by the various states in which we are licensed, but the ultimate content and timing of any statutes and regulations adopted by the states cannot be determined at this time. It is impossible to predict the future impact of changing state and federal regulations on our business, and there can be no assurance that existing or future insurance-related laws and regulations will not become more restrictive. 152 Regulation Governing Potential Acquisitions of Control After the reorganization, we will continue to be subject to regulation under the insurance holding company statutes of the states in which our insurance subsidiaries are organized, principally Massachusetts, which will be the state of domicile of John Hancock Life Insurance Company. The Massachusetts insurance law contains provisions which, in general, provide that the acquisition or change of "control" of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Massachusetts Commissioner of Insurance. In general, a presumption of "control" arises from the ownership, control, possession with the power to vote or possession of proxies with respect to, 10% or more of the voting securities of an insurer or of a person that controls an insurer. A person seeking to acquire control, directly or indirectly, of a Massachusetts insurance company or of any person controlling a Massachusetts insurance company must file an application for approval of the acquisition of control with the Massachusetts Commissioner of Insurance and obtain the approval of the Massachusetts Commissioner of Insurance before consummating the acquisition. In addition, we anticipate that following the reorganization we may be subject to New York insurance law governing the activities of insurance holding companies. Other state holding company laws, specifically those of California and Delaware, apply to us as well because we have insurance subsidiaries organized in those states. Accordingly, the direct or indirect acquisition of control of John Hancock Life Insurance Company will be subject to the prior approval of the California and Delaware Commissioners of Insurance and may also be subject to the prior approval of the New York Superintendent of Insurance. In addition to the restrictions under applicable insurance holding company statutes, each of the Plan of Reorganization governing our reorganization and our restated certificate of incorporation prohibits: . any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock until two years after the effective date of the reorganization; and . without prior approval of our board of directors and the Massachusetts Commissioner of Insurance, any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock during the one year period following the two-year period described in the preceding paragraph. Under the Plan of Reorganization, the same restrictions apply to the common stock of John Hancock Life Insurance Company. There is an exception to the foregoing prohibitions for acquisitions by a person that becomes a beneficial owner of 10% or more of our common stock as a result of our issuance of such common stock to such person as consideration in an acquisition of another entity that was initiated by us by authority of our board of directors. Any such acquisition initiated by us by authority of our board of directors would require the approval of the Massachusetts Commissioner of Insurance and the Commissioners of Insurance of California and Delaware, and, potentially, the New York Superintendent of Insurance. If any person acquires or offers to acquire 10% or more of the outstanding shares of our common stock in violation of our Plan of Reorganization, we and the Massachusetts Commissioner of Insurance would be entitled to injunctive relief. By virtue of these provisions of the Plan of Reorganization and our restated certificate of incorporation, John Hancock Financial Services, Inc. may not be subject to an acquisition by another company during the two years following the effective date of the reorganization and may only be subject to acquisition in the third year following the effective date of the reorganization with the approval of our board of directors and the Massachusetts Commissioner of Insurance. All the restrictions described above may deter, delay or prevent a future acquisition of control, including transactions that could be perceived as advantageous to our stockholders. See "Risk Factors--There are a number of provisions of our Plan of Reorganization, our restated certificate of incorporation and by-laws, laws applicable to us, agreements that we have entered into with our senior management and our stockholder rights plan that will prevent or discourage takeovers and business combinations that our stockholders might otherwise consider to be in their best interest." 153 Regulation of Dividends and Other Payments from Insurance Subsidiaries John Hancock Financial Services, Inc. is a holding company and, after the reorganization, its assets will consist initially of the outstanding capital stock of John Hancock Life Insurance Company and a portion of the net proceeds of the offering. As an insurance holding company, we will depend primarily on dividends from John Hancock Life Insurance Company to pay dividends to our stockholders (other than dividends during the first year following the effective date of the reorganization) and pay operating expenses. Any inability of John Hancock Life Insurance Company to pay dividends to us in the future in an amount sufficient for us to pay dividends to our stockholders and meet our cash obligations may materially adversely affect the market price of our common stock and our business, financial condition or results of operations. The Massachusetts insurance law limits how and when John Hancock Life Insurance Company can pay dividends to us. There are a number of provisions of the Massachusetts insurance law that govern payment of shareholder dividends and other distributions by stock issuance companies. Under the Massachusetts insurance law, no insurer may pay any shareholder dividend from any source other than statutory unassigned funds without the prior approval of the Massachusetts Commission of Insurance. The Massachusetts insurance holding company act requires that a report be given to the Massachusetts Commissioner of Insurance no later than five days following declaration, and at least ten days' prior to payment, of any dividend or distribution by a Massachusetts insurance company. Further, this act provides that no extraordinary dividend may be paid without thirty days' prior written notice to the Massachusetts Commissioner of Insurance, and only if the Massachusetts Commissioner of Insurance has not disapproved, or has approved, the payment within the thirty day notice period. An extraordinary dividend is any dividend or distribution of cash or other property whose fair market value, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (1) 10% of an insurance company's surplus as regards policyholders as of the preceding December 31, or (2) a life insurance company's statutory net gain from operations for the twelve months ending on the preceding December 31. John Hancock Mutual Life Insurance Company's statutory net gain from operations for the year ended December 31, 1998 was $607.1 million and as of December 31, 1998 its statutory surplus was $3,388.7 million. Following the reorganization, John Hancock Life Insurance Company may be commercially domiciled in New York and, if so, dividend payments may also be subject to New York's insurance holding company act as well as Massachusetts law. Surplus and Capital Requirements Insurance regulators have the discretionary authority, in connection with the ongoing licensing of our insurance subsidiaries, to limit or prohibit the ability to issue new policies if, in the regulators' judgment, the insurer is not maintaining a minimum amount of surplus or is in hazardous financial condition. Limits may also be established on the ability to issue new life insurance policies and annuity contracts above an amount based upon the face amount and premiums of policies of a similar type issued in the prior year. Risk-Based Capital The National Association of Insurance Commissioners has established risk- based capital standards for life insurance companies as well as a model act to apply such standards at the state level. The model act provides that life insurance companies must submit an annual risk-based capital report to state regulators reporting their risk-based capital based on four categories of risk: asset risk, insurance risk, interest rate risk and business risk. The formula is intended to be used by insurance regulators as an early warning tool to identify possible weakly capitalized companies for purposes of initiating further regulatory action. If an insurer's risk-based capital falls below specified levels, the insurer would be subject to different degrees of regulatory action depending upon the level. These actions range from requiring the insurer to propose actions to correct the risk-based capital deficiency to placing the insurer under regulatory control. John Hancock Mutual Life Insurance Company exceeded the level of risk-based capital that would require it to propose actions to correct a deficiency by 156% as of December 31, 1998. 154 Guaranty Funds All fifty states of the United States, the District of Columbia and Puerto Rico have insurance laws requiring companies licensed to do life or health insurance business within those jurisdictions to participate as members of the state's life and health insurance guaranty associations. These associations are organized to pay contractual obligations under life and health insurance policies and annuity contracts issued by impaired or insolvent insurance companies. To meet these obligations, these associations levy assessments on all member insurers based on the proportionate share of the premiums written by each member in the lines of business in which the impaired or insolvent insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets, usually over a period of years. For the six months ended June 30, 1999 and the years ended December 31, 1998, 1997 and 1996, we paid (received refunds of) $(0.2) million, $6.9 million, $7.4 million, and $9.3 million, respectively, in assessments pursuant to state guaranty association laws. While the amount of future assessments cannot be accurately predicted, we believe that assessments with respect to other pending insurance company impairments and insolvencies will not be material to our business, financial condition or results of operations. Statutory Investment Valuation Reserves Life insurance companies are required to establish an asset valuation reserve ("AVR") consisting of two components: (i) a "default component," which provides for future credit-related losses on fixed maturity investments, and (ii) an "equity component," which provides for losses on all types of equity investments, including equity securities and real estate. Insurers also are required to establish an interest maintenance reserve ("IMR") for net realized capital gains and losses on fixed maturity securities, net of tax, related to changes in interest rates. The IMR is required to be amortized into statutory earnings on a basis reflecting the remaining period to maturity of the fixed maturity securities sold. These reserves are required by state insurance regulatory authorities to be established as a liability on a life insurer's statutory financial statements, but do not affect our financial statements prepared in accordance with GAAP. Although future additions to AVR will reduce the future statutory capital and surplus of John Hancock Life Insurance Company, we do not believe that the impact under current regulations of such reserve requirements will materially affect the ability of John Hancock Life Insurance Company to increase its statutory capital and surplus and pay future dividends to John Hancock Financial Services, Inc. IRIS Ratios The National Association of Insurance Commissioners has developed a set of financial tests known as the Insurance Regulatory Information System ("IRIS") for early identification of companies which may require special attention by insurance regulators. Insurance companies submit data on an annual basis to the National Association of Insurance Commissioners. This data is used to calculate ratios covering various categories of financial data, with defined "usual ranges" for each category. IRIS consists of 12 key financial ratios for life insurance companies. An insurance company may fall out of the usual range with respect to one or more ratios because of specific transactions that are in themselves immaterial or eliminated at the consolidated level. Departure from the usual range on four or more of the ratios may lead to inquiries from individual states' insurance departments. During the five-year period ended December 31, 1998, John Hancock Mutual Life Insurance Company was outside one usual IRIS ratio range (real estate mortgage loans to total investment assets) on two occasions and has not been outside the usual IRIS ratio range with respect to any ratio during the past three years. Regulation of Investments Our insurance subsidiaries are subject to state laws and regulations that require diversification of their investment portfolios. Some of these laws and regulations also limit the amount of investments in specified investment categories, such as below investment grade fixed maturity securities, equity real estate, other equity investments and derivatives. Failure to comply with these laws and regulations would cause investments 155 exceeding regulatory limitations to be treated as nonadmitted assets for purposes of measuring statutory surplus, in some instances, requiring divestiture. State regulatory authorities from the domiciliary states of our insurance subsidiaries have not indicated any non-compliance with any such regulations. Valuation of Life Insurance Policies Model Regulation The National Association of Insurance Commissioners has adopted a revision to the Valuation of Life Insurance Policies Model Regulation (known as Revised XXX). This model regulation would establish new minimum statutory reserve requirements for certain individual life insurance policies written in the future. Before the new reserve standards can become effective, individual states must adopt the model regulation. If these reserve standards were adopted in their current form, companies selling certain individual life insurance products such as term life insurance with guaranteed premium periods and universal life insurance products with no-lapse guarantees would be required to redesign their products or hold increased reserves to be consistent with the new minimum standards with respect to policies issued after the effective date of the regulation. We cannot predict whether this model regulation will be adopted in Massachusetts or any other state and, if adopted, when it will become effective. However, it is likely that the industry will encourage the states to adopt the regulation with an effective date of January 1, 2000. New York State adopted a regulation similar to the model regulation in 1994, and is considering amending its regulation to be consistent with Revised XXX. Federal Insurance Initiatives and Litigation Although the Federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on our business. Current and proposed measures that may significantly affect the insurance business generally include limitations on anti-trust immunity, minimum solvency requirements, health care reform and the removal of barriers restricting banks from engaging in the insurance and mutual fund business. Several proposals to repeal or modify the Glass-Steagall Act and the Bank Holding Company Act have been made by members of Congress and the Clinton Administration. Currently, the Glass-Steagall Act limits the ability of banks to engage in certain aspects of securities-related businesses, and the Bank Holding Company Act restricts banks from being affiliated with insurance companies. On May 6, 1999 and July 1, 1999, the U.S. Senate and the U.S. House of Representatives, respectively, passed financial services modernization legislation (S. 900 and H.R. 10) which calls for a sweeping reform of the banking system that would permit affiliations between commercial banks, securities firms, insurance companies and, subject to certain significant limitations, other commercial enterprises. The stated purposes of these bills are to enhance competition in the financial services industry in order to foster innovation and efficiency, to encourage the availability of financial services to citizens of all economic circumstances and in all geographic areas, to provide necessary and appropriate protections for investors, and to enhance the competitiveness of U.S. financial service providers internationally. The legislation, if enacted, would remove the restrictions contained in the Glass-Steagall Act and the Bank Holding Company Act, thereby allowing qualified holding companies to control banks, securities firms, insurance companies and other financial firms. Conversely, securities firms, insurance companies and financial firms would be allowed to own or affiliate with a commercial bank. Under the new framework, the Federal Reserve would serve as an umbrella regulator to oversee the new financial holding company structure. Securities affiliates would be required to comply with all applicable federal securities laws, including registration and other requirements applicable to broker-dealers. The legislation also provides that insurance affiliates be subject to applicable state insurance regulations and supervision. It also would preserve the thrift charter and all existing thrift powers, but would prohibit the creation of a new unitary thrift holding company. None of these proposals has yet been enacted, and we cannot predict whether any of these proposals will be enacted. The ability of banks to increase their securities-related businesses or to affiliate with insurance companies, however, may materially and adversely affect all of our product lines by substantially increasing the number and financial strength of potential competitors. Moreover, the United States Supreme Court held in 1995 in NationsBank of North Carolina v. Variable Annuity Life Insurance Company that annuities are not insurance for purposes of the National Bank Act. In 156 addition, the Supreme Court also held in 1996 in Barnett Bank of Marion City v. Nelson that state laws prohibiting national banks from selling insurance in small-town locations are preempted by Federal law. The Office of the Comptroller of the Currency also adopted a ruling in November 1996 that presented a liberal interpretation of the preemption holding in Barnett Bank. At present, the extent to which banks can sell insurance and annuities without regulation by state insurance departments is being litigated in various courts in the United States. Although the effect of these recent developments on us and our competitors is uncertain, both the persistency of our existing products and our ability to sell new products may be materially impacted by these developments in the future. Tax Legislation Currently, under the Internal Revenue Code, holders of many life insurance and annuity products, including both traditional and variable products, are entitled to tax-favored treatment on these products. For example, income tax payable by policyholders on investment earnings under traditional and variable life insurance and annuity products which are owned by natural persons is deferred during the product's accumulation period and is payable, if at all, only when the insurance or annuity benefits are actually paid or to be paid. Also, for example, interest on loans up to $50,000 secured by the cash value of life insurance policies owned by businesses on key employees is eligible for deduction even though investment earnings during the accumulation period are tax-deferred. In the past, legislation has been proposed that would have curtailed the tax-favored treatment of some of our life insurance and annuity products. For example, in 1992, the Bush Administration proposed legislation that, had it been enacted, would have limited otherwise deductible interest payments for businesses that own life insurance policies on the lives of their employees. Similarly, in 1998, the Clinton Administration proposed legislation that, had it been enacted, would have caused transfers between separate accounts underlying tax-deferred annuity products to be taxable. The proposed legislation also contained other provisions unfavorable to our tax favored annuity products. None of these proposals was enacted, and no such proposals or similar proposals are currently under active consideration by Congress. The Clinton Administration has proposed tax law changes that would, if enacted, adversely affect our corporate owned and bank owned life insurance product offerings. If these or similar proposals directed at limiting the tax-favored treatment of life insurance policies or annuity contracts were enacted, market demand for such products would be adversely affected. Securities Laws Certain of our investment advisory activities are subject to federal and state securities laws and regulations. Our mutual funds are registered under the Securities Act of 1933, as amended (the "Securities Act"), and the Investment Company Act. All of our separate investment accounts that fund retail variable annuity contracts and retail variable life insurance products issued by us, other than those which fund private placement investment options that are exempt from registration or support fixed rate investment options that are also exempt from registration, are registered both under the Securities Act and the Investment Company Act. Institutional products such as group annuity contracts, guaranteed investment contracts and funding agreements are sold to tax qualified pension plans or are sold to other sophisticated investors as private "placements", and are exempt from registration under both acts. Some of our subsidiaries are registered as broker/dealers under the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"), and with the National Association of Securities Dealers, Inc., and a number are registered as investment advisers under the Investment Advisers Act of 1940. One subsidiary has filed an application for registration as a commodity pool operator under the Commodity Exchange Act. Our insurance companies or other subsidiaries also own or manage other investment vehicles that are exempt from registration under the Securities Act and the Investment Company Act but may be subject to other requirements of those laws, such as antifraud provisions and the terms of applicable exemptions. We are also subject to similar laws and regulations in the states and foreign countries in which we provide investment advisory services, offer the products described above or non-variable life and annuity products or conduct other securities and investment related activities. 157 Environmental Considerations As owners and operators of real property, we are subject to extensive federal, state and local environmental laws and regulations. Inherent in such ownership and operation is the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties. When deemed appropriate, we routinely conduct environmental assessments for real estate being acquired for investment and before taking title to property acquired through foreclosure or deed in lieu of foreclosure. Based on these environmental assessments and compliance with our internal environmental procedures, we believe that any costs associated with compliance with environmental laws and regulations or any remediation of such properties would not be material to our consolidated financial position. Furthermore, although we hold equity positions in subsidiaries and investments that could potentially be subject to environmental liabilities, we believe, based on our assessment of the business and properties of these companies and our level of involvement in the operation and management of such companies, that we would not be subject to any environmental liabilities with respect to these investments which would have a material adverse effect on our business, financial position or results of operations. ERISA Considerations Certain of our lines of business, including our management of employee benefit plan assets in our advisory capacity in separate accounts, are subject to the requirements of ERISA. In addition, the Small Business Job Protection Act, which we refer to as the SBJPA, offered insurers protection from potential litigation exposure prompted by the 1993 U.S. Supreme Court decision in John Hancock Mutual Life Insurance Company v. Harris Trust & Savings Bank, which we refer to as the Harris Trust Decision, in which the Court held that, with respect to a portion of the funds held under certain general account group annuity contracts, an insurer is subject to the fiduciary requirements of ERISA. The pertinent SBJPA provisions provide that insurers are protected from liability for breaches of fiduciary duties under ERISA for past actions with respect to their general account contracts. However, insurers remain subject to federal criminal law and liable for actions brought by the U.S. Secretary of Labor alleging breaches of fiduciary duties that also constitute a violation of federal or state criminal law. The SBJPA also provides that contracts issued from an insurer's general account on or before December 31, 1998, that are not guaranteed benefit policies, will not be subject to ERISA's fiduciary requirements if they meet the requirements of regulations to be issued by the United States Department of Labor. The SBJPA further provides that contracts issued from an insurer's general account after December 31, 1998, that are not guaranteed benefit policies will be subject to ERISA. In December 1997, the Department of Labor published proposed regulations pursuant to the SBJPA that provide, among other things, that if an employee benefit plan acquired an insurance policy (other than a guaranteed benefit policy) issued on or before December 31, 1998 that is supported by the assets of the insurer's general account, the plan's assets for purposes of ERISA will not be deemed to include any of the assets of the insurer's general account, provided that the requirements of the regulation are met. Accordingly, if those requirements are met, the insurer would not be subject to the fiduciary obligations of ERISA in connection with issuing such an insurance policy. These requirements include detailed disclosures to be made to the employee benefit plan and the requirement that the insurer must permit the policyholder to terminate the policy on 90 days' notice and receive without penalty, at the policyholder's option, either (1) the accumulated fund balance (which may be subject to market value adjustment) or (2) a book value payment of such amount in annual installments with interest. John Hancock Life Insurance Company cannot predict whether these regulations will be adopted in the form proposed. In the event the regulations are adopted in the form proposed and John Hancock Life Insurance Company elects to comply with the requirements set forth therein to secure the exemption provided by the regulations from the fiduciary obligations of ERISA, John Hancock Life Insurance Company's exposure to disintermediation risk could increase due to the termination options that it would be required to provide to policyholders. Since the regulations are only in proposed form and since there has been no final ruling in the Harris Trust litigation regarding whether John Hancock Mutual Life Insurance Company has violated ERISA, we are unable at this time to determine the effects of the decision. In the absence of relief pursuant to the regulations, the Harris Trust Decision could substantially increase administrative costs, may require the segregation of assets associated with non-guaranteed benefit policies allocated to the general 158 account, result in potential liability arising from the application of ERISA's fiduciary rules to ERISA plan contracts, or adversely affect future business. With respect to employee welfare benefit plans subject to ERISA, the Congress periodically has considered amendments to the law's Federal preemption provision, which would expose John Hancock Life Insurance Company, and the insurance industry generally, to state law causes of action, and accompanying extra-contractual (e.g., punitive) damages in lawsuits involving, for example, group life and group disability claims. To date, all such amendments to ERISA have been defeated. 159 OWNERSHIP OF COMMON STOCK The following table sets forth certain information regarding the beneficial ownership of our common stock as of the effective date of the reorganization by: (1) each of our directors and Named Executive Officers (as defined in "Management") and (2) all of our directors and executive officers as a group. The number of shares of our common stock beneficially owned by each director and executive officer and all directors and executive officers as a group is based upon the number of shares that we estimate each director and executive officer, and persons and entities affiliated with each director and executive officer, will receive in their capacity as eligible policyholders under the Plan of Reorganization. Except as otherwise indicated below, each of the persons named in the table will have sole voting and investment power with respect to the shares beneficially owned by such person as set forth opposite such person's name.
Number of Shares to Be Name Beneficially Owned(1) ---- ---------------------- Stephen L. Brown....................................... * Foster L. Aborn........................................ * David F. D'Alessandro.................................. * Samuel W. Bodman....................................... * Joan T. Bok............................................ * I. MacAllister Booth................................... * Wayne A. Budd.......................................... * John M. Connors, Jr.................................... * Robert E. Fast, Esq.................................... * Dr. Kathleen Foley Feldstein........................... * Nelson S. Gifford...................................... * Michael C. Hawley...................................... * Edward H. Linde........................................ * E. James Morton........................................ * Richard F. Syron....................................... * Robert J. Tarr, Jr..................................... * Diane M. Capstaff...................................... * Kathleen M. Graveline.................................. * Thomas E. Moloney...................................... * Richard S. Scipione.................................... * All directors and executive officers as a group (20 persons).............................................. *
- -------- * Less than 1% of the number of shares of our common stock expected to be outstanding on the effective date of the reorganization. (1) Based on an estimated allocation of shares based upon policy ownership records as of August 31, 1999. We believe no persons will beneficially own more than 5% of our outstanding shares of common stock as of the effective date of the reorganization. 160 DESCRIPTION OF CAPITAL STOCK AND CHANGE-OF-CONTROL RELATED PROVISIONS OF OUR PLAN OF REORGANIZATION, RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS, INSURANCE HOLDING COMPANY LAWS AND OUR STOCKHOLDER RIGHTS PLAN The authorized capital stock of John Hancock Financial Services, Inc. consists of 2 billion shares of common stock and 500 million shares of preferred stock. Common Stock Holders of common stock are entitled to receive such dividends as may from time to time be declared by our board of directors out of funds legally available therefor. See "Stockholder Dividend Policy". Holders of common stock are entitled to one vote per share on all matters on which the holders of common stock are entitled to vote and do not have any cumulative voting rights. Holders of common stock have no preemptive, conversion, redemption or sinking fund rights. In the event of a liquidation, dissolution or winding up of John Hancock Financial Services, Inc., holders of common stock are entitled to share equally and ratably in the assets of John Hancock Financial Services, Inc., if any, remaining after the payment of all liabilities of John Hancock Financial Services, Inc. and the liquidation preference of any outstanding class or series of preferred stock. The outstanding shares of common stock are, and the shares of common stock offered by John Hancock Financial Services, Inc. hereby, when issued, will be fully paid and nonassessable. The rights and privileges of holders of common stock are subject to any series of preferred stock that John Hancock Financial Services, Inc. may issue in the future, as described below. Preferred Stock The board of directors has the authority to issue preferred stock in one or more series and to fix the number of shares constituting any such series and the voting rights, designations, preferences and qualifications, limitations and restrictions of the shares constituting any series, without any further vote or action by our stockholders. The issuance of preferred stock by the board of directors could adversely affect the rights of holders of common stock. We have authorized . shares of Series A Junior Participating Preferred Stock for issuance in connection with the stockholder rights plan. See "-- Stockholder Rights Plan". Change-of-Control Related Provisions in Our Plan of Reorganization, Restated Certificate of Incorporation and By-Laws, and Delaware Law Plan of Reorganization and Restated Certificate of Incorporation. The Plan of Reorganization and our restated certificate of incorporation each prohibits: . any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock until two years after the effective date of the reorganization; and . without prior approval of our board of directors and the Massachusetts Commissioner of Insurance, any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock during the one year period following the two-year period described above. Under the Plan of Reorganization, the same restrictions apply to the stock of John Hancock Life Insurance Company. There is an exception to the foregoing prohibitions for acquisitions by a person that becomes a beneficial owner of 10% or more of our common stock as a result of our issuance of such common stock to such person as consideration in an acquisition of another entity that was initiated by us by authority of our board of directors. Any such acquisition initiated by us by authority of our board of directors would require the approval of the 161 Massachusetts Commissioner of Insurance and the Commissioners of Insurance of California and Delaware, and, potentially, the New York Superintendent of Insurance. If any person acquires or offers to acquire 10% or more of the outstanding shares of our common stock in violation of our Plan of Reorganization, we and the Massachusetts Commissioner of Insurance would be entitled to injunctive relief. By virtue of these provisions of the Plan of Reorganization and our restated certificate of incorporation, John Hancock Financial Services, Inc. may not be subject to an acquisition by another company during the two years following the effective date of the reorganization and may only be subject to acquisition in the third year following the effective date of the reorganization with the approval of our board of directors and the Massachusetts Commissioner of Insurance. Restated Certificate of Incorporation and By-Laws. A number of provisions of our restated certificate of incorporation and by-laws deal with matters of corporate governance and rights of stockholders. The following discussion is a general summary of selected provisions of our restated certificate of incorporation and by-laws and regulatory provisions that might be deemed to have a potential anti-takeover effect. These provisions may have the effect of discouraging a future takeover attempt which is not approved by our board of directors but which individual stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of the incumbent board of directors or management more difficult. Some provisions of the Delaware General Corporation Law and the Massachusetts Insurance Law may also have an anti-takeover effect. The following description of selected provisions of our restated certificate of incorporation and by-laws and selected provisions of the Delaware General Corporation Law and the Massachusetts Insurance Law are necessarily general and reference should be made in each case to our restated certificate of incorporation and by-laws, which are filed as exhibits to our registration statement, and to the provisions of those laws. See "Additional Information" for information on where to obtain a copy of our restated certificate of incorporation and by-laws. Unissued Shares of Capital Stock Common Stock. Based upon the assumptions described under "Unaudited Pro Forma Consolidated Financial Information," we currently plan to issue an estimated 333.2 million shares of our authorized common stock in the offering and the demutualization. The remaining shares of authorized and unissued common stock will be available for future issuance without additional stockholder approval. While the additional shares are not designed to deter or prevent a change of control, under some circumstances we could use the additional shares to create voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control by, for example, issuing those shares in private placements to purchasers who might side with our board of directors in opposing a hostile takeover bid. Preferred Stock. Our board of directors has the authority to issue preferred stock in one or more series and to fix the number of shares constituting any such series and the preferences, limitations and relative rights, including dividend rights, dividend rate, voting rights, terms of redemption, redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series, without any further vote or action by our stockholders. The existence of authorized but unissued preferred stock could reduce our attractiveness as a target for an unsolicited takeover bid since we could, for example, issue shares of preferred stock to parties who might oppose such a takeover bid or shares that contain terms the potential acquiror may find unattractive. This may have the effect of delaying or preventing a change in control, may discourage bids for the common stock at a premium over the market price of the common stock, and may adversely affect the market price of, and the voting and other rights of the holders of, common stock. Classified Board of Directors and Removal of Directors. Our restated certificate of incorporation provides that the directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of each class to be three years. The classes serve staggered terms, such that the term of one class of directors expires each year. Any effort to obtain control of our board of directors by causing the election of a majority of the board of directors may require more time than would be required without a staggered election structure. Our restated certificate of incorporation also provides that directors may be removed only for cause at a meeting of 162 stockholders by a vote of a majority of the shares then entitled to vote. This provision may have the effect of slowing or impeding a change in membership of our board of directors that would effect a change of control. Restriction on Maximum Number of Directors and Filling of Vacancies on our Board of Directors. Our by-laws provide that the number of directors shall be fixed and increased or decreased from time to time by resolution of the board of directors, but the board of directors shall at no time consist of fewer than three directors. Stockholders can only remove a director for cause by a vote of a majority of the shares entitled to vote, in which case the vacancy caused by such removal may be filled at such meeting by the stockholders entitled to vote for the election of the director so removed. Any vacancy on the board of directors, including a vacancy resulting from an increase in the number of directors or resulting from a removal for cause where the stockholders have not filled the vacancy, may be filled by a majority of the directors then in office, although less than a quorum. If the vacancy is not so filled, it shall be filled by the stockholders at the next annual meeting of stockholders. The stockholders are not permitted to fill vacancies between annual meetings except where the vacancy resulted from a removal for cause. These provisions give incumbent directors significant authority that may have the effect of limiting the ability of stockholders to effect a change in management. Advance Notice Requirements for Nomination of Directors and Presentation of New Business at Meetings of Stockholders; Action by Written Consent. Our by- laws provide for advance notice requirements for stockholder proposals and nominations for director. In addition, pursuant to the provisions of both the restated certificate of incorporation and the by-laws, action may not be taken by written consent of stockholders; rather, any action taken by the stockholders must be effected at a duly called meeting. The chief executive officer, or, under some circumstances, the president or any vice president, and the board of directors may call a special meeting, and the chief executive officer shall call a special meeting upon the request of stockholders whose holdings are one-fourth or more of our outstanding common stock. These provisions make it more procedurally difficult for a stockholder to place a proposal or nomination on the meeting agenda or to take action without a meeting, and therefore may reduce the likelihood that a stockholder will seek to take independent action to replace directors or seek a stockholder vote with respect to other matters that are not supported by management. Limitations on Director Liability Our restated certificate of incorporation contains a provision that is designed to limit our directors' liability. Specifically, directors will not be held liable to John Hancock Financial Services, Inc. for monetary damages for breach of their fiduciary duty as a director, except to the extent that this limitation on or exemption from liability is not permitted by the Delaware General Corporation Law and any amendments to that law. The principal effect of the limitation on liability provision is that a stockholder is unable to prosecute an action for monetary damages against a director of John Hancock Financial Services, Inc. unless the stockholder can demonstrate a basis for liability for which indemnification is not available under the Delaware General Corporation Law. This provision, however, does not eliminate or limit director liability arising in connection with causes of action brought under the Federal securities laws. Our restated certificate of incorporation does not eliminate our directors' duty of care. The inclusion of this provision in the Restated Certificate of Incorporation may, however, discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefited John Hancock Financial Services, Inc. and our stockholders. This provision should not affect the availability of equitable remedies such as injunction or rescission based upon a director's breach of the duty of care. Our by-laws also provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. We are required to indemnify our directors and officers for all judgments, fines, settlements, legal fees and other expenses incurred in connection with pending or threatened legal proceedings because of the director's or officer's position with John Hancock Financial Services, Inc. or another entity that the director or officer serves at our request, subject to certain conditions, and to advance funds to our directors and officers to enable them to defend against such proceedings. To receive indemnification, the director or officer must have been successful in the legal proceeding or have acted in good faith and in what was reasonably believed to be a lawful manner in the best interest of John Hancock Financial Services, Inc. 163 Supermajority Voting Requirement for Amendment of Certain Provisions of our Restated Certificate of Incorporation and By-Laws. The provisions of our restated certificate of incorporation governing the number of directors and the filling of vacancies and restricting the removal of directors without cause may not be amended, altered, changed or repealed unless the amendment is approved by the vote of holders of two-thirds of the shares then entitled to vote at an election of directors. This requirement exceeds the majority vote of the outstanding stock that would otherwise be required by the Delaware General Corporation Law for the repeal or amendment of such provisions of the restated certificate of incorporation. Our by-laws may be amended by the board of directors or by the vote of holders of two-thirds of the shares then entitled to vote. These provisions make it more difficult for any person to remove or amend any provisions that have an antitakeover effect. Business Combination Statute. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, unless we elect in our restated certificate of incorporation not to be governed by the provisions of Section 203. We have not made that election. Section 203 can affect the ability of an "interested stockholder" of John Hancock Financial Services, Inc. to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares of John Hancock Financial Services, Inc., for a period of three years following the time that the stockholder becomes an "interested stockholder". An "interested stockholder" is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. The provisions of Section 203 are not applicable in some circumstances, including those in which (a) the business combination or transaction which results in the stockholder becoming an "interested stockholder" is approved by the corporation's board of directors prior to the time the stockholder becomes an "interested stockholder" or (b) the "interested stockholder", upon consummation of such transaction, owns at least 85% of the voting stock of the corporation outstanding prior to such transaction. Restrictions on Acquisitions of Securities The insurance holding company and other insurance laws of many states also regulate changes of control (generally presumed upon acquisitions of 10% or more of voting securities) of insurance holding companies, such as John Hancock Financial Services, Inc. The Massachusetts, California and Delaware insurance holding company laws, which we expect to be applicable to us following the reorganization, require filings in connection with proposed acquisitions of control of domestic insurance companies. Following the reorganization, John Hancock Life Insurance Company may be commercially domiciled in New York, and, if so, acquisition of control may also be subject to New York's holding company act. The insurance holding company laws prohibit a person from acquiring direct or indirect control of an insurer incorporated or, in the case of New York, commercially domiciled in the relevant state without prior insurance regulatory approval. Stockholder Rights Plan Our board of directors intends to adopt a stockholder rights plan under which each outstanding share of common stock issued between the effective date of the reorganization and the distribution date (as described below) will be coupled with a stockholder right. Initially, the stockholder rights will be attached to the certificates representing outstanding shares of common stock, and no separate rights certificates will be distributed. Each right will entitle the holder to purchase one one-thousandth of a share of our Series A Junior Participating Preferred Stock. Each one one-thousandth of a share of Series A Junior Participating Preferred Stock would have economic and voting terms equivalent to one share of common stock. Until the right is exercised, the holder of a stockholder right, as such, will not have any rights as a stockholder, including the right to receive dividends or to vote at stockholder meetings. Stockholder rights are not exercisable until the "distribution date," and will expire at the close of business on [ ], 2010 unless earlier redeemed or exchanged by us. Unless an acquisition or offer has been previously approved by our board of directors, a distribution date would occur upon the earlier of: . the tenth day (referred to as the "stock acquisition time") after the first public announcement a person or group of affiliated or associated persons has acquired beneficial ownership of 10% or more of our outstanding common stock (referred to as an "acquiring person"); or 164 . the tenth business day after the commencement or announcement of a tender offer or exchange offer that would result in a person or group becoming an acquiring person. If any person becomes an acquiring person, each holder of a stockholder right will be entitled to exercise the right and receive, instead of Series A Junior Participating Preferred Stock, common stock (or, in certain circumstances, cash, property or other securities of John Hancock Financial Services, Inc.) having a value equal to two times the exercise price of the stockholder right. All stockholder rights that are beneficially owned by an acquiring person or its transferee will become null and void. If at any time following a stock acquisition time (1) we are acquired in a merger or other business combination, or (2) 50% or more of our assets, cash flow or earning power is sold or transferred, each holder of a stockholder right (except rights which previously have been voided as set forth above) shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the right. The purchase price payable, the number of one one-thousandth of a share of Series A Junior Participating Preferred Share or other securities or property issuable upon exercise of rights and the number of rights outstanding, are subject to adjustment from time to time to prevent dilution. With certain exceptions, no adjustment in the purchase price or the number of shares of Series A Junior Participating Preferred Stock issuable upon exercise of a stockholder right will be required until the cumulative adjustment would require an increase or decrease of at least 1 percent in the purchase price or number of shares for which a right is exercisable. At any time until the earlier of (1) 10 days (or longer if extended pursuant to the terms of the Rights Agreement) after a person becomes an acquiring person and (2) the termination of the Rights Agreement, we may redeem the stockholder rights at a price of $0.001 per right. At any time after a public announcement that a person has become an acquiring person, we may exchange the stockholder rights at an exchange ratio of one share of common stock, or one one-thousandth of a share of Series A Junior Participating Preferred Stock (or of a share of a class or series of John Hancock Financial Services, Inc. preferred stock having equivalent rights, preferences and privileges), per right. The stockholder rights plan is designed to protect stockholders of John Hancock Financial Services, Inc. in the event of unsolicited offers to acquire John Hancock Financial Services, Inc. and other coercive takeover tactics which, in the opinion of our board of directors, could impair its ability to represent stockholder interests. The provisions of the stockholder rights plan may render an unsolicited takeover of John Hancock Financial Services, Inc. more difficult or less likely to occur or might prevent such a takeover, even though such takeover may offer our shareholders the opportunity to sell their stock at a price above the prevailing market rate and may be favored by the majority of our stockholders. Potential Effects of the Stockholder Rights Plan. The stockholder rights plan is designed to protect stockholders in the event of unsolicited offers to acquire John Hancock Financial Services, Inc. and other coercive takeover tactics which, in the opinion of our board of directors, could impair its ability to represent stockholder interests. The provisions of the stockholder rights plan may render an unsolicited takeover more difficult or less likely to occur or might prevent such a takeover, even though such takeover may offer our stockholders the opportunity to sell their stock at a price above the prevailing market rate and may be favored by a majority of the stockholders. Transfer Agent and Registrar The transfer agent and registrar for our common stock and our Series A Junior Participating Preferred Stock is EquiServe Trust Company, N.A. 165 COMMON STOCK ELIGIBLE FOR FUTURE SALE Substantially all of the estimated 231.2 million shares of our common stock distributed to eligible policy-holders in the reorganization (estimated to be approximately 69.4% of our outstanding common stock after the offering) will be eligible for immediate resale in the public market without restriction. See "The Reorganization." We have been advised by counsel that the distribution of shares to policyholders in the reorganization will be exempt from registration under the Securities Act by virtue of the exemption provided by Section 3(a)(10) of the Securities Act, and those eligible policyholders who are not our "affiliates" within the meaning of Rule 144 under the Securities Act will be able to resell their shares immediately in the public market without registration or compliance with the time, volume, manner of sale and other limitations set forth in Rule 144. In addition, in accordance with the Plan of Reorganization, we will, for a 90-day period commencing no earlier than the first business day after the six- month anniversary, and no later than the first business day after the twelve- month anniversary, of the effective date of the reorganization, provide for the public sale, at prevailing market prices and without brokerage commissions or similar fees to shareholders, of all shares of our common stock held by shareholders who own 99 shares or fewer of our common stock received pursuant to the Plan of Reorganization or otherwise. The commission-free sales program may be extended by us with the approval of the Massachusetts Commissioner of Insurance. We will also, simultaneously and in conjunction with the commission-free sales program, offer to each such stockholder entitled to participate in the commission-free sales program the opportunity to purchase that number of shares of our common stock necessary to increase such stockholder's holdings to 100 shares without paying brokerage commissions or other similar expenses. No prediction can be made as to the effect, if any, such future sales of shares, or the availability of shares for such future sales, will have on the market price of our common stock prevailing from time to time. The sale of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could harm prevailing market prices for our common stock. See "Risk Factors--The market price of our common stock may decline if persons receiving common stock as compensation in the reorganization sell their stock in the public market." 166 UNDERWRITERS Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the U.S. underwriters named below, for whom Morgan Stanley & Co. Incorporated is acting as U.S. representative, and the international underwriters named below, for whom Morgan Stanley & Co. International Limited is acting as international representative, have severally agreed to purchase, and we have agreed to sell to them, severally, the respective number of shares of our common stock set forth opposite the names of the underwriters below:
Name Number of Shares ---- ---------------- U.S. Underwriters: Morgan Stanley & Co. Incorporated........................... . Subtotal.................................................. International Underwriters: Morgan Stanley & Co. International Limited.................. Subtotal.................................................. . --- Total..................................................... . ===
The U.S. underwriters and the international underwriters, and the U.S. representative and the international representative, are collectively referred to as the "underwriters" and the "representatives", respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of our common stock offered hereby are subject to the approval of legal matters by their counsel and to other customary conditions. The underwriters are obligated to take and pay for all of the shares of our common stock offered hereby if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the U.S. underwriters' over-allotment option described below. In the agreement between U.S. and international underwriters, each U.S. underwriter has represented and agreed that, with specific exceptions: . it is not purchasing any shares for the account of anyone other than a U.S. or Canadian person, and . it has not offered or sold, and will not offer or sell, directly or indirectly, any shares or distribute any prospectus relating to the shares outside the United States or Canada or to anyone other than a U.S. or Canadian person. In the agreement between U.S. and international underwriters, each international underwriter has represented and agreed that, with specific exceptions: . it is not purchasing any shares for the account of any U.S. or Canadian person, and . it has not offered or sold, and will not offer or sell, directly or indirectly, any shares or distribute any prospectus relating to the shares in the United States or Canada or to any U.S. or Canadian person. For any underwriter that is both a U.S. underwriter and an international underwriter, these representations and agreements made by it in its capacity as a U.S. underwriter apply only to it in its capacity as a U.S. underwriter and those made by it in its capacity as an international underwriter apply only to it in its capacity as an international underwriter. The limitations described above do not apply to stabilization transactions or to other transactions specified in the agreement between U.S. and international underwriters. As used in this prospectus, U.S. or Canadian person means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof, other than a branch located outside the United States and Canada of any 167 U.S. or Canadian person. U.S. or Canadian person includes any U.S. or Canadian branch of a person who is otherwise not a U.S. or Canadian person. All shares of common stock to be purchased by the underwriters under the underwriting agreement are referred to as shares. In the agreement between U.S. and international underwriters, sales of shares may be made between the U.S. underwriters and international underwriters. The price of any shares so sold will be the public offering price set forth on the cover page of this prospectus, in U.S. dollars, less an amount not greater than the per share amount of the concessions to dealers set forth below. In the agreement between U.S. and international underwriters, each U.S. underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws of Canada. Each U.S. underwriter has represented that any offer or sale of shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which the offer or sale is made. Each U.S. underwriter has further agreed to send to any dealer who purchases from it any of the shares a notice stating in substance that, by purchasing the shares, the dealer agrees that any offer or sale of shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which the offer or sale is made. Each dealer will deliver to any other dealer to whom it sells any of the shares a notice containing substantially the same Canadian selling restrictions. In the agreement between U.S. and international underwriters, each international underwriter has represented and agreed that: . it has not offered or sold and, prior to the date six months after the closing date for the sale of the shares to the international underwriters, will not offer to sell, any shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; . it has complied and will comply with all applicable provisions of the Financial Services Act 1986; and . it has and will distribute any document relating to the shares in the United Kingdom only to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom such document may otherwise lawfully be distributed. In the agreement between U.S. and international underwriters, each international underwriter has further represented that it has not offered or sold, and has agreed not to offer or sell in Japan or to or for the account of any resident of Japan, any of the shares. This limitation does not apply to Japanese international underwriters or dealers and offers or sales pursuant to any exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law. Each international underwriter has further agreed to send to any dealer who purchases from it any of the shares a notice stating that, by purchasing the shares, the dealer agrees that any offer or sale of the shares in Japan will be made only to Japanese international underwriters or dealers or under an exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law. Each dealer will send to any other dealer to whom it sells any of the shares a notice containing substantially the same Japanese selling restrictions. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus, and part to securities dealers at a price that represents a concession not in excess of $ . per share under the public offering price. Any underwriter may allow, and dealers may reallow, a concession not in excess of $ . per share to other underwriters or to 168 securities dealers. After the initial offering of the shares, the offering price and other selling terms may from time to time be varied by the representatives. We have granted to the U.S. underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of . additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The U.S. underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares offered by this prospectus. To the extent this option is exercised, each U.S. underwriter will become obligated, subject to specified conditions, to purchase about the same percentage of additional shares as the number listed next to the U.S. underwriter's name in the preceding table bears to the total number of shares set forth next to the names of all U.S. underwriters in the preceding table. If the U.S. underwriters' option is exercised in full, the total price to the public for this offering would be $ . , the total underwriters' discounts and commissions would be $ . and total proceeds to John Hancock would be $ . . [The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares offered by them.] We intend to apply for the listing of our common stock on the New York Stock Exchange under the symbol "JHF". The underwriters intend to sell shares to a minimum of . beneficial owners in lots of . or more so as to meet the distribution requirements of this listing. We and all of our directors and executive officers have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we or they, as the case may be, will not, during the period ending . days after the date of this prospectus: [to come] In order to facilitate the offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the shares of our common stock. Specifically, the underwriters may agree to sell or allot more shares than the . shares of our common stock we have agreed to sell to them. This over-allotment would create a short position in our common stock for the underwriters' account. To cover any over-allotments or to stabilize the price of our common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. The underwriters have reserved the right to reclaim selling concessions in order to encourage underwriters and dealers to distribute the common stock for investment, rather than for short-term profit taking. Increasing the proportion of the offering held for investment may reduce the supply of common stock available for short-term trading. Any of these activities may stabilize or maintain the market price of our common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. From time to time, Morgan Stanley & Co. Incorporated has provided, and may continue to provide, investment banking services to us. We and the underwriters have agreed to indemnify each other against a variety of liabilities, including liabilities under the Securities Act. Pricing of the Offering Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation among us and the U.S. representative. Among the factors to be considered in determining the initial public offering price will be our future prospects and our industry in general, our sales, earnings and other financial and operating information in recent periods, and the price-earnings ratios, price-book value ratios, market prices of securities and financial and operating information of companies engaged 169 in activities similar to ours. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the shares of our common stock offered hereby will be passed upon for John Hancock Financial Services, Inc. by Debevoise & Plimpton, New York, New York. The Underwriters have been represented by Cravath, Swaine & Moore, New York, New York. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, as set forth in their report. We have included our financial statements in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. Godfrey Perrott, a consulting actuary associated with Milliman & Robertson, Inc. has rendered an opinion, dated August 31, 1999, to our board of directors that states (in reliance upon the matters described in such opinion) that the allocation of policyholder consideration under the Plan of Reorganization is based on a fair and reasonable formula, that the arrangement for establishment and operation of the closed block set forth in the Plan of Reorganization allocates assets to the closed block which are reasonably sufficient to enable the closed block to provide for the guaranteed benefits, certain expenses and taxes associated with closed block policies, and the continuation of the 1999 dividend scale if the experience underlying that scale continues, and that the arrangement also provides for appropriate adjustment of the dividend scales if the underlying experience changes from that underlying the 1999 dividend scale, and that the appropriate policies are included in the closed block. Such opinion is included herein in reliance upon the authority of such actuary as an expert in actuarial matters generally and in the application of actuarial concepts to insurance matters. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission in Washington, D.C., a registration statement on Form S-1 (Registration No. 333- ) under the Securities Act with respect to the common stock offered hereby. This prospectus which forms a part of the registration statement does not contain all the information set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information with respect to John Hancock Financial Services, Inc. and the common stock offered hereby, reference is made to the registration statement. Statements made in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. The registration statement may be inspected and copied at the Securities and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an internet site, http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission. As a result of the offering we will become subject to the information requirements of the Securities Exchange Act. We will fulfill our obligations with respect to such requirements by filing periodic reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and information may be inspected and copied at the public reference facilities maintained by the Securities and 170 Exchange Commission referenced above. We intend to furnish holders of our common stock with annual reports that include audited annual consolidated financial statements by an independent certified public accounting firm and quarterly reports for the first three quarters of each Fiscal Year containing unaudited interim financial information. We intend to list our common stock on the New York Stock Exchange. Upon such listing, copies of the registration statement, including all exhibits thereto, and periodic reports, proxy statements and other information will be available for inspection at the offices of the New York Stock Exchange, Inc. located at 20 Broad Street, New York, New York 10005. 171 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES Report of Independent Auditors........................................... F-2 Audited Consolidated Financial Statements--December 31, 1998 Consolidated Balance Sheets.............................................. F-3 Consolidated Statements of Income........................................ F-4 Consolidated Statements of Changes in Policyholders' Equity.............. F-5 Consolidated Statements of Cash Flows.................................... F-6 Notes to Consolidated Financial Statements............................... F-7 Unaudited Interim Consolidated Financial Statements--June 30, 1999 Unaudited Interim Consolidated Balance Sheet............................. F-39 Unaudited Interim Consolidated Statements of Income...................... F-40 Unaudited Interim Consolidated Statement of Changes in Policyholders' Equity.................................................................. F-41 Unaudited Interim Consolidated Statements of Cash Flows.................. F-42 Notes to Unaudited Interim Consolidated Financial Statements............. F-44
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors John Hancock Mutual Life Insurance Company and Subsidiaries We have audited the accompanying consolidated balance sheets of John Hancock Mutual Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in policyholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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 the 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 John Hancock Mutual Life Insurance Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP Boston, Massachusetts April 26, 1999 F-2 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 ------------------- 1998 1997 --------- --------- (in millions) Assets Investments--Note 3 Fixed maturities: Held-to-maturity--at amortized cost (fair value: 1998--$13,921.7; 1997--$13,566.1)....... $12,978.2 $12,712.4 Available-for-sale--at fair value (cost: 1998--$14,491.5; 1997--$13,576.9).................. 15,222.2 14,462.5 Equity securities: Available-for-sale--at fair value (cost: 1998--$756.8; 1997--$521.8)........................ 995.8 881.5 Trading securities--at fair value (cost: 1998--$53.0; 1997--$50.6).......................... 67.9 72.1 Mortgage loans on real estate............................... 9,616.1 9,296.3 Real estate................................................. 1,483.2 2,035.6 Policy loans................................................ 1,879.7 1,855.6 Short-term investments...................................... 279.8 294.1 Other invested assets....................................... 1,254.6 831.6 --------- --------- Total Investments....................................... 43,777.5 42,441.7 Cash and cash equivalents................................... 1,876.4 1,036.6 Accrued investment income................................... 537.9 559.2 Premiums and accounts receivable............................ 227.5 358.8 Deferred policy acquisition costs........................... 2,758.7 2,563.0 Reinsurance recoverable..................................... 1,634.3 1,736.0 Other assets................................................ 1,187.8 1,211.1 Separate accounts assets.................................... 24,966.6 21,511.1 --------- --------- Total Assets............................................ $76,966.7 $71,417.5 ========= ========= Liabilities and Policyholders' Equity Liabilities Future policy benefits...................................... $27,070.5 $25,832.7 Policyholders' funds........................................ 14,671.7 13,637.5 Unearned revenue............................................ 373.8 340.5 Unpaid claims and claim expense reserves.................... 886.3 957.9 Dividends payable to policyholders.......................... 432.8 399.4 Short-term debt--Note 6..................................... 427.8 647.9 Long-term debt--Note 6...................................... 602.7 543.3 Income taxes--Note 5........................................ 385.1 439.7 Other liabilities........................................... 2,168.9 2,412.1 Separate accounts liabilities............................... 24,966.6 21,511.1 --------- --------- Total Liabilities....................................... 71,986.2 66,722.1 Commitments and contingencies--Note 9 Policyholders' equity--Note 11 Surplus..................................................... 4,697.1 4,248.6 Accumulated other comprehensive income...................... 283.4 446.8 --------- --------- Total Policyholders' Equity............................. 4,980.5 4,695.4 --------- --------- Total Liabilities and Policyholders' Equity............. $76,966.7 $71,417.5 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-3 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 -------------------------- 1998 1997 1996 -------- -------- -------- (in millions) Revenues Premiums......................................... $2,197.9 $2,473.6 $2,922.5 Universal life and investment-type product charges......................................... 597.0 512.0 466.3 Net investment income--Note 3.................... 3,330.7 3,190.7 3,223.1 Realized investment gains, net--Note 3........... 97.9 115.8 110.7 Investment management revenues, commissions and other fees...................................... 659.7 554.7 751.3 Other revenue.................................... 18.8 99.5 230.9 -------- -------- -------- Total revenues................................. 6,902.0 6,946.3 7,704.8 Benefits and expenses Benefits to policyholders.......................... 4,152.0 4,303.1 4,676.7 Other operating costs and expenses............... 1,383.0 1,283.7 1,694.1 Amortization of deferred policy acquisition costs........................................... 249.7 312.0 230.9 Dividends to policyholders....................... 473.2 457.8 435.1 -------- -------- -------- Total benefits and expenses.................... 6,257.9 6,356.6 7,036.8 -------- -------- -------- Income before income taxes and extraordinary item.. 644.1 589.7 668.0 Income taxes--Note 5............................... 183.9 106.4 247.5 -------- -------- -------- Income before extraordinary item................... 460.2 483.3 420.5 Extraordinary item--demutualization expenses, net of tax............................................ 11.7 -- -- -------- -------- -------- Net income......................................... $ 448.5 $ 483.3 $ 420.5 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN POLICYHOLDERS' EQUITY
Accumulated Other Comprehensive Surplus Income Total -------- ------------- --------- (in millions) Balance at January 1, 1996.................... $3,344.8 $ 436.0 $ 3,780.8 --------- Comprehensive income: Net income.................................. 420.5 420.5 Other comprehensive income, net of tax: Net unrealized gains (losses)............. (78.7) (78.7) Foreign currency translation adjustment... (5.7) (5.7) Minimum pension liability................. 0.8 0.8 --------- Comprehensive income.......................... 336.9 -------- ------- --------- Balance at December 31, 1996.................. 3,765.3 352.4 4,117.7 --------- Comprehensive income: Net income.................................. 483.3 483.3 Other comprehensive income, net of tax: Net unrealized gains (losses)............. 131.0 131.0 Foreign currency translation adjustment... (28.4) (28.4) Minimum pension liability................. (8.2) (8.2) --------- Comprehensive income.......................... 577.7 -------- ------- --------- Balance at December 31, 1997.................. 4,248.6 446.8 4,695.4 --------- Comprehensive income: Net Income.................................. 448.5 448.5 Other comprehensive income, net of tax: Net unrealized gains (losses)............. (148.6) (148.6) Foreign currency translation adjustment... (6.0) (6.0) Minimum pension liability................. (8.8) (8.8) --------- Comprehensive income.......................... 285.1 -------- ------- --------- Balance at December 31, 1998.................. $4,697.1 $ 283.4 $ 4,980.5 ======== ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 --------------------------------- 1998 1997 1996 ---------- ---------- --------- (in millions) Cash flows from operating activities: Net income................................. $ 448.5 $ 483.3 $ 420.5 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of discount--fixed maturities................................ (55.6) (33.9) (8.5) Realized investment gains, net............. (97.9) (115.8) (110.7) Change in deferred policy acquisition costs..................................... (206.9) (154.9) (195.9) Depreciation and amortization.............. 91.9 124.8 155.7 Net cash flows from trading securities..... 4.2 (11.6) 288.1 Decrease in accrued investment income...... 21.3 59.8 46.0 Decrease (increase) in premiums and accounts receivable....................... 131.3 (112.4) 711.3 Increase in other assets and other liabilities, net.......................... (373.0) (454.8) (605.7) Increase in policy liabilities and accruals, net............................. 1,347.4 1,763.8 1,270.5 Increase (decrease) in income taxes........ 17.7 (110.0) (78.6) ---------- ---------- --------- Net cash provided by operating activities.............................. 1,328.9 1,438.3 1,892.7 Cash flows from investing activities: Sales of: Fixed maturities held-to-maturity.......... 8.5 35.0 69.1 Fixed maturities available-for-sale........ 21,079.2 13,635.2 2,989.4 Equity securities available-for-sale....... 249.2 661.2 347.8 Real estate................................ 640.3 449.0 405.2 Short-term investments and other invested assets.................................... 926.3 109.6 185.1 Maturities, prepayments and scheduled redemptions of: Fixed maturities held-to-maturity.......... 2,166.9 2,035.9 2,352.7 Fixed maturities available-for-sale........ 2,162.3 2,571.1 1,496.9 Short-term investments and other invested assets.................................... 79.4 167.4 81.8 Mortgage loans on real estate.............. 1,849.8 1,426.5 2,385.2 Purchases of: Fixed maturities held-to-maturity.......... (2,428.5) (1,886.7) (3,152.2) Fixed maturities available-for-sale........ (24,154.7) (17,455.6) (5,247.6) Equity securities available-for-sale....... (384.5) (663.8) (352.0) Real estate................................ (152.0) (232.7) (692.6) Short-term investments and other invested assets.................................... (1,103.0) (466.3) (382.2) Mortgage loans on real estate issued....... (2,265.3) (1,406.8) (1,696.2) Other, net................................. (13.0) (274.3) 26.3 ---------- ---------- --------- Net cash used in investing activities.... (1,339.1) (1,295.3) (1,183.3) Cash flows from financing activities: Universal life and investment-type contract deposits.................................. 8,214.8 5,778.7 6,000.8 Universal life and investment-type contract maturities and withdrawals................ (7,204.1) (6,447.6) (5,977.2) Issuance of long-term debt................. 77.0 55.4 379.8 Repayment of long-term debt................ (298.1) (251.9) (277.2) Net increase (decrease) in commercial paper..................................... 60.4 73.0 (85.6) ---------- ---------- --------- Net cash provided by (used in) financing activities.............................. 850.0 (792.4) 40.6 ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents............................. 839.8 (649.4) 750.0 Cash and cash equivalents at beginning of year....................................... 1,036.6 1,686.0 936.0 ---------- ---------- --------- Cash and cash equivalents at end of year.................................... $ 1,876.4 $ 1,036.6 $ 1,686.0 ========== ========== =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Summary of Significant Accounting Policies John Hancock Mutual Life Insurance Company (John Hancock) and its subsidiaries (collectively, the Company) is a diversified financial services organization that provides a broad range of insurance and investment products and investment management and advisory services. John Hancock is presently organized as a mutual life insurance company but expects to convert to a stock life insurance company pursuant to a Plan of Reorganization. Principles of Consolidation The accompanying consolidated financial statements include the accounts of John Hancock and its majority-owned and controlled domestic and foreign subsidiaries. Less than majority-owned entities in which the Company has at least a 20% interest are accounted for using the equity method. All significant intercompany transactions and balances have been eliminated. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Investments Management determines the appropriate classification of fixed maturity investments at the time of purchase. Fixed maturity investments include bonds, mortgage-backed securities, and redeemable preferred stock and are classified as held-to-maturity or available-for-sale. Bonds and mortgage-backed securities, which the Company has the positive intent and ability to hold to maturity, are classified as held-to-maturity and carried at amortized cost. Fixed maturity investments not classified as held-to-maturity are classified as available-for-sale and are carried at fair value. Unrealized gains and losses related to available-for-sale securities are reflected in policyholders' equity, after adjustment for deferred policy acquisition costs, participating group annuity contracts and applicable taxes. The amortized cost of fixed maturity investments is adjusted for impairments in value deemed to be other than temporary. For the mortgage-backed bond portion of the fixed maturity investment portfolio, the Company recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date, and anticipated future payments and any resulting adjustment is included in net investment income. Equity securities include common stock and non-redeemable preferred stock. Equity securities that have readily determinable fair values are carried at fair value. For equity securities which the Company has classified as available-for-sale, unrealized gains and losses are reflected in policyholders' equity as described above. Gains and losses, both realized and unrealized, on equity securities classified as trading are included in net investment income. Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premium or discount, less allowance for possible losses. When it is probable that the Company will be unable to collect all amounts of principal and interest due according to the contractual terms of the mortgage loan agreement, the loan is deemed to be impaired and a valuation allowance for probable losses is established. The valuation allowance is based on the present value of the expected future cash flows, discounted at the loan's original effective interest rate, or on the collateral value of the loan if the loan is collateral dependent. Any change to the valuation allowance for mortgage loans on real estate is reported as a component of realized investment gains F-7 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 1--Summary of Significant Accounting Policies--(Continued) (losses). Interest received on impaired mortgage loans on real estate is included in interest income in the period received. If foreclosure becomes probable, the measurement method used is collateral value. Foreclosed real estate is then recorded at the collateral's fair value at the date of foreclosure, which establishes a new cost basis. Investment real estate, which the Company has the intent to hold for the production of income, is carried at depreciated cost, using the straight-line method of depreciation, less adjustments for impairments in value. In those cases where it is determined that the carrying amount of investment real estate is not recoverable, an impairment loss is recognized based on the difference between the depreciated cost and fair value of the asset. The Company reports impairment losses as part of realized investment gains (losses). Real estate to be disposed of is carried at the lower of cost or fair value less costs to sell. Any change to the valuation allowance for real estate to be disposed of is reported as a component of realized investment gains (losses). The Company does not depreciate real estate to be disposed of. During 1998, the Company made a strategic decision to sell the majority of its commercial real estate portfolio. Properties with a carrying value of $535.2 million were sold in 1998, and real estate with a carrying value of $1.0 billion is expected to be sold in 1999. Policy loans are carried at unpaid principal balances. Short-term investments are carried at amortized cost. Partnership and joint venture interests in which the Company does not have control or a majority ownership interest are recorded using the equity method of accounting and included in other invested assets. Realized investment gains and losses are determined on the basis of specific identification. Derivative Financial Instruments The Company uses futures contracts, interest rate swap, cap and floor agreements, swaptions, and currency rate swap agreements for other than trading purposes to hedge and manage its exposure to changes in interest rate levels, foreign exchange rate fluctuations and to manage duration mismatch of assets and liabilities. The Company also uses equity collar agreements to reduce its exposure to market fluctuations in certain equity securities. The Company uses futures contracts principally to hedge risks associated with interest rate fluctuations on sales of guaranteed investment contracts. Futures contracts represent commitments to either purchase or sell securities at a specified future date and at a specified price or yield. The Company uses interest rate swap, cap and floor agreements and swaptions for the purpose of converting the interest rate characteristics (fixed or variable) of certain investments to more closely match its liabilities. Interest rate swap agreements are contracts with a counterparty to exchange interest rate payments of a differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. Interest rate cap and floor agreements are contracts with a counterparty which require the payment of a premium for the right to receive payments for the difference between the cap or floor interest rate and a market interest rate on specified future dates based on an underlying principal balance (notional principal) to hedge against rising and falling interest rates. Swaptions entitle the Company to receive settlement payments from other parties on specified expiration dates, contingent on future interest rates. The amount of such settlement payments, if any, is determined by the present value of the difference between the fixed rate on a market rate swap and the strike rate multiplied by the notional amount. F-8 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 1--Summary of Significant Accounting Policies--(Continued) Currency rate swap agreements are used to manage the Company's exposure to foreign exchange rate fluctuations. Currency rate swap agreements are contracts to exchange the currencies of two different countries at the same rate of exchange at specified future dates. The Company invests in common stock that is subject to fluctuations from market value changes in stock prices. The Company sometimes seeks to reduce its market exposure to such holdings by entering into equity collar agreements. A collar consists of a call option that limits the Company's potential for gain from appreciation in the stock price as well as a put option that limits the Company's potential for loss from a decline in the stock price. Futures contracts are carried at fair value and require daily cash settlement. Changes in the fair value of futures contracts that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. The net differential to be paid or received on interest rate swap agreements and currency rate swap agreements is accrued and recognized as a component of net investment income. The related amounts due to or from counterparties are included in accrued investment income receivable or payable. Premiums paid for interest rate cap and floor agreements and swaptions are deferred and amortized to net investment income on a straight-line basis over the term of the agreements. The unamortized premium is included in other assets. Amounts earned on interest rate cap and floor agreements and swaptions are recorded as an adjustment to net investment income. Settlements received on swaptions are deferred and amortized over the life of the hedged assets as an adjustment to yield. Interest rate swap, cap and floor agreements, swaptions and currency rate swap agreements which hedge instruments designated as available-for-sale are adjusted to fair value with the resulting unrealized gains and losses, net of related taxes, included in policyholders' equity. The net unrealized losses on derivatives hedging available-for-sale instruments included in policyholders' equity were ($128.1) million, ($59.7) million and ($28.3) million, at December 31, 1998, 1997 and 1996, respectively. The change in net unrealized losses for derivatives recorded as part of other comprehensive income for the years ended December 31, 1998, 1997 and 1996 was ($68.4) million, ($31.4) million and ($20.4) million, respectively. The fair value of these derivatives used to hedge items other than available-for-sale instruments is not recognized in the financial statements. Equity collar agreements are carried at fair value and are included in other invested assets, with the resulting unrealized gains and losses included in realized investment gains (losses). Hedge accounting is applied after the Company determines that the items to be hedged expose it to interest or price risk, designates these financial instruments as hedges and assesses whether the instruments reduce the hedged risks through the measurement of changes in the value of the instruments and the items being hedged at both inception and throughout the hedge period. From time to time, futures contracts, interest rate swap, cap and floor agreements, swaptions and currency rate swap agreements are terminated. If the terminated position was accounted for as a hedge, realized gains or losses are deferred and amortized over the remaining lives of the hedged assets or liabilities. Realized and unrealized changes in fair value of derivatives designated with items that no longer exist or are no longer probable of occurring are recorded as a component of the gain or loss arising from the disposition of the designated item or included in income when it is determined that the item is no longer probable of occurring. Changes in the fair value of derivatives no longer effective as hedges are recognized in income from the date the derivative becomes ineffective until their expiration. F-9 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 1--Summary of Significant Accounting Policies--(Continued) Revenue Recognition Premiums from participating and non-participating traditional life insurance and annuity policies with life contingencies are recognized as income when due. Premiums from universal life and investment-type contracts are reported as deposits to policyholders' account balances. Revenues from these contracts consist of amounts assessed during the period against policyholders' account balances for mortality charges, policy administration charges and surrender charges. Premiums for contracts with a single premium or a limited number of premium payments, due over a significantly shorter period than the total period over which benefits are provided, are recorded in income when due. The portion of such premium that is not required to provide for all benefits and expenses is deferred and recognized in income in a constant relationship to insurance in force or, for annuities, the amount of expected future benefit payments. Premiums from long-term care insurance contracts are recognized as income when due. Premiums from group life and health insurance contracts are recognized as income over the period to which the premiums relate in proportion to the amount of insurance protection provided. Property and casualty insurance premiums are recognized as earned over the terms of the contracts. Investment advisory, transfer agent, distribution and service fees are recognized as revenues when services are performed. Commissions related to security transactions are recognized as income on the trade date. Contingent deferred selling charge commissions are recognized as income in the year received. Selling commissions paid to the selling broker/dealer for sales of mutual funds that do not have a front-end sales charge are deferred and amortized on a straight-line basis over periods not exceeding six years. This is the approximate period of time expected to be benefited and during which fees earned pursuant to Rule 12b-1 distribution plans are received from the funds and contingent deferred sales charges are received from shareholders of the funds. Future Policy Benefits and Policyholders' Funds Future policy benefits for participating traditional life insurance policies are based on the net level premium method. This net level premium reserve is calculated using the guaranteed mortality and dividend fund interest rates, which range from 2.5% to 9.5%. The liability for annual dividends represents the accrual of annual dividends earned. Settlement dividends are accrued in proportion to gross margins over the life of the contract. For non-participating traditional life insurance policies, future policy benefits are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency, interest and expenses established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on the Company's experience, which, together with interest and expense assumptions, include a margin for adverse deviation. Benefit liabilities for annuities during the accumulation period are equal to accumulated contractholders' fund balances and after annuitization are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 2.5% to 9.5% for life insurance liabilities, from 2.0% to 14.2% for individual annuity liabilities and from 2.0% to 14.7% for group annuity liabilities. Policyholders' funds for universal life and investment-type products, including guaranteed investment contracts and funding agreements, are equal to the policyholder account values before surrender charges. As of December 31, 1998, the Company had approximately $2.9 billion of funding agreements, of which $457.1 million contained a 30 day termination provision, $527.0 million contained a 90 day termination provision, $433.4 million contained no early termination provisions of less than 1 year and $1,512.0 million contained no F-10 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 1--Summary of Significant Accounting Policies--(Continued) early termination provisions. Policy benefits that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policyholders' account balances. Interest crediting rates range from 3.0% to 9.0% for universal life products and from 2.0% to 16.0% for investment-type products. Future policy benefits for long-term care insurance policies are based on the net level premium method. Assumptions established at policy issue as to mortality, morbidity, persistency, interest and expenses which include a margin for adverse deviation, are based on estimates developed by management. Interest rates used in establishing such liabilities range from 6.0% to 8.5%. Liabilities for unpaid claims and claim expenses include estimates of payments to be made on reported individual and group life, long-term care, and group accident and health insurance claims and estimates of incurred but not reported claims based on historical claims development patterns. Estimates of future policy benefit reserves, claim reserves and expenses are reviewed continually and adjusted as necessary; such adjustments are reflected in current earnings. Although considerable variability is inherent in such estimates, management believes that future policy benefit reserves and unpaid claims and claims expense reserves are adequate. Property and casualty reserves include loss reserve estimates based on claims reported and unreported and estimates of future expenses to be incurred in settlement of the claims provided for in the loss reserve estimates. These liabilities include estimates of future trends in claim severity and frequency and other factors that could vary as the losses are ultimately settled. Certain property and casualty reserves are recorded on a discounted basis, using interest rates from 4.0% to 7.0%; the resulting discounted reserves were $38.8 million and $47.7 million at December 31, 1998 and 1997, respectively, less than the projected ultimate values. Participating Insurance Participating business represents approximately 87.7%, 86.8% and 92.1% of the Company's life insurance in force, 98.4%, 98.5% and 98.6% of the number of life insurance policies in force, and 97.3%, 96.8% and 96.8% of life insurance premiums in 1998, 1997 and 1996, respectively. The portion of earnings allocated to participating group annuity policyholders that cannot be expected to inure to the Company is excluded from net income and policyholders' equity. The amount of policyholders' dividends to be paid is approved annually by the Company's Board of Directors. The aggregate amount of policyholders' dividends is related to actual interest, mortality, morbidity and expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by John Hancock. Deferred Policy Acquisition Costs Costs that vary with, and are related primarily to, the production of new business have been deferred to the extent that they are deemed recoverable. Such costs include commissions, certain costs of policy issue and underwriting, and certain agency expenses. For participating traditional life insurance policies, such costs are being amortized over the life of the contracts at a constant rate based on the present value of the estimated gross margin amounts expected to be realized over the lives of the contracts. Estimated gross margin amounts include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. For universal life insurance contracts and investment-type products, such costs are being amortized generally in proportion to the present value of expected gross profits arising principally from surrender charges and investment results, and mortality and expense F-11 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 1--Summary of Significant Accounting Policies--(Continued) margins. The effects on the amortization of deferred policy acquisition costs of revisions to estimated gross margins and profits are reflected in earnings in the period such estimated gross margins and profits are revised. For non- participating term life and long-term care life insurance products, such costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For property and casualty policies, such costs are being amortized over the contract period. Amortization expense was $290.9 million, $343.2 million and $248.5 million in 1998, 1997 and 1996, respectively. The effect on the deferred policy acquisition cost asset that would result from the realization of unrealized gains (losses) on assets backing participating traditional life insurance and universal life and investment- type contracts is recognized net of tax with an offset to unrealized gains (losses) in policyholders' equity as of the balance sheet date. Cash and Cash Equivalents Cash and cash equivalents include cash and all highly liquid investments with a maturity of three months or less when purchased. Separate Accounts Separate accounts assets and liabilities reported in the accompanying consolidated balance sheets represent funds that are administered and invested by the Company to meet specific investment objectives of the contractholders. Investment income and investment gains and losses generally accrue directly to such contractholders who bear the investment risk, subject in some cases to minimum guaranteed rates. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate account assets are reported at fair value. Deposits, net investment income and realized investment gains and losses of separate accounts are not included in the revenues of the Company. Fees charged to contractholders, principally mortality, policy administration and surrender charges, are included in universal life and investment-type product charges. Reinsurance The Company utilizes reinsurance agreements to provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks and provide additional capacity for growth. Assets and liabilities related to reinsurance ceded contracts are reported on a gross basis. The accompanying statements of income reflect premiums, benefits and settlement expenses net of reinsurance ceded. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Federal Income Taxes The provision for federal income taxes includes amounts currently payable or recoverable and deferred income taxes, computed under the liability method, resulting from temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. Foreign subsidiaries and U.S. subsidiaries operating outside of the United States are taxed under applicable foreign statutory rates. F-12 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 1--Summary of Significant Accounting Policies--(Continued) Foreign Currency Translation The assets and liabilities of operations in foreign currencies are translated into United States dollars at current exchange rates. Revenues and expenses are translated at average rates during the year. The resulting net translation adjustments for each year are accumulated and included in policyholders' equity. Gains or losses on foreign currency transactions are reflected in earnings. Extraordinary Item The accompanying consolidated statements of income reflect extraordinary expenses of $11.7 million (net of tax of $6.3 million) for the year ended December 31, 1998 relating to costs associated with the planned demutualization. Accounting Changes In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which was adopted by the Company in the fourth quarter of 1997 on a retroactive basis. Under SFAS No. 131, business segments are defined on the same basis that the Company is managed versus the product or market approach. Data shown for all periods have been presented to conform to the requirements of SFAS No. 131. SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997, was adopted by the Company during the fourth quarter of 1997 on a retroactive basis as permitted by SFAS No. 130. SFAS No. 130 requires that selected changes in policyholders' equity be added to net income and reported as comprehensive income. The Company reported this information within the consolidated statements of changes in policyholders' equity and the footnotes to the consolidated financial statements. SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," was adopted by the Company during the fourth quarter of 1998. SFAS No. 132 does not change the recognition or measurement of pension or postretirement benefit plans, but standardizes disclosure requirements for pensions and other postretirement benefits. Data shown for all periods has been presented to conform to the requirements of SFAS No. 132. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivatives to be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be recognized immediately in earnings. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company is evaluating the effect that the implementation of SFAS No. 133 will have on its results of operations and financial position and is unable to quantify the impact at this time. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance for determining whether F-13 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 1--Summary of Significant Accounting Policies--(Continued) computer software is for internal use and when costs incurred for internal use software are to be capitalized. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 is not expected to have a material impact on the Company's consolidated financial statements. In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-up Activities." The SOP is effective beginning on January 1, 1999, and requires that start-up costs capitalized prior to January 1, 1999 be written-off and any future start-up costs be expensed as incurred. Restatement of previously issued financial statements is not required. SOP 98-5 is not expected to have a material impact on the Company's consolidated financial statements. In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance for assessments related to insurance activities and requirements for disclosure of certain information. SOP 97-3 is effective for financial statements issued for periods beginning after December 31, 1998. Restatement of previously issued financial statements is not required. SOP 97-3 is not expected to have a material impact on the Company's consolidated financial statements. SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk under a method referred to as deposit accounting. SOP 98-7 is effective for fiscal years beginning after June 15, 1999. SOP 98-7 is not expected to have a material impact on the Company's consolidated financial statements. Note 2--Reorganization On November 9, 1998, John Hancock Mutual Life Insurance Company submitted to the staff of the Massachusetts Division of Insurance (the Division) a draft Plan of Reorganization (the Plan) whereby John Hancock would convert, pursuant to Massachusetts insurance law, from a Massachusetts mutual life insurance company to a Massachusetts stock life insurance company and become a wholly- owned subsidiary of John Hancock Financial Services. It is anticipated a final plan of Reorganization will be adopted by the Company's Board of Directors later in 1999 following completion of the informal review of the draft Plan by the staff of the Division. Under the Plan, the eligible policyholders of John Hancock will receive shares of Common Stock of John Hancock Financial Services, policy credits or cash in exchange for their policyholders' membership interest in John Hancock. Under the Plan, John Hancock will establish and operate a closed block of participating business for the benefit of the policies included therein (the Closed Block). Such business (the Closed Block Business) will contain certain classes of individual or joint traditional whole life insurance participating policies and individual term life insurance policies which are in force on the effective date. The Closed Block will continue in effect until no more policies included therein are in force or until the Commissioner consents to the termination of the Closed Block. John Hancock will allocate to the Closed Block an amount of assets expected to produce cash flows which, together with anticipated revenues from the Closed Block Business, are reasonably sufficient to support the Closed Block Business, including provision for payments of claims, certain expenses and taxes, and for continuation of 1999 dividend scales if experience underlying such scales continues. Future changes in actual reinvestment rates over the long term from assumed reinvestment rates, similar to changes in other assumptions made in funding the Closed Block, may cause dividend scales to change. F-14 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 2--Reorganization--(Continued) To the extent that over time cash flows from the assets allocated to the Closed Block and other experience related to the Closed Block Business are, in the aggregate, more favorable than assumed in establishing the Closed Block, total dividends paid to Closed Block policyholders in future years will be greater than the total dividends that would have been paid to such policyholders if the dividend scales payable in 1999 had been continued. Conversely, to the extent that over time such cash flows and other experience are, in the aggregate, less favorable than assumed in setting up the Closed Block, total dividends paid to Closed Block policyholders in future years will be less than the total dividends that would have been paid to such policyholders if the dividend scales payable in 1999 had been continued. In addition, if the assets allocated to the Closed Block, the cash flows therefrom and the revenues from the Closed Block Business prove to be insufficient to pay the benefits guaranteed under the policies and contracts included in the Closed Block, John Hancock Life Insurance Company will be required to make such payments from its general funds and will reflect the charge to earnings at the time it is determined that any such funding is required. Since the Closed Block will be funded to provide for payment of guaranteed benefits on such policies and contracts, and in addition, for continuation of dividends paid under 1999 dividend scales (assuming the experience underlying such scales continues), it will not be necessary to use general funds to pay guaranteed benefits unless the Closed Block Business experiences substantial adverse deviations in investment, mortality, persistency or other experience factors. Note 3--Investments The following information summarizes the components of net investment income and realized investment gains, net:
Year Ended December 31 ---------------------------- 1998 1997 1996 -------- -------- -------- (in millions) Net Investment Income Fixed maturities........................... $2,210.2 $2,097.3 $2,081.8 Equity securities.......................... 18.7 27.8 22.1 Mortgage loans on real estate.............. 781.2 808.6 880.1 Real estate................................ 415.7 430.9 395.9 Policy loans............................... 111.9 107.7 109.2 Short-term investments..................... 45.3 71.7 65.1 Other...................................... 181.3 144.5 158.7 -------- -------- -------- Gross investment income.................. 3,764.3 3,688.5 3,712.9 Less investment expenses................... 433.6 497.8 489.8 -------- -------- -------- Net investment income.................... $3,330.7 $3,190.7 $3,223.1 ======== ======== ======== Realized Investment Gains (Losses), Net Fixed maturities........................... $ 110.6 $ 101.3 $ 43.1 Equity securities.......................... 115.2 23.6 140.3 Mortgage loans on real estate and real estate.................................... (15.6) 64.2 (22.4) Other...................................... (71.1) (42.1) (32.7) Amortization adjustment for deferred policy acquisition costs......................... (41.2) (31.2) (17.6) -------- -------- -------- Realized investment gains, net........... $ 97.9 $ 115.8 $ 110.7 ======== ======== ========
Gross gains of $268.1 million in 1998, $143.8 million in 1997 and $159.1 million in 1996 and gross losses of $92.9 million in 1998, $35.4 million in 1997 and $30.6 million in 1996 were realized on the sale of available-for-sale securities. F-15 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3--Investments--(Continued) The Company's investments in held-to-maturity securities and available-for- sale securities are summarized below:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (in millions) December 31, 1998 Held-to-Maturity: Corporate securities............... $11,617.0 $1,041.2 $150.3 $12,507.9 Mortgage-backed securities......... 1,318.1 43.2 0.5 1,360.8 Obligations of states and political subdivisions...................... 29.4 3.4 -- 32.8 Debt securities issued by foreign governments....................... 6.0 6.5 -- 12.5 U.S. Treasury securities and obligations of U.S. government corporations and agencies......... 7.7 -- -- 7.7 --------- -------- ------ --------- Total............................ $12,978.2 $1,094.3 $150.8 $13,921.7 ========= ======== ====== ========= Available-for-Sale: Corporate securities............... $ 9,358.3 $ 734.6 $230.3 $ 9,862.6 Mortgage-backed securities......... 4,361.2 156.2 5.4 4,512.0 Obligations of states and political subdivisions...................... 69.3 7.0 -- 76.3 Debt securities issued by foreign governments....................... 387.2 62.4 5.3 444.3 U.S. Treasury securities and obligations of U.S. government corporations and agencies......... 315.5 11.6 0.1 327.0 --------- -------- ------ --------- Total fixed maturities............. 14,491.5 971.8 241.1 15,222.2 Equity securities.................. 756.8 321.5 82.5 995.8 --------- -------- ------ --------- Total............................ $15,248.3 $1,293.3 $323.6 $16,218.0 ========= ======== ====== =========
F-16 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3--Investments--(Continued)
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (in millions) December 31, 1997 Held-to-Maturity: Corporate securities............... $11,192.6 $ 896.4 $ 68.4 $12,020.6 Mortgage-backed securities......... 1,406.6 28.0 21.7 1,412.9 Obligations of states and political subdivisions...................... 91.0 13.2 -- 104.2 Debt securities issued by foreign governments....................... 12.8 6.2 -- 19.0 U.S. Treasury securities and obligations of U.S. government corporations and agencies......... 7.7 -- -- 7.7 Other debt securities.............. 1.7 -- -- 1.7 --------- -------- ------ --------- Total............................ $12,712.4 $ 943.8 $ 90.1 $13,566.1 ========= ======== ====== ========= Available-for-Sale: Corporate securities............... $ 8,423.3 $ 784.4 $ 86.7 $ 9,121.0 Mortgage-backed securities......... 3,935.0 95.7 6.3 4,024.4 Obligations of states and political subdivisions...................... 76.5 4.5 -- 81.0 Debt securities issued by foreign governments....................... 355.1 82.5 0.2 437.4 U.S. Treasury securities and obligations of U.S. government corporations and agencies......... 778.4 11.4 0.3 789.5 Other debt securities.............. 8.6 0.6 -- 9.2 --------- -------- ------ --------- Total fixed maturities............. 13,576.9 979.1 93.5 14,462.5 Equity securities.................. 521.8 398.7 39.0 881.5 --------- -------- ------ --------- Total............................ $14,098.7 $1,377.8 $132.5 $15,344.0 ========= ======== ====== =========
F-17 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3--Investments--(Continued) The amortized cost and fair value of fixed maturities at December 31, 1998, by contractual maturity, are shown below:
Amortized Fair Cost Value --------- --------- (in millions) Held-to-Maturity: Due in one year or less.................................. $ 1,103.0 $ 1,141.6 Due after one year through five years.................... 3,663.7 3,893.2 Due after five years through ten years................... 3,116.5 3,357.3 Due after ten years...................................... 3,776.9 4,168.8 --------- --------- 11,660.1 12,560.9 Mortgage-backed securities............................... 1,318.1 1,360.8 --------- --------- Total.................................................. $12,978.2 $13,921.7 ========= ========= Available-for-Sale: Due in one year or less.................................. $ 656.9 $ 673.2 Due after one year through five years.................... 2,797.4 2,940.9 Due after five years through ten years................... 3,038.0 3,141.6 Due after ten years...................................... 3,638.0 3,954.5 --------- --------- 10,130.3 10,710.2 Mortgage-backed securities............................... 4,361.2 4,512.0 --------- --------- Total.................................................. $14,491.5 $15,222.2 ========= =========
Expected maturities may differ from contractual maturities because eligible borrowers may exercise their right to call or prepay obligations with or without call or prepayment penalties. The sale of fixed maturities held-to-maturity relate to certain securities, with amortized cost of $8.5 million, $98.1 million and $75.4 million, for the years ended December 31, 1998, 1997 and 1996, respectively, which were sold specifically due to a significant decline in the issuers' credit quality. The related realized gains (losses), net on the sales, were $0.0 million, $(63.1) million and $(6.3) million in 1998, 1997 and 1996, respectively. The change in net unrealized gains (losses) on trading securities that has been included in earnings during 1998, 1997 and 1996 amounted to $(6.6) million, $5.0 million, and $8.7 million, respectively. The Company participates in a securities lending program for the purpose of enhancing income on securities held. At December 31, 1998 and 1997, $421.5 million and $217.0 million, respectively, of the Company's bonds and stocks, at market value, were on loan to various brokers/dealers, but were fully collateralized by cash and U.S. government securities in an account held in trust for the Company. The market value of the loaned securities is monitored on a daily basis, and the Company obtains additional collateral when deemed appropriate. For 1998, 1997 and 1996, investment results passed through to participating group annuity contracts as interest credited to policyholders' account balances amounted to $178.1 million, $168.8 million and $182.4 million, respectively. Mortgage loans on real estate are evaluated periodically as part of the Company's loan review procedures and are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The allowance F-18 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3--Investments--(Continued) for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses that exist at the balance sheet date. Management's periodic evaluation of the adequacy of the allowance for losses is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Changes in the allowance for probable losses on mortgage loans on real estate and real estate to be disposed of were as follows:
Balance at Balance Beginning at End of Year Additions Deductions of Year ---------- --------- ---------- ------- (in millions) Year ended December 31, 1998 Mortgage loans on real estate......... $127.3 $ 15.9 $ 32.2 $111.0 Real estate to be disposed of......... 25.5 97.0 10.5 112.0 ------ ------ ------ ------ Total............................... $152.8 $112.9 $ 42.7 $223.0 ====== ====== ====== ====== Year ended December 31, 1997 Mortgage loans on real estate......... $142.0 $ 19.5 $ 34.2 $127.3 Real estate to be disposed of......... 54.5 1.5 30.5 25.5 ------ ------ ------ ------ Total............................... $196.5 $ 21.0 $ 64.7 $152.8 ====== ====== ====== ====== Year ended December 31, 1996 Mortgage loans on real estate......... $204.2 $ 26.7 $ 88.9 $142.0 Real estate to be disposed of......... 72.1 5.7 23.3 54.5 ------ ------ ------ ------ Total............................... $276.3 $ 32.4 $112.2 $196.5 ====== ====== ====== ======
At December 31, 1998 and 1997, the total recorded investment in mortgage loans that are considered to be impaired under SFAS No. 114, along with the related provision for losses, were as follows:
December 31 -------------- 1998 1997 ------ ------ (in millions) Impaired mortgage loans on real estate with provision for losses............................................ $210.6 $312.5 Provision for losses................................... (38.8) (62.8) ------ ------ Net impaired mortgage loans on real estate............. $171.8 $249.7 ====== ======
The average recorded investment in impaired loans and the interest income recognized on impaired loans were as follows:
Year Ended December 31 -------------------- 1998 1997 1996 ------ ------ ------ (in millions) Average recorded investment in impaired loans...... $193.2 $363.1 $453.3 Interest income recognized on impaired loans....... 2.7 18.4 17.2
F-19 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3--Investments--(Continued) The payment terms of mortgage loans on real estate may be restructured or modified from time to time. Generally, the terms of the restructured mortgage loans call for the Company to receive some form or combination of an equity participation in the underlying collateral, excess cash flows or an effective yield at the maturity of the loans sufficient to meet the original terms of the loans. Restructured commercial mortgage loans aggregated $241.8 million and $329.2 million as of December 31, 1998 and 1997, respectively. The expected gross interest income that would have been recorded had the loans been current in accordance with the original loan agreements and the actual interest income recorded were as follows:
Year Ended December 31 ----------------------- 1998 1997 1996 ------- ------- ------- (in millions) Expected.......................................... $23.7 $35.3 $51.3 Actual............................................ 12.6 26.0 33.3
At December 31, 1998, the mortgage portfolio was diversified by geographic region and specific collateral property type as displayed below:
Carrying Geographic Carrying Property Type Amount Concentration Amount ------------- ------------ --------------------- ------------ (in millions) (in millions) Apartments............ $2,377.9 East North Central... $1,122.1 Hotels................ 303.3 East South Central... 159.3 Industrial............ 1,075.6 Middle Atlantic...... 1,513.6 Office buildings...... 2,308.4 Mountain............. 386.7 Retail................ 1,742.8 New England.......... 864.3 1-4 Family............ 105.8 Pacific.............. 1,909.6 Mixed Use............. 93.8 South Atlantic....... 1,662.8 Agricultural.......... 1,380.2 West North Central... 337.0 Other................. 339.3 West South Central... 652.0 Allowance for losses.. (111.0) Canada/Other......... 1,119.7 -------- Allowance for Total................. $9,616.1 losses............... (111.0) ======== -------- Total................ $9,616.1 ========
Mortgage loans with outstanding principal balances of $107.0 million, bonds with amortized cost of $107.1 million and real estate with a carrying value of $22.3 million were non-income producing for the year ended December 31, 1998. Depreciation expense on investment real estate was $41.7 million, $73.1 million and $68.9 million in 1998, 1997 and 1996, respectively. Accumulated depreciation was $189.4 million and $289.6 million at December 31, 1998 and 1997, respectively. Investments in unconsolidated joint ventures and partnerships accounted for by using the equity method of accounting totaled $286.0 million and $297.7 million at December 31, 1998 and 1997, respectively. Total combined assets of these joint ventures and partnerships were $1,819.9 million and $1,874.2 million (consisting primarily of investments), and total combined liabilities were $425.3 million and $800.4 million (including $349.2 million and $135.9 million of nonrecourse notes payable to banks) at December 31, 1998 and 1997, F-20 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3--Investments--(Continued) respectively. Total combined revenues and expenses of such joint ventures and partnerships were $1,435.6 million and $1,128.0 million, respectively, resulting in $312.6 million of total combined income from operations before income taxes in 1998. Total combined revenues of such joint ventures and partnerships were $1,524.1 million and $1,388.3 million, and total combined expenses were $1,275.5 million and $1,209.1 million, respectively, resulting in $248.6 million and $179.2 million of total combined income from operations before income taxes in 1997 and 1996, respectively. Net investment income on investments accounted for on the equity method totaled $70.0 million, $54.6 million and $51.2 million in 1998, 1997 and 1996, respectively. Note 4--Derivatives The notional amounts, carrying values and estimated fair values of the Company's derivative instruments by type of hedge are as follows:
Number of Assets (Liabilities) Contracts/ -------------------------------- Notional Amounts 1998 1997 ------------------ --------------- --------------- Carrying Fair Carrying Fair 1998 1997 Value Value Value Value -------- -------- -------- ------ -------- ------ (in millions) Asset Hedges: Futures contracts to sell securities....... 12,477 4,100 $ (3.7) $ (3.7) $ 2.9 $ 2.9 Interest rate swap agreements Notional............. $5,485.0 $4,477.3 (127.4) (411.0) (60.2) (208.2) Average Fixed Rate-- Paid................ 6.74% 6.95% -- -- -- -- Average Float Rate-- Received............ 5.07% 5.83% -- -- -- -- Interest rate cap agreements............ 80 80 0.4 0.4 0.5 0.5 Interest rate swaption agreements............ 30.0 64.2 (1.9) (1.9) (1.7) (1.7) Currency rate swap agreements............ 439.5 400.1 (19.5) (19.5) (18.2) (18.2) Equity collar agreements............ -- -- 28.6 28.6 (14.1) (14.1) Liability Hedges: Futures contracts to acquire securities.... 1,470 1,559 (0.3) (0.3) (1.2) (1.2) Interest rate swap agreements Notional............. 2,483.3 2,790.0 -- 235.9 -- 156.0 Average Fixed Rate-- Received............ 6.42% 6.71% -- -- -- -- Average Float Rate-- Paid................ 5.07% 5.83% -- -- -- -- Interest Rate Swaps (receive CMT rate).... 609.7 450.6 -- (0.2) -- 3.2 Interest rate cap agreements............ 129.4 129.4 3.2 3.2 1.6 1.6 Interest rate floor agreements............ 125.0 125.0 0.7 0.7 0.4 0.4 Currency rate swap agreements............ 2,597.4 -- -- 21.8 -- --
Financial futures contracts are used principally to hedge risks associated with interest rate fluctuations on sales of guaranteed investment contracts. The Company is subject to the risks associated with changes in the value of the underlying securities; however, such changes in value generally are offset by opposite changes in the value of the hedged items. The contracts or notional amounts of the contracts represent the extent of the Company's involvement but not the future cash requirements, as the Company intends to close the open positions prior to settlement. The futures contracts expire in 1999. The interest rate swap agreements expire in 1999 to 2028. The interest rate cap and floor agreements expire in 2000 to 2007. Interest rate swaption agreements expire in 2025. The currency rate swap agreements expire in 1999 to 2036. The equity collar agreements expire in 2003. Fair values for futures contracts are based on quoted market prices. Fair values for interest rate swap, cap and floor agreements, swaptions, and currency swap agreements and equity collar agreements are based on F-21 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4--Derivatives--(Continued) current settlement values. The current settlement values are based on quoted market prices, which utilize pricing models or formulas using current assumptions. The Company's exposure to credit risk is the risk of loss from a counterparty failing to perform to the terms of the contract. The Company continually monitors its position and the credit ratings of the counterparties to these derivative instruments. To limit exposure associated with counterparty nonperformance on interest rate and currency swap agreements, the Company enters into master netting agreements with its counterparties. The Company believes the risk of incurring losses due to nonperformance by its counterparties is remote and that such losses, if any, would be immaterial. Futures contracts trade on organized exchanges and, therefore, have minimal credit risk. Note 5--Income Taxes Two of the Company's domestic life insurance companies (John Hancock Mutual Life Insurance Company and John Hancock Variable Life Insurance Company) file consolidated federal income tax returns with John Hancock's non-life insurance company subsidiaries (John Hancock Subsidiaries, Inc. and John Hancock International Holdings, Inc.). The Company's other domestic life insurance company, Investors Partner Life Insurance Company, previously filed a separate tax return and is now eligible for inclusion in the 1998 consolidated federal income tax return. In addition to taxes on operations, mutual life insurance companies are charged an equity base tax. The equity base tax is determined by applying an industry based earnings rate to John Hancock's average equity base, as defined by the Internal Revenue Code. The industry earnings rate is determined by the Internal Revenue Service (IRS) and is not finalized until subsequent years. John Hancock estimates income taxes based on estimated industry earnings rates and revises these estimates up or down when the earnings rates are finalized and published by the IRS. Income before income taxes and extraordinary item includes the following:
Year Ended December 31 ---------------------- 1998 1997 1996 ------ ------ ------ (in millions) Domestic......................................... $611.9 $566.8 $652.7 Foreign.......................................... 32.2 22.9 15.3 ------ ------ ------ Income before income taxes and extraordinary item............................................. $644.1 $589.7 $668.0 ====== ====== ====== The components of income taxes were as follows: Year Ended December 31 ---------------------- 1998 1997 1996 ------ ------ ------ (in millions) Current taxes: Federal........................................ $234.9 $144.2 $293.2 Foreign........................................ 1.9 9.5 10.7 State.......................................... 6.3 7.3 8.6 ------ ------ ------ 243.1 161.0 312.5 Deferred taxes: Federal........................................ (66.0) (45.6) (63.4) Foreign........................................ 7.7 (1.9) (5.5) State.......................................... (0.9) (7.1) 3.9 ------ ------ ------ (59.2) (54.6) (65.0) ------ ------ ------ Total income taxes........................... $183.9 $106.4 $247.5 ====== ====== ======
F-22 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 5--Income Taxes--(Continued) A reconciliation of income taxes computed by applying the federal income tax rate to income before income taxes and the consolidated income tax expense charged to operations follows:
Year Ended December 31 ---------------------- 1998 1997 1996 ------ ------ ------ (in millions) Tax at 35%.............................................. $225.4 $206.4 $233.8 Add (deduct): Equity base tax....................................... (19.9) (25.3) 15.4 Prior year taxes...................................... 5.8 9.0 12.1 Tax credits........................................... (13.0) (20.0) (8.9) Foreign taxes......................................... 2.5 4.5 4.7 Tax exempt investment income.......................... (24.4) (18.5) (18.0) Non-taxable gain on sale of subsidiary................ -- -- (8.8) Use of loss carryforwards............................. -- (51.0) -- Other................................................. 7.5 1.3 17.2 ------ ------ ------ Total income taxes.................................. $183.9 $106.4 $247.5 ====== ====== ======
The significant components of the Company's deferred tax assets and liabilities were as follows:
December 31 ---------------- 1998 1997 ------- ------- (in millions) Deferred tax assets: Policy reserve adjustments.................................. $ 673.7 $ 630.6 Other postretirement benefits............................... 151.2 159.6 Investment valuation reserves............................... 175.8 116.7 Dividends payable to policyholders.......................... 132.9 125.0 Unearned premium............................................ 49.1 43.7 Loss on sale of foreign subsidiary.......................... 68.0 68.0 Interest.................................................... 37.8 29.3 Other....................................................... 79.8 70.5 ------- ------- Total deferred tax assets................................. 1,368.3 1,243.4 Valuation allowance......................................... (17.0) (17.0) ------- ------- Net deferred tax assets................................... 1,351.3 1,226.4 ------- ------- Deferred tax liabilities: Deferred policy acquisition costs........................... 684.6 649.5 Depreciation................................................ 268.4 282.4 Basis in partnerships....................................... 142.0 124.3 Market discount on bonds.................................... 48.7 49.9 Pension plan expense........................................ 60.6 45.9 Capitalized charges related to mutual funds................. 98.4 88.7 Unrealized gains............................................ 204.2 275.7 ------- ------- Total deferred tax liabilities............................ 1,506.9 1,516.4 ------- ------- Net deferred tax liabilities.............................. $ 155.6 $ 290.0 ======= =======
The Company made income tax payments of $163.3 million in 1998, $223.1 million in 1997 and $345.9 million in 1996. F-23 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6--Debt and Line of Credit Short-term and long-term debt consists of the following:
December 31 ------------------ 1998 1997 -------- -------- (in millions) Short-term debt: Commercial paper......................................... $ 411.1 $ 350.7 Current maturities of long-term debt..................... 16.7 297.2 -------- -------- Total short-term debt.................................. 427.8 647.9 -------- -------- Long-term debt: Surplus notes, 7.38% maturing in 2024.................... 446.9 446.9 REMIC Trust class A2 notes, interest at LIBOR plus 0.27%, due monthly to June 25, 1998 (average monthly rate:1998--5.80%; 1997--5.93%).......................... -- 42.8 REMIC Trust class A2 notes, interest at LIBOR plus 0.19%, due monthly to December 28, 1998 (average monthly rate: 1998--5.72%; 1997--5.85%)............................... -- 160.8 Notes payable, interest ranging from 5.4% to 9.6%, due in varying amounts to 2007................................. 172.5 190.0 -------- -------- Total long-term debt....................................... 619.4 840.5 Less current maturities.................................... (16.7) (297.2) -------- -------- Long-term debt............................................. 602.7 543.3 -------- -------- Total debt............................................. $1,030.5 $1,191.2 ======== ========
The Company issues commercial paper primarily to take advantage of current investment opportunities, balance operating cash flows and existing commitments and meet working capital needs. The weighted average interest rate for outstanding commercial paper at December 31, 1998 and 1997 was 5.22% and 5.6%, respectively. The weighted average life for outstanding commercial paper at December 31, 1998 and 1997 was approximately 14 days and 8 days, respectively. Commercial paper borrowing arrangements are supported by a syndicated line of credit. The issuance of surplus notes was approved by the Commonwealth of Massachusetts Division of Insurance, and any payments of interest or principal on the surplus notes requires the prior approval of the Commissioner of the Commonwealth of Massachusetts Division of Insurance. In 1995, the Company issued $213.1 million of debt through a Real Estate Mortgage Investment Conduit (REMIC) and in 1996, the Company issued $292.0 million of additional debt through a REMIC (REMIC II). As collateral to the debt, the Company pledged $2.5 billion of commercial mortgages to the REMIC trusts. In addition, the Company has guaranteed the timely payment of principal and interest on the debt. The interest rates on the two notes are calculated on a floating basis based on the monthly LIBOR rate. The LIBOR rates were 5.06% and 5.72%, respectively, at December 31, 1998 and 1997. At December 31, 1998, the Company had a $500.0 million syndicated line of credit with a group of banks. The banks will commit, when requested, to loan funds at prevailing interest rates as determined in accordance with the line of credit agreement, which terminates on June 30, 2001. Under the terms of the agreement, the Company is required to maintain certain minimum levels of net worth and comply with certain other covenants, which were met at December 31, 1998. At December 31, 1998, the Company had no outstanding borrowings under this agreement. F-24 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6--Debt and Line of Credit--(Continued) Aggregate maturities of long-term debt are as follows: 1999--$16.7 million; 2000--$73.3 million; 2001--$23.0 million; 2002--$38.1 million; 2003--$23.0 million and thereafter--$445.3 million. Interest expense on debt, included in operating expenses, was $76.7 million, $76.9 million and $86.8 million in 1998, 1997 and 1996, respectively. Interest paid amounted to $76.7 million in 1998, $76.9 million in 1997 and $86.8 million in 1996. Note 7--Reinsurance The effect of reinsurance on premiums written and earned was as follows:
1998 1997 1996 Premiums Premiums Premiums ------------------ ------------------ ------------------ Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- (in millions) Life, Health and Annuity: Direct................ $2,830.4 $2,828.4 $2,931.6 $2,929.8 $2,887.0 $2,885.8 Assumed............... 351.9 351.9 417.1 417.1 391.0 391.0 Ceded................. (982.5) (982.4) (874.0) (874.0) (395.5) (395.5) -------- -------- -------- -------- -------- -------- Net life, health and annuity premiums... 2,199.8 2,197.9 2,474.7 2,472.9 2,882.5 2,881.3 -------- -------- -------- -------- -------- -------- Property and Casualty: Direct................ 0.4 7.1 37.5 65.0 77.9 88.7 Assumed............... -- 1.9 6.2 6.2 14.3 14.1 Ceded................. ( 0.4) (9.0) (43.0) (70.5) (86.3) (61.6) -------- -------- -------- -------- -------- -------- Net property and casualty premiums.. -- -- 0.7 0.7 5.9 41.2 -------- -------- -------- -------- -------- -------- Net premiums........ $2,199.8 $2,197.9 $2,475.4 $2,473.6 $2,888.4 $2,922.5 ======== ======== ======== ======== ======== ========
For the years ended December 31, 1998, 1997 and 1996, benefits to policyholders under life, health and annuity ceded reinsurance contracts were $810.8 million, $800.4 million and $260.8 million, respectively. On February 28, 1997, the Company sold a major portion of its group insurance business to UNICARE Life & Health Insurance Company (UNICARE), a wholly-owned subsidiary of WellPoint Health Networks Inc. The business sold includes the Company's group accident and health business and related group life business and Cost Care, Inc., Hancock Association Services Group and Tri- State, Inc., all indirect wholly-owned subsidiaries of the Company. The Company retained its group long-term care operations. Assets equal to liabilities of approximately $686.7 million at February 28, 1997, subject to agreement on asset and liability values, were transferred to UNICARE in connection with the sale. Income from operations in both periods was not significant. The insurance business sold was transferred to UNICARE through a 100% coinsurance agreement. The Company remains liable to the policyholders to the extent that UNICARE does not meet its contractual obligations under the coinsurance agreement. A pre-tax gain of $59.6 million was realized on the sale, comprised of a $33.9 million gain on the sale of the underlying business and a $25.7 million gain related to the curtailment of the Company's pension and other postretirement benefit plans. The business sold primarily consisted of short duration contracts, and $15.5 million and $8.5 million of the gain was recognized in 1997 and 1998, respectively, as the underlying claims were settled. The remaining gain realized on the sale of the underlying business of $9.9 million is being recognized over the remaining lives of the contracts in accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." The $25.7 million curtailment gain was recognized in 1997. F-25 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 7--Reinsurance--(Continued) The Company has secured a $397.0 million letter of credit facility with a group of banks. The banks have agreed to issue a letter of credit to the Company pursuant to which the Company may draw up to $397.0 million for any claims not satisfied by UNICARE under the coinsurance agreement after the Company has incurred the first $113.0 million of losses from such claims. The amount available pursuant to the letter of credit agreement and any letter of credit issued thereunder will be automatically reduced on a scheduled basis consistent with the anticipated runoff of liabilities related to the business reinsured under the coinsurance agreement. The letter of credit and any letter of credit issued thereunder are scheduled to expire on March 1, 2002. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under the reinsurance agreements. Failure of the reinsurers to honor their obligations could result in losses to the Company; consequently, estimates are established for amounts deemed or estimated to be uncollectible. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar characteristics of the reinsurers. Note 8--Pension Benefit Plans and Other Postretirement Benefit Plans The Company provides pension benefits to substantially all employees and general agency personnel. These benefits are provided through both qualified defined benefit and defined contribution pension plans. In addition, through nonqualified plans, the Company provides supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan limits imposed by federal tax law. Pension benefits under the defined benefit plans are based on years of service and average compensation generally during the five years prior to retirement. Benefits related to the Company's defined benefit pension plans paid to employees and retirees covered by annuity contracts issued by the Company amounted to $92.6 million in 1998, $89.7 million in 1997 and $84.4 million in 1996. Plan assets consist principally of listed equity securities, corporate obligations and U.S. government securities. The Company's funding policy for qualified defined benefit plans is to contribute annually an amount in excess of the minimum annual contribution required under the Employee Retirement Income Security Act (ERISA). This amount is limited by the maximum amount that can be deducted for federal income tax purposes. Because the qualified defined benefit plans are overfunded, no amounts were contributed to these plans in 1998 or 1997. The funding policy for nonqualified defined benefit plans is to contribute the amount of the benefit payments made during the year. The projected benefit obligation and accumulated benefit obligation for the non-qualified defined benefit pension plans, which are underfunded, for which accumulated benefit obligations are in excess of plan assets were $221.3 million, and $194.8 million, respectively at December 31, 1998, and $202.4 million and $175.5 million, respectively at December 31, 1997. Non-qualified plan assets, at fair value, were $1.2 million and $0.3 million at December 31, 1998 and 1997, respectively. Defined contribution plans include The Investment Incentive Plan and the Savings and Investment Plan. The expense for defined contribution plans was $8.1 million, $6.2 million, and $21.4 million in 1998, 1997 and 1996, respectively. In addition to the Company's defined benefit pension plans, the Company has employee welfare plans for medical, dental, and life insurance covering most of its retired employees and general agency personnel. Substantially all employees may become eligible for these benefits if they reach retirement age while employed by the Company. The postretirement health care and dental coverages are contributory based on service for post January 1, 1992 non-union retirees. A small portion of pre-January 1, 1992 non-union retirees also contribute. The applicable contributions are based on service. F-26 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 8--Pension Benefit Plans and Other Postretirement Benefit Plans-- (Continued) The Company's policy is to fund postretirement benefits in amounts at or below the annual tax qualified limits. As of December 31, 1998 and 1997, plan assets related to non-union employees were comprised of an irrevocable health insurance contract to provide future health benefits to retirees. Plan assets related to union employees were comprised of approximately 70% equity securities and 30% fixed income investments. The changes in benefit obligation and plan assets related to the Company's qualified and nonqualified benefit plans are summarized as follows:
Year Ended December 31 ------------------------------------------ Other Postretirement Pension Benefits Benefits ------------------ ---------------------- 1998 1997 1998 1997 -------- -------- ---------- ---------- (in millions) Change in benefit obligation: Benefit obligation at beginning of year......................... $1,734.5 $1,611.5 $ 452.7 $ 492.7 Service cost..................... 34.6 32.6 7.1 7.6 Interest cost.................... 117.5 111.3 29.1 31.1 Amendments....................... -- -- -- (4.8) Actuarial (gain) loss............ 55.5 77.5 (19.2) (42.5) Transition gain.................. (2.1) (1.3) -- -- Benefits paid.................... (100.2) (97.1) (28.6) (31.4) -------- -------- ---------- ---------- Benefit obligation at end of year............................ 1,839.8 1,734.5 441.1 452.7 -------- -------- ---------- ---------- Change in plan assets: Fair value of plan assets at beginning of year............... 2,044.6 1,829.9 172.7 132.4 Actual return on plan assets..... 298.5 304.0 39.9 31.0 Employer contribution............ 11.5 9.8 2.6 9.3 Transition loss.................. (3.3) (2.0) -- -- Benefits paid.................... (100.2) (97.1) -- -- -------- -------- ---------- ---------- Fair value of plan assets at end of year......................... 2,251.1 2,044.6 215.2 172.7 -------- -------- ---------- ---------- Funded status.................... 411.3 310.1 (225.9) (280.0) Unrecognized actuarial gain...... (301.6) (232.1) (187.2) (150.5) Unrecognized prior service cost.. 23.1 29.6 (1.8) (2.1) Unrecognized net transition asset........................... (23.9) (35.6) -- -- -------- -------- ---------- ---------- Prepaid (accrued) benefit cost, net........................... $ 108.9 $ 72.0 $ (414.9) $ (432.6) ======== ======== ========== ========== Amounts recognized in balance sheet consist of: Prepaid benefit cost............. $ 229.6 $ 189.6 Accrued benefit liability........ (193.6) (175.2) Intangible asset................. 8.3 10.6 Accumulated other comprehensive income.......................... 64.6 47.0 -------- -------- Prepaid benefit cost, net...... $ 108.9 $ 72.0 ======== ========
F-27 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 8--Pension Benefit Plans and Other Postretirement Benefit Plans-- (Continued) The assumptions used in accounting for the Company's qualified and nonqualified benefit plans were as follows:
Year Ended December 31 --------------------------------------- Other Postretirement Pension Benefits Benefits ----------------- --------------------- 1998 1997 1998 1997 -------- -------- ---------- ---------- (in millions) Discount rate..................... 6.8% 7.0% 6.8% 7.0% Expected return on plan assets.... 8.5% 8.5% 8.5% 8.5% Rate of compensation increase..... 4.6% 4.8% 4.6% 4.8%
For measurement purposes, a 5.8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.0% in 2001 and remain at that level thereafter. The net periodic benefit cost (credit) related to the Company's qualified and nonqualified benefit plans includes the following components:
Year Ended December 31 ---------------------------------------------- Other Postretirement Pension Benefits Benefits ---------------------- ---------------------- 1998 1997 1996 1998 1997 1996 ------ ------ ------ ------ ------ ------ (in millions) Service cost................... $ 34.6 $ 32.6 $ 34.2 $ 7.1 $ 7.6 $ 9.4 Interest cost.................. 117.5 111.3 109.2 29.1 31.1 34.4 Expected return on plan assets........................ (168.5) (150.7) (138.1) (14.7) (11.3) (15.9) Amortization of transition asset......................... (11.7) (11.7) (11.7) -- -- -- Amortization of prior service cost.......................... 6.5 6.6 6.7 (0.3) (0.2) (0.1) Recognized actuarial loss (gain)........................ (2.6) (1.0) 0.1 (7.8) (5.4) (2.8) Other.......................... (1.2) (20.2) 0.2 -- (5.2) 7.2 ------ ------ ------ ------ ------ ------ Net periodic benefit cost (credit).................... $(25.4) $(33.1) $ 0.6 $ 13.4 $ 16.6 $ 32.2 ====== ====== ====== ====== ====== ======
Assumed health care cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- (in millions) Effect on total of service and interest costs in 1998.............................. $ 4.4 $ (3.2) Effect on postretirement benefit obligations as of December 31, 1998.......................... 37.6 (33.6)
Note 9--Commitments and Contingencies The Company has extended commitments to purchase fixed maturity investments, preferred and common stock, and other invested assets and issue mortgage loans on real estate totaling $377.4 million, $72.0 million, $214.1 million and $509.9 million, respectively, at December 31, 1998. If funded, loans related to real estate mortgages would be fully collateralized by related properties. The Company monitors the creditworthiness of borrowers under long-term bond commitments and requires collateral as deemed necessary. The estimated fair values of the commitments described above aggregate $1.2 billion at December 31, 1998. The majority of these commitments expire in 1999. F-28 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 9--Commitments and Contingencies--(Continued) During 1996, the Company entered into a credit support and collateral pledge agreement with the Federal National Mortgage Association (FNMA). Under the agreement, the Company sold $532.8 million of commercial mortgage loans and acquired an equivalent amount of FNMA securities. The Company completed similar transactions with FNMA in 1991 for $1.04 billion and in 1993 for $71.9 million. FNMA is guaranteeing the full face value of the bonds of the three transactions to the bondholders. However, the Company has agreed to absorb the first 12.25% of original principal and interest losses (less buy-backs) for the pool of loans involved in the three transactions, based on the total outstanding principal balance of $1.04 billion at July 1, 1996, but is not required to commit collateral to support this loss contingency. Historically, the Company has experienced losses of less than one percent on its multi- family mortgage portfolio. At December 31, 1998, the aggregate outstanding principal balance of all the remaining pools of loans from 1991, 1993 and 1996 is approximately $602.8 million. During 1996, the Company entered into a credit support and collateral pledge agreement with the Federal Home Loan Mortgage Corporation (FHLMC). Under the agreement, the Company sold $535.3 million of multi-family loans and acquired an equivalent amount of FHLMC securities. FHLMC is guaranteeing the full face value of the bonds to the bondholders. However, the Company has agreed to absorb the first 10.5% of original principal and interest losses (less buy- backs) for the pool of loans involved but is not required to commit collateral to support this loss contingency. Historically, the Company has experienced total losses of less than one percent on its multi-family loan portfolio. At December 31, 1998, the aggregate outstanding principal balance of the pools of loans was $445.8 million. There were no mortgage buy-backs in 1998, 1997 or 1996. The Company is subject to insurance guaranty fund laws in the states in which it does business. These laws assess insurance companies amounts to be used to pay benefits to policyholders and claimants of insolvent insurance companies. Many states allow these assessments to be credited against future premium taxes. The Company believes such assessments in excess of amounts accrued would not materially affect its financial position or results of operations. In the normal course of its business operations, the Company is involved with litigation from time to time with claimants, beneficiaries and others, and a number of litigation matters were pending as of December 31, 1998. It is the opinion of management, after consultation with counsel, that the ultimate liability with respect to these claims, if any, will not materially affect the financial position or results of operations of the Company. During 1997, the Company entered into a court approved settlement relating to a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996. In entering into the settlement, the Company specifically denied any wrongdoing. The reserve held in connection with the settlement to provide for relief to class members and for legal and administrative costs associated with the settlement amounted to $436.6 million and $308.8 million at December 31, 1998 and 1997, respectively. Costs incurred related to the settlement were $230.8 million, $173.1 million, and $138.5 million in 1998, 1997 and 1996, respectively. The estimated reserve is based on a number of factors, including the estimated number of claims, the expected type of relief to be sought by class members (general relief or alternative dispute resolution), the estimated cost per claim and the estimated costs to administer the claims. During 1996, management determined that it was probable that a settlement would occur and that a minimum loss amount could be reasonably estimated. Accordingly, the Company recorded its best estimate based on the information available at that time. The terms of the settlement agreement were negotiated throughout 1997 and approved by the court on December 31, 1997. In accordance with the terms of the settlement agreement, the Company contacted class members during 1998 to determine the actual type of relief to be sought by class members. The majority of the responses from class members were received by the fourth quarter of 1998 and the type of relief sought by class members differed from the Company's previous estimates. F-29 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 9--Commitments and Contingencies--(Continued) Given the uncertainties associated with estimating the reserve, it is reasonably possible that the final cost of the settlement could differ materially from the amounts presently provided for by the Company. The Company will continue to update its estimate of the final cost of the settlement as the claims are processed and more specific information is developed, particularly as the actual cost of the claims subject to alternative dispute resolution becomes available. However, based on information available at this time, and the uncertainties associated with the final claim processing and alternative dispute resolution, the range of any additional costs related to the settlement cannot be reasonably estimated. Note 10--Statutory Financial Information John Hancock Mutual Life Insurance Company and its domestic insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the state of domicile. Prescribed statutory accounting practices include state laws, regulations and administrative rules, as well as guidance published by the NAIC. Permitted accounting practices encompass all accounting practices that are not prescribed by the sources noted above. Since 1988, the Commonwealth of Massachusetts Division of Insurance has provided the Company with approval to recognize the pension plan prepaid expense in accordance with the requirements of SFAS No. 87, "Employers' Accounting for Pensions." The Company furnishes the Massachusetts Division of Insurance with an actuarial certification of the prepaid expense computation on an annual basis. In addition, during 1998, the Company received permission from the Commonwealth of Massachusetts Division of Insurance to record its Asset Valuation Reserve in excess of the prescribed maximum reserve level by $111.3 million. There are no other material permitted practices. Statutory net income and surplus include the accounts of John Hancock Mutual Life Insurance Company and its variable life insurance subsidiary, John Hancock Variable Life Insurance Company, including its wholly-owned subsidiary, Investors Partners Life Insurance Company, and Investors Guaranty Life Insurance Company.
1998 1997 1996 -------- -------- -------- (in millions) Statutory net income........................... $ 627.3 $ 414.0 $ 313.8 Statutory surplus.............................. 3,388.7 3,157.8 2,856.1
Massachusetts has enacted laws governing the payment of dividends by insurers. Massachusetts statute limits the dividends an insurer may pay in any twelve month period, without the prior permission of the Commonwealth of Massachusetts Insurance Commissioner, to the greater of (i) 10% of its statutory policyholders' surplus as of the preceding December 31 or (ii) the individual company's statutory net gain from operations for the preceding calendar year, if such insurer is a life company. F-30 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 11 -- Policyholders' Equity The components of accumulated other comprehensive income are as follows:
Foreign Accumulated Currency Minimum Other Net Unrealized Translation Pension Comprehensive Gains (Losses) Adjustment Liability Income -------------- ----------- --------- ------------- (in millions) Balance at January 1, 1996...................... $ 468.1 $(10.0) $(22.1) $ 436.0 ------- ------ ------ ------- Gross unrealized gains (losses) (net of deferred income tax expense of $4.5 million).................. (2.8) -- -- (2.8) Less reclassification adjustment for (gains) losses, realized in net income (net of tax expense of $45.0 million)......... (83.5) -- -- (83.5) Participating group annuity contracts (net of deferred income tax benefit of $6.6 million).................. (12.1) -- -- (12.1) Adjustment to deferred policy acquisition costs and present value of future profits (net of deferred income tax expense of $10.6 million).................. 19.7 -- -- 19.7 ------- ------ ------ ------- Net unrealized gains (losses).................. (78.7) -- -- (78.7) Foreign currency translation adjustment.... -- (5.7) -- (5.7) Minimum pension liability (net of deferred income tax expense of $0.6 million).................. -- -- 0.8 0.8 ------- ------ ------ ------- Balance at December 31, 1996...................... $ 389.4 $(15.7) $(21.3) $ 352.4 ======= ====== ====== ======= Gross unrealized gains (losses) (net of deferred income tax expense of $145.8 million)........... 274.5 -- -- 274.5 Less reclassification adjustment for (gains) losses, realized in net income (net of tax expense of $37.9 million)......... (70.5) -- -- (70.5) Participating group annuity contracts (net of deferred income tax benefit of $22.5 million)............ (41.9) -- -- (41.9) Adjustment to deferred policy acquisition costs and present value of future profits (net of deferred income tax benefit of $16.7 million).................. (31.1) -- -- (31.1) ------- ------ ------ ------- Net unrealized gains (losses).................. 131.0 -- -- 131.0 Foreign currency translation adjustment.... -- (28.4) -- (28.4) Minimum pension liability (net of deferred income tax benefit of $4.4 million).................. -- -- (8.2) (8.2) ------- ------ ------ ------- Balance at December 31, 1997...................... 520.4 (44.1) (29.5) 446.8 ------- ------ ------ ------- Gross unrealized gains (losses) (net of deferred income tax benefit of $56.7 million)............ (121.3) -- -- (121.3) Less reclassification adjustment for (gains) losses, realized in net income (net of tax expense of $61.4 million)......... (113.9) -- -- (113.9) Participating group annuity contracts (net of deferred income tax expense of $31.1 million)............ 57.7 -- -- 57.7 Adjustment to deferred policy acquisition costs and present value of future profits (net of deferred income tax expense of $15.5 million).................. 28.9 -- -- 28.9 ------- ------ ------ ------- Net unrealized gains (losses).................. (148.6) -- -- (148.6) Foreign currency translation adjustment.... -- (6.0) -- (6.0) Minimum pension liability (net of deferred income tax benefit of $6.2 million).................. -- -- (8.8) (8.8) ------- ------ ------ ------- Balance at December 31, 1998...................... $ 371.8 $(50.1) $(38.3) $ 283.4 ======= ====== ====== =======
F-31 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 11--Policyholders' Equity--(Continued) Net unrealized investment gains (losses), included in the consolidated balance sheets as a component of policyholders' equity are summarized as follows:
1998 1997 1996 ------- -------- ------- (in millions) Balance, end of year comprises: Unrealized investment gains (losses) on: Fixed maturities............................. $ 730.7 $ 885.6 $ 629.1 Equity investments........................... 239.0 359.7 267.5 Derivatives and other........................ (111.5) (33.8) 3.0 ------- -------- ------- Total.......................................... 858.2 1,211.5 899.6 Amounts of unrealized investment (gains) losses attributable to: Participating group annuity contracts........ (138.7) (227.5) (163.1) Deferred policy acquisition cost and present value of future profits..................... (143.5) (187.9) (140.1) Deferred federal income taxes................ (204.2) (275.7) (207.0) ------- -------- ------- Total.......................................... (486.4) (691.1) (510.2) ------- -------- ------- Net unrealized investment gains................ $ 371.8 $ 520.4 $ 389.4 ======= ======== =======
Note 12--Segment Information The Company offers financial products and services in two major businesses: (i) its retail business, which offers protection and asset gathering products and services primarily to retail consumers; and (ii) the institutional business, which offers guaranteed and structured financial products and investment management products and services primarily to institutional customers. In addition, there is a Corporate and Other segment. The Company's reportable segments are strategic business units offering different products and services. The reportable segments are managed separately, as they focus on different products, markets or distribution channels. In the Retail-Protection segment, the Company offers a variety of individual life insurance and individual and group long-term care insurance products, including participating whole life, term life, universal life, variable life, and retail and group long-term care insurance. Products are distributed through multiple distribution channels, including insurance agents and brokers and alternative distribution channels that include banks, financial planners, direct marketing and the Internet. In the Retail-Asset Gathering segment, the Company offers individual annuities and mutual fund products and services. Individual annuities consist of fixed deferred annuities, fixed immediate annuities, single premium immediate annuities, and variable annuities. Mutual fund products and services primarily consist of open-end mutual funds, closed-end funds, and 401(k) services. This segment distributes its products through distribution channels including insurance agents and brokers affiliated with the Company, securities brokerage firms, financial planners, and banks. In the Institutional-Guaranteed and Structured Financial Products (G&SFP) segment, the Company offers a variety of retirement products to qualified defined benefit plans, defined contribution plans and non-qualified buyers. The Company's products include guaranteed investment contracts, funding agreements, single premium annuities, and general account participating annuities and fund type products. These contracts provide non-guaranteed, partially guaranteed, and fully guaranteed investment options through general and separate account products. The segment distributes its products through a combination of dedicated regional representatives, pension consultants and investment professionals. F-32 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 12--Segment Information--(Continued) The Institutional-Investment Management segment offers a wide range of investment management products and services to institutional investors covering a variety of private and publicly-traded asset classes including fixed income, equity, mortgage loans, and real estate. The Investment Management segment distributes its products through a combination of dedicated sales and marketing professionals, independent marketing specialists, and investment professionals. The Corporate and Other segment primarily consists of the Company's international insurance operations, certain corporate operations, and businesses that are either disposed of or in run-off. Corporate operations primarily include certain financing activities, income on capital not specifically allocated to the reporting segments and certain non-recurring expenses not allocated to the segments. The disposed businesses primarily consist of group health insurance and related group life insurance, property and casualty insurance, and selected broker/dealer operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Allocations of net investment income are based on the amount of assets allocated to each segment. Other costs and operating expenses are allocated to each segment based on a review of the nature of such costs, cost allocations utilizing time studies, and other relevant allocation methodologies. Management of the Company evaluates performance and bases incentives on after-tax operating income which excludes the effect of net realized investment gains and losses and unusual or non-recurring events and transactions. Segment after-tax operating income is determined by adjusting GAAP net income for net realized investment gains and losses, including gains and losses on disposals of businesses, extraordinary items, and certain other items which management believes are not indicative of overall operating trends. While these items may be significant components in understanding and assessing the Company's financial performance, management believes that the presentation of after-tax operating income enhances its understanding of the Company's results of operations by highlighting net income attributable to the normal, recurring operations of the business. Amounts reported as segment adjustments in the tables below primarily relate to: (i) benefits to policyholders and expenses incurred and recorded during the fourth quarter relating to the settlement of a class action lawsuit against the Company involving certain individual life insurance policies sold from 1979 through 1996; (ii) certain realized investment gains (losses), net of related amortization adjustment for deferred policy acquisition costs; (iii) the surplus tax on mutual life insurance companies which as a stock company will no longer be applicable to the Company; and (iv) benefits obtained in 1997 in connection with a pension participating group annuity contract modification. F-33 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 12--Segment Information--(Continued) The following table summarizes selected financial information by segment for the year ended or as of December 31 and reconciles segment revenues and segment after-tax operating income to amounts reported in the consolidated statements of income (in millions):
Retail-- Institutional-- Retail-- Asset Institutional- Investment Corporate Protection Gathering G&SFP Management and Other Consolidated ---------- --------- -------------- --------------- --------- ------------ 1998 Revenues: Segment revenues...... $ 2,759.2 $ 1,015.3 $ 1,731.2 $ 143.9 $ 1,103.9 $ 6,753.5 Realized investment gains, net........... 75.6 18.3 30.7 .2 23.7 148.5 --------- --------- --------- ------- --------- --------- Revenues.............. $ 2,834.8 $ 1,033.6 $ 1,761.9 $ 144.1 $ 1,127.6 $ 6,902.0 ========= ========= ========= ======= ========= ========= Net investment income............... $ 1,063.9 $ 378.0 $ 1,576.3 $ 24.1 $ 288.4 $ 3,330.7 Net income: Segment after-tax operating income..... $ 172.3 $ 111.1 $ 145.7 $ 15.4 $ 56.3 $ 500.8 Class action lawsuit.. -- -- -- -- (150.0) (150.0) Realized investment gains, net........... 49.2 12.0 17.2 .1 15.4 93.9 Surplus tax........... 11.7 .3 2.0 -- 1.5 15.5 Extraordinary item.... ( 7.9) (1.8) (1.5) -- ( .5) ( 11.7) --------- --------- --------- ------- --------- --------- Net income............ $ 225.3 $ 121.6 $ 163.4 $ 15.5 $ (77.3) $ 448.5 ========= ========= ========= ======= ========= ========= Supplemental information: Inter-segment revenues............. $ -- $ -- $ -- $ 34.3 $ (34.3) $ -- Equity in net income of investees accounted for by the equity method........ 54.9 -- 12.7 .9 1.5 70.0 Amortization of deferred policy acquisition costs.... 153.9 46.8 3.7 -- 45.3 249.7 Interest expense...... .3 8.5 -- 7.0 60.9 76.7 Income tax expense.... 88.6 62.2 68.4 10.7 (46.0) 183.9 Segment assets........ 25,703.7 12,715.7 29,315.2 3,439.6 5,792.5 76,966.7
F-34 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 12--Segment Information--(Continued)
Retail- Institutional- Retail- Asset Institutional- Investment Corporate Protection Gathering G&SFP Management and Other Consolidated ---------- --------- -------------- -------------- --------- ------------ 1997 Revenues: Segment revenues...... $ 2,631.8 $ 904.9 $ 1,814.4 $ 118.5 $ 1,315.1 $ 6,784.7 Realized investment gains, net........... 82.3 6.8 7.6 .1 64.8 161.6 --------- -------- --------- -------- --------- --------- Revenues.............. $ 2,714.1 $ 911.7 $ 1,822.0 $ 118.6 $ 1,379.9 $ 6,946.3 ========= ======== ========= ======== ========= ========= Net investment income............... $ 983.4 $ 353.3 $ 1,545.2 $ 4.0 $ 304.8 $ 3,190.7 Net income: Segment after-tax operating income..... $ 158.1 $ 93.3 $ 138.5 $ 17.2 $ 39.4 $ 446.5 Class action lawsuit.. -- -- -- -- (112.5) (112.5) Realized investment gains, net........... 53.5 4.4 4.8 .1 42.1 104.9 Surplus tax........... 16.9 .3 5.5 -- 12.6 35.3 Benefit from pension participating contract modification......... -- -- 9.1 -- -- 9.1 --------- -------- --------- -------- --------- --------- Net income............ $ 228.5 $ 98.0 $ 157.9 $ 17.3 $ (18.4) $ 483.3 ========= ======== ========= ======== ========= ========= Supplemental information: Inter-segment revenues............. $ -- $ -- $ -- $ 31.0 $ (31.0) $ -- Equity in net income of investees accounted for by the equity method........ 42.3 -- 8.8 .8 2.7 54.6 Amortization of deferred policy acquisition costs.... 224.7 38.9 5.2 -- 43.2 312.0 Interest expense...... .3 9.2 -- 1.3 66.1 76.9 Income tax expense.... 90.2 43.9 55.2 13.0 (95.9) 106.4 Segment assets........ 23,173.9 11,070.3 28,110.0 3,286.8 5,776.5 71,417.5 1996 Revenues: Segment revenues...... $ 2,517.6 $ 720.1 $ 2,035.7 $ 113.4 $ 2,207.3 $ 7,594.1 Realized investment gains, net........... 50.5 2.2 15.5 .1 42.4 110.7 --------- -------- --------- -------- --------- --------- Revenues.............. $ 2,568.1 $ 722.3 $ 2,051.2 $ 113.5 $ 2,249.7 $ 7,704.8 ========= ======== ========= ======== ========= ========= Net investment income............... $ 947.1 $ 320.0 $ 1,608.5 $ 3.4 $ 344.1 $ 3,223.1 Net income: Segment after-tax operating income..... $ 197.3 $ 55.7 $ 155.4 $ 21.6 $ 20.2 $ 450.2 Class action lawsuit.. -- -- -- -- (90.0) (90.0) Realized investment gains, net........... 32.8 1.4 9.9 .1 36.4 80.6 Surplus tax........... (5.7) (1.0) (2.3) -- (11.3) (20.3) --------- -------- --------- -------- --------- --------- Net income............ $ 224.4 $ 56.1 $ 163.0 $ 21.7 $ (44.7) $ 420.5 ========= ======== ========= ======== ========= ========= Supplemental information: Inter-segment revenues............. $ -- $ -- $ -- $ 21.1 $ (21.1) $ -- Equity in net income of investees accounted for by the equity method........ 40.5 -- 8.6 .3 1.8 51.2 Amortization of deferred policy acquisition costs.... 160.7 33.6 5.7 -- 30.9 230.9 Interest expense...... .1 12.9 -- .4 73.4 86.8 Income tax expense.... 121.0 33.4 87.5 15.6 (10.0) 247.5 Segment assets........ 21,031.8 9,272.2 28,061.2 2,465.2 5,672.3 66,502.7
F-35 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 12--Segment Information--(Continued) The Company operates primarily in the United States, Canada and the Pacific Rim (Malaysia, Singapore, Thailand, Indonesia, and the Philippines). The following table summarizes selected financial information by geographic location for the year ended or at December 31:
Income Before Income Taxes and Long-Lived Extraordinary Location Revenues Assets Assets Item - -------- -------- ---------- --------- ------------- (in millions) 1998 United States....................... $6,161.4 $442.5 $71,744.6 $611.9 Canada.............................. 512.0 24.9 4,941.6 30.2 Foreign--other...................... 228.6 2.1 280.5 2.0 -------- ------ --------- ------ $6,902.0 $469.5 $76,966.7 $644.1 ======== ====== ========= ====== 1997 United States....................... $6,207.5 $445.8 $66,589.4 $566.8 Canada.............................. 535.0 29.1 4,588.5 31.5 Foreign--other...................... 203.8 2.0 239.6 (8.6) -------- ------ --------- ------ $6,946.3 $476.9 $71,417.5 $589.7 ======== ====== ========= ====== 1996 United States....................... $6,990.9 $460.2 $62,184.8 $652.7 Canada.............................. 528.2 31.1 4,077.9 19.0 Foreign--other...................... 185.7 2.3 240.0 (3.7) -------- ------ --------- ------ $7,704.8 $493.6 $66,502.7 $668.0 ======== ====== ========= ======
The Company has no reportable major customers and revenues are attributed to countries based on the location of customers. Note 13--Fair Value of Financial Instruments The following discussion outlines the methodologies and assumptions used to determine the fair value of the Company's financial instruments. The aggregate fair value amounts presented herein do not represent the underlying value of the Company and, accordingly, care should be exercised in drawing conclusions about the Company's business or financial condition based on the fair value information presented herein. The following methods and assumptions were used by the Company to determine the fair values of financial instruments: Fair values for publicly traded fixed maturities (including redeemable preferred stocks) are obtained from an independent pricing service. Fair values for private placement securities and fixed maturities not provided by the independent pricing service are estimated by the Company by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. The fair value for equity securities is based on quoted market prices. The fair value for mortgage loans on real estate is estimated using discounted cash flow analyses using interest rates adjusted to reflect the credit characteristics of the loans. Mortgage loans with similar characteristics and credit risks are aggregated into qualitative categories for purposes of the fair value calculations. Fair values for impaired mortgage loans are measured based either on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral for loans that are collateral dependent. F-36 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 13--Fair Value of Financial Instruments--(Continued) The carrying amount in the balance sheet for policy loans, short-term investments and cash and cash equivalents approximates their respective fair values. The fair value of the Company's long-term debt is estimated using discounted cash flows based on the Company's incremental borrowing rates for similar types of borrowing arrangements. Carrying amounts for commercial paper and short-term borrowings approximate fair value. Fair values for the Company's guaranteed investment contracts are estimated using discounted cash flow calculations based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. The fair value for fixed-rate deferred annuities is the cash surrender value, which represents the account value less applicable surrender charges. Fair values for immediate annuities without life contingencies and supplementary contracts without life contingencies are estimated based on discounted cash flow calculations using current market rates. The Company's derivatives include futures contracts, interest rate swap, cap and floor agreements, swaptions, currency rate swap agreements and equity collar agreements. Fair values for these contracts are based on current settlement values. These values are based on quoted market prices for the financial futures contracts and brokerage quotes that utilize pricing models or formulas using current assumptions for all swaps and other agreements. The fair value for commitments approximates the amount of the initial commitment. The following table presents the carrying amounts and fair values of the Company's financial instruments:
Year Ended December 31 ------------------------------------------ 1998 1997 -------------------- -------------------- Carrying Fair Carrying Fair Value Value Value Value --------- --------- --------- --------- (in millions) Assets: Fixed maturities: Held-to-maturity............... $12,978.2 $13,921.7 $12,712.4 $13,566.1 Available-for-sale............. 15,222.2 15,222.2 14,462.5 14,462.5 Equity securities: Available-for-sale............. 995.8 995.8 881.5 881.5 Trading securities............. 67.9 67.9 72.1 72.1 Mortgage loans on real estate.... 9,616.1 10,204.4 9,296.3 9,873.0 Policy loans..................... 1,879.7 1,879.7 1,855.6 1,855.6 Short-term Investments........... 279.8 279.8 294.1 294.1 Cash and cash equivalents........ 1,876.4 1,876.4 1,036.6 1,036.6 Liabilities: Debt............................. 1,030.5 1,082.2 1,191.2 1,212.7 Guaranteed investment contracts.. 12,796.2 12,729.0 12,546.2 12,605.0 Fixed rate deferred and immediate annuities....................... 4,501.7 4,412.2 4,441.5 4,465.4 Supplementary contracts without life contingencies.............. 43.3 44.7 59.8 63.1 Derivatives assets/(liabilities) relating to: Futures contracts, net........... (4.0) (4.0) 1.7 1.7 Interest rate swap agreements.... (127.4) (175.3) (60.2) (49.0) Interest rate cap agreements..... 3.6 3.6 2.1 2.1 Interest rate floor agreements... 0.7 0.7 0.4 0.4 Interest rate swaption agreements...................... (1.9) (1.9) (1.7) (1.7) Currency rate swap agreements.... (19.5) 2.3 (18.2) (18.2) Equity collar agreements......... 28.6 28.6 (14.1) (14.1) Commitments........................ -- (1,202.5) -- (1,602.5)
F-37 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 14--Quarterly Results of Operations (Unaudited) The following is a summary of unaudited quarterly results of operations for 1998 and 1997:
1998 ------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- (in millions) Premiums........................... $ 559.6 $ 525.1 $ 563.0 $ 550.2 Net investment income.............. 801.7 831.3 808.4 889.3 Realized investment gains (losses), net............................... 27.1 86.3 (48.5) 33.0 Investment management revenues, commissions and other fees........ 156.5 170.7 160.7 171.8 Total revenues..................... 1,686.8 1,765.2 1,633.8 1,816.2 Benefits and expenses.............. 1,486.4 1,476.6 1,485.6 1,809.3 Income before income taxes and extraordinary item................ 200.4 288.6 148.1 7.0 Extraordinary item--demutualization expenses, net..................... -- 1.7 3.1 6.9 Net income......................... 143.1 192.2 108.3 4.9 1997 ------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- (in millions) Premiums........................... $ 676.6 $ 610.4 $ 566.3 $ 620.3 Net investment income.............. 780.2 798.4 819.1 793.0 Realized investment gains (losses), net............................... 43.8 8.9 13.5 49.6 Investment management revenues, commissions and other fees........ 129.9 126.0 145.8 153.0 Total revenues..................... 1,833.8 1,672.1 1,682.5 1,757.9 Benefits and expenses.............. 1,630.7 1,492.3 1,498.1 1,735.5 Income before income taxes and extraordinary item................ 203.1 179.8 184.4 22.4 Net income......................... 145.1 125.0 132.4 80.8
F-38 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED BALANCE SHEET June 30, 1999 (in millions) Assets Investments Fixed maturities: Held-to-maturity--at amortized cost (fair value: $13,332.8)........ $13,078.9 Available-for-sale--at fair value (cost: $17,140.1)................ 17,318.9 Trading securities--at fair value (cost $591.9).................... 582.4 Equity securities: Available-for-sale--at fair value (cost: $802.3)................... 1,030.0 Trading securities--at fair value (cost: $55.0).................... 73.2 Mortgage loans on real estate........................................ 10,373.7 Real estate.......................................................... 658.9 Policy loans......................................................... 1,898.9 Short-term investments............................................... 642.9 Other invested assets................................................ 1,101.1 --------- Total Investments................................................ 46,758.9 Cash and cash equivalents............................................ 1,511.8 Accrued investment income............................................ 629.7 Premiums and accounts receivable..................................... 201.0 Deferred policy acquisition costs.................................... 2,899.4 Reinsurance recoverable.............................................. 1,512.7 Other assets......................................................... 1,469.6 Separate accounts assets............................................. 26,862.6 --------- Total Assets..................................................... $81,845.7 ========= Liabilities and Policyholders' Equity Liabilities Future policy benefits............................................... $27,805.9 Policyholders' funds................................................. 16,064.5 Unearned revenue..................................................... 369.1 Unpaid claims and claim expense reserves............................. 722.2 Dividends payable to policyholders................................... 418.6 Short-term debt...................................................... 741.5 Long-term debt....................................................... 576.3 Income taxes......................................................... 346.8 Other liabilities.................................................... 2,716.2 Separate accounts liabilities........................................ 26,862.6 --------- Total Liabilities................................................ 76,623.7 Commitments and contingencies--Note 6 Policyholders' equity Surplus........................................ 5,087.1 Accumulated other comprehensive income............................... 134.9 --------- Total Policyholders' Equity...................................... 5,222.0 --------- Total Liabilities and Policyholders' Equity...................... $81,845.7 =========
The accompanying notes are an integral part of these unaudited interim consolidated financial statements. F-39 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30 -------------------------- 1999 1998 ------------ ------------ (in millions) Revenues Premiums........................................ $ 1,438.3 $ 1,084.7 Universal life and investment-type product charges........................................ 337.0 286.5 Net investment income........................... 1,716.9 1,633.0 Realized investment gains, net.................. 241.2 113.4 Investment management revenues, commissions and other fees..................................... 336.9 327.2 Other revenue................................... 14.3 7.2 ------------ ------------ Total revenues................................ 4,084.6 3,452.0 Benefits and expenses Benefits to policyholders....................... 2,445.3 1,968.4 Other operating costs and expenses.............. 663.4 664.6 Amortization of deferred policy acquisition costs.......................................... 87.5 98.3 Dividends to policyholders...................... 247.0 231.7 ------------ ------------ Total benefits and expenses................... 3,443.2 2,963.0 ------------ ------------ Income before income taxes, extraordinary item and cumulative effect of accounting change............................. 641.4 489.0 Income taxes...................................... 211.0 152.0 ------------ ------------ Income before extraordinary item and cumulative effect of accounting change...................... 430.4 337.0 Extraordinary item--demutualization expenses, net of tax........................................... ( 30.7) ( 1.7) Cumulative effect of accounting change--Note 4.... ( 9.7) -- ------------ ------------ Net income........................................ $ 390.0 $ 335.3 ============ ============
The accompanying notes are an integral part of these unaudited interim consolidated financial statements. F-40 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN POLICYHOLDERS' EQUITY Six Months Ended June 30, 1999
Accumulated Other Comprehensive Surplus Income Total --------- ------------- --------- (in millions) Balance at January 1, 1999................... $ 4,697.1 $ 283.4 $ 4,980.5 --------- Comprehensive income: Net income.................................. 390.0 390.0 Other comprehensive income, net of tax: Net unrealized losses...................... (163.2) (163.2) Foreign currency translation adjustment.... 13.9 13.9 Minimum pension liability.................. 0.8 0.8 --------- Comprehensive income--Note 8................. 241.5 --------- ------- --------- Balance at June 30, 1999..................... $ 5,087.1 $ 134.9 $ 5,222.0 ========= ======= =========
The accompanying notes are an integral part of these unaudited interim consolidated financial statements. F-41 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30 --------------------- 1999 1998 --------- ---------- (in millions) Cash flows from operating activities: Net income............................................. $ 390.0 $ 335.3 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of discount--fixed maturities.......... (29.2) (24.9) Realized investment gains, net...................... (241.2) (113.4) Change in deferred policy acquisition costs......... (133.9) (106.6) Depreciation and amortization....................... 38.5 67.3 Net cash flows from trading securities.............. (597.2) (8.9) Increase in accrued investment income............... (91.8) (40.0) Decrease in premiums and accounts receivable........ 26.5 16.7 Increase in other assets and other liabilities, net................................................ 536.4 358.3 Increase in policy liabilities and accruals, net.... 821.9 195.9 Increase in income taxes............................ 50.8 106.9 --------- ---------- Net cash provided by operating activities......... 770.8 786.6 Cash flows from investing activities: Sales of: Fixed maturities held-to-maturity..................... 40.7 5.2 Fixed maturities available-for-sale................... 5,233.2 11,204.5 Equity securities available-for-sale.................. 93.2 104.5 Real estate........................................... 1,094.1 22.0 Short-term investments and other invested assets...... 390.4 222.0 Maturities, prepayments and scheduled redemptions of: Fixed maturities held-to-maturity..................... 941.9 1,363.0 Fixed maturities available-for-sale................... 1,000.5 1,072.9 Short-term investments and other invested assets...... 156.5 5.6 Mortgage loans on real estate......................... 614.5 838.2 Purchases of: Fixed maturities held-to-maturity..................... (1,049.3) (974.6) Fixed maturities available-for-sale................... (8,871.4) (13,342.3) Equity securities available-for-sale.................. (98.9) (230.9) Real estate........................................... (132.0) (45.1) Short-term investments and other invested assets...... (659.8) (340.3) Mortgage loans on real estate issued.................. (1,350.8) (775.2) Other, net............................................ (6.0) (16.8) --------- ---------- Net cash used in investing activities............. (2,603.2) (887.3)
The accompanying notes are an integral part of these unaudited interim consolidated financial statements. F-42 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
Six Months Ended June 30 -------------------------- 1999 1998 ------------ ------------ (in millions) Cash flows from financing activities: Universal life and investment-type contract deposits........................................ $ 4,401.5 $ 4,143.5 Universal life and investment-type contract maturities and withdrawals...................... (3,221.0) (3,511.5) Issuance of long-term debt....................... -- 15.0 Repayment of long-term debt...................... (6.0) (127.2) Net increase in commercial paper................. 293.3 43.0 ------------ ------------ Net cash provided by financing activities...... 1,467.8 562.8 ------------ ------------ Net (decrease) increase in cash and cash equivalents................................... (364.6) 462.1 Cash and cash equivalents at beginning of period... 1,876.4 1,036.6 ------------ ------------ Cash and cash equivalents at end of period..... $ 1,511.8 $ 1,498.7 ============ ============
The accompanying notes are an integral part of these unaudited interim consolidated financial statements. F-43 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Note 1--Organization and Description of Business John Hancock Mutual Life Insurance Company (John Hancock) and its subsidiaries (collectively, the Company) is a diversified financial services organization that provides a broad range of insurance and investment products and investment management and advisory services. John Hancock is presently organized as a mutual life insurance company but expects to convert to a stock life insurance company pursuant to a Plan of Reorganization. Note 2--Basis of Presentation The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 1998. Note 3--Reorganization On November 9, 1998, John Hancock Mutual Life Insurance Company submitted to the staff of the Massachusetts Division of Insurance (the Division) a draft Plan of Reorganization (the Plan) whereby John Hancock would convert, pursuant to Massachusetts insurance law, from a Massachusetts mutual life insurance company to a Massachusetts stock life insurance company and become a wholly- owned subsidiary of John Hancock Financial Services, Inc. A Plan of Reorganization was adopted by the Company's Board of Directors on August 31, 1999. Under the Plan, the eligible policyholders of John Hancock will receive shares of Common Stock of John Hancock Financial Services, policy credits or cash in exchange for their policyholders' membership interest in John Hancock. Under the Plan, John Hancock will establish and operate a closed block of participating business for the benefit of the policies included therein (the Closed Block). Such business (the Closed Block Business) will contain certain classes of individual or joint traditional whole life insurance participating policies and individual term life insurance policies which are in force on the effective date. The Closed Block will continue in effect until no more policies included therein are in force or until the Commissioner consents to the termination of the Closed Block. John Hancock will allocate to the Closed Block an amount of assets expected to produce cash flows which, together with anticipated revenues from the Closed Block Business, are reasonably sufficient to support the Closed Block Business, including provision for payments of claims, certain expenses and taxes, and for continuation of 1999 dividend scales if experience underlying such scales continues. Future changes in actual reinvestment rates over the long term from assumed reinvestment rates, similar to changes in other assumptions made in funding the Closed Block, may cause dividend scales to change. To the extent that over time cash flows from the assets allocated to the Closed Block and other experience related to the Closed Block Business are, in the aggregate, more favorable than assumed in establishing the Closed Block, total dividends paid to Closed Block policyholders in future years will be greater than the total dividends that would have been paid to such policyholders if the dividend scales payable in 1999 had been continued. Conversely, to the extent that over time such cash flows and other experience are, in the aggregate, F-44 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3--Reorganization--(continued) less favorable than assumed in setting up the Closed Block, total dividends paid to Closed Block policyholders in future years will be less than the total dividends that would have been paid to such policyholders if the dividend scales payable in 1999 had been continued. In addition, if the assets allocated to the Closed Block, the cash flows therefrom and the revenues from the Closed Block Business prove to be insufficient to pay the benefits guaranteed under the policies and contracts included in the Closed Block, John Hancock Life Insurance Company will be required to make such payments from its general funds and will reflect the charge to earnings at the time it is determined that any such finding is required. Since the Closed Block will be funded to provide for payment of guaranteed benefits on such policies and contracts, and in addition, for continuation of dividends paid under 1999 dividend scales (assuming the experience underlying such scales continues), it will not be necessary to use general funds to pay guaranteed benefits unless the Closed Block Business experiences substantial adverse deviations in investment, mortality, persistency or other experience factors. Note 4--Cumulative Effect of Change in Accounting Principle On January 1, 1999 the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that start-up costs capitalized prior to January 1, 1999 be written-off and any future start-up costs be expensed as incurred. The adoption of SOP 98-5 resulted in a charge to operations of $9.7 million (net of taxes) and was accounted for as a cumulative effect of a change in accounting principle. Note 5--Recent Accounting Pronouncement The Financial Accounting Standards Board (FASB) deferred the effective date of Statement of Financial Accounting Standards (SFAS) No. 133 until 2001. The Company plans to adopt SFAS No. 133 effective January 1, 2001 and is currently evaluating the effect that the implementation of SFAS No. 133 will have on its results of operations and financial position. The impact is not known at this time. Note 6--Commitments and Contingencies In the normal course of its business operations, the Company is involved with litigation from time to time with claimants, beneficiaries and others, and a number of litigation matters were pending as of June 30, 1999. It is the opinion of management, after consultation with counsel, that the ultimate liability with respect to these claims, if any, will not materially affect the financial position or results of operations of the Company. During 1997, the Company entered into a court approved settlement relating to a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996. In entering into the settlement, the Company specifically denied any wrongdoing. The reserve held in connection with the settlement to provide for relief to class members and for legal and administrative costs associated with the settlement amounted to $466.5 million at June 30, 1999. Costs incurred related to the settlement were $60.2 million and $0 million for the six months ended June 30, 1999 and 1998, respectively. The estimated reserve is based on a number of factors, including the estimated number of claims, the expected type of relief to be sought by class members (general relief or alternative dispute resolution), the estimated cost per claim and the estimated costs to administer the claims. During 1996, management determined that it was probable that a settlement would occur and that a minimum loss amount could be reasonably estimated. Accordingly, the Company recorded its best estimate based on the information available at that time. The terms of the settlement agreement were negotiated throughout 1997 and approved by the court on December 31, 1997. In accordance with the terms of the settlement agreement, the Company contacted class members during 1998 to determine the actual type of relief to be sought by class members. The majority of the responses from class members were received by the fourth quarter of 1998. The F-45 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6--Commitments and Contingencies--(continued) type of relief sought by class members differed from the Company's previous estimates, primarily due to additional outreach activities by regulatory authorities during 1998 encouraging class members to consider alternative dispute resolution relief. In 1999, the Company updated its estimate of the cost of claims subject to alternative dispute resolution relief and revised its reserve estimate accordingly. Given the uncertainties associated with estimating the reserve, it is reasonably possible that the final cost of the settlement could differ materially from the amounts presently provided for by the Company. The Company will continue to update its estimate of the final cost of the settlement as the claims are processed and more specific information is developed, particularly as the actual cost of the claims subject to alternative dispute resolution becomes available. However, based on information available at this time, and the uncertainties associated with the final claim processing and alternative dispute resolution, the range of any additional costs related to the settlement cannot be reasonably estimated. Note 7--Segment Information The following tables summarize selected financial information by segment as of or for the six months ended June 30, 1999 and 1998, and reconcile segment revenues and segment after-tax operating income to amounts reported in the unaudited interim condensed consolidated statements of income. Amounts reported as segment adjustments in the tables below primarily relate to: (i) certain realized investment gains (losses), net of related amortization adjustment for deferred policy acquisition costs; (ii) benefits to policyholders and expenses incurred relating to the settlement of a class action lawsuit against the Company involving certain individual life insurance policies sold from 1979 through 1996; (iii) restructuring costs related to our mutual fund operations; (iv) the surplus tax on mutual life insurance companies which as a stock company will no longer be applicable to the Company; and (v) extraordinary item and cumulative effect of accounting change.
Retail- Institutional- Retail- Asset Institutional- Investment Corporate Protection Gathering G&SFP Management and Other Consolidated ---------- --------- -------------- -------------- --------- ------------ (in millions) As of or for the six months ended June 30, 1999: Revenues: Segment revenues........ $1,401.8 $520.7 $1,263.2 $89.3 $566.0 $3,841.0 Realized investment gains, net............. 115.9 8.0 126.4 1.0 ( 7.7) 243.6 -------- ------ -------- ----- ------ -------- Revenues................ $1,517.7 $528.7 $1,389.6 $90.3 $558.3 $4,084.6 ======== ====== ======== ===== ====== ======== Net investment income... $ 516.2 $187.5 $ 837.1 $23.6 $152.5 $1,716.9 Net income: Segment after-tax operating income....... $ 89.2 $ 61.7 $ 120.6 $17.2 $ 35.4 $ 324.1 Realized investment gains (losses), net.... 77.5 5.3 80.8 .7 ( 3.7) 160.6 Class action lawsuit.... -- -- -- -- (39.1) (39.1) Restructuring charge.... -- (3.8) -- -- -- (3.8) Surplus tax............. (3.6) (.6) (3.2) -- ( 4.0) (11.4) Extraordinary item...... (19.7) (4.0) (5.8) -- (1.2) (30.7) Cumulative effect of accounting change...... -- (9.6) -- (0.1) -- (9.7) -------- ------ -------- ----- ------ -------- Net income.............. $ 143.4 $ 49.0 $ 192.4 $17.8 $(12.6) $ 390.0 ======== ====== ======== ===== ====== ========
F-46 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 7--Segment Information--(continued)
Retail- Institutional- Retail- Asset Institutional- Investment Corporate Protection Gathering G&SFP Management and Other Consolidated ---------- --------- -------------- -------------- --------- ------------ (in millions) Supplemental information: Inter-segment revenues.. $ -- $ -- $ -- $ 22.1 $ (22.1) $ -- Equity in net income of investees accounted for by the equity method... 20.1 -- 2.1 1.6 5.7 29.5 Amortization of deferred policy acquisition costs.................. 56.4 23.2 0.7 -- 7.2 87.5 Interest expense........ .3 3.2 -- 2.1 29.2 34.8 Income tax expense...... 81.2 30.3 102.2 11.9 (14.6) 211.0 Segment assets.......... 26,703.8 13,735.8 31,887.8 3,455.0 6,063.3 81,845.7 As of or for the six months ended June 30, 1998: Revenues: Segment revenues........ $1,336.8 $ 513.5 $ 836.6 $ 72.2 $ 576.9 $3,336.0 Realized investment gains, net............. 63.8 11.9 23.2 -- 17.1 116.0 -------- -------- -------- ------- ------- -------- Revenues................ $1,400.6 $ 525.4 $ 859.8 $ 72.2 $ 594.0 $3,452.0 ======== ======== ======== ======= ======= ======== Net investment income... $ 508.2 $ 185.3 $ 772.4 $ 6.9 $ 160.2 $1,633.0 Net income: Segment after-tax operating income....... $ 84.3 $ 58.0 $ 76.3 $ 14.1 $ 27.9 $ 260.6 Realized investment gains, net............. 41.4 7.8 8.2 -- 11.1 68.5 Surplus tax............. 5.9 0.1 1.0 -- 0.9 7.9 Extraordinary item...... (1.2) (0.3) (0.2) -- -- (1.7) -------- -------- -------- ------- ------- -------- Net income.............. $ 130.4 $ 65.6 $ 85.3 $ 14.1 $ 39.9 $ 335.3 ======== ======== ======== ======= ======= ======== Supplemental information: Inter-segment revenues.. $ -- $ -- $ -- $ 17.9 $ (17.9) $ -- Equity in net income of investees accounted for by the equity method... 8.1 -- 2.7 .3 1.3 12.4 Amortization of deferred policy acquisition costs.................. 62.1 28.3 1.9 -- 6.0 98.3 Interest expense........ .2 7.3 -- 2.8 28.0 38.3 Income tax expense...... 50.3 37.1 33.1 10.0 21.5 152.0 Segment assets.......... 24,831.2 12,273.8 29,430.4 3,228.8 6,268.7 76,032.9
F-47 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 7--Segment Information--(continued) The Company operates primarily in the United States, Canada and the Pacific Rim (Malaysia, Singapore, Thailand, Indonesia, and the Philippines). The following table summarizes selected financial information by geographic location:
Income Before Income Taxes, Extraordinary Item and Cumulative Long-Lived Effect of Accounting Location Revenues Assets Assets Change - -------- -------- ---------- --------- -------------------- (in millions) As of or for the six months ended June 30, 1999: United States.............. $3,695.6 $440.5 $76,064.8 $623.0 Canada..................... 284.9 24.7 5,464.7 16.5 Foreign--other............. 104.1 2.2 316.2 1.9 -------- ------ --------- ------ $4,084.6 $467.4 $81,845.7 $641.4 ======== ====== ========= ====== As of or for the six months ended June 30, 1998: United States.............. $3,057.7 $432.5 $70,775.3 $468.9 Canada..................... 277.6 28.2 5,019.5 21.1 Foreign--other............. 116.7 1.9 238.1 (1.0) -------- ------ --------- ------ $3,452.0 $462.6 $76,032.9 $489.0 ======== ====== ========= ======
The Company has no reportable major customers and revenues are attributed to countries based on the location of customers. Note 8--Comprehensive Income Total comprehensive income was $241.5 million and $272.6 million for the six month periods ended June 30, 1999 and 1998, respectively. F-48 ANNEX A [LETTERHEAD OF MILLIMAN & ROBERTSON, INC.] August 31, 1999 The Board of Directors John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02111 Re: Plan of Reorganization of John Hancock Mutual Life Insurance Company, dated August 31, 1999 STATEMENT OF ACTUARIAL OPINIONS Qualifications I, Godfrey Perrott, am associated with the firm of Milliman & Robertson, Inc. (M&R) and am a Member of the American Academy of Actuaries, qualified under the Academy's Qualification Standards to render the opinions set forth herein. John Hancock Mutual Life Insurance Company's ("JHMLICO") Plan of Reorganization is carried out under the demutualization statute, Section 19E of Chapter 175 of the General Laws of the Commonwealth of Massachusetts ("(S)19E"). The opinions set forth herein are not legal opinions concerning the Plan, but rather reflect the application of actuarial concepts and standards of practice to the requirements set forth in (S)19E. Reliance In forming the opinion set forth in this memorandum, I have received from JHMLICO extensive information concerning JHMLICO's past and present practices and financial results. I, and other M&R staff acting under my direction, met with JHMLICO personnel and defined the information we required; in all cases, we were provided with the information we required. We have made no independent verification of this information, although we have reviewed it where practicable for general reasonableness and internal consistency. I have relied on this information, which--except for certain investment information discussed below - --was provided under the A-1 The Board of Directors August 31, 1999 Page 2 general direction of Senior Vice President and Corporate Actuary, Barry Shemin, F.S.A., M.A.A.A. My opinions depend on the substantial accuracy of this information. Certain information concerning the expected future cash flows arising from certain assets held by JHMLICO as of December 31, 1998, was provided under the general direction of Vice President Robert Reitano. I have relied on Mr. Reitano's confirmation that these cash flows represent, on the average, JHMLICO's estimates of the most likely cash flows to be derived from these assets. Certain information concerning the statement value, tax basis, and expected market value of certain assets held by JHMLICO as of December 31, 1998, was provided under the general direction of Earl Baucom, Richard Brown, Deborah McAneny, and Gregory Winn (all of whom are officers of JHMLICO). I have relied on their confirmation that these values are correct, or (in the case of expected market value) reasonable. My opinions depend on the substantial accuracy of this information. Process In all cases I, and other M&R staff acting under my direction, either derived the results on which my opinions rest or reviewed derivations carried out by JHMLICO personnel. Opinion #1 In my opinion, the plan for allocation of policyholder consideration set forth in Article VII of the Plan of Reorganization ("the Plan") is based on a fair and reasonable formula as required by (S)19E. Discussion The Policyholder Consideration is allocated on two bases: Variable and Fixed. The Variable Component is allocated among participating policies in proportion to actuarial contributions and represents about 80% of the total consideration. The Fixed component is allocated per policy and represents about 20% of the total consideration. The distribution described in Article VII of the Plan takes into account the ratio of any reasonably determined positive total past contributions to surplus and expected future contributions to surplus for each participating policy or contract ("actuarial contribution") to the sum of all such positive actuarial contributions. MILLIMAN & ROBERTSON, INC. A-2 The Board of Directors August 31, 1999 Page 3 Most of the consideration to be distributed to policyholders is allocated based on the ratios described above. Under (S)19E, there is no specific guidance given for the allocation of consideration in a reorganization other than that it be based on "a fair and reasonable formula." However, the contribution method, taking into account both past and expected future contributions to surplus, is recognized in the actuarial literature as an appropriate method. It is specifically endorsed by the Exposure Draft of the Actuarial Standard of Practice ("ASOP") "Allocation of Policyholder Consideration in Mutual Life Insurance Company Demutualizations" dated May 1999. I therefore find that the use of "actuarial contribution" as the principal basis underlying the allocation of consideration is fair and reasonable. I further find that the actuarial contribution method has been implemented in a reasonable manner. The distribution also takes into account the fact that policyholders have intangible membership rights that are independent of their actuarial contributions. Under the Plan, each Eligible Policy is allocated a fixed number of shares of common stock without regard to the actuarial contribution of that policy. This element of the allocation is consistent with overall concepts of equity and therefore is fair and reasonable. Opinion #2 In my opinion, the arrangement for establishment and operation of the Closed Block set forth in Article VIII of the Plan allocates assets to the Closed Block which are reasonably sufficient to enable the Closed Block to provide for the guaranteed benefits, certain expenses and taxes associated with Closed Block policies, and to provide for the continuation of the 1999 dividend scale if the experience underlying that scale continues. In my opinion, the arrangement also provides for the appropriate adjustment of the dividend scales if the underlying experience changes from that underlying the 1999 dividend scale. Discussion The above opinion rests in part on a projection that extends over the future life of all policies assigned to the Closed Block (the majority of these are individual and joint life insurance policies that are covered by JFMLICO's 1999 dividend scale, plus other such policies that will be issued prior to the Effective Date). That projection is based on the experience underlying the 1999 dividend scale and on the cash flows expected from assets already allocated to the Closed Block. The above opinion also rests in part on the adjustments that will be made shortly after the Effective Date to the assets already allocated to the Closed Block. The projection and adjustments, as set forth in the Closed Block Memorandum, indicate that the assets are sufficient to provide for the continuation of the 1999 dividend scale if the experience is unchanged. MILLIMAN & ROBERTSON, INC. A-3 The Board of Directors August 31, 1999 Page 4 The criteria set forth in Article VIII for modifying the dividend scales if the experience changes are such that, if followed, the Closed Block policyholders will be treated equitably in a manner consistent with the contribution principle for dividend determination. Although (S)19E sets forth no requirements that there be a Closed Block, the funding and operation of the Closed Block as set forth in Article VIII are consistent with actuarial practice, in particular ASOP 15 "Dividend Determination for Participating Individual Life Insurance Policies and Annuity Contracts", and ASOP 33 "Actuarial Responsibilities with Respect to Closed Blocks in Mutual Life Insurance Company Conversions". Opinion #3 In my opinion the appropriate policies are included in the Closed Block. Almost all individual policies which are currently receiving dividends, or are expected to receive dividends, are included in the Closed Block. Term nonparticipating policies (which are substantially reinsured) are included in the Closed Block for administrative reasons. Their inclusion should not affect the participating policies in the Closed Block adversely because the reinsurance already in place on the nonpar term policies transfers most of the mortality risk to the reinsurer. Discussion The Closed Block includes individual and joint life policies covered by JHMLICO's 1999 dividend scale, plus other such policies that will be issued prior to the Effective Date. It also includes individual nonparticipating term policies. It excludes supplementary contracts. It also excludes small amounts of variable life insurance which receive a dividend covering only mortality and expense gains. (These policies were originally issued by John Hancock Variable Life Insurance Company ("JHVLICO") and were assumed by JHMLICO when JHVLICO surrendered its license to issue insurance in New York.) These dividends are small in aggregate amount. Most individual disability income and individual medical policies, while technically participating, have not received dividends for years (similar to the rest of the industry), and there is no expectation that they will receive dividends in the future. A few individual disability income and individual medical policies have received dividends. In addition, a small number of individual retirement annuity policies receive dividends. There are sound administrative reasons to exclude these policies from the Closed Block. The aggregate amount of dividends paid on these policies is small. There are some group policies issued to Hancock sponsored trusts as the policyholder. These include coverages such as optional term life, accidental death and dismemberment, and long term care insurance sold through a sponsoring organization (such as an employer or an MILLIMAN & ROBERTSON, INC A-4 The Board of Directors August 31, 1999 Page 5 association). Sponsored trust arrangements were also used for annuities sold to individuals through sponsoring banks. Each of these group policies was considered for inclusion in the Closed Block since each could be considered insurance that is individual in substance while group in form. None of these blocks pay individual dividends, and so it is not appropriate to include them in the Closed Block. Thus, the Closed Block encompasses almost all individual and joint policies that pay dividends, and this is the appropriate content for the Closed Block to protect the dividend expectations of JHMLICO's policyholders. This is also consistent with actuarial practice as set forth in ASOP 33. Very truly yours, /s/ Godfrey Perrott Godfrey Perrott, F.S.A., M.A.A.A. Consulting Actuary MILLMAN & ROBERTSON, INC. A-5 [Alternate cover page for international prospectus] ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and we are not soliciting offers to buy these + +securities in any jurisdiction where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued , 2000 . Shares [LOGO OF JOHN HANCOCK APPEARS HERE] John Hancock Financial Services, Inc. COMMON STOCK ----------- This is an initial public offering of . shares of common stock of John Hancock Financial Services, Inc. The offering is being made in connection with the reorganization of John Hancock Mutual Life Insurance Company from a mutual life insurance company to a stock life insurance company in a process called a demutualization. In addition to these shares, an estimated . shares of our common stock will be issued to eligible policyholders of John Hancock Mutual Life Insurance Company in the reorganization. ----------- Prior to this offering there has been no public market for our common stock. We anticipate that the initial public offering price per share will be between $ . and $ . per share. ----------- We will apply to list our common stock on the New York Stock Exchange under the symbol "JHF". ----------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 12. ----------- PRICE $ . A SHARE -----------
Underwriting Price to Discounts and Proceeds to Public Commissions Company -------- ------------- ----------- Per Share.................................... $ $ $ Total........................................ $ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. John Hancock Financial Services, Inc. has granted the underwriters the right to purchase up to an additional . shares to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on [ ] 2000. , 2000 ----------- MORGAN STANLEY DEAN WITTER UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS The following is a summary of some United States federal income and estate tax consequences of the ownership and disposition of our common stock by non- U.S. holders. As used herein, "non-U.S. holder" means any person or entity that holds our common stock, other than (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in the United States or under the laws of the United States or of any state of the United States, (iii) an estate whose income is includable in gross income for U.S. federal income tax purposes regardless of its source or (iv) a trust if (x) a court within the United States is able to exercise primary supervision over the administration of the trust and (y) at least one U.S. person has authority to control all substantial decisions of the trust. Recently enacted legislation authorizes the issuance of Treasury Regulations that, under some circumstances, could reclassify as a non-U.S. partnership a partnership that would otherwise be treated as a U.S. partnership, or could reclassify as a U.S. partnership a partnership that would otherwise be treated as a non-U.S. partnership. Such regulations would apply only to partnerships created or organized after the date that proposed Treasury Regulations are filed with the Federal Register (or, if earlier, the date of issuance of a notice substantially describing the expected contents of the regulations). This summary is based on provisions of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury regulations promulgated thereunder (the "Treasury Regulations") and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change, possibly on a retroactive basis. This summary is for general information only. The tax treatment of a particular non-U.S. holder may vary depending on the holder's particular situation. In addition, this summary does not include any description of the tax laws of any state, local or non-U.S. government that may be applicable to a particular non-U.S. holder. PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK, AS WELL AS THE TAX CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN TAX LAWS. Income Tax Dividends. Generally, dividends paid on our common stock to a non-U.S. holder will be subject to U.S. federal income tax. Except for dividends that are effectively connected with a non-U.S. holder's conduct of a trade or business within the United States, this tax is imposed and collected by withholding at the rate of 30% of the amount of the dividend, unless reduced by an applicable income tax treaty. Currently, dividends paid to an address in a country other than the United States are presumed to be paid to a resident of such country in determining the applicability of a treaty for such purposes. However, under recently finalized Treasury Regulations relating to withholding of tax on non-U.S. persons, which by their terms apply to dividend and other payments made after December 31, 2000 (the "Final Withholding Regulations"), a non-U.S. holder who is the beneficial owner (within the meaning of the Final Withholding Regulations) of dividends paid on our common stock and who wishes to claim the benefit of an applicable treaty is generally required to satisfy certain certification and documentation requirements. Certain special rules apply to claims for treaty benefits made by non-U.S. persons that are entities rather than individuals and to beneficial owners (within the meaning of the Final Withholding Regulations) of dividends paid to entities in which such beneficial owners are interest holders. Except as may be otherwise provided in an applicable income tax treaty, dividends paid on our common stock to a non-U.S. holder that are effectively connected with the holder's conduct of a trade or business within the United States are subject to tax at ordinary U.S. federal income tax rates, which tax is not collected by ALT-2 withholding (except as described below under "Backup Withholding and Information Reporting"). All or part of any effectively connected dividends received by a non-U.S. corporation may also, under certain circumstances, be subject to an additional "branch profits" tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty. A non-U.S. holder who wishes to claim an exemption from withholding for effectively connected dividends is generally required to satisfy certain certification and documentation requirements. A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the U.S. Internal Revenue Service (the "I.R.S."). Disposition of Common Stock. Generally, non-U.S. holders will not be subject to U.S. federal income tax (or withholding thereof) in respect of gain recognized on a disposition of our common stock unless (i) the gain is effectively connected with the holder's conduct of a trade or business within the United States (in which case the "branch profits" tax described above may also apply if the holder is a non-U.S. corporation); (ii) in the case of a holder who is a nonresident alien individual and holds our common stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale and certain other conditions are met; (iii) we are or have been a "United States real property holding corporation" for U.S. federal income tax purposes (which the Company does not believe it has been or is currently) and the holder has held directly or constructively more than 5% of the outstanding our common stock within the five-year period ending on the date of the disposition; or (iv) the holder is an individual who lost U.S. citizenship within the 10-year period immediately preceding the close of the taxable year of such disposition, unless such loss of citizenship did not have a U.S. tax avoidance purpose. Estate Tax If an individual non-U.S. holder owns, or is treated as owning, our common stock at the time of his or her death, such stock would be subject to U.S. federal estate tax imposed on the estates of nonresident aliens, in the absence of a contrary provision contained in an applicable tax treaty. Backup Withholding and Information Reporting Dividends. Under current law, dividends paid on our common stock to a non- U.S. holder at an address outside the United States are generally exempt from backup withholding tax and U.S. information reporting requirements (but not from regular withholding tax, as discussed above). Under the Final Withholding Regulations, for dividends paid after December 31, 2000, a non-U.S. person must generally provide proper documentation indicating non-U.S. status to a withholding agent in order to avoid backup withholding tax; however, dividends paid to certain exempt recipients (not including individuals) will not be subject to backup withholding even if such documentation is not provided if the withholding agent is allowed to rely on certain regulatory presumptions concerning the recipient's non-U.S. status (including payment to an address outside the United States). Broker Sales. Payments of proceeds from the sale of our common stock by a non-U.S. holder made to or through a U.S. office of a broker are generally subject to both information reporting and backup withholding at a rate of 31% unless the holder certifies its non-U.S. status under penalties of perjury or otherwise establishes entitlement to an exemption. Payments of proceeds from the sale of our common stock by a non-U.S. holder made to or through a non- U.S. office of a broker generally will not be subject to information reporting or backup withholding. However, payments made to or through certain non-U.S. offices, including the non-U.S. offices of a U.S. broker, are generally subject to information reporting (but not backup withholding) unless the holder certifies its non-U.S. status under penalties of perjury or otherwise establishes entitlement to an exemption. A non-U.S. holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing an appropriate claim for refund with the I.R.S. ALT-3 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the expenses expected to be incurred in connection with the issuance and distribution of the common stock registered hereby, all of which expenses, except for the Securities and Exchange Commission registration fee, the New York Stock Exchange listing fee and the NASD filing fee, are estimates:
Description Amount ----------- -------- Securities and Exchange Commission registration fee............. $567,120 New York Stock Exchange listing fee and expenses................ * NASD filing fee................................................. * Blue Sky fees and expenses (including legal fees)............... * Printing and engraving expenses................................. * Legal fees and expenses (other than Blue Sky)................... * Accounting fees and expenses.................................... * Transfer Agent and Registrar's fee.............................. * Miscellaneous................................................... * -------- TOTAL......................................................... $* ========
- -------- * To be furnished by amendment Item 14. Indemnification of Directors and Officers. Our directors and officers may be indemnified against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by them as provided in the Delaware General Corporation Law and our Restated Certificate of Incorporation and By-Laws. We, by a majority vote of our disinterested directors or a committee thereof or, under certain circumstances, independent counsel appointed by the board of directors, or our stockholders, must determine that the director or officer seeking indemnification acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In addition, the Delaware General Corporation Law and our Restated Certificate of Incorporation may under certain circumstances limit the liability of directors and officers to us or our stockholders. If the person involved is not a director or officer of John Hancock Financial Services, Inc., the board of directors may cause John Hancock Financial Services, Inc. to indemnify, to the same extent allowed for our directors and officers, such person who was or is a party to a proceeding by reason of the fact that he or she is or was, or had agreed to become, our employee or agent, or is or was serving, or had agreed to serve, at our request as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise. We have in force and effect a policy insuring our directors and officers against losses which they or any of them shall become legally obligated to pay for by reason of any actual or alleged error or misstatement or misleading statement or act or omission or neglect or breach of duty by the directors and officers in the discharge of their duties, individually or collectively, or any matter claimed against them solely by reason of their being directors or officers. Such coverage is limited by the specific terms and provisions of the insurance policy. Item 15. Recent Sales of Unregistered Securities. [None.] II-1 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits. See Exhibit Index following the signature pages to this registration statement. (b) Financial Statement Schedules. II-2 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULES Schedule I Summary of Investments--Other Than Investments in Related Parties as of December 31, 1998 Schedule III Supplementary Insurance Information as of December 31, 1998, 1997 and 1996 and for each of the years then ended Schedule IV Reinsurance as of December 31, 1998, 1997 and 1996 and for each of the years then ended
II-3 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and SUBSIDIARIES SCHEDULE I--SUMMARY OF INVESTMENTS-- OTHER THAN INVESTMENTS IN RELATED PARTIES As of December 31, 1998 (in millions of dollars)
Amount at Which Shown in the Consolidated Type of Investment Cost (2) Value Balance Sheet ------------------------------------------ --------- -------- --------------- Fixed maturity securities available-for- sale Bonds: United States Government and government agencies and authorities................. $ 4,676.7 $4,839.0 $ 4,839.0 States, municipalities and political subdivisions............................. 69.3 76.3 76.3 Foreign governments....................... 387.2 444.3 444.3 Public utilities.......................... 932.5 970.6 970.6 Convertibles and bonds with warrants attached................................. 207.4 241.7 241.7 All other corporate bonds................. 7,604.0 8,011.1 8,011.1 Certificates of deposits.................. -- -- -- Redeemable preferred stock................ 614.4 639.2 639.2 --------- -------- --------- Total fixed maturity securities available-for-sale..................... 14,491.5 15,222.2 15,222.2 --------- -------- --------- Equity securities, available-for-sale: Common stocks: Public utilities.......................... 9.7 10.8 10.8 Banks, trust and insurance companies...... 28.8 30.6 30.6 Industrial, miscellaneous and all other... 441.3 677.4 677.4 Non-redeemable preferred stock............ 277.0 277.0 277.0 --------- -------- --------- Total equity securities available-for- sale................................... 756.8 995.8 995.8 --------- -------- --------- Fixed maturity securities held-to- maturity: Bonds: United States Government and government agencies and authorities................. 1,325.8 1,368.5 1,325.8 States, municipalities and political subdivisions............................. 29.4 32.8 29.4 Foreign governments....................... 6.0 12.5 6.0 Public utilities.......................... 1,133.7 1,186.5 1,133.7 Convertibles and bonds with warrants attached................................. 6.1 6.0 6.1 All other corporate bonds................. 10,477.2 11,315.4 10,477.2 Certificates of deposits.................. -- -- -- Redeemable preferred stock................ -- -- -- --------- -------- --------- Total fixed maturity securities held-to- maturity............................... 12,978.2 13,921.7 12,978.2 --------- -------- --------- Equity securities, trading: Common stocks: Public utilities.......................... -- -- -- Banks, trust and insurance companies...... -- -- -- Industrial, miscellaneous and all other... 53.0 67.9 67.9 Non-redeemable preferred stock............ -- -- -- --------- -------- --------- Total equity securities trading......... 53.0 67.9 67.9 --------- -------- --------- Mortgage loans on real estate (1)......... 9,727.1 XXXX 9,616.1 Real estate, net: Investment properties (1)................. 1,256.4 XXXX 1,204.9 Acquired in satisfaction of debt (1)...... 338.8 XXXX 278.3 Policy loans.............................. 1,879.7 XXXX 1,879.7 Other long-term investments............... 1,254.6 XXXX 1,254.6 Short-term investments.................... 279.8 XXXX 279.8 --------- -------- --------- Total investments........................ $43,015.9 XXXX $43,777.5 ========= ======== =========
- -------- (1) Difference is due to valuation allowances on mortgage loans on real estate and real estate. See note 3 to the consolidated financial statements. (2) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts. II-4 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and SUBSIDIARIES SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION As of December 31, 1998, 1997 and 1996 and for each of the years then ended (in millions of dollars)
Other Policy Deferred Policy Future Policy Claims and Acquisition Benefits, Losses, Unearned Benefits Premium Segment Costs and Expenses Revenue Payable Revenue - ------------------------ --------------- ----------------- ------------ ------------ -------- 1998: Protection.............. $2,073.8 $14,093.6 $219.5 $ 85.5 $1,351.4 Asset Gathering......... 425.2 4,850.0 -- 0.2 19.8 Guaranteed & Structured Financial Products..... 8.7 19,366.4 48.4 0.3 121.4 Investment Management... -- -- -- -- -- Corporate & Other....... 251.0 3,865.0 105.9 800.3 705.3 -------- --------- ------ -------- -------- Total.................. 2,758.7 42,175.0 373.8 886.3 2,197.9 -------- --------- ------ -------- -------- 1997: Protection.............. 1,957.6 13,001.7 200.5 82.0 1,343.0 Asset Gathering......... 376.7 4,765.1 -- 0.1 55.0 Guaranteed & Structured Financial Products..... 10.0 18,306.9 46.9 0.3 201.0 Investment Management... -- -- -- -- -- Corporate & Other....... 218.7 3,795.9 93.1 875.5 874.6 -------- --------- ------ -------- -------- Total.................. 2,563.0 39,869.6 340.5 957.9 2,473.6 -------- --------- ------ -------- -------- 1996: Protection.............. 1,958.9 12,330.2 181.4 88.1 1,286.8 Asset Gathering......... 340.1 4,302.5 -- 0.1 23.0 Guaranteed & Structured Financial Products..... 12.0 18,644.9 44.0 0.2 359.6 Investment Management... -- -- -- -- -- Corporate & Other....... 187.1 3,793.3 79.2 897.8 1,253.1 -------- --------- ------ -------- -------- Total.................. $2,498.1 $39,070.9 $304.6 $ 986.2 $2,922.5 -------- --------- ------ -------- -------- Amortization Benefits, Claims, of Deferred Losses, and Policy Other Net Investment Settlement Acquisition Operating Segment Income Expenses Costs Expenses - ------------------------ --------------- ----------------- ------------ ------------ 1998: Protection.............. $1,063.9 $ 1,493.8 $153.9 $ 442.4 Asset Gathering......... 378.0 296.3 46.8 504.9 Guaranteed & Structured Financial Products..... 1,576.3 1,411.5 3.7 92.6 Investment Management... 24.1 -- -- 117.8 Corporate & Other....... 288.4 950.4 45.3 225.3 -------- --------- ------ -------- Total.................. 3,330.7 4,152.0 249.7 1,383.0 -------- --------- ------ -------- 1997: Protection.............. 983.4 1,399.1 224.7 375.7 Asset Gathering......... 353.3 314.5 38.9 416.2 Guaranteed & Structured Financial Products..... 1,545.2 1,481.1 5.2 81.0 Investment Management... 4.0 -- -- 88.4 Corporate & Other....... 304.8 1,108.4 43.2 322.4 -------- --------- ------ -------- Total.................. 3,190.7 4,303.1 312.0 1,283.7 -------- --------- ------ -------- 1996: Protection.............. 947.1 1,341.7 160.7 349.2 Asset Gathering......... 320.0 260.0 33.6 339.2 Guaranteed & Structured Financial Products..... 1,608.5 1,675.3 5.7 88.5 Investment Management... 3.4 -- -- 76.3 Corporate & Other....... 344.1 1,399.7 30.9 840.9 -------- --------- ------ -------- Total.................. $3,223.1 $ 4,676.7 $230.9 $1,694.1 -------- --------- ------ --------
II-5 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and SUBSIDIARIES SCHEDULE IV--REINSURANCE As of December 31, 1998, 1997 and 1996 and for each of the years then ended: (in millions of dollars)
Assumed Percentage Ceded to from of Amount Gross Other Other Assumed to Amount Companies Companies Net Amount Net ---------- --------- --------- ---------- ---------- 1998 Life insurance in force.. $353,807.8 $88,662.6 $29,210.1 $294,355.3 9.9% ========== ========= ========= ========== ===== Premiums: Life insurance........... $ 1,871.9 $ 327.6 $ 221.0 $ 1,765.3 12.5% Accident and health insurance............... 956.5 654.8 130.9 432.6 30.3% P&C...................... 7.1 9.0 1.9 -- 0.0% ---------- --------- --------- ---------- ----- Total................... $ 2,835.5 $ 991.4 $ 353.8 $ 2,197.9 16.1% ========== ========= ========= ========== ===== 1997 Life insurance in force.. $371,627.9 $82,752.3 $ 1,411.6 $290,287.2 0.5% ========== ========= ========= ========== ===== Premiums: Life insurance........... $ 2,177.7 $ 452.7 $ 287.2 $ 2,012.2 14.3% Accident and health insurance............... 752.1 421.3 129.9 460.7 28.2% P&C...................... 65.0 70.5 6.2 0.7 885.7% ---------- --------- --------- ---------- ----- Total................... $ 2,994.8 $ 944.5 $ 423.3 $ 2,473.6 17.1% ========== ========= ========= ========== ===== 1996 Life insurance in force.. $377,230.6 $24,409.1 $23,335.7 $376,157.2 6.2% ========== ========= ========= ========== ===== Premiums: Life insurance........... 2,273.3 235.9 323.8 2,361.2 13.7% Accident and health insurance............... 612.5 159.6 67.2 520.1 12.9% P&C...................... 88.7 61.6 14.1 41.2 34.2% ---------- --------- --------- ---------- ----- Total................... $ 2,974.5 $ 457.1 $ 405.1 $ 2,922.5 13.9% ========== ========= ========= ========== =====
II-6 All schedules, other than those listed above, are omitted because the information is not required or because the information is included in our Consolidated Financial Statements or Notes thereto. Item 17. Undertakings. The undersigned registrant hereby undertakes: (a) To provide to the underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 ("Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions described under Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (d) For the purpose of determining any liability under the Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Boston, Massachusetts on September 15, 1999. John Hancock Financial Services, Inc. /s/ Thomas E. Moloney By: Thomas E. Moloney Title: Chief Financial Officer II-8 Power of Attorney Each person whose signature appears below hereby authorizes and appoints Thomas E. Moloney and Richard S. Scipione, or either of them, as such person's attorney-in-fact, with full power of substitution and resubstitution, to sign and file on such person's behalf individually and in each capacity stated below any and all amendments (including post-effective amendments) to this registration statement and any subsequent registration statement filed by John Hancock Financial Services, Inc. pursuant to Rule 462(b) of the Securities Act of 1933, as amended, as fully as such person could do in person, hereby verifying and confirming all that such attorney-in-fact, or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date - ---- ----- ---- /s/ Stephen L. Brown Chairman of the Board, August 31, 1999 ____________________________________ Chief Executive Officer and Stephen L. Brown Director /s/ Foster L. Aborn Vice Chairman of the Board, August 31, 1999 ____________________________________ Chief Investment Officer and Foster L. Aborn Director /s/ David F. D'Alessandro President and Chief August 31, 1999 ____________________________________ Operations Officer and David F. D'Alessandro Director /s/ Samuel W. Bodman Director August 31, 1999 ____________________________________ Samuel W. Bodman /s/ Joan T. Bok Director August 31, 1999 ____________________________________ Joan T. Bok /s/ I. MacAllister Booth Director August 31, 1999 ____________________________________ I. MacAllister Booth /s/ Wayne A. Budd Director August 31, 1999 ____________________________________ Wayne A. Budd /s/ John M. Connors, Jr. Director August 31, 1999 ____________________________________ John M. Connors, Jr. /s/ Robert E. Fast, Esq. Director August 31, 1999 ____________________________________ Robert E. Fast, Esq.
II-9
Name Title Date - ---- ----- ---- /s/ Dr. Kathleen Foley Feldstein Director August 31, 1999 ____________________________________ Dr. Kathleen Foley Feldstein /s/ Nelson S. Gifford Director August 31, 1999 ____________________________________ Nelson S. Gifford /s/ Michael C. Hawley Director August 31, 1999 ____________________________________ Michael C. Hawley /s/ Edward H. Linde Director August 31, 1999 ____________________________________ Edward H. Linde /s/ E. James Morton Director August 31, 1999 ____________________________________ E. James Morton /s/ Richard F. Syron Director August 31, 1999 ____________________________________ Richard F. Syron /s/ Robert J. Tarr, Jr. Director August 31, 1999 ____________________________________ Robert J. Tarr, Jr.
II-10 EXHIBIT INDEX
Exhibit Page Number Description Number ------- ----------- ------ 1.1 Form of Underwriting Agreement (U.S. Version)** 1.2 Form of Underwriting Agreement (International Version)** 2.1 Plan of Reorganization* 3.1 Restated Certificate of Incorporation of John Hancock Financial Services, Inc.** 3.2 By-laws of John Hancock Financial Services, Inc.* 4.1 Form of certificate for the common stock, par value $0.01 per share, of John Hancock Financial Services, Inc.* 5.1 Opinion of Debevoise & Plimpton** 10.1 Credit Agreement, dated as of July 30, 1999, among John Hancock Mutual Life Insurance Company, John Hancock Capital Corporation, The Banks Listed therein, BankBoston, N.A., as Administrative Agent, Citicorp USA, Inc., as Syndication Agent, The First National Bank of Chicago, as Documentation Agent, and Comerica Bank, The Bank of Nova Scotia, Fleet National Bank, Royal Bank of Canada and Wachovia Bank, as Co- Agents* 10.2 Amended and Restated Credit Agreement, dated as of July 19, 1996 by and among John Hancock Mutual Life Insurance Company and John Hancock Capital Corporation, Banks named therein and Morgan Guaranty Trust Company of New York, as Agent* 10.3 Fiscal Agency Agreement, dated as of February 25, 1994 by and between John Hancock Mutual Life Insurance Company, as Issuer, and First National Bank of Boston, as Fiscal Agent* 10.4 Reinsurance Agreement, dated as of July 30, 1992 by and between John Hancock Mutual Life Insurance Company and Provident Life and Accident Insurance Company* 10.5 Reinsurance Agreement, dated as of July 30, 1992 by and between John Hancock Mutual Life Insurance Company and Provident Life and Accident Insurance Company* 10.6 Coinsurance Agreement, dated as of March 1, 1997 by and between John Hancock Mutual Life Insurance Company and UNICARE Life & Health Insurance Company* 10.7 Letter of Credit Agreement, dated as of January 2, 1997 by and among John Hancock Mutual Life Insurance Company, Banks named therein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent* 10.8 Long-Term Incentive Compensation Plan* 10.9 Form of Employment Continuation Agreement* 10.10 Form of Stockholder Rights Agreement** 10.11 Long-Term Stock Incentive Plan** 10.12 Incentive Compensation Plan* 21.1 Subsidiaries of the registrant** 23.1 Consent of Ernst & Young LLP* 23.2 Consent of Debevoise & Plimpton (included in Exhibit 5.1)** 23.3 Consent of Godfrey Perrott, F.S.A., M.A.A.A.* 24.1 Powers of Attorney (included on signature page hereto) 27.1 Financial Data Schedule*
- -------- * Filed herewith ** To be filed by amendment. EX-2.1 2 PLAN OF REORGANIZATION EXHIBIT 2.1 ================================================================================ PLAN OF REORGANIZATION OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY Under Section 19E of Chapter 175 of the General Laws of the Commonwealth of Massachusetts Dated as of August 31, 1999 ================================================================================ TABLE OF CONTENTS -----------------
ARTICLE I: DEFINITIONS............................................................................. 1 - ARTICLE II: PURPOSE OF REORGANIZATION............................................................... 5 - ARTICLE III: APPROVAL BY THE COMMISSIONER............................................................ 6 - 3.1 Commissioner's Hearing........................................................................ 6 - 3.2 Notice of Hearing............................................................................. 7 - ARTICLE IV: APPROVAL BY POLICYHOLDERS............................................................... 7 - 4.1 Policyholder Vote............................................................................. 7 - 4.2 Notice of Vote................................................................................ 8 - ARTICLE V: THE REORGANIZATION...................................................................... 8 - 5.1 Effect of Reorganization on Holding Company................................................... 8 - 5.2 Effectiveness of Plan......................................................................... 9 - 5.3 Tax Considerations............................................................................ 11 -- ARTICLE VI: POLICIES................................................................................ 12 -- 6.1 Policies...................................................................................... 12 -- 6.2 Determination of Ownership.................................................................... 13 -- 6.3 In Force...................................................................................... 14 -- 6.4 Certain Group Policies and Contracts.......................................................... 15 -- ARTICLE VII: ALLOCATION OF POLICYHOLDER CONSIDERATION................................................ 15 -- 7.1 Allocation of Allocable Shares................................................................ 15 -- 7.2 Allocation of Aggregate Variable Component.................................................... 16 -- 7.3 Distribution of Consideration................................................................. 17 -- 7.4 ERISA Plans................................................................................... 20 -- ARTICLE VIII: CLOSED BLOCK............................................................................ 21 -- 8.1 Establishment of the Closed Block............................................................. 21 -- 8.2 Operation of the Closed Block................................................................. 21 -- 8.3 Guaranteed Benefits........................................................................... 28 -- 8.4 Accounting.................................................................................... 28 -- 8.5 Policies Not Included in the Closed Block..................................................... 28 -- ARTICLE IX: ADDITIONAL PROVISIONS................................................................... 28 --
i 9.1 Continuation of Corporate Existence; Company Name............................................. 28 -- 9.2 Restriction on Acquisition of Securities by Officers and Directors............................ 28 -- 9.3 Compensation of Officers, Directors and Employees............................................. 30 -- 9.4 General Restriction on Acquisition of Securities.............................................. 30 -- 9.5 Authority to Remedy Errors.................................................................... 30 -- 9.6 Adjustment of Share Numbers................................................................... 31 -- 9.7 No Preemptive Rights.......................................................................... 31 -- 9.8 Notices....................................................................................... 31 -- 9.9 Amendment or Withdrawal of Plan............................................................... 31 -- 9.10 Corrections................................................................................... 32 -- 9.11 Costs and Expenses............................................................................ 32 -- 9.12 Governing Law................................................................................. 32
ii Exhibits to the Plan: EXHIBIT A - Form of Restated Certificate of Incorporation of the Holding Company EXHIBIT B - Form of By-Laws of the Holding Company EXHIBIT C - Form of Restated Articles of Organization of the Company EXHIBIT D - Form of Restatement and Amendment of By-Laws of the Company EXHIBIT E - Actuarial Contribution Memorandum EXHIBIT F - Closed Block Memorandum iii PLAN OF REORGANIZATION OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY Under Section 19E of Chapter 175 of the General Laws of the Commonwealth of Massachusetts This Plan of Reorganization, which has been adopted by the Board of Directors (the "Board") of John Hancock Mutual Life Insurance Company, a mutual life insurance company organized under the laws of the Commonwealth of Massachusetts (the "Company"), at a meeting duly called and held at the offices of the Company on August 31, 1999 (the "Adoption Date"), provides for the conversion of the Company from a mutual life insurance company into a stock life insurance company in accordance with the requirements of Section 19E of Chapter 175 of the General Laws of the Commonwealth of Massachusetts, as amended. ARTICLE I: DEFINITIONS As used in the Plan of Reorganization the following terms have the following meanings: "Actuarial Contribution" means, with respect to a particular Policy, the contribution that such Policy has made to the Company's statutory surplus and asset valuation reserve, plus the contribution that such Policy is expected to make in the future. "Actuarial Contribution Date" means December 31, 1998. "Actuarial Contribution Memorandum" has the meaning specified in Section 7.1(b). "Adoption Date" has the meaning specified in the first paragraph hereof. "Aggregate Variable Component" has the meaning specified in Section 7.1(b). "Allocable Shares" means 300 million shares of Common Stock, to be allocated as described in Article VII, subject to Section 9.6. "Annual Statement" shall have the meaning specified in Section 8.2(b)(i). "Blackout Period" means any period of restriction on trading in the Common Stock related to earnings announcements or other material developments and imposed by the Holding Company on Officers or certain groups of Officers pursuant to federal securities law. "Board" has the meaning specified in the first paragraph hereof. "Chapter 175" means Chapter 175 of the General Laws of the Commonwealth of Massachusetts. "Class Action Settlement" means the Stipulation of Settlement, as amended to the date hereof, approved by the United States District Court for the District of Massachusetts of the class action lawsuit entitled Duhaime et al. v. ----------------- John Hancock Mutual Life Insurance Company et al. originally filed in the United - ------------------------------------------------- States District Court for the Middle District of Florida in Tampa, Florida in September, 1995. "Closed Block" has the meaning specified in Section 8.1(a). "Closed Block Assets" has the meaning specified in Section 8.1(b). "Closed Block Business" generally means individual or joint traditional whole life insurance Policies that are currently paying or are expected to pay Policy dividends and individual term life insurance Policies and only to the extent such Policies are In Force on the Effective Date. Closed Block Business also includes any such Policy which (x) is In Force on the - Effective Date pursuant to a participating nonforfeiture provision, (y) is In - Force on the Closed Block Funding Date as a premium paying Policy, and remains In Force on the Effective Date pursuant to a non-participating nonforfeiture provision, or (z) is issued before the Effective Date and is reinstated after - the Effective Date pursuant to the Company's normal administrative practices. "Closed Block Funding Date" has the meaning specified in Section 8.1(b). "Closed Block Memorandum" has the meaning specified in Section 8.1(a). "Code" means the Internal Revenue Code of 1986, as amended. "Commissioner" means the Commissioner of Insurance of the Commonwealth of Massachusetts, or such other governmental officer, body or authority 2 as becomes the primary regulator of the Company's insurance business under applicable Massachusetts law. "Common Stock" means the shares of common stock, par value $.01 per share, of the Holding Company. "Company" has the meaning specified in the first paragraph hereof. "Company Trust" means any trust (other than the Excess Loss Insurance Trust or the Signature Group Program Insurance Trust) established by the Company for its own administrative convenience in its capacity as an insurer. "Director" shall mean any member of the Board or of the board of directors of the Holding Company. "Effective Date" has the meaning specified in Section 5.2(a). "Eligible Policy" means a Voting Policy which is In Force on both the Statement Date and the Adoption Date, other than any Policy that on either of such dates has been continued under a nonforfeiture benefit as reduced paid-up insurance or as extended term insurance on the records of the Company and is not eligible to participate in the annual divisible surplus of the Company in that status. "Eligible Policyholder" means a Person (or, collectively, the Persons) whose name appears on the Effective Date on the Company's records as the Owner of one or more Eligible Policies. "Equity Share" has the meaning specified in Section 7.2(a)(ii). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Executive Officer" means any "executive officer" (within the meaning of Rule 3b-7 under the Exchange Act) of the Holding Company from time to time, whether such person is an officer of the Holding Company or one of its subsidiaries. For a period of one year after the Effective Date, the individuals identified as executive officers in the Holding Company's registration statement under the Securities Act of 1933, as amended, relating to the IPO shall be considered Executive Officers regardless of any change in title or duties, provided that such individuals are in the employ of the Holding Company or any of its subsidiaries. "Fixed Income Investments" has the meaning specified in Section 8.2(b)(i). 3 "Funding Agreement" means an agreement which authorizes the Company to accept and accumulate funds for the purpose of making one or more payments at future dates and which does not contain or provide for any voting rights or for mortality or morbidity contingencies. "Hearing Officer" has the meaning specified in Section 3.1(b). "Holding Company" means John Hancock Financial Services, Inc., a corporation organized under the laws of the State of Delaware. "In Force" has the meaning specified in Section 6.3. "IPO" means the initial public offering by the Holding Company of shares of Common Stock. "IPO Stock Price" means the price per share to the public at which Common Stock is sold in the IPO. "Membership Interest" means, as of the Effective Date, all the rights or interests in respect of each insurance policy and annuity contract of the Company including, but not limited to, any right to vote and any rights which may exist with regard to the surplus of the Company not apportioned or declared prior to the Effective Date by the Board for policyholder dividends, including any such rights in liquidation or reorganization of the Company, but shall not include any other benefits, values, guarantees, dividend rights or other rights expressly conferred by an insurance policy or annuity contract. "Moody's" has the meaning specified in Section 8.2(b)(iv). "NAIC" means the National Association of Insurance Commissioners. "Officer" means a person elected as an officer of the Company or the Holding Company, as the case may be, by the Board or the board of directors of the Holding Company. "Owner" means, with respect to any Policy, the Person or Persons specified or determined pursuant to Section 6.2 or 6.4. "Participating Policy" means a Policy under which there is eligibility to participate in the divisible surplus of the Company. 4 "Person" means an individual, corporation, joint venture, partnership, association, trust, trustee, unincorporated entity, organization or government or any department or agency thereof. A Person who is the Owner of Policies in more than one legal capacity (e.g., a trustee under separate trusts) shall be - - deemed to be a separate Person in each such capacity. "Plan of Reorganization" means this Plan of Reorganization (including all Schedules and Exhibits hereto), as it may be amended from time to time in accordance with Section 9.9. "Policy" has the meaning specified in Section 6.1. "Policy Credit" means (i) for an individual or joint participating - whole life insurance Policy, the crediting of paid-up additions which will increase the cash value and death benefit of the Policy, and (ii) for all other -- individual or joint life Policies and annuities, (x) if the Policy or contract - has a defined account value, an increase in the account value, or, (y) if the - Policy or contract does not have a defined account value, the crediting of dividends left on deposit under the Policy or contract. "Section 19E" means Section 19E of Chapter 175, as amended and in effect on the Adoption Date. "State" means any state, territory or insular possession of the United States of America and the District of Columbia. "Statement Date" means the December 31 immediately preceding the Effective Date. "Variable Component Policy" means an Eligible Policy that is a Participating Policy. "Voting Policy" means a Policy under which there is a right to vote. "Voting Policyholder" has the meaning specified in Section 4.1(a). ARTICLE II: PURPOSE OF REORGANIZATION The principal purposes of the reorganization are to demutualize the Company so that, as a stock insurance subsidiary of the Holding Company, it can improve its access to the capital markets and raise capital to permit the Company and the Holding 5 Company to grow their existing business and develop new business opportunities in the insurance and financial services industries. Growth will enable the Company to reduce its unit expenses through economies of scale. This growth will be facilitated by the Company's ability to acquire other companies using its own stock as acquisition currency. Additionally, access to capital markets will enable the Company to invest in new technology, improved customer service, new products and channels of distribution. The Company will also obtain more financial flexibility with which to maintain its ratings and financial stability and be able to better attract, retain and provide incentives to management in a fashion consistent with other stock life insurance companies. In addition, the reorganization of the Company pursuant to the Plan of Reorganization will provide Eligible Policyholders with shares of Common Stock, cash or Policy Credits in exchange for their otherwise illiquid Policyholders' Membership Interests. Thus, Eligible Policyholders will realize economic value from their Membership Interests that is otherwise currently unavailable to them. However the demutualization will not in any way reduce the benefits, values, guarantees or dividend eligibility of existing Policies or contracts issued by the Company. As part of the reorganization, the Holding Company will be established and will become the stock holding company for the Company and its subsidiaries. Therefore, after the reorganization, the Company, as a stock insurer that is a subsidiary of the Holding Company, will have access through the Holding Company to the capital markets, enabling the Company to obtain capital from a variety of sources. Management believes that this holding company structure provides several benefits to the Company. This structure affords increased flexibility in raising additional capital in the form of debt and equity financings and in pursuing growth in the Company's current and future insurance and non-insurance businesses. The new organization will benefit from increased flexibility in allocating capital and resources among the various subsidiaries and affiliates of the Company. ARTICLE III: APPROVAL BY THE COMMISSIONER 3.1 Commissioner's Hearing. (a) This Plan of Reorganization is subject to the approval of the Commissioner after a hearing thereon (the "Hearing"). (b) The Commissioner or a Hearing Officer or Officers designated by her shall preside at the Hearing. The Company, its directors, officers, employees and policyholders shall have the right to appear and be heard at the Hearing, including the right to offer oral and written statements, subject to such reasonable limitations and procedures 6 as may be established by the Commissioner or the Hearing Officer or Officers, as the case may be. 3.2 Notice of Hearing. (a) Notice by the Commissioner of such Hearing shall be mailed or delivered on her behalf by the Company at the Company's expense at least 30 days prior to the Hearing to all Persons entitled to appear at the Hearing, except in instances where mailing of notice is not feasible as determined by the Commissioner. (b) Such notice of Hearing shall be accompanied or preceded by information relevant to the Hearing, including a summary of the Plan of Reorganization and other explanatory information, all of which shall be in a form satisfactory to the Commissioner. (c) The Company shall give notice of such Hearing by publication once in each of The Boston Globe, The Worcester Telegram & Gazette, The Springfield Union-News, The Berkshire Eagle, The New York Times (National Edition) and USA Today (National Edition) and by posting on the Company's website. Such newspaper publications and Company website posting shall not be less than 30 days before the Hearing, and shall be in a form satisfactory to the Commissioner. ARTICLE IV: APPROVAL BY POLICYHOLDERS 4.1 Policyholder Vote. (a) The Company shall hold a special meeting of policyholders in accordance with its bylaws (the "Special Meeting"). At such Special Meeting, any Person who is (or, collectively, Persons who are) the Owner on the Adoption Date of one or more Voting Policies then In Force ("Voting Policyholder") shall be entitled to vote on the proposal to approve the Plan of Reorganization. (b) This Plan of Reorganization is subject to the approval of not less than two-thirds of the votes of the Voting Policyholders voting thereon in person, by proxy or by mail at the Special Meeting. (c) Based upon the Company's records of the Owners on the Adoption Date of Voting Policies In Force on the Adoption Date, each Voting Policyholder shall be entitled to the number of votes equal to (i) for each life or endowment - insurance policy, one vote and (except for variable policies) one additional vote for each $5,000 of insurance in excess of the first $5,000 of insurance, (ii) for each annuity or pure endowment contract, one vote and (except for -- variable annuity contracts) one additional vote for each $150 of annual annuity income in excess of the first $150 of annual annuity income, (iii) for each --- health insurance or disability insurance policy, one vote and (iv) for -- 7 each group policy, one vote; provided that in no case may any Voting -------- Policyholder, in person, by proxy or by mail, cast more than twenty votes. 4.2 Notice of Vote. (a) The Company shall mail notice of the Special Meeting to Voting Policyholders as provided herein. Such notice of Special Meeting may be mailed together with the Notice of Hearing pursuant to Section 3.2 of this Plan of Reorganization. The notice shall set forth the reasons for the ballot vote and the time and place of the Special Meeting, and shall enclose one ballot for each Voting Policyholder. Such notice and ballot shall be mailed to the address of each Voting Policyholder as it appears on the records of the Company, except in instances where mailing of notice is not feasible as determined by the Commissioner. Such mailing shall be made at least 30 days prior to the Special Meeting and shall be in a form satisfactory to the Commissioner. Such notice period for the Special Meeting may run concurrently with the notice period for the Hearing provided for in Section 3.2. (b) Such notice of Special Meeting shall be accompanied or preceded by information relevant to the Special Meeting, including a summary of the Plan of Reorganization and other explanatory information, all of which shall be in a form satisfactory to the Commissioner. With the approval of the Commissioner, the Company may also provide supplemental information to Voting Policyholders relevant to the Special Meeting. (c) The Company shall give notice of such Special Meeting by publication once in each of The Boston Globe, The Worcester Telegram & Gazette, The Springfield Union-News, The Berkshire Eagle, The New York Times (National Edition) and USA Today (National Edition) and by posting on the Company's website. Such newspaper publications and Company website posting shall be made in accordance with the provisions of the Company's Bylaws and shall be not less than 30 days before the Special Meeting, and shall be in a form satisfactory to the Commissioner. ARTICLE V: THE REORGANIZATION 5.1 Effect of Reorganization on Holding Company. On the Adoption Date, the Holding Company is a wholly-owned subsidiary of the Company. The forms of the certificate of incorporation and by-laws of the Holding Company as shall be in effect on the Effective Date are set forth as Exhibits A and B, respectively. Upon the effectiveness of the Plan of Reorganization, the Company shall become a wholly-owned subsidiary of the Holding Company as a result of the transactions contemplated by this Plan of Reorganization. 8 5.2 Effectiveness of Plan. (a) The effective date of the Plan of Reorganization (the "Effective Date") shall be the date on which the closing of the IPO occurs, which shall be a date occurring after the approval by the Commissioner and the Voting Policyholders of this Plan of Reorganization but on or before December 31, 2000, provided that the Commissioner may, if requested by -------- the Company, defer such latest possible Effective Date for a period of up to six months. The Commissioner's consideration of any such deferral shall be deemed to be related to this Plan of Reorganization and any such deferral shall be subject to such terms and conditions as may be required by the Commissioner at the time of such deferral. The Plan of Reorganization shall be deemed to have become effective at 12:01 a.m., Eastern Time, on the Effective Date. (b) Upon the effectiveness of the Plan of Reorganization: (i) the Company shall become a stock life insurance company by operation of Section 19E; and (ii) all Membership Interests shall be extinguished and Eligible Policyholders shall be entitled to receive in exchange therefor shares of Common Stock, cash or Policy Credits in accordance with Article VII and subject to Section 9.6. (c) On the Effective Date: (i) the Company shall file with the Secretary of State of the Commonwealth of Massachusetts the Company's amended and restated charter, substantially in the form set forth in Exhibit C and bearing an endorsement of approval and certified by the Commissioner pursuant to Section 50B of Chapter 175, and the Company's amended and restated by-laws, substantially in the form set forth in Exhibit D, shall take effect; (ii) the Company shall issue to the Holding Company shares of its common stock for consideration in an amount at least adequate to satisfy the requirements of Section 5.2(h) and any applicable requirements as to minimum paid-in capital stock and net cash surplus of each state where the Company is licensed; (iii) the Company shall surrender to the Holding Company, and the Holding Company shall cancel, for no consideration, all of the Common Stock previously issued by the Holding Company to the Company and held by the Company immediately prior to the Effective Date; and 9 (iv) the Holding Company shall sell shares of Common Stock in the IPO for cash. (d) On each occasion on which the Holding Company receives any Net Cash Proceeds (as defined below), the Holding Company shall, not later than one business day after its receipt of such Net Cash Proceeds, contribute to the Company all of the Net Cash Proceeds so received; provided, however, that, subject to the next sentence, the Holding Company may retain, in the aggregate, an amount of Net Cash Proceeds equal to a working capital allowance of $50 million plus an amount determined by the Holding Company to be reasonably necessary to provide for regular cash dividends to stockholders in the year following the Effective Date. On the business day following the 30th calendar day after the Effective Date, the Holding Company shall, except as otherwise approved by the Commissioner, contribute to the Company any portion of the Net Cash Proceeds retained by the Holding Company pursuant to the preceding sentence that exceeds the Holding Company Permitted Amount (as defined below). For purposes of this Section 5.2(d), the "Net Cash Proceeds" means proceeds of the IPO received by the Holding Company (including any proceeds received pursuant to exercise of an underwriter over-allotment option) plus proceeds of any other transaction received by the Holding Company as described in Section 5.2(g) that occurs on or prior to the 30th calendar day after the Effective Date, net of all offering expenses and other transaction expenses of the Holding Company. The "Holding Company Permitted Amount" means one-half of the amount by which (i) the total Net Cash Proceeds, as estimated by the Holding Company on the 30th day after the Effective Date, exceeds (ii) the IPO Stock Price multiplied by the total number of Allocable Shares that could be converted to cash or policy credits by the Company under Section 7.3(d) by application of the Net Cash Proceeds contributed by the Holding Company to the Company pursuant to the first sentence of this paragraph (to be determined assuming no additional contribution would be required by the second sentence of this paragraph). (e) After the Effective Date, the Holding Company shall issue shares of Common Stock to Eligible Policyholders pursuant to Section 7.3(c) and the Company shall pay cash or credit cash or Policy Credits to Eligible Policyholders pursuant to Section 7.3(b), subject in each case to Section 9.6. (f) The Holding Company shall arrange for the listing of the Common Stock on a national securities exchange and shall use its reasonable efforts to maintain such listing for so long as the Holding Company is a publicly-traded company. Except as provided in Section 7.3(f), neither the Company nor the Holding Company shall have any obligation to provide a procedure for the sale of shares of Common Stock. 10 (g) In addition to the IPO, the Holding Company may also raise capital through one or more of the following: (1) a private placement or public - offering of debt, preferred stock, or a combination thereof on or prior to the Effective Date, or (2) bank borrowings on or prior to the Effective Date. The - capital to be raised shall be in such amounts as the Board of Directors of the Holding Company shall determine. (h) Upon the completion of the transactions occurring on the Effective Date, the Company's paid-in capital stock and net cash surplus shall be equal to an amount not less than the minimum paid-in capital stock and the net cash surplus required of a new domestic stock insurer upon initial authorization to transact like kinds of insurance. 5.3 Tax Considerations. The Plan of Reorganization shall not become effective unless, on or prior to the Effective Date, the Company shall have received an opinion of nationally recognized independent tax counsel substantially to the effect that: (a) Policies issued by the Company prior to the Effective Date will not be deemed newly issued, issued in exchange for existing policies or newly purchased for any material federal income tax purpose as a result of the reorganization of the Company pursuant to the Plan of Reorganization; (b) with respect to any Policy issued by the Company prior to the Effective Date that is part of a tax-qualified retirement funding arrangement described in Section 403(b) or 408 of the Code, the consummation of the Plan of Reorganization, including the crediting of consideration in the form of Policy Credits to such Policy pursuant to Section 7.3, will not result in any transaction that: (i) constitutes a distribution to the employee or beneficiary of the arrangement under Section 72 or 403(b)(11) of the Code, or a designated distribution that is subject to withholding under Section 3405(e)(1)(A) of the Code, (ii) disqualifies an individual retirement annuity policy under Section 408(e) of the Code or gives rise to a prohibited transaction under Section 4975 of the Code between the individual retirement annuity and the individual for whose benefit it is established, or his or her beneficiary, (iii) requires the imposition of a penalty for a premature distribution under Section 72(t) of the Code or a penalty for excess contributions to certain qualified retirement plans under Section 4973 or 4979 of the Code, or 11 (iv) otherwise adversely affects the tax-favored status accorded such Policies under the Code or results in penalties or any other material adverse federal income tax consequences to the holders of such Policies under the Code; (c) Eligible Policyholders receiving solely Common Stock pursuant to Section 7.3 will not recognize gain or loss for federal income tax purposes as a result of the consummation of the Plan of Reorganization; and (d) the summary of the principal income tax consequences to Eligible Policyholders of their receipt of consideration pursuant to Section 7.3, set forth in the information provided to Voting Policyholders pursuant to Section 4.2(b), to the extent it describes matters of law or legal conclusions, is, subject to the limitations and assumptions set forth therein, an accurate summary of the material federal income tax consequences to eligible policyholders of the consummation of the Plan under the federal income tax law and remains accurate under the applicable federal income tax law and other relevant authorities in effect as of the Effective Date, except for any developments between the date thereof and the Effective Date (i) the principal - federal income tax consequences of which to Eligible Policyholders are, in the opinion of such counsel, accurately described in all material respects in the information provided to Voting Policyholders or (ii) that the Company has -- determined are not materially adverse to the interests of Eligible Policyholders. ARTICLE VI: POLICIES 6.1 Policies. (a) For the purposes of this Plan of Reorganization, the term "Policy" means: (i) except for a policy or contract described in Section 6.1(a)(ii) or (iii), each life insurance policy (including, without limitation, a pure endowment contract), annuity contract, or accident and health insurance policy (including without limitation a long term care insurance policy) authorized pursuant to paragraphs (6) and (16) of Section 47 of Chapter 175 that has been issued by the Company, including without limitation policies assumed by virtue of the issuance by the Company of assumption reinsurance certificates, provided that any supplementary contract issued to effect the annuitization of an individual deferred annuity at maturity of such annuity shall be treated with such annuity as one Policy; (ii) each employer plan that participates under any of the Company's group insurance policies issued to the Excess Loss Insurance Trust or the Signature Group Program Insurance Trust; and 12 (iii) each certificate that has been issued by the Company to an insured or an annuitant, as applicable, under a group insurance policy or group annuity contract issued to a Company Trust. (b) The following policies and contracts shall be deemed not to be Policies for purposes of this Plan of Reorganization: (i) except as provided in Section 6.1(a)(i), any supplementary contract or settlement option contract; (ii) except as provided in Section 6.1(a)(iii), any certificate issued to an insured or an annuitant, as applicable, under a group insurance policy or group annuity contract; (iii) any reinsurance assumed by the Company as a reinsurer on an indemnity basis (but assumption certificates may constitute Policies if they otherwise fall within the definition of Policies in this Section 6.1); and (iv) any Funding Agreement. 6.2 Determination of Ownership. Unless otherwise stated herein, the Owner of any Policy as of any date shall be determined on the basis of the Company's records as of such date in accordance with the following provisions: (a) The Owner of a Policy shall be the holder of the Policy as shown on the Company's records. (b) Except as specified in Section 6.4, the Owner of a Policy that is a group insurance policy or a group annuity contract shall be the Person or Persons specified in the master policy or contract as the policyholder or contract holder, unless no policyholder or contract holder is so specified, in which case the Owner shall be the Person or Persons to whom or in whose name the master policy or contract shall have been issued, as shown on the Company's records. (c) Notwithstanding Sections 6.2(a) and (b), the Owner of a Policy that has been assigned to another Person by an assignment of ownership thereof absolute on its face and filed with the Company, in accordance with the provisions of such Policy and the Company's rules with respect to the absolute assignment of such Policy in effect at the time of such assignment, shall be the assignee of such Policy as shown on the records of the Company. Unless an assignment satisfies the requirements specified for such an 13 assignment in this Section 6.2(c), the determination of the Owner of a Policy shall be made without giving effect to such assignment. (d) Except as otherwise set forth in this Article VI, the identity of the Owner of a Policy shall be determined without giving effect to any interest of any other Person in such Policy. (e) In any situation not expressly covered by the foregoing provisions of this Section 6.2, the policyholder, as reflected on the records of, and as determined in good faith by, the Company, shall conclusively be presumed to be the Owner of such Policy for purposes of this Section 6.2, and the Company shall not be required to examine or consider any other facts or circumstances. (f) The mailing address of an Owner as of any date for purposes of the Plan of Reorganization shall be the Owner's last known address as shown on the records of the Company as of such date. (g) Any dispute as to the identity of the Owner of a Policy or the right to vote or receive consideration shall be resolved in accordance with the foregoing and such other procedures as may be acceptable to the Commissioner. 6.3 In Force. (a) Except as otherwise provided in Section 6.4, a Policy shall be deemed to be in force ("In Force") as of any date if, as shown on the Company's records, (A)(i) such policy has been issued and is in effect, - - or (ii) such Policy has not been issued but has an effective date on or before -- such date and the Company's administrative office has received with respect to such policy an application, complete on its face, together with all required underwriting information (including all required medical information), and payment of the full initial premium (or such lesser amount required by the Company's normal administrative procedures for coverage to become effective), provided that any policy referred to in this clause (ii) is issued as applied - -------- for, and (B) such policy has not matured by death or otherwise or been - surrendered or otherwise terminated; provided that (x) a Policy shall be deemed -------- - to be In Force after lapse for nonpayment of premiums until expiration of any applicable grace period (or other similar period however designated in such Policy) or any extension of such grace period in accordance with the Company's normal administrative procedures, during which time the Policy is in full force for its basic benefits and (y) a Policy that has been reinstated after not being - In Force shall be deemed to be In Force commencing on the date of reinstatement of such Policy, as shown on the records of the Company, without regard to any prior period during which such Policy was In Force, unless both the termination of such Policy and its reinstatement occurred between the Adoption Date and the Statement Date, in which case such Policy shall be deemed, for purposes of this Plan of 14 Reorganization, to have been continuously In Force during the period between the Adoption Date and the Statement Date. (b) A Policy shall be deemed not to have matured by death as of any date unless notice of such death has been received by the Company on or prior to such date, as shown on the Company's records. The date of the surrender or lapse of a Policy shall be as shown on the Company's records. (c) In the case of any reinstated Policy deemed pursuant to this Plan of Reorganization to be a Variable Component Policy, the determination of such Policy's contribution to the Company's surplus pursuant to Article VII shall be made based on the original issue date of such Policy and without regard to any lapse and reinstatement. 6.4 Certain Group Policies and Contracts. (a) Each employer plan that participates under any of the Company's group insurance policies issued to the Excess Loss Insurance Trust or Signature Group Program Insurance Trust shall be deemed to be an Owner of a Policy that shall be deemed to be In Force as of any date, if the coverage provided to such employer plan through such trust is in effect as of such date, as shown on the Company's records. Such employer plan, and not the trustee of any such trust established by the Company, shall be a Voting Policyholder, an Eligible Policyholder or an Owner, as applicable. For the purposes of this Section 6.4(a), "employer plan" shall mean a plan pursuant to which either an employer or a trust sponsored by an employer has contracted to obtain coverage through the Excess Loss Insurance Trust or the Signature Group Program Insurance Trust. (b) Each holder of a certificate issued to an insured or an annuitant, as applicable, under a group insurance policy or group annuity contract issued to a Company Trust shall be deemed to be an Owner of a Policy, and such certificate holder, and not the trustee of any such Company Trust shall be deemed a Voting Policyholder, an Eligible Policyholder or an Owner, as applicable. ARTICLE VII: ALLOCATION OF POLICYHOLDER CONSIDERATION 7.1 Allocation of Allocable Shares. (a) The consideration to be given to Eligible Policyholders in exchange for the Membership Interests shall be shares of Common Stock, cash or Policy Credits. Solely for purposes of calculating the amount of such consideration, each Eligible Policyholder will be allocated (but not necessarily issued) shares of Common Stock in accordance with this Article VII. 15 (b) Each Eligible Policyholder shall be paid or credited consideration based on the allocation to such Eligible Policyholder of a number of shares of Common Stock equal to the sum of: (i) a fixed component of consideration equal to 17 shares of Common Stock (subject to proportional adjustment as provided in Section 9.6) for each Eligible Policy of which such Eligible Policyholder is the Owner on the Effective Date, and (ii) if applicable, a variable component of consideration equal to the portion, if any, of the Aggregate Variable Component allocated in respect of each Variable Component Policy of which such Eligible Policyholder is the Owner on the Effective Date. The Allocable Shares shall be allocated first to provide for the number of shares required for the aggregate fixed component of consideration allocable in respect of all Eligible Policies, and the remainder of the Allocable Shares shall constitute the aggregate variable component of consideration (the "Aggregate Variable Component"). The Aggregate Variable Component shall be allocated in respect of the Variable Component Policies in accordance with the principles set forth in Section 7.2 and the calculation of actuarial contribution described in the Actuarial Contribution Memorandum (the "Actuarial Contribution Memorandum") attached as Exhibit E. (c) Notwithstanding any other provision of this Section 7.1, no consideration shall be allocated or paid in respect of any Policy issued to any Officer or Director that was not In Force on or before May 10, 1998. 7.2 Allocation of Aggregate Variable Component. (a) The Aggregate Variable Component shall be allocated to Eligible Policyholders in respect of their Variable Component Policies as follows: (i) Such allocation shall be made by multiplying an Equity Share (defined below) for each Variable Component Policy by the number of shares of Common Stock constituting the Aggregate Variable Component and, for each Variable Component Policy, rounding such result to the nearest integral number of shares (with one-half being rounded upward). Because of such rounding, the aggregate of Eligible Policyholders' variable components will not necessarily be equal to the Aggregate Variable Component. 16 (ii) The Equity Share for each Variable Component Policy shall be equal to the ratio of Actuarial Contribution for such Variable Component Policy to the sum of all Actuarial Contributions of all Variable Component Policies. (iii) The Company shall make reasonable determinations of the dollar amount of Actuarial Contribution, which shall be zero or a positive number, for each Variable Component Policy, according to the principles and methodologies set forth in detail in the Actuarial Contribution Memorandum. (iv) Each such Actuarial Contribution shall be determined on the basis of the Company's records as of the Actuarial Contribution Date, unless such Variable Component Policy shall have been issued after the Actuarial Contribution Date, in which case the Actuarial Contribution for such Variable Component Policy shall be as determined by the Company in accordance with the Actuarial Contribution Memorandum. (b) All allocations and calculations pursuant to this Section 7.2 shall be made without regard to any Policy issued to any Officer or Director that was not In Force on or before May 10, 1998. 7.3 Distribution of Consideration. (a) The Company shall pay or credit cash or Policy Credits (in an amount determined pursuant to Section 7.3(b)) to each Eligible Policyholder based on the number of shares of Common Stock allocated to such Eligible Policyholder, or the Holding Company shall issue a number of shares of Common Stock equal to the number of such shares allocated to such Eligible Policyholder, as provided in this Article VII as follows: (i) Policy Credits to the extent shares of Common Stock are allocable with respect to a Policy that is an individual retirement annuity contract within the meaning of Section 408(b) of the Code or a tax sheltered annuity contract within the meaning of Section 403(b) of the Code; (ii) Policy Credits to the extent shares of Common Stock are allocable with respect to a Policy that is an individual annuity contract that has been issued pursuant to a plan qualified under Section 401(a) of the Code directly to the plan participant; (iii) Policy Credits to the extent that shares of Common Stock are allocable with respect to a Policy that is an individual life insurance policy that has been issued pursuant to a plan qualified under Section 401(a) of the Code directly to the plan participant; 17 (iv) cash to the extent that shares of Common Stock are allocable to an Eligible Policyholder of a Policy where such Eligible Policyholder's address for mailing purposes as shown on the records of the Company is an address at which mail is undeliverable or deemed to be undeliverable in accordance with guidelines approved by the Commissioner, unless the Policy is one of the types described in clauses (i) through (iii) of this Section 7.3(a); (v) cash to the extent that shares of Common Stock are allocable with respect to a Policy and such Policy is known to the Company to be subject to a creditor lien (other than a policy loan made by the Company) or bankruptcy proceeding, unless the Policy is one of the types described in clauses (i) through (iii) of this Section 7.3(a); (vi) cash to the extent that shares of Common Stock are allocable to an Eligible Policyholder whose address for mailing purposes as shown on the records of the Company is located outside the States of the United States of America, unless the Policy is one of the types described in clauses (i) through (iii) of this Section 7.3(a); (vii) except as otherwise provided in clauses (i) through (vi) of this Section 7.3(a), Common Stock if such Eligible Policyholder has affirmatively elected, on a form provided to such Eligible Policyholder that has been properly completed and received by the Company on or prior to the date of the Special Meeting referred to in Section 4.1, a preference to receive Common Stock; (viii) except as provided in clauses (i) through (vii) of this Section 7.3(a), and subject to Section 7.3(d), cash; (ix) Common Stock to the extent funds available, after the payment and crediting of cash and Policy Credits pursuant to clauses (i) through (vi) of this Section 7.3(a), are inadequate to pay cash to all Eligible Policyholders described in clause (viii) of this Section 7.3(a) who have not indicated a preference to receive Common Stock. (b) If consideration is to be paid or credited to an Eligible Policyholder in cash or Policy Credits, as the case may be, pursuant to the Plan of Reorganization, the amount of such consideration shall be equal to the number of shares of Common Stock allocable to such Eligible Policyholder as provided in this Article VII multiplied by the greater of the IPO Stock Price, or the average of the closing price of the Common Stock on the primary exchange where such Common Stock is listed for the first twenty days during which it is traded, provided that the amount of such consideration shall in no event - -------- 18 exceed the number of shares of Common Stock allocable to such Eligible Policyholder as provided in this Article VII multiplied by 120% of the IPO Stock Price. The Company shall use reasonable efforts to make payment of such consideration within seven weeks after the Effective Date, net of any applicable withholding tax, by check, or by the crediting of a Policy Credit or cash, as the case may be. (c) The Holding Company shall use reasonable efforts to issue within seven weeks after the Effective Date to each Eligible Policyholder the shares of Common Stock allocated to such Eligible Policyholder for which such Eligible Policyholder will not receive consideration from the Company in the form of cash or Policy Credits. Such shares of Common Stock may be issued in book-entry form as uncertificated shares, except that stock certificates will be issued to any Eligible Policyholder who requests stock certificates representing his or her shares. An appropriate notice shall be sent to each Eligible Policyholder to whom uncertificated shares of Common Stock are issued. (d) Subject to the provisions of the following sentence, the total amount of funds available to be distributed in cash or credited as cash or Policy Credits to Eligible Policyholders described in clauses (i) through (vi) and clause (viii) of Section 7.3(a) shall be equal to the amount of cash proceeds contributed by the Holding Company to the Company pursuant to Section 5.2(d) less the amount of expenses of the Company resulting from the transactions contemplated by this Plan of Reorganization. If the amount available to be paid by the Company to such Eligible Policyholders as determined under the preceding sentence is inadequate, after the payment and crediting of cash and Policy Credits pursuant to clauses (i) through (vi) of Section 7.3(a), to pay cash to all the Eligible Policyholders referenced in Section 7.3(a)(viii), the amount available shall be distributed by the Company to such Eligible Policyholders in accordance with the number of shares of Common Stock allocated, beginning with the Eligible Policyholders allocated no more than the number of shares of Common Stock constituting the fixed component of consideration and continuing to the highest level of share allocation possible at which cash preferences can be completely satisfied using such amount of available funds, provided that the Company, if it deems it prudent to do so, shall also, subject to the approval of the Commissioner, distribute cash to the next higher level of share allocation by drawing as necessary upon other funds of the Company to complete such distribution with respect to such level. Under no circumstances shall such payments be made to Eligible Policyholders referenced in Section 7.3(a)(viii) unless such available amounts are at least adequate to pay cash to all such Eligible Policyholders allocated no more than the number of shares constituting the fixed component of consideration. Any funds remaining after all such payments shall be retained by the Company for general corporate purposes. 19 (e) In the event that more than one Person constitutes a single Owner of a Policy, consideration allocated pursuant to this Article VII shall be distributed jointly to such Persons. (f) Subject to any applicable requirements of federal or state securities law, the Holding Company shall establish a commission-free sales program which shall begin no sooner than the first business day after the six- month anniversary of the Effective Date and no later than the first business day after the twelve-month anniversary of the Effective Date and shall continue in either case for 90 days (and, with the approval of the Commissioner, may be extended if the Board of Directors of the Holding Company determines such extension to be appropriate and in the best interest of the Holding Company and its stockholders). Pursuant to such sales program, each Eligible Policyholder or other shareholder who holds 99 or fewer shares of Common Stock shall have the opportunity to sell at prevailing market prices all, but not less than all, the shares of Common Stock owned by such shareholder, without paying brokerage commissions, mailing charges, registration fees or other administrative or similar expenses. The Company shall concurrently offer each shareholder entitled to participate in the commission-free sales program the opportunity to purchase that number of shares of Common Stock necessary in order to increase such shareholder's holdings to a 100-share round lot, without paying brokerage commissions, mailing charges, registration fees or other administrative or similar expenses. The commission-free sale and purchase arrangements described herein shall be subject to such limitations as are agreed upon between the Company and the Securities and Exchange Commission. 7.4 ERISA Plans. (a) The Company has applied to the Department of Labor for an exemption from Section 406(a) of the Employee Retirement Income Security Act of 1974 and Section 4975 of the Code with respect to the receipt of consideration pursuant to the Plan of Reorganization by employee benefit plans subject to the provisions of such sections. Notwithstanding any other provision of the Plan of Reorganization, if such exemption is not received prior to the Effective Date, the Company, with the approval of the Commissioner, may either pay such consideration to such Eligible Policyholders or delay payment of such consideration to such Eligible Policyholders and may place such consideration in an escrow or similar arrangement subject to terms and conditions approved by the Commissioner. Any such escrow or arrangement shall provide for payment to Eligible Policyholders of such consideration not later than the third anniversary of the Effective Date and all costs and expenses of such escrow or arrangement shall be borne by the Company. (b) Each non-trusteed qualified pension and profit-sharing plan entitled to receive Common Stock pursuant to this Plan of Reorganization shall be entitled to direct that the Company place such Common Stock in a master trust established by the Company 20 for such purpose. The trustee of such master trust shall be independent of the Company. Such Common Stock will remain in the master trust until a plan fiduciary instructs the trustee to either sell or distribute such Common Stock. Each such plan will be responsible for its share of the fees and expenses of the trust. ARTICLE VIII: CLOSED BLOCK 8.1 Establishment of the Closed Block. (a) For policyholder dividend purposes only, the Closed Block Business shall be operated by the Company as a closed block of participating business for the exclusive benefit of the Policies included therein, (the "Closed Block"). As set forth in the Closed Block Memorandum attached as Exhibit F (the "Closed Block Memorandum"), assets of the Company have been allocated to the Closed Block in an amount that produces cash flows which, together with anticipated revenue from the Closed Block Business, is expected to be sufficient to support the Closed Block Business including, but not limited to, provisions for payment of claims and certain taxes, and to provide for continuation of dividend scales payable in 1999, if the experience underlying such scales (including the portfolio interest rate) continues, and for appropriate adjustments in such scales if the experience changes. (b) The Closed Block Memorandum sets forth certain of the Company's assets (including cash and policy loans, investment income due and accrued, and due and deferred premiums) and the portions thereof that have been allocated to the Closed Block as of January 1, 1999 (the "Closed Block Funding Date"). The amount of the Company's assets, and the amount of additional assets, if any, to be purchased and allocated to the Closed Block pursuant to the following sentence, required to support the Closed Block as of the Closed Block Funding Date (the "Closed Block Assets") is determined as set forth in the Closed Block Memorandum. Shortly after the Effective Date, the Company shall transfer cash to, or withdraw cash from, the Closed Block to complete the funding of the Closed Block as specified in the Closed Block Memorandum. (c) The Company may amend the Closed Block Memorandum at any time with the approval of the Commissioner. 8.2 Operation of the Closed Block. (a) After the Closed Block Funding Date, insurance and investment cash flows from operations of the Closed Block Business, the Closed Block Assets and, as described in the Closed Block Memorandum, all other assets acquired by or allocated to the Closed Block shall be received by or withdrawn from the Closed Block in accordance with the principles set forth in this Section 8.2(a). Closed Block investments shall be managed in good faith and with such degree of care 21 that a reasonably prudent person or entity in a like position and familiar with such matters would use under similar circumstances. (i) With respect to insurance cash flows: (A) Cash premiums, cash repayments of policy loans and policy loan interest paid in cash on Closed Block Business shall be received by the Closed Block. Death, surrender and maturity benefits (including any interest allowed for delayed payment of benefits), policy loans taken in cash and dividends paid in cash shall be withdrawn from the Closed Block. (B) Cash shall be withdrawn from the Closed Block in the amount of foreign, State and local premium taxes (including guaranty fund assessments and franchise taxes to the extent measured solely by premiums) and retaliatory taxes incurred on premiums received in respect of Closed Block Business. Cash payments with respect to reinsurance, not including net cash transfers under surplus relief reinsurance treaties, on Closed Block Business shall be withdrawn from or received by the Closed Block. (C) Cash payments shall be received by or withdrawn from the Closed Block for foreign, federal or State taxes on or measured by income, capital or net worth in accordance with the tax sharing procedure described in the Closed Block Memorandum. (D) No cash shall be withdrawn from the Closed Block with respect to expenses other than taxes, except as provided in this Section 8.2(a)(i) and Section 8.2(a)(ii). (E) With respect to Closed Block Business issued after the Closed Block Funding Date but before the Effective Date, an amount will be paid to the Company equal to the estimated excess of the present value of premiums over the present value of benefits (including dividends) and taxes expected to be charged to the Closed Block, as of the date upon which each such Policy was issued, as set forth in the Closed Block Memorandum. Such amounts are being charged because commissions and other expenses are provided for in the premiums paid for such Policies, and the Closed Block will not otherwise be charged for such commissions and other expenses. This will establish the funding for these Policies on the same basis as those Policies In Force on the Closed Block Funding Date. 22 (F) With respect to additional benefits provided under Closed Block Business in accordance with the Class Action Settlement, shortly after such benefits are credited to Closed Block Business, the Company shall transfer to the Closed Block an amount necessary to provide for such benefits, as set forth in the Closed Block Memorandum. (G) With respect to Policy Credits provided on Policies included in the Closed Block Business pursuant to Article VII, shortly after the Effective Date, the Company shall transfer to the Closed Block the amount appropriate to reflect the addition of such Policy Credits as set forth in the Closed Block Memorandum. (ii) With respect to investment cash flows: (A) After the Closed Block Funding Date, investment cash flows from operations of the Closed Block Business shall be received by or withdrawn from the Closed Block. (B) Cash received on dispositions of investments shall be net of all reasonable and customary brokerage and other transaction expenses paid to third parties unaffiliated with the Company. With respect to any Closed Block assets that are investments in equity real estate, cash payments for reasonable and customary operating expenses and taxes paid to third parties unaffiliated with the Company shall be withdrawn from the Closed Block. (C) Cash paid to third parties unaffiliated with the Company for expenses in acquiring an investment shall be withdrawn from the Closed Block. (D) Investment management expenses (other than as described in the immediately preceding clauses (B) or (C)) shall not be withdrawn from or charged to the Closed Block. (b) (i) As of January 1, 1999, all new investments acquired with Closed Block cash-flows shall consist only of: fixed income securities; commercial mortgages; agricultural mortgages; short-term securities; cash; (collectively, the "Fixed Income Investments"); real property; common stock; financial futures and interest rate options; interest rate and currency swaps; and such other assets as may be listed on Schedule BA of the Company's Annual Statement to the Massachusetts Division of Insurance (the "Annual Statement"). Without the prior approval of the Commissioner, no investments 23 shall be made in securities which, at the time of investment by the Closed Block, are securities of any Person controlling, controlled by or under common control with the Company or the Holding Company within the meaning of Section 206 of Chapter 175 (as may be amended from time to time), unless such investment is made pursuant to a workout or restructuring of a preexisting investment that complied with this Section 8.2(b)(i) at the time that it was made, nor shall any investment be made directly or through a partnership in any real property principally occupied by any such Person at the time of investment by the Closed Block. (ii) Fixed income securities acquired with Closed Block cash-flows pursuant to Section 8.2(b), at the time of acquisition, shall consist of obligations, not in default, which are issued, assumed, guaranteed or insured by the United States of America (the "U.S.") or by any agency or instrumentality thereof, Canada, other foreign governments or other U.S. or foreign issuers. The Company may purchase a de minimis equity position in conjunction with the purchase of fixed income securities. (iii) Calendar year acquisitions of Fixed Income Investments will be targeted to achieve a weighted average life of no less than five years and no more than ten years, except that, at a certain point in time, a weighted average life of less than five years may be targeted if appropriate to reflect the expected life of the remaining Closed Block liabilities. (iv) The weighted average quality of the portfolio of Fixed Income Investments, excluding cash and short-term investments, shall be rated at least "Baa2" by Moody's Investors Service ("Moody's") or the equivalent rating by another recognized rating service or, if unrated, of comparable quality as determined by the Company. At the time of acquisition, the fixed income securities described in clause (b)(i) shall be rated at least "Baa3" by Moody's or the equivalent rating by another recognized rating service or, if unrated, of comparable quality as determined by the Company. Notwithstanding this Section 8.2(b), the Company may invest up to 10% of the book value of the Fixed Income Investments in fixed income securities described in clause (b)(i) that are rated below "Baa3" by Moody's, or the equivalent rating by another recognized rating service or if unrated, of comparable quality as determined by the Company. (v) No more than 20% of the book value of the Closed Block Assets shall be invested in any standard industry classification (with such classification as determined by the U.S. Office of Management and Budget), and no more than 5% of the book value of the Closed Block Assets shall be invested in any issuer or family of issuers other than issuers whose obligations are guaranteed by the United States government. 24 (vi) The percentage of the book value of the Closed Block Assets to be invested in securities issued in nations other than the U.S. or Canada shall not exceed the percentage of life insurance company general account assets that may consist of such assets under applicable state laws from time to time. (vii) The Closed Block cash-flows may be used to purchase asset- backed securities collateralized by automobile loans, credit card receivables, home equity loans, manufactured housing loans, and other fixed income collateral. No more than 30% of the book value of the Closed Block Assets shall be invested in asset-backed securities. Acquired asset-backed securities must be rated at least "Baa3" by Moody's or the equivalent rating by another recognized rating service or if unrated, of comparable quality as determined by the Company. (viii) The Closed Block cash-flows may be used to purchase publicly- traded, residential or commercial mortgaged backed securities issued by the U.S., by any agency or instrumentality thereof, or by a corporation domiciled in the U.S. No more than 25% of the book value of the Closed Block Assets shall be invested in mortgage-backed securities. (ix) No more than 25% of the book value of the Closed Block Assets shall be invested in holdings of commercial and agricultural mortgages. (x) The Company may use the Closed Block cash-flows to purchase, or otherwise acquire through workout situations, equity based investments such as real property, common stock or assets that may be listed in Schedule BA of the Annual Statement, subject to a maximum of 10% of the book value of the Closed Block Assets. Preference will be given to equities which also provide a current, relatively predictable, cash flow stream. (xi) Closed Block cash-flows may be invested in (a) short-term interest bearing or discounted U.S. securities or other securities rated at least "P-2" by Moody's, or the equivalent rating by another recognized rating service, (b) interest bearing accounts maintained at, or certificates of deposit issued by, FDIC insured banks with capital, surplus, and undivided profits in excess of $100 million at the time of deposit, and (c) eligible pooled short- term accounts maintained by the Company. (xii) Closed Block cash-flows may be used to purchase and sell financial futures contracts and options on financial futures contracts to hedge against changes in securities prices and interest rates. The Company will engage in these transactions only for hedging purposes and all such transactions will be executed on a U.S. commodity exchange. 25 (xiii) Closed Block cash-flows may be used to purchase, sell or enter into transactions involving income derivative instruments not traded on a nationally recognized exchange ("OTC Derivatives"). The Company may engage in such transactions if such transactions are necessary for prudent portfolio management and not to speculate on future market events. Counterparties to such transactions shall be limited to banks and registered securities broker/dealers whose long term debt is rated not lower than "A2" by Moody's, or the equivalent rating by another recognized rating service. Counterparty credit ratings shall be monitored at least quarterly. OTC Derivative positions with counterparties who cease to meet the above criteria shall be (i) unwound if market conditions permit, (ii) transferred to another counterparty who satisfies the above criteria, or (iii) covered by collateral posted by the counterparty to secure the position of the Closed Block Assets. The potential credit exposure (as determined by the Company's proprietary model) of the outstanding OTC Derivatives with any one counterparty may not exceed 1% of the book value of the Closed Block Assets. (xiv) If appropriate, the Closed Block may borrow cash through the Company's financing subsidiary, John Hancock Capital Corporation, at market rates of interest consistent with the stated term of the borrowing. (xv) If due to changes in credit ratings, interest rates or market values, the Closed Block Assets no longer meet the requirements set forth in this Section 8.2(b), the Company shall take such action consistent with market conditions and prudent management practices as may be necessary to bring the Closed Block into compliance with this Section 8.2(b). (c) (i) Dividends on Closed Block Business shall be apportioned annually in accordance with applicable law, applicable standards of actuarial practice as promulgated by the Actuarial Standards Board and with the objective of minimizing tontine effects and exhausting assets allocated to the Closed Block with the final payment under the last Policy contained in the Closed Block. (ii) Subject to the provisions of clause (i) of this Section 8.2(c), dividends on Closed Block Business shall be apportioned, and shall be allocated among policies in the Closed Block, so as to reflect the underlying experience of the Closed Block, and the degree to which the various classes of Closed Block policies have contributed to such experience. (iii) The Company shall submit periodic reports of the operation of the Closed Block to the Commissioner. Such reports shall be submitted by June 1 of each of the first three years following the year in which the Effective Date occurs and by June 1 of each third year thereafter so long as the Commissioner may require. Such reports shall 26 include the opinion of an independent actuary who would be a "qualified actuary" pursuant to Section 9B(A)(5) of Chapter 175 (as may be amended from time to time). The actuary shall opine whether the Company, in setting dividend scales for Closed Block Business, has acted in accordance with the provisions of this Article VIII. Reports subsequent to the third such report need not include such an actuary's opinion if the Commissioner, at the request of the Company, so approves. (d) The Company shall provide as supplemental schedules to its Annual Statements for the years commencing in the year in which the Effective Date occurs (i) financial schedules, consisting of the information required by Annual - Statement pages 2, 3, 4 and 5 and (ii) investment schedules, consisting of the -- information required by Annual Statement Schedules A, B, BA, D and E, in each case for the Closed Block. By June 1 of the year subsequent to the year being reported, the Company's independent public accountants shall furnish to the Company, and the Company shall submit to the Commissioner, an opinion on the financial statements of the Company, which opinion shall encompass the financial schedules of the Closed Block referred to in clause (i) of this Section 8.2(d). - Additionally, the Company shall submit to the Commissioner by June 1 of each such year a report, prepared at the Company's request by its independent public accountants, in a form acceptable to the Commissioner, of the results of certain procedures, which procedures shall have been approved by the Commissioner, to test the Company's compliance with Subsections (a), (b), (e) and (f) of this Section 8.2, provided that, once such reports have been supplied for five -------- consecutive years the Company may, with the prior approval of the Commissioner, discontinue such reports. The reporting obligations provided for in this Section 8.2(d) shall continue for so long as the Commissioner may require. (e) No amounts shall be withdrawn from or received by the Closed Block for any taxes, including federal, State, local or foreign taxes, resulting from the operations of the Company or any of its subsidiaries prior to the Closed Block Funding Date. Because they are noncash items, no asset valuation reserve or interest maintenance reserve or any increases or decreases therein, shall be charged or credited to the Closed Block. The Company may, however, consider potential loan defaults in apportioning dividends on Closed Block Business. (f) Except as provided in Section 8.2(b) and the Closed Block Memorandum, no assets shall be reallocated, transferred, borrowed or loaned between the Closed Block and any other portion of the Company's general account or any of its separate accounts or any Person (directly or indirectly) controlling, controlled by or under common control with the Company or the Holding Company within the meaning of Section 206 of Chapter 175 of the General Laws of the Commonwealth of Massachusetts (as may be amended from time to time) without the prior approval of the Commissioner. 27 (g) The Company shall not cease to maintain the Closed Block except with the prior approval of the Commissioner, upon such terms and conditions as the Commissioner may approve, and, so long as there are New York-resident holders of policies within the Closed Block, the prior approval of the New York Superintendent of Insurance. In the event of such discontinuance, the Policies then constituting the Closed Block Business shall remain obligations of the Company and dividends on such Policies shall be apportioned by the Board in accordance with applicable law. (h) Except as provided in Section 8.2(g), none of the assets, including the revenue therefrom, allocated to the Closed Block or acquired by the Closed Block shall revert to the Company. (i) The Company may amend this Section 8.2 at any time with the approval of the Commissioner. 8.3 Guaranteed Benefits. The Company shall pay all guaranteed benefits for Closed Block Business in accordance with the terms of the Policies contained in the Closed Block. The assets allocated to the Closed Block are the Company's assets and are subject to the same liabilities (in the same priority) as all assets in the Company's general account. 8.4 Accounting. Accounting for, and reporting of activity in, the Closed Block shall be done in accordance with statutory accounting practices. 8.5 Policies Not Included in the Closed Block. Participating Policies not included in the Closed Block shall continue to be eligible for the payment of dividends after the Effective Date to the same extent as prior to the Effective Date. ARTICLE IX: ADDITIONAL PROVISIONS 9.1 Continuation of Corporate Existence; Company Name. Upon the reorganization of the Company under the terms of this Plan of Reorganization and Section 19E, (a) the Company's corporate existence as a stock life insurance - company shall be a continuation of its corporate existence as a mutual life insurance company and (b) the Company's name shall be "John Hancock Life - Insurance Company" in accordance with the amended and restated charter set forth in Exhibit C. 9.2 Restriction on Acquisition of Securities by Officers and Directors. (a) Subject to the limitations set forth in this Section 9.2, nothing in this Plan shall be deemed to prohibit the officers, directors, employees, agents and employee benefit plans of 28 the Company or the Holding Company from purchasing for cash, at the same price as offered to the public in any public offering, Common Stock or from acquiring Common Stock as consideration pursuant to Article VII or pursuant to a transaction otherwise permitted by this Plan of Reorganization. Subject to the limitations set forth in this Section 9.2, nothing shall be deemed to prohibit the establishment of stock option, incentive, and share ownership plans customary for publicly traded companies. (b) Until one year after the completion of the IPO, neither the Holding Company nor the Company shall award any stock options or stock grants to any Executive Officer or Director. (c) Any Common Stock or securities convertible into Common Stock owned by any Executive Officer or Director or by any child or other direct descendant (or spouse of any such child or direct descendant) of an Executive Officer or Director who acquired such securities by gift from such Executive Officer or Director shall not be sold for a period of at least two years following the IPO, except in the event of death or disability of such Executive Officer, director, child, direct descendant or spouse. (d) Any Common Stock or securities convertible into Common Stock owned by any Officer or by any child or other direct descendant (or spouse of any such child or direct descendant) of an Officer who acquired such securities by gift from such Officer shall not be sold for a period of at least one year following the IPO, except in the event of death or disability of such Officer, child, direct descendant or spouse. (e) The Executive Officers and the Directors shall not purchase or enter into any contract, agreement or other arrangement to purchase any Common Stock prior to the later of (i) the twenty-first day during which such Common - Stock is publicly traded and (ii) if applicable, the last day of any Blackout -- Period that is in effect on the twenty-first day of such twenty-one day period. (f) The Officers shall not purchase or enter into any contract, agreement or other arrangement to purchase any Common Stock prior to the later of (i) the second day during which such Common Stock is publicly traded and (ii) - -- if applicable, the last day of any Blackout Period that is in effect on the second day of such two day period. (g) Nothing in this Section 9.2 shall prevent the Holding Company or the Company from issuing Common Stock (i) in connection with an employee stock - ownership plan and/or other employee benefit plan established for the benefit of the employees of the Holding Company, the Company or any other subsidiary of the Holding Company and qualified under Sections 401(a) or 403(a) of the Internal Revenue Code; or (ii) to match contributions by employees to any such plan. -- Further, except as provided in 29 Section 9.2(b), nothing in this Section 9.2 shall prevent the Holding Company from issuing Common Stock pursuant to any stock incentive plan. (h) All the restrictions in this Section 9.2 applicable to any Officer, Executive Officer or Director shall also apply to shares held by the spouse and dependent children of such Officer, Executive Officer or Director and to any other shares that would be considered "beneficially owned" by such Officer, Executive Officer or Director pursuant to Rule 13d-3 under the Exchange Act. (i) For a period of three years following the Effective Date, the Holding Company shall provide the Commissioner with copies of filings on Forms 3, 4 and 5 under the Exchange Act received by the Holding Company pursuant to Rule 16a-3(e) under the Exchange Act. 9.3 Compensation of Officers, Directors and Employees. No director, officer, agent or employee of the Company shall receive any fee, commission or other valuable consideration whatsoever, other than their usual salary and compensation, for in any manner aiding, promoting or assisting in connection with the transactions contemplated by the Plan of Reorganization, except as provided for herein or as approved by the Commissioner. 9.4 General Restriction on Acquisition of Securities. No Person (or Persons acting in concert) may directly or indirectly offer to acquire or acquire the beneficial ownership of 10% or more of the Common Stock or the common stock of the Company until two years after the Effective Date, except a Person that becomes such a beneficial owner as a result of the Holding Company's issuance of such Common Stock to such Person as consideration in an acquisition of another entity initiated by the Holding Company by authority of the Holding Company's Board of Directors. Further, without the prior approval of the Holding Company's Board of Directors and the Commissioner, no Person (or Persons acting in concert) may directly or indirectly offer to acquire or acquire the beneficial ownership of 10% or more of the Common Stock or the common stock of the Company during the one year period following the two year period described above, except a Person that becomes such a beneficial owner as a result of the Holding Company's issuance of such Common Stock to such Person as consideration in an acquisition of another entity initiated by the Holding Company by authority of the Holding Company's Board of Directors. 9.5 Authority to Remedy Errors. Subject to the terms of the Plan of Reorganization and with the prior approval of the Commissioner, the Holding Company may issue additional shares of Common Stock and take any other action it deems 30 appropriate to remedy errors or miscalculations made in connection with the Plan of Reorganization. 9.6 Adjustment of Share Numbers. In order to effect a filing range (in the registration statement under the Securities Act of 1933, as amended, relating to the IPO) for the IPO Stock Price which the Company and the managing underwriters of the IPO deem appropriate, the Company may adjust, by vote of the Company's Board or a duly authorized committee thereof at any time before the Effective Date and with the prior approval of the Commissioner, the number of shares of Common Stock set forth in the definition of Allocable Shares. Upon such an adjustment, the following numbers of shares of Common Stock in the Plan of Reorganization shall be adjusted proportionately: (a) the number of shares - set forth in the definition of Allocable Shares in Article I and (b) the number - of shares set forth in Section 7.1(b)(i) as the fixed component of consideration. The number of shares resulting from any such adjustment shall be rounded up to the next higher whole share; provided, that no such adjustment -------- will be made unless it would result, without any such rounding, in the number of Allocable Shares to be allocated in respect of each Eligible Policy as the fixed component of consideration pursuant to Section 7.1(b)(i) being a whole number. 9.7 No Preemptive Rights. No policyholder of the Company or other Person shall have any preemptive right to acquire shares of Common Stock or shares of the common stock of the Company in connection with this Plan. 9.8 Notices. If the Company complies substantially and in good faith with the requirements of Section 19E or the terms of the Plan of Reorganization with respect to the giving of any required notice to policyholders, its failure in any case to give such notice to any Person or Persons entitled thereto shall not impair the validity of the actions and proceedings taken under Section 19E or the Plan of Reorganization or entitle such Person to any injunctive or other equitable relief with respect thereto. 9.9 Amendment or Withdrawal of Plan. At any time prior to the Effective Date, the Board may withdraw or, with the Commissioner's approval, amend, the Plan of Reorganization. Except as otherwise expressly provided herein, the Plan of Reorganization may not be amended after the Effective Date without the affirmative vote of at least three-quarters of the Directors serving on the Holding Company's Board of Directors and the approval of the Commissioner. However, nothing herein shall be construed to prevent the amendment of the certificate of incorporation or by-laws of the Holding Company or the charter or by-laws of the Company at any time in accordance with their terms and with applicable law. 31 9.10 Corrections. At any time either prior to or after the Effective Date, the Company, with the prior approval of the Commissioner, may make such modifications as are appropriate to correct errors, clarify existing items or make additions to correct manifest omissions in the Plan of Reorganization. 9.11 Costs and Expenses. All reasonable costs, including those costs attributable to the use of the staff personnel and outside advisors and consultants of the Massachusetts Division of Insurance, related to the Plan of Reorganization (including, without limitation, costs related to any deferral of the Effective Date pursuant to Section 5.2) shall be borne by the Company or the Holding Company. 9.12 Governing Law. The terms of the Plan of Reorganization shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. Nothing contained in this Plan shall prevent the application of otherwise applicable requirements of the insurance laws, including the holding company laws, of the Commonwealth of Massachusetts or any other jurisdiction following the Effective Date. 32 IN WITNESS WHEREOF, John Hancock Mutual Life Insurance Company, by authority of its Board of Directors, has caused this Plan of Reorganization to be duly executed this 31st day of August, 1999. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Stephen L. Brown ----------------------------- Stephen L. Brown Chairman and Chief Executive Officer Attest: /s/ Barry J. Rubinstein - ---------------------------- Secretary 33 EX-3.2 3 BYLAWS OF JOHN HANCOCK FINANCIAL SERVICES EXHIBIT 3.2 ________________________________________________________________________________ JOHN HANCOCK FINANCIAL SERVICES, INC. BY-LAWS As Adopted on August 26, 1999 ________________________________________________________________________________ TABLE OF CONTENTS
PAGE ARTICLE I. STOCKHOLDERS..................................................................... 1 Section 1.01. Annual Meetings.............................................................. 1 Section 1.02. Special Meetings............................................................. 1 Section 1.03. Notice of Meetings; Waiver................................................... 1 Section 1.04. Quorum....................................................................... 2 Section 1.05. Voting....................................................................... 2 Section 1.06. Voting by Ballot............................................................. 2 Section 1.07. Adjournment.................................................................. 2 Section 1.08. Proxies...................................................................... 3 Section 1.09. Organization; Procedure...................................................... 3 Section 1.10. Notice of Stockholder Business and Nominations............................... 4 Section 1.11. Inspectors of Elections...................................................... 6 Section 1.12. Opening and Closing of Polls................................................. 7 Section 1.13. No Stockholder Action by Written Consent..................................... 7 ARTICLE II. BOARD OF DIRECTORS.............................................................. 8 Section 2.01. General Powers............................................................... 8 Section 2.02. Number of Directors.......................................................... 8 Section 2.03. Classified Board; Election of Directors...................................... 8 Section 2.04. Annual and Regular Meetings.................................................. 8 Section 2.05. Special Meetings; Notice..................................................... 9 Section 2.06. Quorum; Voting............................................................... 9 Section 2.07. Adjournment.................................................................. 9 Section 2.08. Action Without a Meeting..................................................... 10 Section 2.09. Regulations; Manner of Acting................................................ 10 Section 2.10. Action by Telephonic Communications.......................................... 10 Section 2.11. Resignations................................................................. 10 Section 2.12. Removal of Directors......................................................... 10 Section 2.13. Vacancies and Newly Created Directorships.................................... 10 Section 2.14. Compensation................................................................. 11 Section 2.15. Reliance on Accounts and Reports, etc........................................ 11 ARTICLE III. EXECUTIVE COMMITTEE AND OTHER COMMITTEES....................................... 11 Section 3.01. Standing Committees.......................................................... 11 Section 3.02. Designation of Members and Chairmen of Standing Committees................... 11 Section 3.03. Notices of Times of Meetings of Standing Committees and Presiding Officers... 12 Section 3.04. Other Committees............................................................. 12 Section 3.05. Powers....................................................................... 12 Section 3.06. Proceedings.................................................................. 13 Section 3.07. Quorum and Manner of Acting.................................................. 13 Section 3.08. Action by Telephonic Communications.......................................... 13 Section 3.09. Absent or Disqualified Members............................................... 13 Section 3.10. Resignations................................................................. 13
i Section 3.11. Removal...................................................................... 13 Section 3.12. Vacancies.................................................................... 13 ARTICLE IV. OFFICERS........................................................................ 14 Section 4.01. Number....................................................................... 14 Section 4.02. Election..................................................................... 14 Section 4.03. Salaries..................................................................... 14 Section 4.04. Removal and Resignation; Vacancies........................................... 14 Section 4.05. Authority and Duties of Officers............................................. 14 Section 4.06. The Chairman................................................................. 15 Section 4.07. The Chief Executive Officer.................................................. 15 Section 4.08. The President................................................................ 15 Section 4.09. The Vice President........................................................... 15 Section 4.10. The Secretary................................................................ 16 Section 4.11. The Chief Financial Officer.................................................. 16 Section 4.12. The Treasurer................................................................ 17 Section 4.13. Additional Officers.......................................................... 17 Section 4.14. Security..................................................................... 18 ARTICLE V. CAPITAL STOCK.................................................................... 18 Section 5.01. Certificates of Stock, Uncertificated Shares................................. 18 Section 5.02. Signatures; Facsimile........................................................ 18 Section 5.03. Lost, Stolen or Destroyed Certificates....................................... 18 Section 5.04. Transfer of Stock............................................................ 19 Section 5.05. Record Date.................................................................. 19 Section 5.06. Registered Stockholders...................................................... 20 Section 5.07. Transfer Agent and Registrar................................................. 20 ARTICLE VI. INDEMNIFICATION................................................................. 20 Section 6.01. Nature of Indemnity.......................................................... 20 Section 6.02. Successful Defense........................................................... 21 Section 6.03. Determination that Indemnification is Proper................................. 21 Section 6.04. Advance Payment of Expenses.................................................. 22 Section 6.05. Procedure for Indemnification of Directors and Officers...................... 22 Section 6.06. Survival; Preservation of Other Rights....................................... 23 Section 6.07. Insurance.................................................................... 23 Section 6.08. Severability................................................................. 23 ARTICLE VII. OFFICES........................................................................ 24 Section 7.01. Registered Office............................................................ 24 Section 7.02. Other Offices................................................................ 24 ARTICLE VIII. GENERAL PROVISIONS............................................................ 24 Section 8.01. Dividends.................................................................... 24 Section 8.02. Reserves..................................................................... 24 Section 8.03. Execution of Instruments..................................................... 25 Section 8.04. Corporate Indebtedness....................................................... 25 Section 8.05. Deposits..................................................................... 25 Section 8.06. Checks....................................................................... 25
ii Section 8.07. Sale, Transfer, etc. of Securities........................................... 26 Section 8.08. Voting as Stockholder........................................................ 26 Section 8.09. Fiscal Year.................................................................. 26 Section 8.10. Seal......................................................................... 26 Section 8.11. Books and Records; Inspection................................................ 26 ARTICLE IX. AMENDMENT OF BY-LAWS............................................................ 26 Section 9.01. Amendment.................................................................... 27 ARTICLE X. CONSTRUCTION..................................................................... 27 Section 10.01. Construction................................................................ 27
iii JOHN HANCOCK FINANCIAL SERVICES, INC. BY-LAWS As adopted on August 26, 1999 __________________________________________ ARTICLE I. ---------- STOCKHOLDERS ------------ Section 1.01. Annual Meetings. The annual meeting of the stockholders --------------- of the Corporation for the election of Directors and for the transaction of such other business as properly may come before such meeting shall be held at such place, either within or without the State of Delaware, and at such date and at such time, as may be fixed from time to time by resolution of the Board of Directors and set forth in the notice or waiver of notice of the meeting. [Del.GCL (S) 211(a)] Section 1.02. Special Meetings. Special meetings of the stockholders ---------------- may be called at any time by the Chief Executive Officer (or, in the event of his absence or disability, by the President or any Vice President), or by the Board of Directors. A special meeting shall be called by the Chief Executive Officer (or, in the event of his absence or disability, by the President or any Vice President), or by the Secretary either (i) pursuant to a resolution approved by a majority of the entire Board of Directors or (ii) upon the request of stockholders whose holdings are one-fourth (1/4) or more of the outstanding stock of the Corporation. Such special meetings of the stockholders shall be held at such places, within or without the State of Delaware, as shall be specified in the respective notices or waivers of notice thereof. [Del. GCL (S) 211(b), (S) 211(d)] Section 1.03. Notice of Meetings; Waiver. The Secretary or any -------------------------- Assistant Secretary shall cause written notice of the place, date and hour of each meeting of the stockholders, and, in the case of a special meeting, the purpose or purposes for which such meeting is called, to be given personally or by mail, not less than ten nor more than sixty days prior to the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is mailed, it shall be deemed to have been given to a stockholder when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the record of stockholders of the Corporation, or, if a stockholder shall have filed with the Secretary of the Corporation a written request that notices to such stockholder be mailed to some other address, then directed to such stockholder at such other address. Such further notice shall be given as may be required by law. [Del. GCL (S) 222] A written waiver of any notice of any annual or special meeting signed by the person entitled thereto, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in a written waiver of notice. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 1.04. Quorum. Except as otherwise required by law or by the ------ Certificate of Incorporation, the presence in person or by proxy of the holders of record of one-third of the shares entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business at such meeting. [Del. GCL (S) 216] Section 1.05. Voting. If, pursuant to Section 5.05 of these By-Laws, a ------ record date has been fixed, every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote for each share outstanding in his or her name on the books of the Corporation at the close of business on such record date. If no record date has been fixed, then every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote for each share of stock standing in his or her name on the books of the Corporation at the close of business on the day next preceding the day on which notice of the meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. Except as otherwise required by law or by the Certificate of Incorporation or by these By-Laws, the vote of a majority of the shares represented in person or by proxy at any meeting at which a quorum is present shall be sufficient for the transaction of any business at such meeting. [Del. GCL (S) 212] Section 1.06. Voting by Ballot. No vote of the stockholders need be ---------------- taken by written ballot unless otherwise required by law. Any vote not required to be taken by ballot may be conducted in any manner approved at the meeting at which such vote is taken. Section 1.07. Adjournment. If a quorum is not present at any meeting ----------- of the stockholders, the stockholders present in person or by proxy shall have the power to 2 adjourn any such meeting from time to time until a quorum is present. Notice of any adjourned meeting of the stockholders of the Corporation need not be given if the place, date and hour thereof are announced at the meeting at which the adjournment is taken, provided, however, that if the adjournment is for more than thirty days, or if after the adjournment a new record date for the adjourned meeting is fixed pursuant to Section 5.05 of these By-Laws, a notice of the adjourned meeting, conforming to the requirements of Section 1.03 hereof, shall be given to each stockholder of record entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. Section 1.08. Proxies. Any stockholder entitled to vote at any meeting ------- of the stockholders may authorize another person or persons to vote at any such meeting and express such consent or dissent for him or her by proxy. A stockholder may authorize a valid proxy by executing a written instrument signed by such stockholder, or by causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature, or by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person designated as the holder of the proxy, a proxy solicitation firm or a like authorized agent. No such proxy shall be voted or acted upon after the expiration of three years from the date of such proxy, unless such proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where applicable law provides that a proxy shall be irrevocable. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the Secretary. Proxies by telegram, cablegram or other electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Any copy, facsimile telecommunication or other reliable reproduction of a writing or transmission created pursuant to this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 1.09. Organization; Procedure. At every meeting of ----------------------- stockholders the presiding officer shall be the Chairman or, in the event of his or her absence or disability, a presiding officer chosen by a majority of the stockholders present in person or by proxy. The Secretary, or in the event of his or her absence or disability, the Assistant Secretary, if any, or if there be no Assistant Secretary, in the absence of the Secretary, an appointee of the presiding officer, shall act as Secretary of the meeting. The order of business and all other matters of procedure at every meeting of stockholders may be 3 determined by such presiding officer. Section 1.10. Notice of Stockholder Business and Nominations. ---------------------------------------------- (1) Annual Meetings of Stockholders. (i) Nominations of persons for ------------------------------- election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) by or at the direction of the Board of Directors or the Chairman of the Board, or (B) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in clauses (ii) and (iii) of this paragraph and who was a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder, pursuant to clause (B) of paragraph (1)(i) of this Section 1.10, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than ninety days nor more than one hundred and twenty days prior to the first anniversary of the preceding year's annual meeting and in any event at least 45 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting of shareholders; provided, that if with respect to the first annual meeting of stockholders after the time the Common Stock has been registered pursuant to the provisions of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or, if in any succeeding year, the date of the annual meeting is advanced by more than thirty days or delayed by more than seventy days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than one hundred and twenty days prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. In no event shall the adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (A) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, and Rule 14a-11 thereunder, or any successor provisions, including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected; (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of any 4 beneficial owner on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and any beneficial owner on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (iii) Notwithstanding anything in the second sentence of paragraph (1)(ii) of this Section 1.10 to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for Director or specifying the size of the increased Board of Directors made by the Corporation at least one hundred days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice under this paragraph shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (2) Special Meetings of Stockholders. Only such business as shall -------------------------------- have been brought before the special meeting of the stockholders pursuant to the Corporation's notice of meeting pursuant to Section 1.03 of these By-Laws shall be conducted at such meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which Directors are to be elected pursuant to the Corporation's notice of meeting (1) by or at - the direction of the Board of Directors or (2) by any stockholder of the - Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this Section 1.10 and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. Nominations by stockholders of persons for election to the Board of Directors may be made at such special meeting of stockholders if the stockholder's notice as required by paragraph (1)(ii) of this Section 1.10 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the one hundred and twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (3) General. (i) Only persons who are nominated in accordance with ------- the procedures set forth in this Section 1.10 shall be eligible to serve as Directors and only 5 such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.10. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 1.10 and, if any proposed nomination or business is not in compliance with this Section 1.10, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this Section 1.10, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 1.10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 1.10. Nothing in this Section 1.10 shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the - Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act, or (B) of the holders of any series of Preferred Stock, if any, to elect Directors - if so provided under any applicable Preferred Stock Certificate of Designation (as defined in the Certificate of Incorporation). Section 1.11. Inspectors of Elections. Preceding any meeting of the ----------------------- stockholders, the Board of Directors shall appoint one or more persons to act as Inspectors of Elections, and may designate one or more alternate inspectors. In the event no inspector or alternate is able to act, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of the duties of an inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector shall: (1) ascertain the number of shares outstanding and the voting power of each; (2) determine the shares represented at a meeting and the validity of proxies and ballots; (3) count all votes and ballots; (4) specify the information relied upon to determine the validity of 6 electronic transmissions in accordance with Section 1.08 hereof; (5) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (6) certify his or her determination of the number of shares represented at the meeting, and his or her count of all votes and ballots; (7) the inspector may appoint or retain other persons or entities to assist in the performance of the duties of inspector; and (8) when determining the shares represented and the validity of proxies and ballots, the inspector shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 1.08 of these By-Laws, ballots and the regular books and records of the Corporation. The inspector may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers or their nominees or a similar person which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspector considers other reliable information as outlined in this section, the inspector, at the time of his or her certification pursuant to (6) of this section, shall specify the precise information considered, the person or persons from whom the information was obtained, when this information was obtained, the means by which the information was obtained, and the basis for the inspector's belief that such information is accurate and reliable. [Del. GCL (S) 231] Section 1.12. Opening and Closing of Polls. The date and time for the ---------------------------- opening and the closing of the polls for each matter to be voted upon at a stockholder meeting shall be announced at the meeting. The inspector of the election shall be prohibited from accepting any ballots, proxies or votes or any revocations thereof or changes thereto after the closing of the polls, unless the Court of Chancery upon application by a stockholder shall determine otherwise. Section 1.13. No Stockholder Action by Written Consent. Effective as ---------------------------------------- of the time the Common Stock shall be registered pursuant to the provisions of the Exchange Act, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of the stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is specifically denied. [Del GCL (S) 228(a)] 7 ARTICLE II. ----------- BOARD OF DIRECTORS ------------------ Section 2.01. General Powers. Except as may otherwise be provided by -------------- law, by the Certificate of Incorporation or by these By-Laws, the property, affairs and business of the Corporation shall be managed by or under the direction of the Board of Directors and the Board of Directors may exercise all the powers of the Corporation. Section 2.02. Number of Directors. Subject to the rights of the ------------------- holders of any class or series of Preferred Stock, if any, the number of Directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the entire Board; provided, however, that the Board shall at no time consist of fewer than three (3) Directors. Section 2.03. Classified Board; Election of Directors. The Directors --------------------------------------- of the Corporation, subject to the rights of the holders of shares of any class or series of preferred stock, shall be classified with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class ("Class I") whose initial term expires at the 2000 annual ------- meeting of stockholders, another class ("Class II") whose initial term expires -------- at the 2001 annual meeting of stockholders, and another class ("Class III") --------- whose initial term expires at the 2002 annual meeting of stockholders, with each class to hold office until its successors are elected and qualified. Except as otherwise provided in Sections 2.12 and 2.13 of these By-Laws, at each annual meeting of stockholders of the corporation, and subject to the rights of the holders of shares of any class or series of preferred stock, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. [Del. GCL (S) 141(d)] Section 2.04. Annual and Regular Meetings. The annual meeting of the --------------------------- Board of Directors for the purpose of electing officers and for the transaction of such other business as may come before the meeting shall be held as soon as possible following adjournment of the annual meeting of the stockholders at the place of such annual meeting of the stockholders. Notice of such annual meeting of the Board of Directors need not be given. The Board of Directors from time to time may by resolution provide for the holding of regular meetings and fix the place (which may be within or without the State of Delaware) and the date and hour of such meetings. Notice of regular meetings need not be given, provided, however, that if the Board of Directors shall fix or change the time or place of any regular meeting, notice of such action shall be mailed promptly, or sent by telephone, including a voice messaging system or other system or technology designed to 8 record and communicate messages, telegraph, facsimile, electronic mail or other electronic means, to each Director who shall not have been present at the meeting at which such action was taken, addressed to him or her at his or her usual place of business, or shall be delivered to him or her personally. Notice of such action need not be given to any Director who attends the first regular meeting after such action is taken without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting. Section 2.05. Special Meetings; Notice. Special meetings of the Board ------------------------ of Directors shall be held whenever called by the Chief Executive Officer (or, in the event of his or her absence or disability, by the President or any Vice President), or by the Chairman of the Board of Directors, at such place (within or without the State of Delaware), date and hour as may be specified in the respective notices or waivers of notice of such meetings. Special meetings of the Board of Directors may be called on twenty-four (24) hours' notice, if notice is given to each Director personally or by telephone, including a voice messaging system, or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means, or on five (5) days' notice, if notice is mailed to each Director, addressed to him or her at his or her usual place of business. Notice of any special meeting need not be given to any Director who attends such meeting without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting, and any business may be transacted thereat. Section 2.06. Quorum; Voting. At all meetings of the Board of -------------- Directors, the presence of at least a majority of the total authorized number of Directors shall constitute a quorum for the transaction of business. Except as otherwise required by law, the vote of at least a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, provided however, that in accordance with Section 9.9 of the Plan of Reorganization of John Hancock Mutual Life Insurance Company, dated August 31, 1999 (the "Plan"), the affirmative vote of at least three-fourths (3/4) of the Directors shall be required to amend the Plan following the effective date of the reorganization of John Hancock Mutual Life Insurance Company. Section 2.07. Adjournment. A majority of the Directors present, ----------- whether or not a quorum is present, may adjourn any meeting of the Board of Directors to another time or place. No notice need be given of any adjourned meeting unless the time and place of the adjourned meeting are not announced at the time of adjournment, in which case notice conforming to the requirements of Section 2.05 of these By-Laws shall be given to each Director. 9 Section 2.08. Action Without a Meeting. Any action required or ------------------------ permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.09. Regulations; Manner of Acting. To the extent consistent ----------------------------- with applicable law, the Certificate of Incorporation and these By-Laws, the Board of Directors may adopt such rules and regulations for the conduct of meetings of the Board of Directors and for the management of the property, affairs and business of the Corporation as the Board of Directors may deem appropriate. The Directors shall act only as a Board and the individual Directors shall have no power as such. Section 2.10. Action by Telephonic Communications. Members of the ----------------------------------- Board of Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 2.11. Resignations. Any Director may resign at any time by ------------ delivering a written notice of resignation, signed by such Director, to the Chairman or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 2.12. Removal of Directors. Subject to the rights of the -------------------- holders of any class or series of Preferred Stock, if any, to elect additional Directors under specified circumstances, any Director may be removed at any time, but only for cause, upon the affirmative vote of the holders of a majority of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the election of Directors. Any vacancy in the Board of Directors caused by any such removal may be filled at such meeting by the stockholders entitled to vote for the election of the Director so removed. If such stockholders do not fill such vacancy at such meeting, such vacancy may be filled in the manner provided in Section 2.13 of these By-Laws. Section 2.13. Vacancies and Newly Created Directorships. Subject to ----------------------------------------- the rights of the holders of any class or series of Preferred Stock, if any, to elect additional Directors under specified circumstances, and except as provided in Section 2.12, if any vacancies shall occur in the Board of Directors, by reason of death, resignation, removal or otherwise, or if the authorized number of Directors shall be increased, the Directors then in office shall continue to act, and such vacancies and newly created directorships may be filled by a majority of the Directors then in office, although less than a quorum. A Director elected to fill a vacancy or a newly created directorship shall hold office until his 10 successor has been elected and qualified or until his earlier death, resignation or removal. [Del. GCL (S) 223(a)] Section 2.14. Compensation. The amount, if any, which each Director ------------ shall be entitled to receive as compensation for such Director's services as such shall be fixed from time to time by resolution of the Board of Directors. Section 2.15. Reliance on Accounts and Reports, etc. A Director, or a ------------------------------------- member of any committee designated by the Board of Directors shall, in the performance of such Director's duties, be fully protected in relying in good faith upon the records of the Corporation and upon information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees designated by the Board of Directors, or by any other person as to the matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. ARTICLE III. ------------ EXECUTIVE COMMITTEE AND OTHER COMMITTEES ---------------------------------------- Section 3.01. Standing Committees. The Board of Directors shall have ------------------- the following standing committees, each consisting of not less than three Directors, as shall be determined by the Board: Compensation Committee Audit Committee Section 3.02. Designation of Members and Chairmen of Standing ----------------------------------------------- Committees. At the annual meeting each year the Board of Directors, by - ---------- resolution adopted by a majority of the then authorized number of Directors, shall designate from among the Directors the members of the standing committees and from among the members of each such committee a chairman thereof, who shall serve as such, at the pleasure of the Board, so long as they shall continue in office as Directors until the next annual meeting of the Board of Directors and thereafter until the appointment of their successors. The Board may by similar resolution designate one or more Directors as alternate members of such committees, who may replace any absent member or members at any meeting of such committees, but no officer Director may be designated as an alternate member of the Audit Committee or the Compensation Committee. Vacancies in the membership or chairmanship of any standing committee may be filled in the same manner as original designations at any regular or special meeting of the Board, and the chief executive officer may designate from among the remaining members of any standing 11 committee whose chairmanship is vacant a chairman who shall serve until a successor is designated by the Board. Section 3.03. Notices of Times of Meetings of Standing Committees and ------------------------------------------------------- Presiding Officers. Meetings of each standing committee shall be held upon call - ------------------ of the chief executive officer, or upon call of the chairman of such standing committee or two members of such standing committee. Meetings of each standing committee may also be held at such other times as it may determine. Meetings of a standing committee shall be held at such places and upon such notice as it shall determine or as shall be specified in the calls of such meetings. Any such chairman, if present, or such member or members of each committee as may be designated by the chief executive officer shall preside at meetings thereof or, in the event of the absence or disability of any thereof or failing such designation, the committee shall select from among its members present a presiding officer. Meetings of a standing committee may be attended by Directors who are not members of such committee unless the chairman of such committee requests otherwise. Section 3.04. Other Committees. The Board of Directors may designate ---------------- one or more other committees, each such committee to consist of such number of Directors as from time to time may be fixed by the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any such committee, who may replace any absent or disqualified member or members at any meeting of such committee. Thereafter, members (and alternate members, if any) of each such committee may be designated at the annual meeting of the Board of Directors. Any such committee may be abolished or re-designated from time to time by the Board of Directors. Each member (and each alternate member) of any such committee (whether designated at an annual meeting of the Board of Directors or to fill a vacancy or otherwise) shall hold office until his or her successor shall have been designated or until he or she shall cease to be a Director, or until his or her earlier death, resignation or removal. Section 3.05. Powers. Each committee, except as otherwise provided in ------ this section, shall have and may exercise such powers of the Board of Directors as may be provided by resolution or resolutions of the Board of Directors, However, no committee shall have the power or authority: (1) to approve or adopt, or recommend to the stockholders, any action or matter expressly required by the General Corporation Law to be submitted to the stockholders for approval; or (2) to adopt, amend or repeal the By-Laws of the Corporation. Any committee may be granted by the Board of Directors power to authorize the seal of the Corporation to be affixed to any or all papers which may require it. 12 Section 3.06. Proceedings. Each such committee may fix its own rules ----------- of procedure and may meet at such place (within or without the State of Delaware), at such time and upon such notice, if any, as it shall determine from time to time. Each such committee shall keep minutes of its proceedings and shall report such proceedings to the Board of Directors at the meeting of the Board of Directors next following any such proceedings. Section 3.07. Quorum and Manner of Acting. Except as may be otherwise --------------------------- provided in the resolution creating such committee, at all meetings of any committee, the presence of members (or alternate members) constituting a majority of the total authorized membership of such committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at any meeting at which a quorum is present shall be the act of such committee. Any action required or permitted to be taken at any meeting of any such committee may be taken without a meeting, if all members of such committee shall consent to such action in writing and such writing or writings are filed with the minutes of the proceedings of the committee. The members of any such committee shall act only as a committee, and the individual members of such committee shall have no power as such. Section 3.08. Action by Telephonic Communications. Members of any ----------------------------------- committee designated by the Board of Directors may participate in a meeting of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 3.09. Absent or Disqualified Members. In the absence or ------------------------------ disqualification of a member of any committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 3.10. Resignations. Any member (and any alternate member) of ------------ any committee may resign at any time by delivering a written notice of resignation, signed by such member, to the Board of Directors or the Chairman. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 3.11. Removal. Any member (and any alternate member) of any ------- committee may be removed at any time, either for or without cause, by resolution adopted by a majority of the whole Board of Directors. Section 3.12. Vacancies. If any vacancy shall occur in any committee, --------- by 13 reason of disqualification, death, resignation, removal or otherwise, the remaining members (and any alternate members) shall continue to act, and any such vacancy may be filled by the Board of Directors. ARTICLE IV. ----------- OFFICERS -------- Section 4.01. Number. The officers of the Corporation shall be chosen ------ by the Board of Directors and shall be a Chairman of the Board, Chief Executive Officer, President, one or more Vice Presidents, Chief Financial Officer, a Secretary and a Treasurer. The Board of Directors also may elect one or more Assistant Secretaries and Assistant Treasurers in such numbers as the Board of Directors may determine. Any number of offices may be held by the same person. No officer need be a Director of the Corporation. Section 4.02. Election. Unless otherwise determined by the Board of --------- Directors, the officers of the Corporation shall be elected by the Board of Directors at the annual meeting of the Board of Directors, and shall be elected to hold office until the next succeeding annual meeting of the Board of Directors. In the event of the failure to elect officers at such annual meeting, officers may be elected and qualified at any regular or special meeting of the Board of Directors. Each officer shall hold office until his successor has been elected and qualified, or until his or her earlier death, resignation or removal. Section 4.03. Salaries. The salaries of all officers and agents of the --------- Corporation shall be fixed by the Board of Directors. Section 4.04. Removal and Resignation; Vacancies. Any officer may be ---------------------------------- removed for or without cause at any time by the Board of Directors. Any officer may resign at any time by delivering a written notice of resignation, signed by such officer, to the Board of Directors or the Chief Executive Officer. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, shall be filled as determined by the Board of Directors. Section 4.05. Authority and Duties of Officers. The officers of the -------------------------------- Corporation shall have such authority and shall exercise such powers and perform such duties as may be specified in these By-Laws or in a resolution of the Board of Directors, except that in any event each officer shall exercise such powers and perform such duties as may be required by law. 14 Section 4.06. The Chairman. The Directors shall elect from among the ------------ members of the Board a "Chairman" of the Board. The Chairman shall have such duties and powers as set forth in these By-Laws or as shall otherwise be conferred upon the Chairman from time to time by the Board. The Chairman shall preside over all meetings of the Stockholders and the Board. Section 4.07. The Chief Executive Officer. The Chief Executive --------------------------- Officer shall have general control and supervision of the policies and operations of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He or she shall manage and administer the Corporation's business and affairs and shall also perform all duties and exercise all powers usually pertaining to the office of a chief executive officer of a corporation. He or she shall have the authority to sign, in the name and on behalf of the Corporation, checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or an Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. He or she shall have the authority to cause the employment or appointment of such employees and agents of the Corporation as the conduct of the business of the Corporation may require, to fix their compensation, and to remove or suspend any employee or agent elected or appointed by the Chief Executive Officer or the Board of Directors. The Chief Executive Officer shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 4.08. The President. The President, subject to the authority ------------- of the Chief Executive Officer, shall be the Chief Operating Officer of the Company and shall have primary responsibility for, and authority with respect to, the management of the day-to-day business and affairs of the Company. He or she shall have the authority to sign, in the name and on behalf of the Corporation, checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or an Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. The President shall have the authority to cause the employment or appointment of such employees and agents of the Company as the conduct of the business of the Company may require, to fix their compensation, and to remove or suspend any employee or agent elected or appointed by the President. Section 4.09. The Vice President. The Vice Presidents, if any, shall ------------------ have such designations (including, without limitation, Senior Vice President, Vice President and Second Vice president) and shall perform such other duties and have such other powers as the Board or the Chief Executive Officer or President may from time to time prescribe. 15 Section 4.10. The Secretary. The Secretary shall have the following powers and duties, except as may be otherwise determined by the Board of Directors: (1) he or she shall keep or cause to be kept a record of all the proceedings of the meetings of the stockholders and of the Board of Directors in books provided for that purpose. (2) he or she shall cause all notices to be duly given in accordance with the provisions of these By-Laws and as required by law. (3) whenever any committee shall be appointed pursuant to a resolution of the Board of Directors, he or she shall furnish a copy of such resolution to the members of such committee. (4) he or she shall be the custodian of the records and of the seal of the Corporation and cause such seal (or a facsimile thereof) to be affixed to all certificates representing shares of the Corporation prior to the issuance thereof and to all instruments the execution of which on behalf of the Corporation under its seal shall have been duly authorized in accordance with these By-Laws, and when so affixed he or she may attest the same. (5) he or she shall properly maintain and file all books, reports, statements, certificates and all other documents and records required by law, the Certificate of Incorporation or these By-Laws. (6) he or she shall have charge of the stock books and ledgers of the Corporation and shall cause the stock and transfer books to be kept in such manner as to show at any time the number of shares of stock of the Corporation of each class issued and outstanding, the names (alphabetically arranged) and the addresses of the holders of record of such shares, the number of shares held by each holder and the date as of which each became such holder of record. (7) he or she shall sign (unless the Chief Financial Officer, the Treasurer, an Assistant Treasurer or Assistant Secretary shall have signed) certificates representing shares of the Corporation, the issuance of which shall have been authorized by the Board of Directors. (8) he or she shall perform, in general, all duties incident to the office of secretary and such other duties as may be specified in these By-Laws or as may be assigned to him or her from time to time by the Board of Directors, or the President. Section 4.11. The Chief Financial Officer. The Chief Financial --------------------------- Officer of 16 the Corporation shall have the following powers and duties: (1) he or she shall have charge and supervision over and be responsible for the moneys, securities, receipts and disbursements of the Corporation, and shall keep or cause to be kept full and accurate records of all receipts of the Corporation. (2) he or she shall cause the moneys and other valuable effects of the Corporation to be deposited in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as shall be selected in accordance with Section 8.05 of these By-Laws. (3) he or she shall cause the moneys of the Corporation to be disbursed by checks or drafts (signed as provided in Section 8.06 of these By- Laws) upon the authorized depositaries of the Corporation and cause to be taken and preserved proper vouchers for all moneys disbursed. (4) he or she shall render to the Board of Directors, the Chief Executive Officer or the President, whenever requested, a statement of the financial condition of the Corporation and of all his or her transactions as Chief Financial Officer, and render a full financial report at the annual meeting of the stockholders, if called upon to do so. (5) he or she shall be empowered from time to time to require from all officers or agents of the Corporation reports or statements giving such information as he or she may desire with respect to any and all financial transactions of the Corporation. (6) he or she may sign (unless the Treasurer, an Assistant Treasurer or the Secretary or an Assistant Secretary shall have signed) certificates representing stock of the Corporation, the issuance of which shall have been authorized by the Board of Directors. (7) he or she shall perform, in general, all duties as may be specified in these By-Laws or as may be assigned to him or her from time to time by the Board of Directors, the Chief Executive Officer or the President. Section 4.12. The Treasurer. The Treasurer shall perform such duties ------------- and exercise such powers as may be assigned to him or her from time to time by the Chief Financial Officer. In the absence of the Chief Financial Officer, the duties of the Chief Financial Officer shall be performed and his or her powers may be exercised by the Treasurer; subject in any case to review and superseding action by the Board of Directors or the Chief Executive Officer. Section 4.13. Additional Officers. The Board of Directors may ------------------- appoint such other officers and agents as it may deem appropriate, and such other officers and 17 agents shall hold their offices for such terms and shall exercise such powers and perform such duties as may be determined from time to time by the Board of Directors. The Board of Directors from time to time may delegate to any officer or agent the power to appoint subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Any such officer or agent may remove any such subordinate officer or agent appointed by him or her, for or without cause. Section 4.14. Security. The Board of Directors may require any -------- officer, agent or employee of the Corporation to provide security for the faithful performance of his or her duties, in such amount and of such character as may be determined from time to time by the Board of Directors. ARTICLE V. ---------- CAPITAL STOCK ------------- Section 5.01. Certificates of Stock, Uncertificated Shares. The -------------------------------------------- shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until each such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock in the Corporation represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of, the Corporation, by the Chief Executive Officer, the President or a Vice President, and by the Chief Financial Officer, the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, representing the number of shares registered in certificate form. Such certificate shall be in such form as the Board of Directors may determine, to the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws. [Del. GCL (S) 158] Section 5.02. Signatures; Facsimile. All of such signatures on the --------------------- certificate referred to in Section 5.01 of these By-Laws may be a facsimile, engraved or printed, to the extent permitted by law. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Section 5.03. Lost, Stolen or Destroyed Certificates. The Board of -------------------------------------- Directors, or the Chief Financial Officer, Treasurer or other officer as authorized by the 18 Board of Directors, may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon delivery to the Board of Directors, or the Chief Financial Officer, Treasurer or other officer as authorized by the Board of Directors, of an affidavit of the owner or owners of such certificate, setting forth such allegation. The Board of Directors, or the Chief Financial Officer, Treasurer or other officer as authorized by the Board of Directors, may require the owner of such lost, stolen or destroyed certificate, or his or her legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate. Section 5.04. Transfer of Stock. Upon surrender to the Corporation ----------------- or the transfer agent of the Corporation of a certificate for shares, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Within a reasonable time after the transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the General Corporation Law of the State of Delaware. Subject to the provisions of the Certificate of Incorporation and these By-Laws, the Board of Directors may prescribe such additional rules and regulations as it may deem appropriate relating to the issue, transfer and registration of shares of the Corporation. Section 5.05. Record Date. In order to determine the stockholders ----------- entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for 19 determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5.06. Registered Stockholders. Prior to due surrender of a ----------------------- certificate for registration of transfer, the Corporation may treat the registered owner as the person exclusively entitled to receive dividends and other distributions, to vote, to receive notice and otherwise to exercise all the rights and powers of the owner of the shares represented by such certificate, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have notice of such claim or interests. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer or uncertificated shares are requested to be transferred, both the transferor and transferee request the Corporation to do so. Section 5.07. Transfer Agent and Registrar. The Board of Directors ---------------------------- may appoint one or more transfer agents and one or more registrars, and may require all certificates representing shares to bear the signature of any such transfer agents or registrars. ARTICLE VI. ----------- INDEMNIFICATION --------------- Section 6.01. Nature of Indemnity. The Corporation shall indemnify ------------------- any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer, of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and may indemnify any person who was or is a party or is threatened to be made a party to such an action, suit or proceeding by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed 20 to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful; except that in the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (1) such indemnification shall be - limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (2) no - indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding the foregoing, but subject to Section 6.05 of these By- Laws, the Corporation shall not be obligated to indemnify a director or officer of the Corporation in respect of a Proceeding (or part thereof) instituted by such director or officer, unless such Proceeding (or part thereof) has been authorized by the Board of Directors. The termination of any action, suit or proceeding by judgment, order settlement, conviction, or upon a plea of nolo contendere or its equivalent, ---- ---------- shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Section 6.02. Successful Defense. To the extent that a present or ------------------ former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 6.01 hereof or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 6.03. Determination that Indemnification is Proper. Any -------------------------------------------- indemnification of a present or former director or officer of the Corporation under Section 6.01 hereof (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the present or former director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 6.01 hereof. Any indemnification of a present or former employee or agent of the Corporation under Section 6.01 hereof (unless ordered by a court) may be made by the Corporation upon a determination that indemnification of the present or former employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 6.01 hereof. Any such determination 21 shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the Directors who are not - parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such Directors designated by majority vote of such - Directors, even though less than a quorum, or (3) if there are no such - Directors, or if such Directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. - Section 6.04. Advance Payment of Expenses. Expenses (including --------------------------- attorneys' fees) incurred by a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by former Directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate. The Board of Directors may authorize the Corporation's counsel to represent such director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. Section 6.05. Procedure for Indemnification of Directors and Officers. ------------------------------------------------------- Any indemnification of a director or officer of the Corporation under Sections 6.01 and 6.02, or advance of costs, charges and expenses to a director or officer under Section 6.04 of these By-Laws, shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If a determination by the Corporation that the director or officer is entitled to indemnification pursuant to this Article VI is required, and the Corporation fails to respond within sixty (60) days to a written request for indemnity, the Corporation shall be deemed to have approved such request. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this Article VI shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 6.04 of these By-Laws where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 6.01 of these By-Laws, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such 22 action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 6.01 of these By-Laws, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 6.06. Survival; Preservation of Other Rights. The foregoing -------------------------------------- indemnification provisions shall be deemed to be a contract between the Corporation and each director, officer, employee and agent who serves in any such capacity at any time while these provisions as well as the relevant provisions of the Delaware Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" may not be modified retroactively without the consent of such director, officer, employee or agent. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 6.07. Insurance. The Corporation may purchase and maintain --------- insurance on behalf of any person who is or was or has agreed to become a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person or on such person's behalf in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article VI. Section 6.08. Severability. If this Article VI or any portion hereof ------------ shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion 23 of this Article VI that shall not have been invalidated and to the fullest extent permitted by applicable law. ARTICLE VII. ------------ OFFICES ------- Section 7.01. Registered Office. The registered office of the ----------------- Corporation in the State of Delaware shall be located at Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. Section 7.02. Other Offices. The Corporation may maintain offices or ------------- places of business at such other locations within or without the State of Delaware as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE VIII. ------------- GENERAL PROVISIONS ------------------ Section 8.01. Dividends. Subject to any applicable provisions of law --------- and the Certificate of Incorporation, dividends upon the shares of the Corporation may be declared by the Board of Directors at any regular or special meeting of the Board of Directors and any such dividend may be paid in cash, property, or shares of the Corporation's capital stock. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the Director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid. Section 8.02. Reserves. There may be set aside out of any funds of -------- the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet 24 contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall think conducive to the interest of the Corporation, and the Board of Directors may similarly modify or abolish any such reserve. Section 8.03. Execution of Instruments. The Chief Executive Officer, ------------------------ the President, any Senior Vice President, Vice President or Second Vice President, the Secretary, the Chief Financial Officer or the Treasurer may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors the Chief Executive Officer or the President may authorize any other officer or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization may be general or limited to specific contracts or instruments. Section 8.04. Corporate Indebtedness. No loan shall be contracted on ---------------------- behalf of the Corporation, and no evidence of indebtedness shall be issued in its name, unless authorized by the Board of Directors or the Chief Executive Officer. Such authorization may be general or confined to specific instances. Loans so authorized may be effected at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual. All bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation issued for such loans shall be made, executed and delivered as the Board of Directors or the Chief Executive Officer shall authorize. When so authorized by the Board of Directors or the Chief Executive Officer, any part of or all the properties, including contract rights, assets, business or good will of the Corporation, whether then owned or thereafter acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in trust as security for the payment of such bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation, and of the interest thereon, by instruments executed and delivered in the name of the Corporation. Section 8.05. Deposits. Any funds of the Corporation may be -------- deposited from time to time in such banks, trust companies or other depositaries as may be determined by the Board of Directors or the Chief Executive Officer, or by such officers or agents as may be authorized by the Board of Directors or the Chief Executive Officer to make such determination. Section 8.06. Checks. All checks or demands for money and notes of ------ the Corporation shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as the Board of Directors or the Chief Executive Officer from time to time may determine. 25 Section 8.07. Sale, Transfer, etc. of Securities. To the extent ---------------------------------- authorized by the Board of Directors or by the Chief Executive Officer, the President, any Senior Vice President, Vice President or Second Vice President, the Secretary, the Chief Financial Officer or the Treasurer or any other officers designated by the Board of Directors or the Chief Executive Officer may sell, transfer, endorse, and assign any shares of stock, bonds or other securities owned by or held in the name of the Corporation, and may make, execute and deliver in the name of the Corporation, under its corporate seal, any instruments that may be appropriate to effect any such sale, transfer, endorsement or assignment. Section 8.08. Voting as Stockholder. Unless otherwise determined by --------------------- resolution of the Board of Directors, the Chief Executive Officer, the President or any Vice President shall have full power and authority on behalf of the Corporation to attend any meeting of stockholders of any corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting. The Board of Directors may by resolution from time to time confer such power and authority upon any other person or persons. Section 8.09. Fiscal Year. The fiscal year of the Corporation shall ----------- commence on the first day of January of each year (except for the Corporation's first fiscal year which shall commence on the date of incorporation) and shall terminate in each case on December 31. Section 8.10. Seal. The seal of the Corporation shall be circular in ---- form and shall contain the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Delaware". The form of such seal shall be subject to alteration by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or reproduced, or may be used in any other lawful manner. Section 8.11. Books and Records; Inspection. Except to the extent ----------------------------- otherwise required by law, the books and records of the Corporation shall be kept at such place or places within or without the State of Delaware as may be determined from time to time by the Board of Directors. ARTICLE IX. ----------- AMENDMENT OF BY-LAWS -------------------- 26 Section 9.01. Amendment. These By-Laws may be amended, altered or --------- repealed (1) by resolution adopted by a majority of the Board of Directors at any special or regular meeting of the Board if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting; or (2) at any regular or special meeting of the stockholders upon the affirmative vote of the holders of two-thirds (2/3) or more of the combined voting power of the outstanding shares of the Corporation entitled to vote generally in the election of Directors if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting. Notwithstanding the foregoing, the proviso to Section 2.06 of these By-Laws may be amended, altered or repealed only to the extent necessary to reflect an amendment of Section 9.9 of the Plan and only with the affirmative vote of the same number of Directors as was required under the Plan for such amendment. ARTICLE X. ---------- CONSTRUCTION ------------ Section 10.01. Construction. In the event of any conflict between the ------------ provisions of these By-Laws as in effect from time to time and the provisions of the Certificate of Incorporation of the Corporation as in effect from time to time, the provisions of such Certificate of Incorporation shall be controlling. ________________________________________________________________________________ 27 EX-4.1 4 FORM OF CERTIFICATE OF COMMON STOCK EXHIBIT 4.1 (Form of Share Certificate) [FRONT OF CERTIFICATE] Certificate for not more than 100,000 shares [Certificate Number] [Number of Shares] [CUSIP Number] See Reverse For Certain Definitions JOHN HANCOCK FINANCIAL SERVICES, INC. Incorporated Under The Laws Of The State Of Delaware This Certificate is Transferable either in Boston, Massachusetts or in New York, New York THIS CERTIFIES that _______________________________________________________ is the Owner of ________________ (Number) FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER SHARE of John Hancock Financial Services, Inc. transferable on the books of the Corporation by said owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Corporation's Restated Certificate of Incorporation and By-Laws, as amended (copies of which are on file with the Transfer Agent), to all of which the holder by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signature of its duly authorized officers. SEAL Dated: John Hancock Financial Services, Inc. By: ________________________ _______________________ Stephen L. Brown [ ] Chairman and Chief Secretary Executive Officer Countersigned and registered [Name of Bank] _________________________ By: [Authorized Officer] Transfer Agent and Registrar [REVERSE OF CERTIFICATE] This Certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between the Corporation and Equiserve Limited Partnership, dated as of [___________], 2000, and as it may be amended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Corporation. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Corporation will mail to the holder of this certificate a copy of the Rights Agreement (as in effect on the date of mailing) without charge promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights beneficially owned by an Acquiring Person, or any Associate or Affiliate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void. Ownership and transfer of the shares of Common Stock represented by this certificate are subject to certain restrictions. Subject to certain limited exceptions, these restrictions prevent (i) any person or persons acting in - concert from directly or indirectly offering to acquire or acquiring beneficial ownership of 10% or more of the Common Stock of the Corporation or of John Hancock Life Insurance Company until the date that is two years from the date of the initial public offering of the Corporation, and (ii), without the prior -- approval of the Corporation's Board of Directors and of the Massachusetts Commissioner of Insurance, any person or persons acting in concert from directly or indirectly offering to acquire or acquiring beneficial ownership of 10% or more of the Common Stock of the Corporation or of John Hancock Life Insurance Company during the one year period following the two-year period described in the preceding clause. The full text and exact terms of these restrictions and the exceptions thereto are specifically set forth in Articles VIII and IX of the Restated Certificate of Incorporation of the Corporation. JOHN HANCOCK FINANCIAL SERVICES, INC. The Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof of the Corporation, and the qualifications, limitations or restrictions of such preferences and/or rights. Such request should be addressed to the transfer agent named herein. The following abbreviations when used in the inscription on the face of this certificate shall be construed as though they were written out in full according to applicable laws or regulations. Abbreviations in addition to those appearing below may be used.
Abbreviation Equivalent - ------------ ---------- TEN COM as tenants in common UNIF GIFT MIN ACT-- TEN ENT as tenants by the entireties ______________________ JT TEN as joint tenants with right of (Custodian's Name).........Custodian.......__________ (Minor) survivorship and not as under the Uniform Gifts to Minors Act.................(State) tenants in common DM Administrator(s) Administratrix EST Estate, Of estate of EX Executor(s), Executrix FBO For the benefit of MB Made by TR (As) trustee(s), for, of UA Under agreement UW Under will of, Of will of, Under last will & testament
2 Assignment Form FOR VALUE RECEIVED THE UNDERSIGNED SELLS, ASSIGNS AND TRANSFERS UNTO _________________________________________ PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE) __________ shares of the capital stock represented by this certificate and does hereby irrevocably constitute and appoint ______________________________________ (leave blank or fill in as explained in Notice below) as Attorney to transfer the said Stock on the books of the Corporation with full power of substitution. X ---------------------------------------- DATED ______________________ X ---------------------------------------- (Sign here exactly as name(s) is shown on the face of this certificate without any change or alteration whatever.) Signature(s) Guaranteed: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION PARTICIPATING IN A MEDALLION PROGRAM APPROVED BY THE SECURITIES TRANSFER ASSOCIATION, INC., SUCH AS, A COMMERCIAL BANK, TRUST COMPANY, SECURITIES BROKER/DEALER, CREDIT UNION, OR A SAVINGS ASSOCIATION. Important Notice: When you sign your name to this Assignment Form without filling in the name of your "Assignee" or "Attorney", this stock certificate becomes full negotiable, similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you either (i) fill in the name of the new owner in the "Assignee" blank, or (ii) if you are sending the signed certificate to your bank or broker, fill in the name of the bank or broker in the "Attorney" blank. Alternatively, instead of using this Assignment form, you may sign a separate "stock power" form and then mail the unsigned stock certificate and the signed "stock power" in separate envelopes. For added protection, use certified or registered mail for a stock certificate. EX-10.1 5 CREDIT AGREEMENT Exhibit 10.1 $500,000,000 CREDIT AGREEMENT dated as of July 30, 1999 among John Hancock Mutual Life Insurance Company, John Hancock Capital Corporation, The Banks Listed Herein, BankBoston, N.A., as Administrative Agent, Citicorp USA, Inc., as Syndication Agent, The First National Bank of Chicago, as Documentation Agent, and Comerica Bank, The Bank of Nova Scotia, Fleet National Bank, Royal Bank of Canada and Wachovia Bank, as Co-Agents TABLE OF CONTENTS ARTICLE I. DEFINITIONS................................................................ 1 SECTION 1.01. Definitions........................................................... 1 SECTION 1.02. Accounting Terms and Determinations................................... 11 SECTION 1.03. Types of Borrowings................................................... 11 ARTICLE II. THE CREDITS................................................................ 12 SECTION 2.01. Commitments to Lend................................................... 12 SECTION 2.02. Notice of Committed Borrowing......................................... 12 SECTION 2.03. Reserved.............................................................. 12 SECTION 2.04. Notice to Banks; Funding of Loans..................................... 13 SECTION 2.05. Notes................................................................. 13 SECTION 2.06. Maturity of Loans..................................................... 14 SECTION 2.07. Interest Rates........................................................ 14 SECTION 2.08. Facility Fee.......................................................... 16 SECTION 2.09. Optional Termination or Reduction of Commitments...................... 16 SECTION 2.10. Method of Electing Interest Rates..................................... 16 SECTION 2.11. Optional Prepayments.................................................. 17 SECTION 2.12. General Provisions as to Payments..................................... 18 SECTION 2.13. Funding Losses........................................................ 18 SECTION 2.14. Computation of Interest and Fees...................................... 19 SECTION 2.15. Withholding Tax Exemption............................................. 19 SECTION 2.16. Regulation D Compensation............................................. 19 ARTICLE III. CONDITIONS................................................................. 20 SECTION 3.01. Effectiveness......................................................... 20
-i- SECTION 3.02. Borrowings............................................................ 21 ARTICLE IV. REPRESENTATIONS AND WARRANTIES............................................. 22 SECTION 4.01. Existence and Power................................................... 22 SECTION 4.02. Authorization; No Contravention....................................... 22 SECTION 4.03. Binding Effect........................................................ 22 SECTION 4.04. Title to Properties................................................... 22 SECTION 4.05. Financial Information................................................. 23 SECTION 4.06. Litigation............................................................ 24 SECTION 4.07. Compliance with ERISA................................................. 24 SECTION 4.08. Compliance with Laws.................................................. 24 SECTION 4.09. Taxes................................................................. 24 SECTION 4.10. No Event of Default................................................... 24 SECTION 4.11. Not an Investment Company............................................. 24 SECTION 4.12. Full Disclosure....................................................... 25 SECTION 4.13. Year 2000 Compliance.................................................. 25 ARTICLE V. COVENANTS.................................................................. 25 SECTION 5.01. Information........................................................... 25 SECTION 5.02. Maintenance of Property; Insurance.................................... 28 SECTION 5.03. Conduct of Business and Maintenance of Existence...................... 28 SECTION 5.04. Compliance with Laws.................................................. 29 SECTION 5.05. Compliance with ERISA................................................. 29 SECTION 5.06. Taxes................................................................. 29 SECTION 5.07. Subsidiary Debt....................................................... 29 SECTION 5.08. Management Surplus.................................................... 30 SECTION 5.09. Capitalization Ratio.................................................. 30
-ii- SECTION 5.10. Company Negative Pledge............................................... 30 SECTION 5.11. JHCC Negative Pledge.................................................. 31 SECTION 5.12. Consolidations, Mergers and Sales of Assets........................... 31 SECTION 5.13. Support Agreement; Company Assumption Agreement; Guarantee Agreement.. 32 SECTION 5.14. Use of Proceeds....................................................... 32 ARTICLE VI. DEFAULTS................................................................... 33 SECTION 6.01. Events of Default..................................................... 33 SECTION 6.02. Notice of Default..................................................... 35 ARTICLE VII. THE AGENT.................................................................. 36 SECTION 7.01. Appointment and Authorization......................................... 36 SECTION 7.02. Agent and Affiliates.................................................. 36 SECTION 7.03. Action by Agent....................................................... 36 SECTION 7.04. Consultation with Experts............................................. 36 SECTION 7.05. Liability of Agent.................................................... 36 SECTION 7.06. Indemnification....................................................... 36 SECTION 7.07. Credit Decision....................................................... 37 SECTION 7.08. Successor Agent....................................................... 37 SECTION 7.09. Agent's Fee........................................................... 37 ARTICLE VIII. CHANGE IN CIRCUMSTANCES.................................................... 37 SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.............. 37 SECTION 8.02. Illegality............................................................ 38 SECTION 8.03. Increased Cost and Reduced Return..................................... 38 SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loan.............. 40 SECTION 8.05. Substitution of Bank.................................................. 40
-iii- ARTICLE IX. MISCELLANEOUS.............................................................. 40 SECTION 9.01. Notices............................................................... 40 SECTION 9.02. No Waivers............................................................ 41 SECTION 9.03. Expenses; Documentary Taxes; Indemnification.......................... 41 SECTION 9.04. Sharing of Set-Offs................................................... 41 SECTION 9.05. Amendments and Waivers................................................ 42 SECTION 9.06. Successors and Assigns................................................ 42 SECTION 9.07. Collateral............................................................ 44 SECTION 9.08. Waiver of Certain Claims.............................................. 44 SECTION 9.09. Termination of JHCC as a Borrower..................................... 44 SECTION 9.10. Governing Law; Submission to Jurisdiction............................. 45 SECTION 9.11. Counterparts; Integration............................................. 45 SECTION 9.12. Waiver of Jury Trial.................................................. 45
-iv- Exhibit A - Note Exhibit B - Company Assumption Agreement Exhibit C - Guarantee Agreement Exhibit D - Opinion of the Second Vice President and Counsel of the Company Exhibit E - Opinion of Special Counsel for the Agent Exhibit F - Assignment and Assumption Agreement Exhibit G - JHCC Termination Notice Exhibit H - Support Agreement -v- CREDIT AGREEMENT AGREEMENT dated as of July 30, 1999 among JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, JOHN HANCOCK CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and BANKBOSTON, N.A., as Agent. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrowers (as hereinafter defined) desire to obtain credit from the Banks (as hereinafter defined) pursuant to a 364-day Senior Revolving Credit Facility (the "Facility"); WHEREAS, the Banks desire to extend credit to the Borrowers pursuant to the Facility; and WHEREAS, each Bank, in entering into this Agreement, expressly relies on the Support Agreement (as hereinafter defined) pursuant to Section (6) thereof; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have ----------- the following meanings: "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Company) duly completed by such Bank. "Agent" means BankBoston, N.A. in its capacity as administrative agent for the Banks hereunder, and its successors in such capacity. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Base Rate Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "Assignee" has the meaning set forth in Section 9.06(c). "Authorized Officers" means, with respect to either Borrower, individuals described as such in the most recent certificate with respect thereto delivered to the Agent in -1- accordance with Section 9.01 by the Secretary or an Assistant Secretary of such Borrower; provided that the Agent may conclusively rely on any such certificate -------- of a Borrower as to the Authorized Officers of such Borrower, whether or not, at any applicable time, any individual identified as an Authorized Officer of such Borrower in such certificate is, at such time, an officer of such Borrower, until and unless the Agent shall have received a new certificate from such Borrower which alters or supersedes such previous certificate. "AVR" means the Asset Valuation Reserve established and required to be maintained by the Company pursuant to, and as described in, the Purposes and Procedures of the Securities Valuation Office of the NAIC, as such statement is amended from time to time. "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the rate of interest publicly announced by BankBoston, N.A. at its head office in Boston, Massachusetts as its base rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Effective Rate for such day. "Base Rate Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Boston, Massachusetts are authorized by law to close. "Base Rate Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Base Rate Lending Office) or such other office as such Bank may hereafter designate as its Base Rate Lending Office by notice to the Company and the Agent. "Base Rate Loan" means (i) a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or the provisions of Article VIII or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means the Company or JHCC, as the context may require, and "Borrowers" means both of the foregoing; provided that if JHCC shall have been -------- terminated as a Borrower hereunder pursuant to Section 9.09, neither the term "Borrower" nor the term "Borrowers" shall thereafter include or refer to JHCC. "Borrowing" has the meaning set forth in Section 1.03. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.09 or terminated pursuant to Section 2.01 or 2.09. -2- "Committed Loan" means a Base Rate Loan or Euro-Dollar Loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or -------- portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Company" means John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts, and its permitted successors. "Company Assumption Agreement" means an agreement entered into by the Company for the benefit of the Agent, the Banks and the holders from time to time of the Notes issued by JHCC, substantially in the form of Exhibit B hereto. "Consent Date" has the meaning set forth in Section 2.06(b). "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all obligations of such Person to purchase securities (or other property) which arise out of or in connection with the sale of the same or substantially similar securities (or other property), (vi) all non-contingent obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vii) all Debt of others secured by a Lien on the assets generally of such Person, whether or not such Debt is assumed by such Person, (viii) all Debt of others Guaranteed by such Person, and (ix) all redeemable preferred stock issued by such Person other than any such preferred stock redeemable at the sole option of such Person; provided, that the term Debt shall -------- not include (x) the debt under the Credit Agreement, dated as of March 12, 1999, among the Borrowers listed on Schedule 1 thereof, the Banks listed on Schedule 2 thereof, Fleet National Bank, as Administrative Agent, BankBoston, N.A., as Syndication Agent, Citicorp USA, Inc., as Documentation Agent, and State Street Bank and Trust Company, as Operations Agent, as such Credit Agreement may be amended, supplemented or modified, or as such Credit Agreement may be substituted for or replaced by a credit agreement of similar import, (y) obligations recourse for the payment of which is limited to specified assets of such Person and (z) obligations of a Person which is an insurance company (1) which arise in connection with policies or contracts of insurance, funding agreements and other similar contracts entered into in the ordinary conduct of such Person's insurance business or (2) to the extent that recourse for the payment of such obligations is limited to assets held in separate accounts of such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. -3- "Designated Deposit Account" means (i) in the case of the Company, the deposit account number 279-80008 maintained with the Agent at the address of the Agent specified in or pursuant to Section 9.01 or such other deposit account maintained with the Agent at such address as the Company shall specify in writing to the Agent and (ii) in the case of JHCC, the deposit account number 561-01317 maintained with the Agent at such address or such other deposit account maintained with the Agent at such address as JHCC shall specify in writing to the Agent. "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Eligible Affiliate" means a Person (1) that is a Parent or subsidiary of a Bank hereunder or has the same Parent as a Bank hereunder and (2) that is --- (a) a commercial bank organized under the laws of the United States of America, or any state thereof, and having total assets in excess of $1,000,000,000; (b) a savings and loan association or savings bank organized under the laws of the United States of America, or any state thereof, and having a tangible net worth of at least $1,000,000,000; (c) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development ("OECD"), or a political subdivision of any such country, and having total assets in excess of $10,000,000,000, provided that such bank is acting through a branch or agency located in the United States of America; or (d) any other Person consented to by the Agent and the Borrower (such consent not to be unreasonably withheld). "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the clean-up or other remediation thereof. "Equivalent Rating" means a senior unsecured long-term debt rating of an NRSRO, which rating is (i) requested by a Borrower as an alternative to a rating from S&P, (ii) acceptable to the Agent in its sole discretion, and (iii) equivalent to the Level I Rating, Level II Rating, Level III Rating or Level IV Rating, as the case may be, from S&P, as determined by the Agent, subject to the approval of the Required Banks. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Company and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company, are treated as a single employer under Section 414 of the Internal Revenue Code, but only to the extent that either Borrower could have liability under ERISA with respect to the actions or inactions of such members. -4- "Euro-Dollar Business Day" means any Base Rate Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London or such other eurodollar interbank market as may be selected by the Agent in its sole discretion acting in good faith. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro- Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Company and the Agent. "Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or (ii) an overdue amount which was a Euro- Dollar Loan immediately before it became overdue. "Euro-Dollar Margin" has the meaning set forth in Section 2.07(c). "Euro-Dollar Rate" has the meaning set forth in Section 2.07(c). "Euro-Dollar Reference Banks" means the principal Euro-Dollar Lending Offices of such Banks as may be selected by the Agent in its sole discretion acting in good faith. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in Boston, Massachusetts with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.01. "Excluded Subsidiary" means (i) a limited partnership of which any Subsidiary serves as general partner or a trust over which any Subsidiary exercises control, which limited partnership or trust was formed primarily for the purpose of making debt or equity investments in other entities and in which entities other than the Company and the Subsidiaries own, following the close of the syndication period with respect thereto, 20% or more of the equity or beneficial interest, as the case may be, and (ii) any Subsidiary the beneficial or equity interest in which is directly or indirectly acquired by the Company in connection with workouts, either in a bankruptcy proceeding or otherwise, of investments previously made by the Company or any Subsidiary. "Facility" has the meaning set forth in the preamble to this Agreement. -5- "Federal Funds Effective Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day by the Federal Reserve Bank of Boston; provided that (i) if such day is not -------- a Base Rate Business Day, the Federal Funds Effective Rate for such day shall be such rate on such transactions on the next preceding Base Rate Business Day as so published on the next succeeding Base Rate Business Day, and (ii) if no such rate is so published on such next succeeding Base Rate Business Day, the Federal Funds Effective Rate for such day shall be the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent. "Granting Bank" has the meaning set forth in Section 9.06(f). "Group of Loans" means at any time a group of Loans made to a Borrower consisting of (i) all Committed Loans made to such Borrower which are Base Rate Loans at such time or (ii) all Committed Loans made to such Borrower which are Euro-Dollar Loans having the same Interest Period and bearing interest at the same type of interest rate at such time; provided that, if Committed Loans of -------- any particular Bank made to such Borrower are converted to or made as Base Rate Loans pursuant to Section 8.02 or 8.04, such Loans shall be included in the same Group or Groups of Loans from time to time as they would have been in if they had not been so converted or made. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include -------- endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantee Agreement" means an agreement entered into by the Company for the benefit of the Agent, the Banks and the holders from time to time of the Notes issued by JHCC, substantially in the form of Exhibit C hereto. "Interest Period" means, with respect to each Euro-Dollar Loan, a period commencing on the date of Borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the applicable Borrower may elect in the applicable Notice; provided that: -------- -6- (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; "Internal Revenue Code" means the Internal Revenue Code of 1986 and the regulations thereunder, all as amended and in effect from time to time. "JHCC" means John Hancock Capital Corporation, a Delaware corporation, and its permitted successors. "JHSI" means John Hancock Subsidiaries, Inc., a Delaware corporation, and its successors. "Level I Rating" means a senior unsecured long-term debt rating of AAA from S&P, or an Equivalent Rating. "Level II Rating" means a senior unsecured long-term debt rating of at least AA+ from S&P, or an Equivalent Rating. "Level III Rating" means a senior unsecured long-term debt rating of at least AA- from S&P, or an Equivalent Rating. "Level IV Rating" means a senior unsecured long-term debt rating of below AA- from S&P, or an Equivalent Rating. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Company or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Base Rate Loan or a Euro-Dollar Loan, and "Loans" means Base Rate Loans, Euro-Dollar Loans or any combination of the foregoing. "Management Surplus" means, at any date, the sum at such date, without duplication, of (a) Surplus of the Company and (b) AVR of the Company and any other reserve established and maintained by the Company with respect to its invested assets (except for -7- reserves established for separate accounts), either voluntarily or pursuant to requirements of applicable law, the NAIC, the Insurance Department of the Commonwealth of Massachusetts or any other state or federal regulatory authority having jurisdiction over the Company, in addition to or in substitution for or replacement of AVR (other than an interest maintenance reserve or other similar reserve). "Material Adverse Effect" means a material adverse effect on the ability of either Borrower to perform its obligations under this Agreement or the Notes. "Material Debt" means (i) for purposes of Section 6.01(e), Debt (other than the Notes or Permitted Collateralization Obligations) of one or both Borrowers, arising in one or more related or unrelated transactions, in an aggregate principal amount in excess of (A) for purposes of subsections 6.01(e) (i) (A) and 6.01(e) (ii), $50,000,000 and (B) for purposes of subsection 6.01(e) (i) (B), $75,000,000 and (ii) for purposes of Section 6.01(f), Debt (other than Permitted Collateralization Obligations) of one or more Subsidiaries of the Company each of which is not a Borrower, arising in one or more related or unrelated transactions, in an aggregate principal amount in excess of $75,000,000; provided that for purposes of this definition, Debt of the Company -------- or any Subsidiary referred to in the exception contained in the definition of "Permitted Collateralization Obligation" shall, at any date, be deemed to be in an amount equal to the amount of such Debt then due. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $75,000,000. "Material Subsidiary" means, at any date, (i) unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, JHCC and (ii) any Subsidiary the principal activities of which consist of activities other than the ownership or management of, or investment in, other Subsidiaries and the assets of which (other than, in the case of any Subsidiary that is an insurance company, assets held in separate accounts of such Subsidiary) as of such date exceed 15% of the Company's assets (other than assets held in separate accounts of the Company), as reflected on the most recent statutory financial statements of the Company delivered or required to be delivered to the Banks pursuant to Section 4.05(a)(i) or 5.01(a) (i) "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a) (3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NAIC" means the National Association of Insurance Commissioners or any entity succeeding to its function of advising insurance companies as to the values to be assigned to assets of such insurance companies included within one or more categories of such assets. "Notes" means promissory notes of either or both Borrowers, substantially in the form of Exhibit A hereto, evidencing the obligations of such Borrower or Borrowers to repay the Loans made to it or them, and "Note" means any one of such promissory notes issued hereunder. -8- "Notice of Committed Borrowing" has the meaning set forth in Section 2.02. "Notice of Interest Rate Election" has the meaning set forth in Section 2.10. "NRSRO" means any nationally recognized statistical rating organization. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b) "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Collateralization Assets" means assets pledged to secure Permitted Collateralization Obligations. "Permitted Collateralization Obligation" means any obligation relating to REMICs, pass-through obligations, collateralized mortgage obligations, collateralized bond obligations or similar instruments, except an obligation of the Company or any Subsidiary (excluding any Subsidiary (other than JHCC, unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09) that is the issuer of the REMIC, pass-through obligation, collateralized mortgage obligation, collateralized bond obligation or similar instrument) to the extent that such obligation requires a cash payment by the Company or such Subsidiary, recourse for the payment of which is not limited to specific assets of the Company or such Subsidiary (excluding any obligation of the Company or such Subsidiary (i) to make advances in connection with the servicing of such REMIC, pass-through obligation, collateralized mortgage obligation, collateralized bond obligation or similar instrument or (ii) to repurchase collateral). "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Quarterly Date" means the last Euro-Dollar Business Day of each March, June, September and December. -9- "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks having at least 50% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 50% of the aggregate unpaid principal amount of the Loans. "S&P" means Standard & Poor's Corporation, and its successors. "Senior Financial Officer" means (i) with respect to the Company, the Chief Financial Officer, the Controller or the Treasurer of the Company and (ii) with respect to JHCC, the President, any Vice President or the Treasurer of JHCC. "Signing Date" means the date upon which the Agent shall have received counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of the execution and delivery of a counterpart hereof by such party). "SPC" has the meaning set forth in Section 9.06(f). "Special Act" has the meaning set forth in Section 4.01. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "Support Agreement" means the Support Agreement dated as of October 15, 1984 between the Company and JHCC, a copy of which is attached hereto as Exhibit H, as the same may, subject to Section 5.13, be amended from time to time. "Surplus of the Company" means the statutory surplus of the Company consisting of the excess of the admitted assets of the Company over the sum of its capital and liabilities, except that surplus notes issued by the Company shall not be considered as liabilities of the Company, but shall be considered as part of the Surplus of the Company. "Tax Group" means, for any applicable period, both Borrowers and all corporations (within the meaning of the Internal Revenue Code) for the payment of the federal income taxes of which either Borrower is jointly and severally liable under the Internal Revenue Code for such period. "Termination Date" means the 364th day after the Effective Date or, if the maturity shall have been extended pursuant to Section 2.06(b) hereof, the 364th day after the Consent Date. -10- "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Year 2000 Compliant" means the ability of computer applications, imbedded microchips and other hardware and software systems used by a Borrower, or its material vendors, properly to recognize and perform date sensitive functions involving certain dates prior to January 1, 2000 and any date after December 31, 1999. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made and all financial statements required to be delivered hereunder shall be prepared in accordance with, in the case of the Company or any of its insurance Subsidiaries, accounting practices prescribed or permitted by insurance regulatory authorities (it being understood that as of the date hereof such accounting practices are considered by the Company's independent public accountants to be generally accepted accounting principles) and, in the case of each non-insurance Subsidiary of the Company, generally accepted accounting principles, in each case as in effect from time to time, applied on a basis consistent (except, in the case of the Company or any of its insurance Subsidiaries, for changes required by insurance regulatory authorities and, in the case of each non-insurance Subsidiary of the Company, for changes concurred in by the Company's independent public accountants) with the most recent comparable financial statements thereof delivered to the Banks pursuant to Section 4.05(a) or (b) or Section 5.01(a) or (b); provided that, if -------- the Company notifies the Agent that it wishes to amend any covenant in Article V to eliminate the effect of any change in, in the case of the Company or any of its insurance Subsidiaries, accounting practices prescribed or permitted by insurance regulatory authorities or, in the case of any non-insurance Subsidiary of the Company, generally accepted accounting principles, on the operation of such covenant (or if the Agent notifies the Company that the Required Banks wish to amend Article V for such purpose), then the Borrowers' compliance with such covenant shall be determined on the basis of, in the case of the Company and any of its insurance Subsidiaries, accounting practices prescribed or permitted by insurance regulatory authorities and, in the case of any non-insurance Subsidiary of the Company, generally accepted accounting principles, in each case in effect immediately before the relevant change in such accounting practices or accounting principles, as the case may be, became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. SECTION 1.03. Types of Borrowings. The term "Borrowing" denotes the ------------------- aggregation of Loans of one or more Banks to be made to a single Borrower pursuant to Article II on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement by reference to the pricing of Loans comprising such Borrowing (i.e., a "Base Rate Borrowing" is a ---- Borrowing composed of "Base Rate Loans" and a "Euro-Dollar Borrowing" is a Borrowing composed of Euro-Dollar Loans). -11- ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend. Each Bank severally agrees, on ------------------- the terms and conditions set forth in this Agreement, to make loans to either Borrower pursuant to this Section from time to time before the Termination Date in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding to both Borrowers shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $25,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(b)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, either Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time before the Termination Date under this Section. The Commitments shall terminate at the close of business on the Termination Date. SECTION 2.02. Notice of Committed Borrowing. The applicable Borrower ----------------------------- shall give the Agent notice executed on behalf of such Borrower by its Authorized Officers (a "Notice of Committed Borrowing"), not later than 10:00 A.M. (Boston, Massachusetts time) on (x) the date of each Base Rate Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Base Rate Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate or at a Euro-Dollar Rate, and (d) in the case of a Euro-Dollar Rate Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Reserved. -------- SECTION 2.04. Notice to Banks; Funding of Loans. --------------------------------- (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. -12- (b) Not later than 2:00 P.M. (Boston, Massachusetts time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in Boston, Massachusetts, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will deposit the funds so received from the Banks on the day received in the applicable Borrower's Designated Deposit Account. (c) Unless the Agent shall have received notice from a Bank prior to the date of (or, in the case of a Base Rate Borrowing, prior to 11:00 A.M. (Boston, Massachusetts time) on the date of) any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the applicable Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to such Borrower until the date such amount is repaid to the Agent, at (i) in the case of such Borrower, a rate per annum equal to the higher of the Federal Funds Effective Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Effective Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. Notes. (a) The Loans of each Bank to each Borrower ----- shall be evidenced by a single Note of such Borrower payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans to such Borrower. (b) Each Bank may, by notice to the Company and the Agent, request that its Loans of a particular type to a Borrower be evidenced by a separate Note of such Borrower in an amount equal to the aggregate unpaid principal amount of such Loans, in which case any Note then held by such Bank that would otherwise evidence Loans of such type shall be appropriately modified to reflect the fact that it does not evidence Loans of such type. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to a "Note" or the "Notes" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Notes pursuant to Section 3.01(b), the Agent shall deliver such Notes by hand or overnight courier to such Bank. Each Bank shall record the date and amount of each Loan made by it to a Borrower and the date and amount of each payment of principal made by such Borrower with respect thereto, and prior to any transfer of its Note of a Borrower, shall endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan to such Borrower then outstanding; provided that the failure of any Bank to make any such recordation -------- or endorsement -13- shall not affect the obligations of such Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by each Borrower so to endorse the Note of such Borrower and to attach to and make a part of the Note of such Borrower a continuation of any such schedule as and when required. SECTION 2.06. Maturity of Loans. (a) Each Committed Loan included in ----------------- any Committed Borrowing shall mature, and the principal amount thereof shall be due and payable, on the Termination Date. (b) The Borrowers may request a 364-day extension of the Termination Date by delivering written notice thereof to the Agent no more than 60 and no less than 45 days before the Termination Date. The Banks, in their sole discretion, may but shall not be obligated to agree to such an extension. The Banks shall advise the Borrowers of their respective decisions 30 days prior to the Termination Date (the "Consent Date"), and if more than 50% of the Banks agree to extend, the Termination Date will be extended until the 364/th/ day after the Consent Date. Non-consenting Banks shall exit the Facility, and the outstandings on their respective Commitments shall be paid by the Borrowers, on the Termination Date as in effect prior to such extension. The Facility will automatically be reduced by the non-consenting Banks' Commitments, but such non- consenting Banks may be replaced by the Company at any time prior to maturity with the assistance of and upon consultation with the Agent. SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear -------------- interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Date, on the Termination Date, and on the date such Base Rate Loan is converted to a Euro-Dollar Loan. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Intentionally omitted. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin applicable on such day plus the Euro-Dollar Rate applicable for such Interest Period, provided that after an Event of Default, each Euro-Dollar Margin shall -------- be increased by 200 basis points. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means: (i) for any day on which the Company has a Level I Rating, .125 of 1% per annum if the aggregate outstanding principal amount of the Loans is less than or equal to -14- 50% of the Commitments and .175 of 1% per annum if the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (ii) for any day on which the Company has a Level II Rating, .150 of 1% per annum if the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .200 of 1% per annum if the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (iii) for any day on which the Company has a Level III Rating, .180 of 1% per annum if the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .230 of 1% per annum if the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; and (iv) for any day on which the Company has a Level IV Rating, .210 of 1% per annum if the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .260 of 1% per annum if the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments. The "Euro-Dollar Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market, or such other eurodollar interbank market as may be selected by the Agent in its sole discretion acting in good faith, at approximately 11:00 A.M. (local time of such market) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro- Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the Euro-Dollar Margin applicable on such day plus the higher of (i) the Euro-Dollar Rate applicable to such Loan and (ii) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market or such other eurodollar interbank market as may be selected by the Agent in its sole discretion acting in good faith for the applicable period determined as provided above (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) Intentionally omitted. -15- (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the applicable Borrower and the participating Banks by telex or facsimile of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Euro-Dollar Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Euro- Dollar Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Euro-Dollar Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.08. Facility Fee. The Company shall pay to the Agent for ------------ the account of the Banks ratably a facility fee at the rate of (i) for any day on which the Company has a Level I Rating, .035 of 1% per annum, (ii) for any day on which the Company has a Level II Rating, .050 of 1% per annum, (iii) for any day on which the Company has a Level III Rating, .070 of 1% per annum and (iv) for any day on which the Company has a Level IV Rating, .100 of 1% per annum. Such facility fee shall accrue from and including the Signing Date to but excluding the Termination Date (or, if later, the date the Loans shall be repaid in their entirety), on the total amount of the Facility. Accrued fees under this Section shall be payable quarterly in arrears on each Quarterly Date and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 2.09. Optional Termination or Reduction of Commitments. (a) ------------------------------------------------ At any time prior to the Termination Date, the Company may, upon at least three Base Rate Business Days' notice to the Agent, (i) terminate the Commitments in full at any time, if no Loans are outstanding at such time, or (ii) ratably reduce from time to time by (A) an aggregate amount of $25,000,000, (B) any larger multiple of $25,000,000 or (C) the full amount thereof, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. (b) Upon receipt of a notice of termination or reduction pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such reduction and such notice shall not thereafter be revocable by either Borrower. SECTION 2.10. Method of Electing Interest Rates. (a) The Loans --------------------------------- included in each Committed Borrowing shall bear interest initially at the type of rate specified by the applicable Borrower in the applicable Notice of Committed Borrowing. Thereafter, such Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans made to such Borrower (subject in each case to the provisions of Article VIII), as follows: (i) if such Loans are Base Rate Loans, such Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and -16- (ii) if such Loans are Euro-Dollar Loans, such Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice executed on behalf of the applicable Borrower by its Authorized Officers (a "Notice of Interest Rate Election") to the Agent at least three Euro-Dollar Business Days before the conversion or continuation selected in such notice is to be effective (unless the relevant Loans are to be continued as Base Rate Loans of the same type for an additional Interest Period, in which case such notice shall be delivered to the Agent at least three Base Rate Business Days before such conversion or continuation is to be effective). A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably -------- among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $25,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from a Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by such Borrower. If a Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Group of Euro-Dollar Loans made to such Borrower, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. SECTION 2.11. Optional Prepayments. (a) A Borrower may, upon at -------------------- least one Base Rate Business Day's notice to the Agent, prepay a Group of Base Rate Loans made to such Borrower in whole at any time, or from time to time in part in amounts aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with -17- accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group or Borrowing. (b) A Borrower may, upon at least three Euro-Dollar Business Days' notice to the Agent, prepay a Group of Euro-Dollar Loans made to such Borrower on the last day of any Interest Period applicable to such Group, in whole at any time, or from time to time in part in amounts aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by either Borrower. SECTION 2.12. General Provisions as to Payments. --------------------------------- (a) The Borrowers shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (Boston, Massachusetts time) on the date when due, in Federal or other funds immediately available in Boston, Massachusetts, to the Agent at its address referred to in Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans or of fees shall be due on a day which is not a Base Rate Business Day, the date for payment thereof shall be extended to the next succeeding Base Rate Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from a Borrower prior to the date on which any payment is due from such Borrower to the Banks hereunder that such Borrower will not make such payment in full, the Agent may assume that such Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount, if any, then due such Bank from such Borrower. If and to the extent that such Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount, if any, distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Effective Rate. SECTION 2.13. Funding Losses. If a Borrower makes any payment of -------------- principal with respect to any Euro-Dollar Loan or any Euro-Dollar Loan is converted to a Base Rate Loan (pursuant to Article VI or VIII or otherwise) on any day other than the last day of an Interest -18- Period applicable thereto, or the end of an applicable period fixed pursuant to Section 2.07(d), or if a Borrower fails to borrow or prepay any Euro-Dollar Loans after notice has been given to any Bank in accordance with Section 2.04(a) or 2.11(d), as applicable, such Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow or prepay, provided that such Bank -------- shall have delivered to such Borrower a certificate signed by an officer of such Bank with knowledge of and responsibility for such matters which sets forth the amount of such loss or expense and a reasonable explanation of the basis therefor, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. Computation of Interest and Fees. Interest on Base -------------------------------- Rate Loans and facility fee and other fee calculations shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). Interest on Euro-Dollar Loans shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. Withholding Tax Exemption. At least five Base Rate ------------------------- Business Days prior to the first date on which interest or fees are payable by either Borrower hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Company and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments from both Borrowers under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Company and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Company or the Agent, in each case certifying that such Bank is entitled to receive payments from both Borrowers under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including, without limitation, any change in any treaty, law or regulation or in the interpretation or administration thereof) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Company and the Agent that it is not capable of receiving such payments without any deduction or withholding of United States federal income tax. SECTION 2.16. Regulation D Compensation. For so long as any Bank is ------------------------- required, or is requested by any applicable regulatory authority, to maintain and does maintain reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States -19- office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro- Dollar Loans is increased, then such Bank may require the applicable Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans made to such Borrower, additional interest on the related Euro-Dollar Loan of such Bank for each day on which such Bank maintains such reserves at a rate per annum up to but not exceeding the excess of (i) (A) the Euro-Dollar Rate applicable to such Loan divided by (B) one minus the Euro-Dollar Reserve ----- Percentage for such day over (ii) the Euro-Dollar Rate applicable to such Loan. Any Bank wishing to require payment of such additional interest (x) shall so notify the Company and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Company at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans made to either Borrower a certificate signed by an officer of such Bank with knowledge of and responsibility for such matters setting forth the amount to which such Bank is then entitled from such Borrower under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it) and a reasonable explanation of the basis therefor. Each such certificate shall be accompanied by such information as the Company may reasonably request as to the computation set forth therein. ARTICLE III CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become effective ------------- on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05): (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of the execution and delivery of a counterpart hereof by such party); (b) receipt by the Agent for the account of each Bank of a duly executed Note of each Borrower dated on or before the Effective Date complying with the provisions of Section 2.05; (c) the fact that all amounts payable by the Borrowers on or before the Effective Date (including the fees payable pursuant to Section 2.08) shall have been paid in full; (d) receipt by the Agent of a copy of the Support Agreement, certified by the Company to be a true and complete copy thereof and to then be in full force and effect; -20- (e) receipt by the Agent of an opinion of Edward J. Crane, Jr., Second Vice President and Counsel of the Company, substantially in the form of Exhibit D hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (f) receipt by the Agent of an opinion of Goulston & Storrs, P.C., special counsel for the Agent, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; and (g) receipt by the Agent of all documents it may reasonably request relating to the existence of each Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; provided that this Agreement shall not become effective or be binding on any - -------- party hereto unless all of the foregoing conditions are satisfied not later than July 31, 1999. The Agent shall promptly notify the Company and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan ---------- on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02; (b) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (c) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; (d) the fact that the representations and warranties of each Borrower contained in this Agreement (other than, in the case of the demutualization of the Company, the requirement to be a legal reserve mutual life insurance company, as set forth in Section 4.01) and, if the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, in such Company Assumption Agreement or Guarantee Agreement, as the case may be, shall be true on and as of the date of such Borrowing; and (e) the fact that (i) the Support Agreement shall not have been terminated pursuant to Section (8) thereof or otherwise and (ii) a notice of termination pursuant to Section (9) of the Support Agreement shall not have been given by either party thereto, unless, in either case, the Company shall have, prior thereto, executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09. -21- Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrowers on the date of such Borrowing as to the facts specified in clauses (b), (c), (d) and (e) of this Section. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrowers jointly and severally represent and warrant that: SECTION 4.01. Existence and Power. The Company is a legal reserve ------------------- mutual life insurance company duly organized in 1862 pursuant to a special act of the Legislature of the Commonwealth of Massachusetts (the "Special Act") and is validly existing and in good standing under the laws of the Commonwealth of Massachusetts, and has all powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Each Material Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. Authorization; No Contravention. The execution, ------------------------------- delivery and performance by each Borrower of this Agreement, the Support Agreement and its Notes are within such Borrower's powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or, in the case of the Company, the Special Act, as amended from time to time, and, in the case of JHCC, the certificate of incorporation of JHCC, or the by-laws of such Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon such Borrower or result in or require the creation or imposition of any Lien on any asset of the Company or any Material Subsidiary. SECTION 4.03. Binding Effect. Each of this Agreement and, unless the -------------- Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, the Support Agreement constitutes a valid and binding agreement of each Borrower and the Notes of each Borrower, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of such Borrower. SECTION 4.04. Title to Properties. Each Borrower has good and ------------------- marketable title to its properties, assets and rights of every name and nature now purported to be owned by it, the absence of which would have a Material Adverse Effect with respect to either Borrower, free from all liens prohibited by this Agreement, except for those defects in title and Liens that would not have a Material Adverse Effect. -22- SECTION 4.05. Financial Information. --------------------- (a) (i) The Annual Statement of the Company as of December 31, 1998, as filed with the Insurance Department of the Commonwealth of Massachusetts, together with the related exhibits, schedules and explanations therein contained or thereto annexed, copies of which have been delivered to each of the Banks, are a full and true statement of all assets and liabilities and of the condition and affairs of the Company as of such date and of its income and deductions therefrom for the year then ended (within the meaning of applicable regulations and practices of the Insurance Department of the Commonwealth of Massachusetts), and such Annual Statement is accompanied by an opinion of the Corporate Actuary of the Company to the effect that the amounts carried in the balance sheet of the Company contained therein of certain actuarial items (A) are computed in accordance with commonly accepted actuarial standards consistently applied and are fairly stated in accordance with sound actuarial principles, (B) are based on actuarial assumptions which are in accordance with or stronger than those called for in policy provisions, (C) meet the requirements of the insurance laws of Massachusetts, (D) make a good and sufficient provision for all unmatured obligations of the Company guaranteed under the terms of the policies included in such items, (E) are computed on the basis of assumptions consistent with those used in computing the corresponding items in the Annual Statement as of the preceding year end (except as required or permitted under applicable regulations of the Insurance Department of the Commonwealth of Massachusetts) and (F) include provision for all actuarial reserves and related statement items which ought to be established; and (ii) the audited statements of financial position of the Company as of December 31, 1998 and the related summary of operations and changes in policyholders' contingency reserves and statement of cash flows for the fiscal year then ended, reported on by Ernst & Young, a copy of which has been, in each case, delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles and reporting practices prescribed or permitted by insurance regulatory authorities, the financial position of the Company at such date and the results of operations and changes in policyholders' contingency reserves and cash flows of the Company for such year. (b) The audited balance sheet of JHCC as of December 31, 1998 and the related statements of income and retained earnings and cash flows for the fiscal year then ended, reported on by Ernst & Young, a copy of which has been, in each case, delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the financial position of JHCC as of such date and its results of operations and cash flows for such fiscal year. (c) The audited consolidated balance sheet of JHSI and its consolidated subsidiaries as of December 31, 1998 and the related consolidated statements of operations, shareholder's equity and cash flows for the fiscal year then ended, reported on by Ernst & Young, a copy of which has been, in each case, delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of JHSI and its consolidated subsidiaries as of such date and the consolidated results of operations and cash flows of JHSI and its consolidated subsidiaries for such fiscal year. (d) From but excluding December 31, 1998 through the Effective Date, there has been no material adverse change in the business, financial position, results of operations or prospects of either Borrower. -23- SECTION 4.06. Litigation. There is no action, suit or proceeding ---------- pending against, or to the knowledge of either Borrower threatened against or affecting, the Company or any Subsidiary before any court or arbitrator or any governmental body, agency or official (i) which, if adversely determined, would have a Material Adverse Effect or a material adverse effect on the ability of either Borrower to perform its respective obligations under the Support Agreement or (ii) which in any manner draws into question the validity or enforceability of this Agreement, the Support Agreement or any of the Notes or, if it has been executed and delivered, the Company Assumption Agreement or the Guarantee Agreement. SECTION 4.07. Compliance with ERISA. (a) Each member of the ERISA --------------------- Group has (i) fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and (ii) is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan and (b) no member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA, except where any failure to fulfill such obligations or comply with such provisions referred to in clause (a) above or any such waiver, failure or liability referred to in clause (b) above would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 4.08. Compliance with Laws. Each Borrower and each Material -------------------- Subsidiary is in compliance with all applicable laws, including, without limitation, all Environmental Laws, except where any failure to comply with any such laws would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 4.09. Taxes. Each member of the Tax Group has filed all ----- United States Federal income tax returns and all other material tax returns which are required to be filed by it and has paid all taxes due pursuant to such returns or pursuant to any assessment received by any member of the Tax Group, except where the failure to file such returns or pay such taxes would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 4.10. No Event of Default. No Default or Event of Default ------------------- has occurred and is continuing. SECTION 4.11. Not an Investment Company. The Company is not an ------------------------- investment company within the meaning of the Investment Company Act of 1940, as amended. JHCC has been exempted from all provisions of the Investment Company Act of 1940, as amended, including, without limitation, those relating to the offering and sale of securities by JHCC, by order of the Securities and Exchange Commission dated June 26, 1984 issued pursuant to Section 6(c) of such Act, and such order remains in full force and effect and has not in any way been modified or amended. -24- SECTION 4.12. Full Disclosure. All information heretofore furnished --------------- by either Borrower to all the Banks for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by either Borrower to all the Banks will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrowers have disclosed to the Banks in writing any and all matters concerning the Borrowers (other than general economic, political and insurance-industry-wide conditions) which could reasonably be expected to result in a Material Adverse Effect or which materially and adversely affect or could reasonably be expected to affect materially and adversely (to the extent either Borrower can now reasonably foresee) the ability of either Borrower to perform its obligations under the Support Agreement. As of the Effective Date, the Borrowers have disclosed to the Banks in writing any and all matters concerning the Borrowers (other than general economic, political and insurance- industry-wide conditions) which materially and adversely affect or could reasonably be expected to affect materially and adversely (to the extent either Borrower can reasonably foresee as of the Effective Date) the business, results of operations or financial condition of the Company and the Material Subsidiaries, taken as a whole. SECTION 4.13. Year 2000 Compliance. Each Borrower has (i) reviewed -------------------- the areas within its business and operations which could be adversely affected by failure to become Year 2000 Compliant; (ii) developed a detailed plan and timetable to become Year 2000 Compliant in a timely manner; and (iii) committed adequate resources to supports its Year 2000 plan. Based upon such review and plan each Borrower reasonably believes that it is Year 2000 Compliant or that it will become Year 2000 Compliant on a timely basis, except to the extent that a failure to do so will not have a Material Adverse Effect with respect to such Borrower. ARTICLE V COVENANTS The Borrowers jointly and severally agree that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Company will deliver to each of the ----------- Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, (i) the Annual Statement of the Company as of the end of such fiscal year, as filed with (and in the form required under applicable law and regulations of) the Insurance Department of the Commonwealth of Massachusetts (x) accompanied by an opinion of the Corporate Actuary of the Company covering amounts carried on the balance sheet of certain actuarial items of the Company in the form required under applicable law and regulations of the Insurance Department of the Commonwealth of Massachusetts and (y) certified -25- by a Senior Financial Officer of the Company on behalf of the Company as to consistency with respect to accounting and actuarial policies and that such Annual Statement is a full and true statement of all the assets and liabilities and of the condition and affairs of the Company as of the end of such fiscal year and of its income and deductions therefrom for such fiscal year (within the meaning of applicable regulations and practices of the Insurance Department of the Commonwealth of Massachusetts); and (ii) the audited statements of financial position of the Company as of the end of such fiscal year and the related audited summary of operations and changes in policyholders' contingency reserves and statement of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Ernst & Young or other independent public accountants of nationally recognized standing without qualification as to the scope of the audit performed or any material weakness noted in the Company's system of internal controls; (b) unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, as soon as available and in any event within 90 days after the end of each fiscal year of JHCC, the audited balance sheet of JHCC as of the end of such fiscal year and the related audited statements of income and retained earnings and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Ernst & Young or other independent public accountants of nationally recognized standing without qualification as to the scope of the audit performed or any material weakness noted in JHCC's system of internal controls; (c) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, the Quarterly Statement of the Company as of the end of such quarter, as filed with the Insurance Department of the Commonwealth of Massachusetts, certified (subject to year-end accounting and actuarial adjustments) on behalf of the Company by a Senior Financial Officer of the Company as to consistency with respect to accounting and actuarial policies and that such Quarterly Statement is a full and true statement of all the assets and liabilities and of the condition and affairs of the Company as of the end of such quarter, and of its income and deductions therefrom for such quarter and for the portion of the Company's fiscal year ended at the end of such quarter (within the meaning of applicable regulations and practices of the Insurance Department of the Commonwealth of Massachusetts); (d) unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of JHCC, the unaudited balance sheet of JHCC as of the end of such quarter and the related unaudited statements of income for the portion of JHCC's fiscal year ended at the end of such quarter, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency, in each case by a Senior Financial Officer of JHCC; -26- (e) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (c) above, a certificate of a Senior Financial Officer of the Company (i) setting forth in reasonable detail the calculations required to establish whether the Borrowers were in compliance with the requirements of Sections 5.08 and 5.09 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrowers are taking or propose to take with respect thereto; (f) within 15 days after any Senior Financial Officer of either Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of a Senior Financial Officer of the Company setting forth the details thereof and the action which the Borrowers are taking or propose to take with respect thereto; (g) promptly upon the mailing thereof to the policyholders of the Company generally and, following the demutualization of the Company, to the shareholders of the public holding company of the Company, copies of all financial statements, reports and proxy statements so mailed; (h) promptly upon the filing thereof, (i) in addition to the Annual Statement and Quarterly Statement referred to in clauses (a) (i) and (c) above, copies of all other financial statements of the Company filed with the Insurance Department of the Commonwealth of Massachusetts, and (ii) copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent), including without limitation the preliminary and final prospectuses for an initial public offering of the Company, and all reports on Forms 10-K, 10-Q and 8-K (or their equivalents), if any, which the Company or, unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, JHCC shall have filed with the Securities and Exchange Commission with respect to debt securities or preferred or common stock issued by the Company or JHCC, as the case may be; (i) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a -27- bond or other security, a certificate of a Senior Financial Officer of the Company setting forth details as to such occurrence and action, if any, which the Company or applicable member of the ERISA Group is required or proposes to take; and (j) from time to time such additional information regarding the financial position, results of operations or business of the Borrowers as the Agent, at the request of any Bank, may reasonably request. SECTION 5.02. Maintenance of Property; Insurance. ---------------------------------- (a) Each Borrower will keep, and the Company will cause each Material Subsidiary to keep, all property material to their respective businesses in good working order and condition, ordinary wear and tear excepted. (b) Each Borrower will maintain, and the Company will cause each Material Subsidiary to maintain (in the name of such Borrower or in such Material Subsidiary's own name, as applicable), with financially sound and responsible insurance companies, insurance on all their respective properties and against such other risks, in each case in at least such amounts (and with such risk retentions) as are usually insured against by companies of established repute engaged in the same or a similar business. SECTION 5.03. Conduct of Business and Maintenance of Existence. Each ------------------------------------------------ Borrower will continue, and the Company will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by such Borrower and such Material Subsidiary, as the case may be, and each Borrower will preserve, renew and keep in full force and effect, and the Company will cause each Material Subsidiary to preserve, renew and keep in full force and effect, its existence and its rights, privileges and franchises which are material to the conduct of such business; provided that nothing in this Section -------- shall prohibit: (a) any consolidation or merger of either Borrower permitted under Section 5.12(i); (b) any sale, lease or transfer of assets by JHCC permitted under Section 5.12(ii); (c) the consolidation or merger of a Material Subsidiary (other than JHCC, unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09) with or into another Person, if, after giving effect thereto, no Default shall have occurred and be continuing; (d) the termination of the existence of a Material Subsidiary: (i) pursuant to clause (a) or (c) above; -28- (ii) in the case of JHCC (if JHCC is at such time a Borrower), if the Company shall have executed and delivered a Company Assumption Agreement; (iii) in the case of any other Material Subsidiary (and, if JHCC has been terminated as a Borrower hereunder pursuant to Section 9.09 and is at the applicable time a Material Subsidiary, JHCC), if after giving effect thereto, no Default shall have occurred and be continuing; or (e) the conversion of the Company from a mutual life insurance company to a stock life insurance company (i.e., demutualization), provided that the Company remains in compliance with all of the other covenants and other provisions of this Agreement (other than the requirement to be a legal reserve mutual life insurance company, as set forth in Section 4.01). SECTION 5.04. Compliance with Laws. Each Borrower will comply, and -------------------- the Company will cause each Material Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities (including, without limitation, Environmental Laws and the rules, regulations and requirements thereunder), except where a failure to comply therewith would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 5.05. Compliance with ERISA. Each Borrower will fulfill, and --------------------- the Company will cause each member of the ERISA Group to fulfill, its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan, and each Borrower will comply, and the Company will cause each member of the ERISA Group to comply, with all applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan, except where such failure or non-compliance, alone or in the aggregate, would not have a Material Adverse Effect. SECTION 5.06. Taxes. Each member of the Tax Group will file all ----- United States Federal income tax returns and all other material tax returns which are required to be filed by it and will pay all taxes due pursuant to such returns or pursuant to any assessment received by it, except where a failure to file any such returns or pay any such taxes would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 5.07. Subsidiary Debt. The Company will not permit any --------------- Subsidiary to incur, assume or at any time be liable with respect to any Debt except: (a) Debt of JHCC under this Agreement and the Notes; (b) Debt, the proceeds of which are on-lent to the Company; (c) Debt owing to the Company or any other Subsidiary of the Company or any combination thereof; (d) Permitted Collateralization Obligations; -29- (e) Debt of Excluded Subsidiaries; and (f) Debt not otherwise permitted by the foregoing clauses of this Section so long as the aggregate principal amount of such Debt outstanding at any time, together with the aggregate principal amount then outstanding of Debt secured by Liens permitted by clause (j) of Section 5.10, does not exceed $6,000,000,000. SECTION 5.08. Management Surplus. The Company will not, at any time, ------------------ permit Management Surplus to be less than $3,750,000,000. SECTION 5.09. Capitalization Ratio. The Company will not, at any -------------------- time, permit Management Surplus to be less than 5% of the assets of the Company (other than assets held in separate accounts of the Company). SECTION 5.10. Company Negative Pledge. The Company shall not create, ----------------------- assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it (other than assets held in separate accounts of the Company), except: (a) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 90 - -------- days after the acquisition thereof; (b) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Company and not created in contemplation of such event; (c) any Lien existing on any asset prior to the acquisition thereof by the Company and not created in contemplation of such acquisition; (d) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not -------- secured by any additional assets; (e) Liens on Permitted Collateralization Assets; (f) Liens, if any, arising out of loans of securities, in the ordinary course of the investment business of the Company; (g) any Liens arising in connection with policies or contracts of insurance, funding agreements and other similar contracts entered into in the ordinary conduct of the insurance business of the Company; (h) easements, rights-of-way and similar Liens on real property that do not in the aggregate materially impair the Company's use of such property; -30- (i) Liens not otherwise permitted by the foregoing clauses of this Section which (i) do not secure Debt and (ii) do not secure obligations in an aggregate amount exceeding $5,000,000,000; and (j) Liens that secure Debt and that are not otherwise permitted by the foregoing clauses of this Section, so long as the aggregate principal amount at any time outstanding of the Debt secured thereby (together with the aggregate principal amount then outstanding of Debt permitted by clause (f) of Section 5.07) does not exceed $6,000,000,000. SECTION 5.11. JHCC Negative Pledge. Unless JHCC shall have been -------------------- terminated as a Borrower hereunder pursuant to Section 9.09, JHCC will not create, assume or suffer to exist any Lien that secures Debt on any asset now owned or hereafter acquired by it unless it shall make or cause to be made effective provision whereby the obligations of JHCC hereunder and under its Notes shall be secured equally and ratably with all other obligations secured thereby; and, if such provision is not made, and notwithstanding that such failure constitutes an Event of Default, an equitable Lien, equally and ratably securing the obligations of JHCC hereunder and under its Notes, shall exist, to the extent permitted by law, on such asset. SECTION 5.12. Consolidations, Mergers and Sales of Assets. Neither ------------------------------------------- Borrower will (i) consolidate or merge with or into any other Person, except that: (a) JHCC may consolidate or merge with or into (A) the Company if the Company is the surviving corporation or (B) another Subsidiary if (1) JHCC is the surviving corporation or (2) (x) prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or (y) the Subsidiary that is the surviving corporation shall assume all of the obligations of JHCC hereunder and under the Notes and either (I) the Company agrees in writing that such Subsidiary shall have all of the benefits of the Support Agreement and that all of the obligations of such Subsidiary hereunder and under the Notes shall constitute Covered Credit (as defined in Section (5) of the Support Agreement) and that the Agent, each of the Banks and each holder from time to time of any Note issued by JHCC and assumed by such Subsidiary or issued by such Subsidiary shall constitute a Covered Creditor (as so defined) or (II) the Company executes a Guarantee Agreement modified in such manner as shall be satisfactory to the Required Banks to reflect the fact that such Subsidiary shall thereafter be a Borrower hereunder; provided that after giving effect thereto, no Default shall -------- have occurred and be continuing; and (b) the Company may consolidate or merge with or into any other Person so long as the Company shall be the surviving corporation and, after giving effect thereto, no Default shall have occurred and be continuing; or (ii) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any other Person except, in the case of JHCC, to the Company. -31- SECTION 5.13. Support Agreement; Company Assumption Agreement; ------------------------------------------------ Guarantee Agreement. - ------------------- (a) No term or provision of the Support Agreement shall be amended, modified, waived or supplemented, and the Support Agreement shall not be terminated, novated or otherwise changed, without the express prior written consent of the Required Banks unless, prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09. (b) The Company and JHCC hereby expressly agree with each other, the Agent, the Banks and the holders from time to time of the Notes that (i) the benefits of the Support Agreement shall extend to the Banks, the Agent and the holders from time to time of the Notes with respect to all obligations of JHCC hereunder or under the Notes, in either case whether now existing or hereafter arising, (ii) all of the obligations of JHCC hereunder or under the Notes, in either case whether now existing or hereafter arising, constitute Covered Credit (as defined in Section (5) of the Support Agreement) and the Agent, each of the Banks and each holder from time to time of any Note issued by JHCC constitutes a Covered Creditor (as so defined) and (iii) so long as any Bank has any Commitment hereunder, the Company will not terminate the Support Agreement, pursuant to Section (8) or (9) thereof or otherwise, unless, prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09. (c) If the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, no term or provision of such Company Assumption Agreement or Guarantee Agreement, as the case may be, shall be amended, modified, waived or supplemented, and such Company Assumption Agreement or Guarantee Agreement, as the case may be, shall not be terminated, novated or otherwise changed, without the express prior written consent of the Required Banks. SECTION 5.14. Use of Proceeds. --------------- (a) The proceeds of the Loans made under this Agreement will be used for general corporate purposes (including the back-up of commercial paper) of the Borrowers and their Subsidiaries in the ordinary course of business. (b) None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock", within the meaning of Regulation U, in violation of the Securities Exchange Act of 1934, as amended, or the applicable margin regulations of the Board of Governors of the Federal Reserve System, in each case as in effect from time to time, and following the application by the applicable Borrower of such proceeds, the value of all "margin stock" owned by such Borrower (other than, in the case where the Company is the Borrower, "margin stock" held in separate accounts of the Company) will not exceed 25% of the assets of such Borrower (other than, in the case where the Company is the Borrower, assets held in separate accounts of the Company). -32- ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following ------------------ events ("Events of Default") shall have occurred and be continuing: (a) either Borrower shall fail to pay when due any principal of any Loan, or shall fail to pay within five days of the due date thereof any interest, fees or other amount payable hereunder or under the Notes; (b) either Borrower shall fail to observe or perform any covenant contained in Sections 5.07 through 5.13, inclusive, and 5.14(b); (c) either Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Company by the Agent at the request of any Bank and for an additional 60 days thereafter if the Borrowers are diligently proceeding to cure such failure; (d) any representation or warranty made, or deemed made pursuant to Section 3.02, by either Borrower hereunder shall prove to have been incorrect in a material respect as of the date when made, or deemed made pursuant to Section 3.02, and shall continue to be incorrect in a material respect at the time it is discovered to have been incorrect; (e) any event or condition shall occur and continue which (A) results in the acceleration of the maturity of any Material Debt of the Borrowers prior to the date such Material Debt would otherwise be due and payable, which acceleration has not been waived, revoked, rescinded or annulled, or (B) enables (without further notice or opportunity to cure) the holder or holders of any such Material Debt or any Person acting on such holder's or holders' behalf to accelerate the maturity thereof or (ii) the principal amount of any such Material Debt shall otherwise be due in full and not paid; (f) any event or condition shall occur and continue which results in the acceleration of the maturity of any Material Debt of any Subsidiaries (other than JHCC, unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, or any Excluded Subsidiary), prior to the date such Material Debt would otherwise be due and payable, which acceleration has not been waived, revoked, rescinded or annulled, or the principal amount of any such Material Debt shall otherwise be due in full and not paid; (g) the Support Agreement shall cease for any reason to be in full force and effect or either party thereto shall so assert in writing, unless, prior thereto, the Company -33- shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09; (h) either Borrower shall fail for any reason to remain in compliance with the terms of, or perform its obligations under, the Support Agreement, unless, prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09; (i) either Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, rehabilitation, conservatorship, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, rehabilitator, conservator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (j) an involuntary case or other proceeding shall be commenced against either Borrower or any Material Subsidiary seeking liquidation, rehabilitation, conservatorship, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, rehabilitator, conservator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 90 days; or an order for relief shall be entered against either Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (k) any member or members of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $75,000,000 which it or they shall have become liable to pay under Title IV of ERISA with respect to a Plan; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c) (5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur current payment obligations in excess of $75,000,000 in the aggregate; -34- (l) one or more judgments or orders for the payment of money in excess of $250,000,000 in the aggregate shall be rendered against the Company or any Material Subsidiary and such judgments or orders shall continue unsatisfied and unstayed for a period of 10 days; (m) any Person or group of related Persons shall have obtained (whether after the demutualization of the Company or otherwise) the right to vote more than 30% of the voting rights for the election of directors of the Company; (n) JHCC shall cease for any reason to be a wholly owned Subsidiary, unless (i) JHCC shall have been consolidated or merged with or into the Company or the Company shall have executed and delivered a Company Assumption Agreement, in either case in accordance with the terms hereof, or (ii) JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09; (o) if the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, such Company Assumption Agreement or Guarantee Agreement, as the case may be, shall cease for any reason to be in full force and effect or the Company shall so assert in writing; or (p) if the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, the Company shall fail for any reason to remain in compliance with the terms of, or perform its obligations under, such Company Assumption Agreement or Guarantee Agreement, as the case may be; then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrowers terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrowers declare the Notes (together with accrued interest thereon) to be, and the Notes (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower; provided that in the case of any of the Events -------- of Default specified in clause (i) or (j) above with respect to either Borrower, without any notice to either Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower. After an Event of Default, each Euro-Dollar Margin shall be increased by 200 basis points. SECTION 6.02. Notice of Default. The Agent shall give notice to the ----------------- Company under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. -35- ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization. Each Bank irrevocably ----------------------------- appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agent and Affiliates. BankBoston, N.A. (and any -------------------- successor by merger) shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and BankBoston, N.A. (and any successor by merger) and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Company or any Subsidiary or any affiliate of any thereof as if it were not the Agent hereunder. SECTION 7.03. Action by Agent. The obligations of the Agent --------------- hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. Consultation with Experts. The Agent may consult with ------------------------- legal counsel (who may be counsel for either Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its ------------------ directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of either Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in --------------- accordance with its Commitment, indemnify the Agent (to the extent not reimbursed by the Borrowers) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder. -36- SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, --------------- independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agent. The Agent may resign at any time by --------------- giving written notice thereof to the Banks and the Company. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 7.09. Agent's Fee. The Company shall pay to the Agent for ----------- its own account fees in the amounts and at the times previously agreed upon in writing between the Company and the Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or ------------------------------------------------- Unfair. If on or prior to the first day of any Interest Period for any Euro- - ------ Dollar Loan: (a) the Agent is advised by the Euro-Dollar Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Euro-Dollar Reference Banks in the relevant market for such Interest Period, or (b) Banks having 50% or more of the aggregate principal amount of the affected Loans advise the Agent that the Euro-Dollar Rate, as determined by the Agent, will not adequately and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans for such Interest Period, the Agent shall forthwith give notice thereof to the Company and the Banks, whereupon until the Agent notifies the Company that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make Euro- Dollar Loans, or to convert outstanding Loans into Euro-Dollar -37- Loans, shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless a Borrower notifies the Agent at least two Base Rate Business Days before the date of any Euro-Rate Borrowing for which a Notice of Borrowing has previously been given by such Borrower that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. SECTION 8.02. Illegality. If, on or after the date of this ---------- Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans to either Borrower and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Company, whereupon until such Bank notifies the Company and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans to such Borrower, or to convert outstanding Loans made to such Borrower into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. SECTION 8.03. Increased Cost and Reduced Return. --------------------------------- (a) If on or after the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans, the adoption of any applicable law, rule, regulation or treaty, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Euro-Dollar Loans, its Notes or its obligation to make Euro-Dollar Loans, or shall change the basis of taxation of payments to any Bank (or its Applicable Lending Office) of the principal of or interest on its Euro-Dollar Loans or any other amounts due under this Agreement in respect of its Euro-Dollar Loans or its obligation to make Euro-Dollar Loans (except for changes in the rate of tax imposed, or the imposition of tax, on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Applicable Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal -38- Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.16), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market or other eurodollar interbank market selected by the Agent any other condition affecting its Euro-Dollar Loans, its Notes or its obligation to make Euro-Dollar Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the applicable Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) Without duplication of any amounts paid under subsection (a) above or amounts for which any Bank is entitled to compensation during the relevant Interest Period under Section 2.16, if any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the applicable Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Company and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder that is signed by an officer of such Bank with knowledge of and responsibility for such matters and that sets forth such amount or amounts and a reasonable explanation of the basis therefor shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. -39- SECTION 8.04. Base Rate Loans Substituted for Affected Euro-Dollar ---------------------------------------------------- Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans - ----- to either Borrower has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) or 2.16 and the Company shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Company that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans to such Borrower which would otherwise be made by such Bank as (or continued as or converted into) Euro-Dollar Loans shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans to such Borrower has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Company that the circumstances giving rise to such notice no longer apply, the principal amount of each such Base Rate Loan shall be subject to the provisions of Section 2.10 in the same manner as the Euro-Dollar Loans in the Group of Loans in which such Base Rate Loan is included, effective as of the first day of the next succeeding Interest Period applicable thereto. SECTION 8.05. Substitution of Bank. If (i) the obligation of any -------------------- Bank to make Euro-Dollar Loans to either Borrower has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation from either Borrower under Section 8.03 or 2.16, the Company shall have the right (a) with the assistance of and upon consultation with the Agent, to seek a substitute bank or banks (which may be one or more of the Banks) to purchase the Notes and assume the Commitment of such Bank or (b) to terminate the Commitment of such Bank; provided that after giving effect to such termination, the aggregate Commitments - -------- terminated pursuant to this subsection (b) do not exceed 20% of the initial aggregate amount of the Commitments (with appropriate adjustments to take account of optional reductions of Commitments pursuant to Section 2.09). ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other ------- communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of either Borrower or the Agent, at its address or telex or facsimile transmission number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telex or facsimile transmission number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telex or facsimile transmission number as such party may hereafter specify for the purpose by notice to -40- the Agent and the Company. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in or pursuant to this Section and the appropriate answer back is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in or pursuant to this Section; provided that notices to the Agent under Article II -------- or Article VII I, certificates as to the Authorized Officers of any Borrower and notices designating a new Designated Deposit Account shall not be effective until received. SECTION 9.02. No Waivers. No failure or delay by the Agent or any ---------- Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise hereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a) The -------------------------------------------- Company shall pay (i) all reasonable and documented out-of-pocket expenses of the Agent, including all reasonable and documented fees and disbursements of special counsel for the Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable and documented out-of-pocket expenses incurred by the Agent and each Bank, including reasonable fees and disbursements of counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. The Company will indemnify each Bank against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement or the original issuance of any Note. (b) The Company agrees to indemnify the Agent and each Bank and hold the Agent and each Bank harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable and documented fees and disbursements of counsel, which may be incurred by any Bank or by the Agent in connection with its actions as Agent hereunder in connection with any investigative, administrative or judicial proceeding (whether or not the Agent or such Bank shall be designated a party thereto) relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that neither the Agent nor any Bank -------- shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it ------------------- shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note of a Borrower held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note of such Borrower held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes of such Borrower held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect -41- to the Notes of such Borrower held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank -------- to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of such Borrower other than its indebtedness under the Notes. Each Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note of such Borrower, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Borrower in the amount of such participation. SECTION 9.05. Amendments and Waivers. Any provision of this ---------------------- Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by each Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, - -------- (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment, (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement or (v) change any of the provisions of Article VII concerning the Agent's rights, powers and obligations. SECTION 9.06. Successors and Assigns. (a) The provisions of this ---------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that neither Borrower may assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Company and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrowers and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrowers hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided -------- that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. Each Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VIII and Section 2.16 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). -42- (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part of all, of its rights and obligations under this Agreement and the Notes of each Borrower, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit F hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrowers and the Agent (which consent shall not, in any such case, be unreasonably withheld); provided that (i) no such consent -------- shall be required if such Assignee is, prior to such assignment, a Bank hereunder or an Eligible Affiliate of such Bank, (ii) any such assignment shall be in respect of a portion of such transferor Bank's Commitment in an amount equal to or greater than $5,000,000 or, if a Bank has a Commitment which is less than $5,000,000, such assignment shall be in respect of all of the Commitment of the transferor Bank, and (iii) no such consent shall be required from the Borrowers if an Event of Default has occurred. Subject to the foregoing, upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment (together, if such Assignee is, prior to such assignment, a Bank hereunder, with such Assignee's previously existing Commitment hereunder) as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrowers shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $3,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Company and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 2.15. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 2.16 or 8.03 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Company's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (f) Notwithstanding anything to the contrary contained herein, any Bank (a "Granting Bank") may grant to a special purpose funding vehicle (an "SPC"), identified as such in writing from time to time by the Granting Bank to the Agent and the Borrower, the option to provide to the Borrower all or any part of any advance that such Granting Bank would otherwise -43- be obligated to make to the Borrower pursuant to this Agreement; provided that -------- (i) an SPC shall be a Subsidiary or other affiliate of such Granting Bank, (ii) nothing herein shall constitute a commitment by any SPC to make any advance, and (iii) nothing herein shall relieve the Granting Bank of any of its obligations under this Agreement and, if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such advance, the Granting Bank shall be obligated to make such advance pursuant to the terms hereof. An SPC shall not become a Bank hereunder or possess rights to vote, rights to receive notice, or any other rights under this Agreement. The making of an advance by an SPC hereunder shall utilize the Commitment of the Granting Bank to the same extent, and as if, such advance were made by such Granting Bank. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Bank). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 9.06(f), any SPC may (i) with notice to, but without the prior written consent of, the Borrower and the Agent and without paying any processing fee therefor, assign all or a portion of its interests in any advances to the Granting Bank, (ii) with the prior written consent of the Borrower and the Agent and without paying any processing fee therefor, assign all or a portion of its interests in any advances to any financial institution providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of advances and (iii) disclose on a confidential basis any non-public information relating to its advances to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC. This section may not be amended without the written consent of the SPC. SECTION 9.07. Collateral. Each of the Banks represents to the Agent ---------- and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.08. Waiver of Certain Claims. Each Borrower hereby ------------------------ expressly waives any claim, cause of action or remedy of such Borrower against the Agent, any Bank or any Participant arising out of or relating to, directly or indirectly, (i) any failure by any Bank to make any Loan or (ii) any failure by the Agent or any Bank to comply with any interest rate election, in any such case on account of or attributable to the fact that the applicable Notice of Borrowing or Notice of Interest Rate Election, as the case may be, was not signed by the Authorized Officers of such Borrower. SECTION 9.09. Termination of JHCC as a Borrower. The Borrowers may, --------------------------------- at any time (i) at which there shall be no Loans outstanding to JHCC or (ii) after the Company shall have executed and delivered a Company Assumption Agreement, upon written notice thereof to the Agent, executed on behalf of the Company and JHCC and substantially in the form of Exhibit G hereto, terminate JHCC as a Borrower hereunder. Immediately upon the receipt by the -44- Agent of such notice, all commitments of the Banks to make Loans to JHCC, and all rights of JHCC hereunder, shall terminate and JHCC shall immediately cease to be a Borrower hereunder; provided that, unless the Company shall have -------- executed and delivered a Company Assumption Agreement, all obligations of JHCC as a Borrower hereunder arising in respect of any period in which JHCC was, or on account of any action or inaction by JHCC as, a Borrower hereunder shall survive such termination and if the Company shall have executed and delivered a Company Assumption Agreement, the liability of JHCC (but not of the Company) with respect to such obligations shall terminate. SECTION 9.10. Governing Law; Submission to Jurisdiction. THIS ----------------------------------------- AGREEMENT AND EACH NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. EACH BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS AND OF ANY MASSACHUSETTS STATE COURT SITTING IN SUFFOLK COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SECTION 9.11. Counterparts; Integration. This Agreement may be ------------------------- signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof (other than the agreement referred to in Section 7.09). SECTION 9.12. Waiver of Jury Trial. EACH OF THE BORROWERS, THE AGENT -------------------- AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. -45- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: /s/ Gregory P. Winn ------------------------------- Title: Vice President and Treasurer ---------------------------- By: /s/ Julie H. Indge ------------------------------- Title: Assistant Treasurer ---------------------------- 200 Clarendon Street, T-56 Boston, Massachusetts 02117 Attention: Treasurer Facsimile transmission number: (617) 572-0411 Telex number: 62021772 JOHN HANCOCK CAPITAL CORPORATION By: /s/ James E. Cruickshank ------------------------------- Title: President ---------------------------- By: /s/ Peter S. Mitsopoulos ------------------------------- Title: Treasurer ---------------------------- 200 Clarendon Street, T-56 Boston, Massachusetts 02117 Attention: Treasurer Facsimile transmission number: (617) 572-0411 Telex number: 62021772 Commitments - ----------- $ 50,000,000 BANKBOSTON, N.A. ("Administrative Agent") By: /s/ Lawrence C. Bigelow --------------------------- Title: Managing Director, Financial Institutions Division $ 50,000,000 CITICORP USA, INC. ("Syndication Agent") By: ___________________________ Title:_________________________ $ 50,000,000 THE FIRST NATIONAL BANK OF CHICAGO ("Documentation Agent") By: ___________________________ Title:_________________________ $ 48,000,000 COMERICA BANK ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 THE BANK OF NOVA SCOTIA ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 FLEET NATIONAL BANK ("Co-Agent") By: ___________________________ Title:_________________________ Commitments - ----------- $ 50,000,000 BANKBOSTON, N.A. ("Administrative Agent") By: ___________________________ Title: Managing Director, Financial Institutions Division $ 50,000,000 CITICORP USA, INC. ("Syndication Agent") By: /s/ Claire Wibrow --------------------------- Title:Vice President ------------------------- $ 50,000,000 THE FIRST NATIONAL BANK OF CHICAGO ("Documentation Agent") By: ___________________________ Title:_________________________ $ 48,000,000 COMERICA BANK ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 THE BANK OF NOVA SCOTIA ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 FLEET NATIONAL BANK ("Co-Agent") By: ___________________________ Title:_________________________ Commitments - ----------- $ 50,000,000 BANKBOSTON, N.A. ("Administrative Agent") By: ___________________________ Title: Managing Director, Financial Institutions Division $ 50,000,000 CITICORP USA, INC. ("Syndication Agent") By: ___________________________ Title:_________________________ $ 50,000,000 THE FIRST NATIONAL BANK OF CHICAGO ("Documentation Agent") By: /s/ Samuel W. Bridges --------------------------- Title:First Vice President ------------------------- $ 48,000,000 COMERICA BANK ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 THE BANK OF NOVA SCOTIA ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 FLEET NATIONAL BANK ("Co-Agent") By: ___________________________ Title:_________________________ Commitments - ----------- $ 50,000,000 BANKBOSTON, N.A. ("Administrative Agent") By: ___________________________ Title: Managing Director, Financial Institutions Division $ 50,000,000 CITICORP USA, INC. ("Syndication Agent") By: ___________________________ Title:_________________________ $ 50,000,000 THE FIRST NATIONAL BANK OF CHICAGO ("Documentation Agent") By: ___________________________ Title:_________________________ $ 48,000,000 COMERICA BANK ("Co-Agent") By: /s/ Kimberley S. Kersten --------------------------- Title:Vice President ------------------------- $ 40,000,000 THE BANK OF NOVA SCOTIA ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 FLEET NATIONAL BANK ("Co-Agent") By: ___________________________ Title:_________________________ Commitments - ----------- $ 50,000,000 BANKBOSTON, N.A. ("Administrative Agent") By: ___________________________ Title: Managing Director, Financial Institutions Division $ 50,000,000 CITICORP USA, INC. ("Syndication Agent") By: ___________________________ Title:_________________________ $ 50,000,000 THE FIRST NATIONAL BANK OF CHICAGO ("Documentation Agent") By: ___________________________ Title:_________________________ $ 48,000,000 COMERICA BANK ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 THE BANK OF NOVA SCOTIA ("Co-Agent") By: /s/ [SIGNATURE ILLEGIBLE]^^ --------------------------- Title: Authorized Signatory ------------------------- $ 40,000,000 FLEET NATIONAL BANK ("Co-Agent") By: ___________________________ Title:_________________________ Commitments - ----------- $ 50,000,000 BANKBOSTON, N.A. ("Administrative Agent") By: ___________________________ Title: Managing Director, Financial Institutions Division $ 50,000,000 CITICORP USA, INC. ("Syndication Agent") By: ___________________________ Title:_________________________ $ 50,000,000 THE FIRST NATIONAL BANK OF CHICAGO ("Documentation Agent") By: ___________________________ Title:_________________________ $ 48,000,000 COMERICA BANK ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 THE BANK OF NOVA SCOTIA ("Co-Agent") By: ___________________________ Title:_________________________ $ 40,000,000 FLEET NATIONAL BANK ("Co-Agent") By: /s/ David A. Bosselait, --------------------------- Title:Vice President ------------------------- Commitments - ----------- $ 40,000,000 ROYAL BANK OF CANADA ("Co-Agent") By: /s/ Vivian Abdelmessih --------------------------- Title: Senior Manager ------------------------ $ 40,000,000 WACHOVIA BANK, N.A. ("Co-Agent") By: ___________________________ Title:_________________________ $ 30,000,000 BANQUE NATIONALE DE PARIS By: ___________________________ Title:_________________________ By: ___________________________ Title:_________________________ $ 22,000,000 THE CHASE MANHATTAN BANK By: ___________________________ Title:_________________________ $ 20,000,000 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: ___________________________ Title:_________________________ Commitments - ----------- $ 40,000,000 ROYAL BANK OF CANADA ("Co-Agent") By: ___________________________ Title: ________________________ $ 40,000,000 WACHOVIA BANK, N.A. ("Co-Agent") By: /s/ Eugene Wood --------------------------- Title:Senior Vice President ------------------------- $ 30,000,000 BANQUE NATIONALE DE PARIS By: ___________________________ Title:_________________________ By: ___________________________ Title:_________________________ $ 22,000,000 THE CHASE MANHATTAN BANK By: ___________________________ Title:_________________________ $ 20,000,000 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: ___________________________ Title:_________________________ Commitments - ----------- $ 40,000,000 ROYAL BANK OF CANADA ("Co-Agent") By: ___________________________ Title: ________________________ $ 40,000,000 WACHOVIA BANK, N.A. ("Co-Agent") By: ___________________________ Title:_________________________ $ 30,000,000 BANQUE NATIONALE DE PARIS By: /s/ Phil Truesdale --------------------------- Title:Vice President ------------------------- By: /s/ [SIGNATURE ILLEGIBLE]^^ --------------------------- Title:Vice President ------------------------- $ 22,000,000 THE CHASE MANHATTAN BANK By: ___________________________ Title:_________________________ $ 20,000,000 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: ___________________________ Title:_________________________ Commitments - ----------- $ 40,000,000 ROYAL BANK OF CANADA ("Co-Agent") By: ___________________________ Title: ________________________ $ 40,000,000 WACHOVIA BANK, N.A. ("Co-Agent") By: ___________________________ Title:_________________________ $ 30,000,000 BANQUE NATIONALE DE PARIS By: ___________________________ Title:_________________________ By: ___________________________ Title:_________________________ $ 22,000,000 THE CHASE MANHATTAN BANK By: /s/ [SIGNATURE ILLEGIBLE]^^ --------------------------- Title:Vice President ------------------------- $ 20,000,000 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: ___________________________ Title:_________________________ Commitments - ----------- $ 40,000,000 ROYAL BANK OF CANADA ("Co-Agent") By: ___________________________ Title: ________________________ $ 40,000,000 WACHOVIA BANK, N.A. ("Co-Agent") By: ___________________________ Title:_________________________ $ 30,000,000 BANQUE NATIONALE DE PARIS By: ___________________________ Title:_________________________ By: ___________________________ Title:_________________________ $ 22,000,000 THE CHASE MANHATTAN BANK By: ___________________________ Title:_________________________ $ 20,000,000 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /s/ Gary R. Peet --------------------------- Title:Managing Director ------------------------- Commitments - ----------- $ 20,000,000 CREDIT SUISSE FIRST BOSTON By: /s/ Jay Chall ------------------------- Title:Director ----------------------- By: /s/ Andrea E. Shkane ------------------------- Title:Vice President ----------------------- $ 20,000,000 THE NORTHERN TRUST COMPANY By: _________________________ Title:_______________________ $ 20,000,000 STATE STREET BANK AND TRUST COMPANY By: _________________________ Title:_______________________ $ 10,000,000 THE BANK OF NEW YORK By: _________________________ Title:_______________________ __________________ Total Commitments $500,000,000 BANKBOSTON, N.A., as Agent By:_____________________ Title: Managing Director, Financial Institutions Division 100 Federal Street Boston, Massachusetts 02110 Attention: Lawrence C. Bigelow Facsimile transmission number: (617) 434-1096 Telex number: 4996527 Commitments - ----------- $ 20,000,000 CREDIT SUISSE FIRST BOSTON By: _________________________ Title:_______________________ By: _________________________ Title:_______________________ $ 20,000,000 THE NORTHERN TRUST COMPANY By: /s/ Richard W. Berger ------------------------- Title:Vice President ----------------------- $ 20,000,000 STATE STREET BANK AND TRUST COMPANY By: _________________________ Title:_______________________ $ 10,000,000 THE BANK OF NEW YORK By: _________________________ Title:_______________________ __________________ Total Commitments $500,000,000 BANKBOSTON, N.A., as Agent By:_____________________ Title: Managing Director, Financial Institutions Division 100 Federal Street Boston, Massachusetts 02110 Attention: Lawrence C. Bigelow Facsimile transmission number: (617) 434-1096 Telex number: 4996527 Commitments - ----------- $ 20,000,000 CREDIT SUISSE FIRST BOSTON By: _________________________ Title:_______________________ By: _________________________ Title:_______________________ $ 20,000,000 THE NORTHERN TRUST COMPANY By: _________________________ Title:_______________________ $ 20,000,000 STATE STREET BANK AND TRUST COMPANY By: /s/ Edward M Anderson ------------------------- Title:Vice President ----------------------- $ 10,000,000 THE BANK OF NEW YORK By: _________________________ Title:_______________________ __________________ Total Commitments $500,000,000 BANKBOSTON, N.A., as Agent By:_____________________ Title: Managing Director, Financial Institutions Division 100 Federal Street Boston, Massachusetts 02110 Attention: Lawrence C. Bigelow Facsimile transmission number: (617) 434-1096 Telex number: 4996527 Commitments - ----------- $ 20,000,000 CREDIT SUISSE FIRST BOSTON By: _________________________ Title:_______________________ By: _________________________ Title:_______________________ $ 20,000,000 THE NORTHERN TRUST COMPANY By: _________________________ Title:_______________________ $ 20,000,000 STATE STREET BANK AND TRUST COMPANY By: _________________________ Title:_______________________ $ 10,000,000 THE BANK OF NEW YORK By: /s/ Robert V. Masi ------------------------- Title:Vice President ----------------------- __________________ Total Commitments $500,000,000 BANKBOSTON, N.A., as Agent By:_____________________ Title: Managing Director, Financial Institutions Division 100 Federal Street Boston, Massachusetts 02110 Attention: Lawrence C. Bigelow Facsimile transmission number: (617) 434-1096 Telex number: 4996527 Commitments - ----------- $ 20,000,000 CREDIT SUISSE FIRST BOSTON By:________________________ Title:_____________________ By:________________________ Title:_____________________ $ 20,000,000 THE NORTHERN TRUST COMPANY By:________________________ Title:_____________________ $ 20,000,000 STATE STREET BANK AND TRUST COMPANY By:________________________ Title:_____________________ $ 10,000,000 THE BANK OF NEW YORK By:________________________ Title:_____________________ __________________ Total Commitments $500,000,000 BANKBOSTON, N.A., as Agent By: /s/ Lawrence C. Bigelow ---------------------------- Title: Managing Director, Financial Institutions Division 100 Federal Street Boston, Massachusetts 02110 Attention: Lawrence C. Bigelow Facsimile transmission number: (617) 434-1096 Telex number: 4996527 EXHIBIT A NOTE Boston, Massachusetts July ___, 1999 For value received, [John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts] [John Hancock Capital Corporation, a Delaware corporation] (the "Borrower"), promises to pay to the order of ________________________________ (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the Termination Date provided, or as otherwise provided, in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of BankBoston, N.A., 100 Federal Street, Boston, Massachusetts. All Loans made by the Bank and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding shall be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or - -------- endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of July ___, 1999 among the Borrower, the banks listed on the signature pages thereof and BankBoston, N.A., as Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. [JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY] [JOHN HANCOCK CAPITAL CORPORATION] By________________________ Title: By________________________ Title: A-1 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL - ------------------------------------------------------------------------------ Amount of Amount of Principal Notation Date Loan Repaid Made by - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ A-2 EXHIBIT B COMPANY ASSUMPTION AGREEMENT ---------------------------- AGREEMENT, dated as of _____________, _____, made by JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts (the "Company"), in favor of the Banks and the Agent party to the Credit Agreement referred to herein and the holders from time to time of the Notes issued by JHCC (as defined below) thereunder. W I T N E S S E T H: -------------------- WHEREAS, John Hancock Capital Corporation ("JHCC") is a party to a Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of July ___, 1999 among the Company, JHCC, the Banks listed on the signature pages thereof and BankBoston, N.A., as agent (the "Agent"); WHEREAS, the Company owns, directly or indirectly, all of the common stock of JHCC; and [WHEREAS, as of the date hereof [describe transaction by which JHCC's corporate existence is being terminated] [describe merger or consolidation of JHCC into another Subsidiary], and under Section [5.03] [5.12] of the Credit Agreement it is a condition to such [termination] [merger] [consolidation] that the Company execute and deliver this Agreement;] [WHEREAS, the Support Agreement, dated as of October 15, 1984 between JHCC and the Company (the "Support Agreement") is being terminated as of the date hereof, and under Section 5.13 of the Credit Agreement it is a condition to such termination that the Company execute and deliver this Agreement;] [WHEREAS, the Borrowers desire to terminate JHCC as a Borrower under the Credit Agreement as of the date hereof, and under Section 9.09 of the Credit Agreement it is a condition to such termination that the Company execute and deliver this Agreement;] NOW THEREFORE, in consideration of the premises the Company hereby agrees as follows: SECTION 1. Definitions. Capitalized terms used and not otherwise defined ----------- herein shall have the respective meanings given them in the Credit Agreement. SECTION 2. Assumption. The Company hereby unconditionally and irrevocably ---------- assumes, as principal obligor, all of the obligations of JHCC under the Credit Agreement and the Notes issued by JHCC thereunder, including, without limitation, the obligations of JHCC to pay B-1 in full when due (whether at stated maturity, upon acceleration or otherwise) the principal of and interest on such Notes and all other amounts payable by JHCC under the Credit Agreement. SECTION 3. Representations and Warranties. The Company hereby represents ------------------------------ and warrants that: (a) Authorization; No Contravention. The execution, delivery and ------------------------------- performance by the Company of this Agreement are within the Company's powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or the Special Act, as amended from time to time, or the by-laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or result in or require the creation or imposition of any Lien on any asset of the Company or any Material Subsidiary. (b) Binding Effect. This Agreement constitutes a valid and binding -------------- agreement of the Company. SECTION 4. Notices. All notices and other communications provided for or ------- permitted hereunder shall be made as specified in Section 9.01 of the Credit Agreement. SECTION 5. Priority. The obligations of the Company under this Agreement, -------- and the obligations assumed by the Company hereunder, are unsecured and rank equally with other unsecured and unsubordinated obligations of the Company, subject to the requirements of Section 180F, Chapter 175, of the Massachusetts General Laws as to priorities of distribution in any liquidation proceedings begun in Massachusetts against an insolvent Massachusetts insurer. SECTION 6. Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the Commonwealth of Massachusetts. SECTION 7. Severability. Any provision of this Agreement which is ------------ illegal, invalid, prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such illegality, invalidity, prohibition or unenforceability without invalidating the remaining provisions hereof and any such illegality, invalidity, prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 8. Entire Agreement. This Agreement and the Credit Agreement ---------------- embody the entire agreement of the Company with respect to the subject matter hereof and supersede any prior written or oral agreements and understandings relating to the subject matter hereof. B-2 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and delivered by its officers thereunto duly authorized as of the date first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By:__________________________ Authorized Officer By:__________________________ Authorized Officer B-3 EXHIBIT C GUARANTEE AGREEMENT ------------------- GUARANTEE AGREEMENT, dated as of _____________, _____, made by JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts (the "Company"), in favor of the Banks and the Agent party to the Credit Agreement referred to herein and the holders from time to time of the Notes issued by JHCC (as defined below) thereunder. W I T N E S S E T H: -------------------- WHEREAS, John Hancock Capital Corporation ("JHCC") is a party to a Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of July ___, 1999 among the Company, JHCC, the Banks listed on the signature pages thereof and BankBoston, N.A., as agent (the "Agent"); WHEREAS, the Company owns directly or indirectly, all of the common stock of JHCC; and WHEREAS, the Support Agreement, dated as of October 15, 1984 between the Company and JHCC (the "Support Agreement") is being terminated as of the date hereof, and under Section 5.13 of the Credit Agreement it is a condition to such termination that the Company execute and deliver this Guaranty Agreement; NOW THEREFORE, in consideration of the premises, the Company hereby agrees as follows: SECTION 1. Definitions. Capitalized terms used and not otherwise defined ----------- herein shall have the respective meanings given them in the Credit Agreement. SECTION 2. Guarantee. The Company hereby unconditionally and irrevocably --------- guarantees as principal and not merely as surety the full and punctual payment when due (whether at stated maturity, upon acceleration or otherwise) of the principal of and interest on each Note issued by JHCC under the Credit Agreement and the full and punctual payment of all other amounts payable by JHCC under the Credit Agreement. SECTION 3. Guarantee Absolute. The Company agrees that the guarantee ------------------ contained in this Guarantee Agreement is a guarantee of payment and not of collection or collectibility, and that the obligations of the Company hereunder shall be primary, absolute and unconditional and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: C-1 (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of JHCC under the Credit Agreement or any Note, by operation of law or otherwise; (ii) any modification or amendment of or supplement to the Credit Agreement or any Note; (iii) any release, non-perfection or invalidity of any direct or indirect security for any obligation of JHCC under the Credit Agreement or any Note; (iv) any change in the corporate existence, structure or ownership of JHCC, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting JHCC or its assets or any resulting release or discharge of any obligation of JHCC contained in the Credit Agreement or any Note; (v) the existence of any claim, set-off or other rights which the company may have at any time against JHCC, the Agent, any Bank or any other Person, whether in connection herewith or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim -------- by separate suit or compulsory counterclaim or with respect to obligations of the Company other than obligations hereunder; (vi) any invalidity or unenforceability relating to or against JHCC for any reason of the Credit Agreement or any Note, or any provision of applicable law or regulation purporting to prohibit the payment by JHCC of the principal of or interest on any Note or any other amount payable by JHCC under the Credit Agreement; or (vii) any other act or omission to act or delay of any kind by JHCC, the Agent, any Bank or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of the Company's obligations hereunder. SECTION 4. Representations and Warranties. The Company hereby represents ------------------------------ and warrants that: (a) Authorization; No Contravention. The execution, delivery and ------------------------------- performance by the Company of this Guarantee Agreement are within the Company's powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or the Special Act, as amended from time to time, or the by- laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or result in or require the creation or imposition of any Lien on any asset of the Company or any Material Subsidiary. (b) Binding Effect. This Guarantee Agreement constitutes a valid and -------------- binding agreement of the Company. C-2 SECTION 5. Manner of Payment. Payment by the Company hereunder shall be ----------------- made in such funds, to such Persons and at such times and places as are specified for corresponding payments under the Credit Agreement. SECTION 6. Enforcement of Guarantee. In no event shall any Bank, the ------------------------ Agent or any other Person have any obligation to proceed against JHCC or any other Person or any property that may be pledged to secure the obligations of JHCC under the Credit Agreement or the Notes before seeking satisfaction from the Company. SECTION 7. Waiver. The Company hereby irrevocably waives promptness, ------ diligence, acceptance hereof, presentment, demand, protest and any and all other notice not provided for herein and any requirement that at any time any Bank, the Agent or any other Person exhaust any right or take any action against JHCC or any other Person and any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge, release or defense of the Company or that might otherwise limit recourse against the Company. SECTION 8. Waiver of Subrogation. The Company irrevocably waives any and --------------------- all rights to which it may be entitled, by operation of law or otherwise, upon making any payment hereunder to be subrogated to the rights of the payee against JHCC with respect to such payment or otherwise to be reimbursed, indemnified or exonerated by JHCC in respect thereof. SECTION 9. Notices. All notices and other communications provided for or ------- permitted hereunder shall be made as specified in Section 9.01 of the Credit Agreement. SECTION 10. No Waiver; Remedies. No failure on the part of any Bank or ------------------- the Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 11. Continuing Guarantee; Reinstatement in Certain Circumstances. ------------------------------------------------------------ The guarantee contained in this Guarantee Agreement is a continuing guarantee and the Company's obligations hereunder shall (i) unless the Company shall have executed and delivered a Company Assumption Agreement or JHCC shall have consolidated with or merged into the Company in accordance with Section 5.12(i)(a)(A) of the Credit Agreement, remain in full force and effect until the indefeasible payment in full of the principal of and interest on the notes issued by JHCC and all other amounts payable by JHCC under the Credit Agreement and the expiration or earlier termination of the Commitments with respect to JHCC under the Credit Agreement, (ii) be binding upon the Company and its successors and assigns, and (iii) inure to the benefit of and be enforceable by the Banks, the Agent and the holders from time to time of the Notes issued by JHCC and their respective successors, transferees and assigns. If at any time any payment of any of the principal of or interest on any Note or any other amount payable by JHCC under the Credit Agreement is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy or reorganization of JHCC or otherwise, the Company's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. C-3 SECTION 12. Stay of Acceleration. If acceleration of the time for payment -------------------- of any amount payable by JHCC under the Credit Agreement or the Notes is stayed upon the insolvency, bankruptcy or reorganization of JHCC, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement shall nonetheless be payable by the Company hereunder forthwith on demand by the Agent made at the request of the requisite proportion of the Banks specified in Article VI of the Credit Agreement. SECTION 13. Priority. The obligations of the Company under this Guarantee -------- Agreement are unsecured and rank equally with other unsecured and unsubordinated obligations of the Company, subject to the requirements of Section 180F, Chapter 175, of the Massachusetts General Laws as to priorities of distribution in any liquidation proceedings begun in Massachusetts against an insolvent Massachusetts insurer. SECTION 14. Governing Law. This Guarantee Agreement shall be governed by, ------------- and construed in accordance with, the laws of the Commonwealth of Massachusetts. SECTION 15. Severability. Any provision of this Guarantee Agreement which ------------ is illegal, invalid, prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such illegality, invalidity, prohibition or unenforceability without invalidating the remaining provisions hereof and any such illegality, invalidity, prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 16. Entire Agreement. This Guarantee Agreement and the Credit ---------------- Agreement embody the entire agreement of the Company with respect to the subject matter hereof and supersede any prior written or oral agreements and understandings relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the Company has caused this Guarantee Agreement to be duly executed and delivered by its officers thereunto duly authorized as of the date first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By:__________________________ Authorized Officer By:__________________________ Authorized Officer C-4 EXHIBIT D OPINION OF EDWARD J. CRANE, JR., SECOND VICE PRESIDENT AND COUNSEL OF THE COMPANY ---------------------- July ___, 1999 The Banks and the Agent listed on the signature pages of the below- referenced Credit Agreement c/o BankBoston, N.A. 100 Federal Street Boston, MA 02110 Re: John Hancock Mutual Life Insurance Company and John Hancock Capital Corporation Credit Agreement ------------------------------------------------- I have acted as counsel for John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts ("John Hancock"), and John Hancock Capital Corporation, a Delaware corporation and an indirect, wholly-owned subsidiary of John Hancock ("JHCC"), in connection with the negotiation, execution and delivery by John Hancock and JHCC of the Credit Agreement, dated as of July ___, 1999, among John Hancock, JHCC, the Banks listed on signature pages of such Credit Agreement (the "Banks") and BankBoston, N.A., as Agent (the "Agent") (the "Credit Agreement"), and the execution and issuance thereunder of the Notes of John Hancock (the "John Hancock Notes") and JHCC (the "JHCC Notes"). All terms capitalized herein which are not otherwise defined have the meanings attributed thereto in the Credit Agreement. In so acting, I have reviewed, among other things, the Credit Agreement, the Notes and the Support Agreement and such other documents as I have deemed necessary or appropriate as a basis for the opinions expressed below. In my examination I have assumed the genuineness of all signatures (other than signatures of officers of John Hancock and JHCC), the authenticity of all documents submitted to me as originals (other than the Credit Agreement, the Support Agreement and the Notes), the conformity D-1 to original documents of all documents submitted to me as certified or photostatic copies, and the authenticity of the originals of such copies. I have also examined and relied upon the representations and warranties as to factual matters contained in and made pursuant to the Credit Agreement and the Support Agreement and I have examined and relied upon the originals or copies certified, or otherwise identified to my satisfaction, of such records, documents, certificates and other instruments, and I have made such other investigations, as in my judgment are necessary or appropriate to enable me to render the opinion below. Subject to the qualifications discussed below, I am of the following opinion: 1. John Hancock. John Hancock is a legal reserve mutual life insurance ------------ company duly organized in 1862 pursuant to the Special Act and is validly existing and in good standing under the laws of the Commonwealth of Massachusetts, and has all powers, and to my knowledge, all material governmental licenses, consents and approvals required to carry on its business as now conducted and to execute and deliver the Credit Agreement, the John Hancock Notes and the Support Agreement. 2. JHCC. JHCC is a corporation duly incorporated, validly existing and ---- in good standing under the laws of the State of Delaware, and has all corporate powers and, to my knowledge, all material governmental licenses, consents and approvals required to carry on its business as now conducted and to execute and deliver the Credit Agreement, the JHCC Notes and the Support Agreement. 3. The Credit Agreement. The Credit Agreement has been duly authorized, -------------------- executed and delivered by both John Hancock and JHCC, and constitutes the legal, valid and binding obligation of John Hancock and JHCC, enforceable against John Hancock and JHCC, as the case may be, in accordance with its terms. 4. The John Hancock Notes. The John Hancock Notes have been duly ---------------------- authorized, executed and delivered by John Hancock, and each John Hancock Note issued on the date hereof is a legal, valid and binding obligation of John Hancock, enforceable against John Hancock in accordance with its terms. 5. The JHCC Notes. The JHCC Notes have been duly authorized, executed -------------- and delivered by JHCC, and each JHCC Note issued on the date hereof is a legal, valid and binding obligation of JHCC, enforceable against JHCC in accordance with its terms. 6. Ranking. (a) The obligations of John Hancock under the Credit ------- Agreement, the John Hancock Notes and the Support Agreement will rank D-2 equally with other unsecured and unsubordinated obligations of John Hancock, subject to the requirements of section one hundred and eighty F of Chapter 175 of the Massachusetts General Laws, which section establishes priorities of distribution in any liquidation proceeding begun in the Commonwealth of Massachusetts against an insolvent Massachusetts insurer, and (b) the obligations of JHCC under the Credit Agreement and the JHCC Notes will rank equally with other unsecured and unsubordinated obligations of JHCC. 7. Support Agreement. The Support Agreement has been duly authorized, ----------------- executed and delivered by John Hancock and JHCC and constitutes the legal, valid and binding obligation of John Hancock and JHCC enforceable against John Hancock or JHCC, as the case may be, in accordance with its terms, and the provisions thereof which purport to create a direct right of the holders of any JHCC Notes to enforce John Hancock's obligations under the Support Agreement in the event of JHCC's failure to meet its obligations under the JHCC Notes are legally effective for such purpose. 8. Governmental Consents. No consent or action of, or filing with, any --------------------- governmental or public regulatory body or authority, including, without limitation, the Executive Office of Consumer Affairs and Business Regulation, Division of Insurance, of the Commonwealth of Massachusetts, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance by John Hancock or JHCC of the Credit Agreement or the Support Agreement or their respective obligations thereunder or by John Hancock of the John Hancock Notes or JHCC of the JHCC Notes or their respective obligations thereunder. 9. Conflict with Instruments, Etc. Neither the execution and delivery by ------------------------------- John Hancock and JHCC of the Credit Agreement, the Notes or the Support Agreement, nor the fulfillment of, nor compliance with, the terms and provisions thereof, will violate any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality or result in any breach of any of the terms, conditions or provisions of, or constitute a default under, or result in the creation or imposition of, any mortgage, lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of John Hancock or JHCC pursuant to the terms of, the Special Act, the Certificate of Incorporation of JHCC, or the By-Laws of John Hancock or JHCC, or any mortgage, indenture, agreement or instrument of which I am aware and to which John Hancock or JHCC is a party or by which it is bound. 10. Litigation. To my knowledge, there is no action, suit or proceeding ---------- pending or threatened against or affecting either Borrower before any D-3 court or arbitrator or any governmental body, agency or official (i) which, if adversely determined, would have a Material Adverse Effect or a material adverse effect on the ability of either Borrower to perform its respective obligations under the Support Agreement or (ii) which in any manner draws into question the validity or enforceability of the Credit Agreement, the Support Agreement or any of the Notes. 11. Not an Investment Company. John Hancock is not an investment company ------------------------- within the meaning of the Investment Company Act of 1940, as amended. JHCC has been exempted from all provisions of the Investment Company Act of 1940, as amended, including, without limitation, those relating to the offering and sale of securities by JHCC, by order of the Securities and Exchange Commission dated June 26, 1984 issued pursuant to Section 6(c) of such Act, and to my knowledge such order remains in full force and effect and has not in any way been modified or amended. The opinions expressed above are subject to the following qualifications: (a) I express no opinion as to any laws other than the laws of the Commonwealth of Massachusetts, the Federal laws of the United States of America and, to the extent set forth in the foregoing opinions with respect to JHCC, the corporate laws of the State of Delaware; (b) I have assumed the requisite corporate power and authority on the part of the Agent and the Banks to enter into the Credit Agreement and to make Loans thereunder and the due authorization, execution and delivery of the Credit Agreement by the Agent and the Banks; (c) I express no opinion as to the enforceability of Section 9.12 of the Credit Agreement; (d) I express no opinion as to the effect on the opinions herein stated of (i) the compliance or noncompliance by the Agent or any Bank with any state, Federal or other laws or regulations applicable to it or (ii) the legal or regulatory status or the nature of the business of the Agent or any Bank; and (e) The enforceability of the Credit Agreement, the Notes and the Support Agreement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law), and with respect to the enforceability of the Credit Agreement, the John Hancock Notes and the Support Agreement against John Hancock, such enforceability may be further limited by the requirements of section one hundred and eighty F of Chapter 175 of the Massachusetts General Laws, D-4 which section establishes priorities of distribution in any liquidation proceeding begun in the Commonwealth of Massachusetts against an insolvent Massachusetts insurer. I am delivering this opinion to you for your benefit pursuant to Section 3.01(e) of the Credit Agreement. Goulston & Storrs may rely on this opinion as if it were addressed to them. No Person other than you and Goulston & Storrs is entitled to rely on this opinion without my prior written consent. This opinion does not address facts and circumstances or changes in law arising after the date hereof and I assume no responsibility to inform you of any such changes which may come to my attention. Very truly yours, Edward J. Crane, Jr. Second Vice President and Counsel D-5 EXHIBIT E OPINION OF GOULSTON & STORRS, P.C., SPECIAL COUNSEL FOR THE AGENT ---------------------------------------- July ___, 1999 To the Banks and the Agent Referred to Below c/o BankBoston, N.A., as Agent 100 Federal Street Boston, Massachusetts 02110 Dear Sirs: We have participated in the preparation of the Credit Agreement (the "Credit Agreement") dated as of July ___, 1999 among John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts, and John Hancock Capital Corporation, a Delaware corporation (each, a "Borrower"), the banks listed on the signature pages thereof (the "Banks") and BankBoston, N.A., as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01(f) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have made such examination of law and have examined such certificates, documents, and opinions of counsel for each Borrower as we have deemed necessary for the purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that the Credit Agreement constitutes a valid and binding agreement of each Borrower and that the Notes of each Borrower constitute valid and binding obligations of such Borrower. Our opinions set forth herein are subject to the following limitations and qualifications: A. In our examination and in rendering this opinion, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the power and authority of all natural persons (other than officers of the Agent), E-1 the authenticity and completeness of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, the authenticity of the originals of such latter documents and the accuracy and completeness of information or documents furnished to us with respect to the Credit Agreement and the Notes. B. In rendering this opinion, we have relied without any independent investigation on the opinion of Edward J. Crane, Jr., Second Vice President and Counsel of the Company, delivered to you on the date hereof, to the effect that each Borrower has all requisite power and authority and has taken all necessary corporate or other action to authorize it to execute, deliver and perform the Credit Agreement and any other related documents as may be executed in connection therewith to which it is a party and to effect the transactions contemplated thereby; that each Borrower has executed and delivered the Credit Agreement and such other related documents; and that the same constitute legal, valid and binding obligations of such Borrower. We have also assumed that each Bank has all requisite power and authority and has taken all necessary corporate or other action to authorize it to execute, deliver and perform the Credit Agreement and any other related documents as may be executed in connection therewith to which it is a party and to effect the transactions contemplated thereby; that each Bank has executed and delivered the Credit Agreement and such other related documents; and that the same constitute legal, valid and binding obligations of such Bank. Our opinion does not take account of, and we express no opinion with respect to, (i) any requirement of law which may be applicable to the Borrower, the Agent, or the Banks by reason of the legal or regulatory status of any Borrower, the Agent or any Bank or by reason of any other facts particularly pertaining to such Borrower, Agent or Bank, or (ii) any approval or consent arising out of any contract or agreement (other than the Credit Agreement) to which such Borrower, Agent or Bank is a party or by which it is bound. C. Our opinions set forth herein as to the validity and binding effect are specifically qualified to the extent that the validity and binding effect of any obligations of each Borrower under the Credit Agreement and the Notes may be subject to or limited by (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other statutory or decisional laws, heretofore or hereafter enacted or in effect, affecting the rights and remedies of creditors generally, (ii) the exercise of judicial or administrative discretion in accordance with general equitable principles, (iii) the application by courts of competent jurisdiction of laws containing provisions determined to have a paramount public interest, (iv) each Bank's implied duty of good faith, and (v) the availability or enforceability of particular remedies, of exculpatory E-2 provisions and of waivers contained in the Credit Agreement or the Notes, which particular remedies, exculpatory provisions and waivers of rights may be limited by equitable principles or applicable laws, rules, regulations, court decisions and constitutional requirements. D. This opinion is limited to the legal matters explicitly addressed herein and does not extend, by implication or otherwise, to any other matter. This opinion is not subject to, and shall not be governed by or interpreted in accordance with, the Third-Party Legal Opinion Report (including the Legal Opinion Accord and the "guidelines" set forth therein) of the ABA Section of Business Law (1991). E. We are not passing upon and do not assume any responsibility for the accuracy, sufficiency, completeness or fairness of any statements, representations, warranties, descriptions, information or financial data supplied to the Agent or the Banks with respect to the Credit Agreement or the Notes or the transactions contemplated thereby or for the fairness of such transactions themselves, and we make no representation that we have independently verified the accuracy, sufficiency, completeness or fairness of any of the foregoing. F. We are members of the Bar of the Commonwealth of Massachusetts and the foregoing opinion is limited to the laws of the Commonwealth of Massachusetts and the federal laws of the United States of America. Insofar as this opinion involves matters arising under the law of the State of Delaware, we have relied without any independent investigation on the opinion of Edward J. Crane, Jr., Second Vice President and Counsel of the Company, delivered to you on the date hereof. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the Commonwealth of Massachusetts) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other Person without our prior written consent. Very truly yours, DMA/PAH/HSD/AJF E-3 EXHIBIT F ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _______________, _____ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY (the "Company"), JOHN HANCOCK CAPITAL CORPORATION ("JHCC") and BANKBOSTON, N.A., as Agent (the "Agent"). W I T N E S S E T H - - - - - - - - - - WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Credit Agreement dated as of July ___, 1999 among the Company, JHCC (the Company and JHCC, collectively, the "Borrowers" and each, a "Borrower"), the Assignor and the other Banks party thereto, as Banks, and the Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrowers in an aggregate principal amount at any time outstanding not to exceed $_____________; WHEREAS, Committed Loans made to the Borrowers by the Assignor under the Credit Agreement in the aggregate principal amount of $___________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its commitment thereunder in an amount equal to $____________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined ----------- herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the ---------- Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the F-1 corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, each Borrower and the Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale -------- contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount separately agreed between them It is understood that participation and facility fees accrued to the date hereof are for the account of the Assignor and facility fees accruing from and including the date hereof in respect of the Assigned Amount are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrowers and the Agent. Except as provided in -------------------------------------- Section 9.06(c) of the Credit Agreement, this Agreement is conditioned upon the consent of the Borrowers and the Agent pursuant to such Section 9.06(c). The execution of this Agreement by each Borrower and the Agent is evidence of this consent. Pursuant to Section 9.06(c) each Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation ------------------------ or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of either Borrower, or the validity and enforceability of the obligations of either Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrowers. SECTION 6. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the Commonwealth of Massachusetts. SECTION 7. Counterparts. This Agreement may be signed in any number of ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. F-2 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By: ___________________________ Title: [ASSIGNEE] By: ___________________________ Title: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By ___________________________ Authorized Officer By ___________________________ Authorized Officer JOHN HANCOCK CAPITAL CORPORATION By ___________________________ Authorized Officer By ___________________________ Authorized Officer BANKBOSTON, N.A., as Agent By ___________________________ Title: F-3 EXHIBIT G JHCC TERMINATION NOTICE ----------------------- [Date] To: BankBoston, N.A. (the "Agent") From: John Hancock Mutual Life Insurance Company (the "Company") and John Hancock Capital Corporation ("JHCC") Re: Credit Agreement (the "Credit Agreement") dated as of July ___, 1999 among the Company, JHCC, the Banks listed on the signature pages thereof and the Agent --------------------------------------------- We hereby give notice pursuant to Section 9.09 of the Credit Agreement that, effective as of the date hereof, JHCC is terminated as a Borrower under the Credit Agreement and all commitments by the Banks to make Loans to JHCC under the Credit Agreement are hereby terminated. We hereby certify that the termination of JHCC as a Borrower under the Credit Agreement complies with Section 9.09 of the Credit Agreement for the reasons set forth below: [1. There are no Loans outstanding to JHCC. 2. All obligations of JHCC as a Borrower under the Credit Agreement arising in respect of any period in which JHCC was, or on account of any action of inaction of JHCC as, a Borrower under the Credit Agreement shall survive the termination effected by this notice.]/*/ [1. The Company has executed and delivered a Company Assumption Agreement]. _______________________ /*/ Include this language if no Company Assumption Agreement has been executed and delivered. G-1 Terms used herein have the meanings assigned to them in the Credit Agreement. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By ___________________________ Authorized Officer By ___________________________ Authorized Officer JOHN HANCOCK CAPITAL CORPORATION By ___________________________ Authorized Officer By ___________________________ Authorized Officer G-2 EXHIBIT H H-1 SUPPORT AGREEMENT dated as of October 15, 1984 between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts corporation ("John Hancock"), and JOHN HANCOCK CAPITAL CORPORATION, a Delaware corporation ("Capital"). WHEREAS, John Hancock owns through John Hancock Subsidiaries, Inc., a Delaware corporation and a wholly-owned subsidiary of John Hancock, and presently intends to continue to own, either directly or through one or more wholly-owned subsidiaries, all of the outstanding shares of the capital stock of Capital having general voting power; and WHEREAS, it is in the interests of both John Hancock and Capital and in furtherance of Capital's corporate purposes that Capital be able to borrow money from banks, other financial institutions and others, including borrowings in the form of Commercial Paper (as hereinafter defined), and to incur such borrowings at the most favorable prevailing rates and terms, and in this regard Capital has requested John Hancock to enter into this Agreement; and WHEREAS, Capital intends to issue, from time to time, its short-term notes having maturities not exceeding nine months from their dates of issue (such notes herein referred to as "Commercial Paper') and to sell its Commercial Paper in the commercial paper market, and to incur, from time to time, other indebtedness for borrowed money, all in furtherance of its corporate purposes; and WHEREAS, Capital also intends to guarantee indebtedness for borrowed money (including such indebtedness in the form of bonds, notes and other transferable securities) incurred from time to time by John Hancock Overseas Finance N.V. and other direct or indirect subsidiaries of John Hancock (herein collectively referred to as "John Hancock companies"); and WHEREAS, Capital intends that the proceeds of any such borrowings incurred by it be used to make loans to John Hancock and the John Hancock companies; and WHEREAS, in furtherance of the foregoing objectives, John Hancock and Capital are entering into this Agreement for the express benefit of the holder or holders of the Commercial Paper of Capital, and, if and to the extent John Hancock may hereafter specifically agree in writing, the holder or holders of other indebtedness for borrowed money of Capital and the holder or holders of indebtedness for borrowed money incurred by one or more of the John Hancock companies which has been guaranteed by Capital. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, John Hancock and Capital hereby agree as follows: (1) Stock Ownership. John Hancock, during the term of this Agreement, will --------------- continue to own, either directly or through one or more wholly-owned subsidiaries, the legal title to and beneficial interest in all outstanding shares of the capital stock of Capital having general voting power, and will not directly or indirectly pledge or in any way encumber or otherwise dispose of any such shares of stock. -2- (2) Maintenance of Tangible Net Worth. John Hancock, during the term of this --------------------------------- Agreement will take such action as may be required to enable Capital to have and maintain a "Tangible Net Worth" of at least $1,000,000. The term "Tangible Net Worth" shall mean an amount equal to the capital stock and surplus (including paid-in or capital surplus) accounts of Capital after deducting therefrom the book amount of all intangible assets of Capital, all determined in accordance with generally accepted accounting principles, except that any Subordinated Loan made by John Hancock or by any one or more of the John Hancock companies to Capital shall be considered part of such capital stock and surplus accounts. The term "Subordinated Loan" shall mean any loan or advance made to Capital by John Hancock or by any of the John Hancock companies which by its terms is subordinated in right of payment to all obligations for borrowed money issued or guaranteed by Capital, except Subordinated Loans. (3) Officer's Certificate; Payments to Capital. If at any time Capital shall ------------------------------------------ determine that its Tangible Net Worth shall be less than $1,000,000, Capital shall promptly deliver to John Hancock a certificate of the President or any Vice President or the Treasurer of Capital ("Officer's Certificate") setting forth the Tangible Net Worth of Capital as of the date of said certificate and the amount of the payment ("Deficiency Amount") required to be made under Section (2) in order to enable Capital -3- to have the amount of Tangible Net Worth provided for in Section (2), all in reasonable detail and determined in accordance with Section (2). John Hancock shall pay, or shall cause to be paid, subject to subsequent adjustment as provided for in Section (4), to Capital an amount equal to the Deficiency Amount immediately upon receipt of the Officer's Certificate. Any such payment shall be in the form of a capital contribution, the purchase of additional shares of capital stock of Capital or the making of Subordinated Loans, as John Hancock shall determine. (4) Adjustment of Deficiency Amount. John Hancock shall not be deemed to have ------------------------------- accepted an asserted Deficiency Amount certified to it under Section (3), if within ten (10) days after receipt of such certification, it shall give Capital written notice of its objections thereto and the reasons therefor ("Objection Notice"), provided that the giving of such Objection Notice shall not relieve John Hancock of its obligation to pay or cause to be paid, to Capital an amount equal to the asserted Deficiency Amount in accordance with Section (3). If such Objection Notice is given, John Hancock and Capital will attempt in good faith to agree upon the amount of such deficiency. If John Hancock and Capital cannot so agree within ten (10) days after the Objection Notice is given, then -4- John Hancock and Capital agree that Ernst & Whinney shall be requested to deliver to John Hancock and Capital, within thirty (30) days after the Objection Notice is given, a letter from Ernst & Whinney to John Hancock and Capital (A) stating the actual deficiency as of the date of the Officer's Certificate setting forth the asserted Deficiency Amount, as computed by Ernst & Whinney from the books and records of Capital, (B) demonstrating in reasonable detail the manner in which such actual deficiency was computed, and (C) stating that such computation was made in accordance with the terms of this Agreement. Such computation of the actual deficiency shall be binding and conclusive upon John Hancock and Capital. If the amount of the actual deficiency as finally determined under this Section (4) is different from the asserted Deficiency Amount, then the amount of the Deficiency Amount asserted under Section (3) shall be adjusted by refunds from Capital, or additional payments to Capital in the manner provided in Section (3), as may be required. John Hancock and Capital shall bear equally any fees and disbursements incurred by Ernst & Whinney in rendering any letter in accordance with the terms of this Section (4). John Hancock and Capital agree that other mutually acceptable nationally recognized certified public accounting firms may be substituted for Ernst & Whinney. -5- (5) Benefit of Agreement. This Agreement is made for the express benefit of -------------------- the holder or holders from time to time of Capital's Commercial Paper and, if and to the extent that John Hancock may hereafter agree with Capital in writing to expressly extend the benefits of this Agreement to the holder or holders of other indebtedness for borrowed money of Capital or the holder or holders of indebtedness for borrowed money incurred by one or more of the John Hancock companies which has been guaranteed by Capital, such holder or holders as may be specifically described in any such writing, and nothing in this Agreement shall be construed otherwise (such Commercial Paper; such other indebtedness of Capital and such indebtedness guaranteed by Capital being herein referred to as "Covered Credit"; such holder or holders being herein referred to as "Covered Creditors"). Capital agrees that it will not incur any indebtedness for borrowed money, other than with respect to Commercial Paper and Subordinated Loans, or guarantee any indebtedness incurred by one or more of the John Hancock companies, unless and until John Hancock shall have expressly agreed in writing that such indebtedness for borrowed money or such indebtedness guaranteed by Capital, as the case may be, shall be Covered Credit and the holder or holders of such indebtedness shall be Covered Creditors. -6- (6) Enforcement of Agreement. Capital agrees for the benefit of Covered ------------------------ Creditors that it will timely take any and all action under this Agreement necessary to require John Hancock to perform its obligations under this Agreement. Capital and John Hancock further agree that, if and to the extent that Capital shall fail to take such action, any Covered Creditor may do so. John Hancock hereby makes a continuing offer to each person who, in reliance on this Agreement and prior to the termination of this Agreement, becomes a Covered Creditor, to perform its obligations under Section (2) of this Agreement. Such offer shall be deemed to be accepted by the act of such person becoming a Covered Creditor and shall give rise to a direct right of action on the part of such person against John Hancock to enforce John Hancock's obligations under Section (2) of this Agreement in the event of Capital's failure to do so. (7) Not a Guaranty. This Agreement is not intended to be and is not, and -------------- nothing herein contained and nothing done by John Hancock pursuant to this Agreement shall be deemed to constitute, a guaranty by John Hancock of the payment of the interest or principal of any obligations, indebtedness or liability of any kind or character and howsoever evidenced or arising of Capital or any of the other John Hancock companies to any person or persons whomsoever. -7- (8) Termination By Deposit of Funds. If and to the extent that John Hancock ------------------------------- shall deposit or shall cause to be deposited, in trust at a bank or trust company organized under the laws of any State of the United States or a national building association, in any such case having capital stock, surplus and undivided profits aggregating at least $50,000,000 (hereinafter referred to as the "Depository"), money, or direct obligations of, or obligations secured fully by direct obligations of, or obligations unconditionally guaranteed as to payment of principal and interest by, the United States of America, the principal of and interest on which when due will provide funds in amount sufficient to pay when due and payable the principal of, and premium, if any, and interest on, all Covered Credit which is outstanding as of the close of business on the date of such deposit, and, if such deposit shall be accompanied by an irrevocable written direction from John Hancock to the Depository to apply such deposit to the payment of the principal of and premium, if any, and interest on, such Covered Credit as and when the same shall become due and payable, then this Agreement shall forthwith terminate and be of no further force and effect. (9) Amendment, Modification; Termination By Notice. This Agreement may be ---------------------------------------------- amended or modified only by an agreement in writing executed by both of the parties hereto, and, in addition to the termination provisions of Section (8), this Agreement may be terminated by either party hereto -8- by written notice given to the other party not less than thirty (30) days in advance of the date specified in such notice for such termination ("Cut- off Date'); provided, however, that no such amendment or modification, and no such termination shall relieve John Hancock of any of its obligations under this Agreement or in any way affect adversely the rights of Covered Creditors under this Agreement unless and until all Covered Credit which is outstanding as of the close of business on the effective date of such amendment or modification or the Cut-off Date shall either (A) have been paid in full or (B) have been unconditionally guaranteed as to payment of principal, premium, if any, and interest by John Hancock pursuant to an agreement entered into between John Hancock and Capital for the benefit of Covered Creditors. (10) Communications. All communications provided for herein shall be delivered, -------------- or mailed (by first class mail, postage prepaid), addressed (A) if to John Hancock, to John Hancock Mutual Life Insurance Company, John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117, Attention: Vice President and --------- Treasurer, or (B) if to Capital, to John Hancock Capital Corporation, John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117, Attention: President. --------- (11) Other. This Agreement is intended to take effect as a sealed instrument. ----- This Agreement shall be binding upon John Hancock, its successors and assigns, and shall inure to the benefit of Capital, its successors and assigns. -9- This Agreement constitutes the entire agreement of John Hancock and Capital with respect to the subject matter hereof. The headings of this Agreement are for reference only and shall not affect the meaning hereof. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, John Hancock and Capital have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Edward J. Boudreau ------------------------------ By /s/ Christopher M. Meyer ------------------------------ JOHN HANCOCK CAPITAL CORPORATION By /s/ John T. Farady ------------------------------ By /s/ Henry J. Desautel ------------------------------ -10- EX-10.2 6 AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 10.2 AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT dated as of July 19, 1996 among JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and JOHN HANCOCK CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. WITNESSETH: WHEREAS, certain of the parties hereto have heretofore entered into the Credit Agreement dated as of December 13, 1991, as amended by Amendment No. 1 to Credit Agreement dated as of May 1, 1994, Amendment No. 2 to Credit Agreement dated as of May 20, 1994 and Amendment No. 3 to Credit Agreement dated as of June 30, 1995 (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement as set forth herein and to restate the Agreement in its entirety to read as set forth in the Agreement with the amendments specified below; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically ----------------------- defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement as amended hereby. SECTION 2. Amendment of Definitions in Section 1.01 of the Agreement. --------------------------------------------------------- (a) The following definitions contained in Section 1.01 of the Agreement shall be amended in their entirety to read as follows: "Bank" means each bank listed on the signature pages of the Amended and Restated Credit Agreement, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages of the Amended and Restated Credit Agreement, as such amount may be reduced from time to time pursuant to Section 2.09 or terminated pursuant to Section 2.01 or 2.09. "Level I Rating" means, with respect to the rating of short-term unsecured debt securities by S&P and/or Moody's, at least A1+ in the case of S&P and P1 in the case of Moody's. "Level I Status" exists at any date if, on such date, the Company's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such short-term unsecured debt securities that are rated by S&P and Moody's, JHCC's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party other than the Company) are rated the Level I Rating. "Level II Rating" means, with respect to the rating of short-term unsecured debt securities by S&P and/or Moody's, at least Al in the case of S&P and P1 in the case of Moody's. "Level II Status" exists at any date if, on such date, Level I Status does not exist and the Company's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such short-term unsecured debt securities that are rated by S&P and Moody's, JHCC's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party other than the Company) are rated the Level II Rating. "Level III Status" exists at any date if, on such date, neither Level I Status nor Level II Status exists and the Company's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such short-term unsecured debt securities that are rated by S&P and Moody's, JHCC's short- term unsecured debt securities that do not have the benefit of credit enhancement from any third party other than the Company) are rated the Level III Rating. "Termination Date" means the Quarterly Date falling in June 2001. 2 (b) The following definitions shall be inserted in alphabetical order in Section 1.01 of the Agreement: "Amended and Restated Credit Agreement" means the Amended and Restated Credit Agreement dated as of July 19, 1996 among the Borrowers, the Banks listed on the signature pages thereof and the Agent. "Level III Rating" means, with respect to the rating of short-term unsecured debt securities by S&P and/or Moody's, at least Al in the case of S&P or P1 in the case of Moody's. "Level IV Rating" means, with respect to the rating of short-term unsecured debt securities by S&P and/or Moody's, at least A2 in the case of S&P or P2 in the case of Moody's. "Level IV Status" exists at any date if, on such date, neither Level I Status nor Level II Status nor Level III Status exists and the Company's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such short-term unsecured debt securities that are rated by S&P and Moody's, JHCC's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party other than the Company) are rated the Level IV Rating. "Level V Rating" means, with respect to the rating of short-term unsecured debt securities by S&P and/or Moody's, at least A3 in the case of S&P or P3 in the case of Moody's. "Level V Status" exists at any date if, on such date, neither Level I Status nor Level II Status nor Level III Status nor Level IV Status exists and the Company's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such short-term unsecured debt securities that are rated by S&P and Moody's, JHCC's short-term unsecured debt securities that do not have the benefit of credit enhancement from any third party other than the Company) are rated the Level V Rating. "Level VI Status" exists on any date on which, neither Level I Status nor Level II Status nor Level 3 III Status nor Level IV Status nor Level V Status exists. (c) The definition of "Debt" contained in Section 1.01 of the Agreement shall be amended by deleting the reference therein to "John Hancock Clearing Corporation" and inserting a reference to "John Hancock Freedom Securities Corporation" in lieu thereof. SECTION 3. Amendment of Section 2.07 of the Agreement. Section 2.07 of ------------------------------------------ the Agreement shall be amended by deleting the definitions of "CD Margin" contained in subsection (b) thereof and "Euro-Dollar Margin" contained in subsection (c) thereof and inserting the following definitions in lieu thereof: "CD Margin" means: (i) for any day on which Level I Status exists, .2550 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .3050 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (ii) for any day on which Level II Status exists, .2950 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .3450 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (iii) for any day on which Level III Status exists, .3250 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .3750 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (iv) for any day on which Level IV Status exists, .3500 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .4000 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; 4 (v) for any day on which Level V Status exists, .3750 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .4250 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; and (vi) for any day on which Level VI Status exists, .4750 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .5750 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments. "Euro-Dollar Margin" means: (i) for any day on which Level I Status exists, .1300 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .1800 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (ii) for any day on which Level II Status exists, .1700 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .2200 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (iii) for any day on which Level III Status exists, .2000 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .2500 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (iv) for any day on which Level IV Status exists, .2250 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .2750 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; 5 (v) for any day on which Level V Status exists, .2500 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .3000 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; and (vi) for any day on which Level VI Status exists, .3500 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .4500 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments. SECTION 4. Amendment of Section 2.08 of the Agreement. Section 2.08 of ------------------------------------------ the Agreement shall be amended by deleting it in its entirety and inserting the following in lieu thereof: SECTION 2.08. Facility Fee. The Company shall pay to the Agent for the ------------ account of the Banks ratably a facility fee at the rate of (i) for any day on which Level I Status exists, .0700 of 1% per annum, (ii) for any day on which Level II Status exists, .0800 of 1% per annum, (iii) for any day on which Level III Status exists, .1000 of 1% per annum, (iv) for any day on which Level IV Status exists, .1250 of 1% per annum, (v) for any day on which Level V Status exists, .1500 of 1% per annum and (vi) for any day on which Level VI Status exists, .2500 of 1% per annum. Such facility fee shall accrue from and including the Signing Date to but excluding the Termination Date (or, if later, the date the Loans shall be repaid in their entirety), on the daily average of the greater of (x) the aggregate of the Commitments (whether used or unused) and (y) the aggregate outstanding principal amount of the Loans; provided, however, that the provisions of --------- ------- Section 2.08 of the Agreement (as in effect prior to the Amended and Restated Credit Agreement) shall apply to and including the effective date of the Amended and Restated Credit Agreement. Accrued fees under this Section shall be payable quarterly in arrears on each Quarterly Date and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 5. Amendment of Section 3.02(d) of the Agreement. Section --------------------------------------------- 3.02(d) of the Agreement shall be amended by adding the following parenthetical phrase 6 "(except, other than in the case of a Borrowing on the effective date of the Amended and Restated Credit Agreement, the representations and warranties set forth in Sections 4.04(d) and 4.05)" after the reference to "this Agreement". SECTION 6. Amendment of Section 4.04 of the Agreement. Subsections (a) (i) ------------------------------------------ and (ii) and (b) and (c) and (d) of Section 4.04 of the Agreement shall be amended by deleting the references therein to "1993" and inserting references to "1995" in lieu thereof. Such subsection (d) shall be further amended by deleting the reference to "Amendment No. 1" therein and inserting in lieu thereof a reference to "the Amended and Restated Credit Agreement." SECTION 7. Amendment of Section 4.10 of the Agreement. Section 4.10 of the ------------------------------------------ Agreement shall be amended by deleting the reference to "and as of the date of Amendment No. 1" in the last sentence of Section 4.10 and inserting in lieu thereof a reference to "and as of the effective date of the Amended and Restated Credit Agreement." SECTION 8. Amendment of Section 5.08 of the Agreement. The reference to ------------------------------------------ "$2,000,000,000" contained in Section 5.08 of the Agreement shall be deleted and a reference to "$2,500,000,000" shall be inserted in lieu thereof. SECTION 9. Support Agreement. The Borrowers jointly and severally represent ----------------- and warrant that the Support Agreement has not been amended or supplemented or otherwise revised or replaced since the version thereof dated as of October 15, 1984, a copy of which is attached as Exhibit K to the Agreement. SECTION 10. Representations and Warranties. The Borrowers jointly and ------------------------------ severally make as of the date hereof the representations and warranties contained in Article IV of the Agreement and further represent and warrant that as of the date hereof no Default has occurred and is continuing. SECTION 11. Fees. Fees accrued to but not including the effective date ---- hereof pursuant to subsection (b) of Section 2.08 shall be paid on such date by the Company to the Agent for the benefit of each Bank which, upon the effectiveness of this Amended and Restated Credit Agreement, no longer has any Commitment under the Agreement. 7 SECTION 12. Governing Law. This Amended and Restated Credit Agreement shall ------------- be governed by and construed in accordance with the laws of the State of New York. SECTION 13. Counterparts; Effectiveness. This Amended and Restated Credit --------------------------- Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amended and Restated Credit Agreement shall become effective as of the date on which the Agent shall have received duly executed counterparts hereof signed by the Borrowers and the Banks and the Agent (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution and delivery of a counterpart hereof by such party). SECTION 14. Certain Banks. The parties hereto understand and agree that the ------------- banks signing below the signature of the Agent will no longer be Banks after the effective date hereof. 8 IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Credit Agreement to be duly executed by their respective authorized officers as of the day and year first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Henry J. Desautel --------------------- Title: Second Vice President By /s/ Julie H. Indge ------------------ Title: Assistant Treasurer JOHN HANCOCK CAPITAL CORPORATION By /s/ Peter S. Mitsopoulos ------------------------ Title: Treasurer By /s/ Julie H. Indge ------------------ Title: Assistant Treasurer 9
COMMITMENTS - ----------- $35,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Anne E. Darby ----------------------------------------- Title: Vice President $35,000,000 THE FIRST NATIONAL BANK OF BOSTON By /s/ Lawrence C. Bigelow ----------------------------------------- Title: Director $30,000,000 THE CHASE MANHATTAN BANK By /s/ Peter W. Platten ----------------------------------------- Title: Vice President $30,000,000 CITIBANK, N.A. By /s/ Scott F. Engle ----------------------------------------- Title: Attorney-in-fact $30,000,000 COMERICA BANK By /s/ Chris Georgvassilis ----------------------------------------- Title: Vice President
10 $30,000,00 BANK OF TOKYO-MITSUBISHI By /s/ Dane E. Holmes ----------------------------------------- Title: Attorney-in-fact $30,000,000 FLEET NATIONAL BANK By /s/ Sandra M. Anselment ----------------------------------------- Title: Assistant Vice President $30,000,000 THE SANWA BANK, LIMITED By /s/ Yutaka Higashino ----------------------------------------- Title: Senior Vice President $20,000,000 DEN DANSKE BANK AKTIESELSKAB Cayman Island Branch By /s/ John A. O'Neill ----------------------------------------- Title: Vice President $20,000,000 THE FUJI BANK, LIMITED By /s/ Gina M. Kearns ----------------------------------------- Title: Vice President 11 $20,000,000 THE NORTHERN TRUST COMPANY By /s/ Marcia P. Saper ----------------------------------------- Title: Vice President $20,000,000 ROYAL BANK OF CANADA By /s/ Gary Overton ------------------------------------------- Title: Senior Manager $20,000,000 WELLS FARGO BANK, N.A. By /s/ Edwin Sauve ---------------------------------------- Title: Vice President $15,000,000 CREDIT LYONNAIS NEW YORK BRANCH By /s/ Sebastian Rocco ---------------------------------------- Title: First Vice President 12 $15,000,000 CREDIT SUISSE By /s/ Juerq Johner ---------------------------------------- Title: Associate By /s/ Anne Schultheiss-Jensen ---------------------------------------- Title: Associate $15,000,000 THE SUMITOMO BANK, LIMITED By /s/ Yoshinori Kawamura ---------------------------------------- Title: Joint General Manager $15,000,000 WACHOVIA BANK OF GEORGIA, N.A. By /s/ Kathleen H. Reedy ---------------------------------------- Title: Vice President $10,000,000 BANK OF AMERICA ILLINOIS By /s/ Ron Drobny ---------------------------------------- Title: Vice President $10,000,000 BANK OF HAWAII By /s/ Alison Sierens ---------------------------------------- Title: Assistant Vice President 13 $10,000,000 THE BANK OF NEW YORK By /s/ Lizanne T. Eberle ---------------------------------------- Title: Vice President $10,000,000 THE BANK OF NOVA SCOTIA By /s/ Terry M. Pitcher ---------------------------------------- Title: Authorized Signatory $10,000,000 BARNETT BANK OF JACKSONVILLE, N.A. By /s/ Lawrence B. Katz ---------------------------------------- Title: Vice President & Regional Manager $10,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ Thomas Collimore ---------------------------------------- Title: Vice President $10,000,000 STATE STREET BANK AND TRUST COMPANY By /s/ Edward M. Anderson ---------------------------------------- Title: Vice President 14 $10,000,000 SUNTRUST BANK, ATLANTA By /s/ Susan M. Boyd ---------------------------------------- Title: Vice President $10,000,000 U.S. NATIONAL BANK OF OREGON By /s/ Ross A. Beaton ---------------------------------------- Title: Vice President - --------------------- Total Commitments $500,000,000 ============ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Kerry J. Fall ---------------------------------------- Title: Vice President BANK OF MONTREAL By /s/ Loren K. Christenson ---------------------------------------- Title: Senior Vice President 15 CONFORMED COPY AMENDMENT NO. 3 TO CREDIT AGREEMENT AMENDMENT dated as of June 30, 1995 among JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and JOHN HANCOCK CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. WITNESSETH: WHEREAS, the parties hereto have heretofore entered into the Credit Agreement dated as of December 13, 1991, as amended by Amendment No. 1 to Credit Agreement dated as of May 1, 1994 and Amendment No. 2 to Credit Agreement dated as of May 20, 1994 (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement as follows. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically ----------------------- defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement or herein shall from and after the date hereof refer to the Agreement as amended hereby. SECTION 2. Amendment of Definition in Section 1.01 of the Agreement. -------------------------------------------------------- The definition of the term "Termination Date" contained in Section 1.01 of the Agreement shall be amended by inserting a reference to "June 2000" therein in lieu of the reference therein to "March 1997". SECTION 3. Representations and Warranties. The Borrowers jointly and ------------------------------ severally make as of the date hereof the representations and warranties contained in Article IV of the Agreement and further represent and warrant that as of the date hereof no Default has occurred and is continuing. SECTION 4. Governing Law. This Amendment shall be governed by and ------------- construed in accordance with the laws of the State of New York. SECTION 5. Counterparts; Effectiveness. This Amendment may be signed --------------------------- in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date on which the Agent shall have received duly executed counterparts hereof signed by the Borrowers and the Banks and the Agent (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution and delivery of a counterpart hereof by such party). IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Henry J. Desautel ----------------------------- Title: Second Vice President By /s/ Julie H. Indge --------------------------- Title: Assistant Treasurer JOHN HANCOCK CAPITAL CORPORATION By /s/ Karen E. Liukkonen ---------------------- Title: President By /s/ Julie H. Indge --------------------------- Title: Assistant Treasurer 2 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Joseph T. Wilson, Jr. ------------------------ Title: Vice President CITICORP USA, INC. By /s/ Stephen P. Zwick ---------------------- Title: Vice President COMERICA BANK By /s/ Jon A. Bird ---------------------- Title: Vice President SHAWMUT BANK, N. A. By /s/ Robert W. McClelland ------------------------ Title: Vice President THE BANK OF TOKYO TRUST COMPANY By /s/ Alta N. Fleming ------------------------ Title: Vice President 3 THE FIRST NATIONAL BANK OF BOSTON By /s/ Lawrence C. Bigelow ----------------------- Title: Director THE SANWA BANK, LIMITED By /s/ Yutaka Higashino ----------------------------- Title: Senior Vice President CHEMICAL BANK (as successor in interest to MANUFACTURERS HANOVER TRUST COMPANY) By /s/ Peter W. Platten ---------------------- Title: Vice President DEN DANSKE BANK AXTIESELSKAB Cayman Islands Branch By /s/ John A. O'Neill --------------------- Title Vice President By /s/ Sonia Kataria -------------------------------- Title: Assistant Vice President 4 FIRST INTERSTATE BANK OF CALIFORNIA By /s/ Edwin J. Sauve ------------------ Title: Vice President By /s/ Stephen F. Marshall ----------------------- Title: Vice President FLEET BANK OF MASSACHUSETTS, N.A. By /s/ Thomas J. Bullard ---------------------- Title: Vice President ROYAL BANK OF CANADA By /s/ Gary R. Overton ---------------------- Title: Senior Manager THE FUJI BANK, LIMITED By /s/ Gina M. Kearns -------------------------------- Title: Vice President & Manager THE NORTHERN TRUST COMPANY By /s/ Dean V. Banick ----------------------- Title: Vice President 5 BANK OF MONTREAL By /s/ Donald J. Jordan -------------------- Title: Director CREDIT LYONNAIS NEW YORK BRANCH By /s/ Sebastian Rocco ---------------------------- Title: First Vice President CREDIT LYONNAIS CAYMAN ISLAND BRANCH By /s/ Sebastian Rocco ---------------------------- Title: First Vice President CREDIT SUISSE By /s/ Juerq Johner ---------------- Title: Associate By /s/ Nikolai A. Nachamkin ------------------------ Title: Associate THE SUMITOMO BANK, LIMITED By /s/ Shuntaro Higashi -------------------------- Title: Joint General Manager 6 WACHOVIA BANK OF GEORGIA, N.A. By /s/ James B. Gburek ------------------- Title: Senior Vice President STATE STREET BANK AND TRUST COMPANY By /s/ Edward M. Anderson ---------------------- Title: Vice President THE BANK OF NEW YORK By /s/ Lizanne T. Eberle --------------------- Title: Vice President THE BANK OF NOVA SCOTIA By /s/ T.M. Pitcher ---------------------------- Title: Authorized Signatory THE CHASE MANHATTAN BANK, N . A. By /s/ Dennis Cogan ---------------------- Title: Vice President 7 TRUST COMPANY BANK, ATLANTA By /s/ Smith W. Brookhart, IV -------------------------- Title: Group Vice President BANK OF HAWAII By /s/ Joseph T. Donalson ---------------------- Title: Vice President BARNETT BANK OF CENTRAL FLORIDA, N.A. By /s/ Glen Romm ---------------------- Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By /s/ Thomas J. Collimore ----------------------- Title: Vice President 8 UNITED STATES NATIONAL BANK OF OREGON By /s/ Steven T. Williams ---------------------- Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Joseph T. Wilson, Jr. ------------------------ Title: Vice President 9 AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT dated as of May 20, 1994 among JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and JOHN HANCOCK CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. WITNESSETH : WHEREAS, the parties hereto have heretofore entered into the Credit Agreement dated as of December 13, 1991, as amended by Amendment No. 1 to Credit Agreement dated as of May 20, 1994 (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement as follows. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined ----------------------- herein, each term used herein which is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement or herein shall from and after the date hereof refer to the Agreement as amended hereby. SECTION 2. Amendment of Section 9.06(c) of the Agreement. Clause (ii) --------------------------------------------- contained in Section 9.06(c) of the Agreement shall be amended by adding the following phrase at the end thereof "or, if a Bank has a Commitment which is less than $10,000,000 and such assignment is to another Bank, such assignment shall be in respect of all of the Commitment of the transferor Bank". SECTION 3. Representations and Warranties. The Borrowers jointly and ------------------------------ severally make as of the date hereof the representations and warranties contained in Article IV of the Agreement and further represents and warrants that as of the date hereof no Default has occurred and is continuing. SECTION 4. Governing Law. This Amendment shall be governed by and construed ------------- in accordance with the laws of the State of New York. SECTION 5. Counterparts; Effectiveness. This Amendment may be signed in any --------------------------- number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date on which the Agent shall have received duly executed counterparts hereof signed by the Borrowers and the Banks and the Agent (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution and delivery of a counterpart hereof by such party). IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Henry J. Desautel --------------------- Title: Second Vice President By /s/ Julie H. Indge ------------------ Title: Assistant Treasurer JOHN HANCOCK CAPITAL CORPORATION By /s/ Karen E. Liukkonen ---------------------- Title: President By /s/ George A. Cardarelli ------------------------ Title: Assistant Treasurer 2 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By _________________________________ Title: J.P. MORGAN DELAWARE By _________________________________ Title: CITICORP USA, INC. By _________________________________ Title: COMERICA BANK By ________________________________ Title: SHAWMUT BANK, N.A. By _________________________________ Title: 3 THE BANK OF TOKYO TRUST COMPANY By _________________________________ Title: THE FIRST NATIONAL BANK OF BOSTON By _________________________________ Title: THE SANWA BANK, LIMITED By ________________________________ Title: CHEMICAL BANK (as successor in interest to MANUFACTURERS HANOVER TRUST COMPANY) By ________________________________ Title: DEN DANSKE BANK AKTIESELSKAB Cayman Islands Branch By _________________________________ Title: By _________________________________ Title: 4 FIRST INTERSTATE BANK OF CALIFORNIA By _________________________________ Title: By _________________________________ Title: FLEET BANK OF MASSACHUSETTS, N.A. By _________________________________ Title: ROYAL BANK OF CANADA By _________________________________ Title: THE FUJI BANK, LIMITED By _________________________________ Title: THE NORTHERN TRUST COMPANY By _________________________________ Title: 5 BANK OF MONTREAL By ________________________________________ Title: CREDIT LYONNAIS NEW YORK BRANCH By ________________________________________ Title: CREDIT LYONNAIS CAYMAN ISLAND BRANCH By ________________________________________ Authorized Signature CREDIT SUISSE By ________________________________________ Title: By ________________________________________ Title: THE SUMITOMO BANK, LIMITED By ________________________________________ Title: 6 WACHOVIA BANK OF GEORGIA, N.A. By ________________________________________ Title: STATE STREET BANK AND TRUST COMPANY By ________________________________________ Title: THE BANK OF NEW YORK By ________________________________________ Title: THE BANK OF NOVA SCOTIA By ________________________________________ Title: THE CHASE MANHATTAN BANK, N.A. By ________________________________________ Title: 7 TRUST COMPANY BANK OF ATLANTA By ________________________________________ Title: BANK OF HAWAII By ________________________________________ Title: BANKERS TRUST COMPANY By ________________________________________ Title: BARNETT BANK OF CENTRAL FLORIDA, N.A. By ________________________________________ Title: THE FIRST NATIONAL BANK OF CHICAGO By ________________________________________ Title: 8 UNITED STATES NATIONAL BANK OF OREGON By ________________________________________ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By ________________________________________ Title: 9 CONFORMED COPY AMENDMENT NO. 1 TO CREDIT AGREEMENT AMENDMENT dated as of May 1, 1994 among JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and JOHN HANCOCK CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. WITNESSETH: WHEREAS, the parties hereto have heretofore entered into the Credit Agreement dated as of December 13, 1991 (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement to, inter alia, extend the Termination Date. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise ----------------------- specifically defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement or herein shall from and after the date hereof refer to the Agreement as amended hereby. SECTION 2. Amendment of Definitions in Section 1.01 of the ----------------------------------------------- Agreement. (a) The following definitions contained in Section 1.01 of the - --------- Agreement shall be amended in their entirety to read as follows: "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages of Amendment No. 1, as such amount may be reduced from time to time pursuant to Section 2.09 or terminated pursuant to Section 2.01 or 2.09. "Level I Rating" means, with respect to the rating of commercial paper notes by S&P or Moody's, Al+ in the case of S&P and P1 in the case of Moody's. "Level I Status" exists at any date if, on such date, the Company's unsecured commercial paper notes that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such commercial paper notes that are rated by S&P and Moody's, JHCC's unsecured commercial paper notes that do not have the benefit of credit enhancement from any third party other than the Company) are rated the Level I Rating by S&P and Moody's. "Level II Status" exists at any date if, on such date, Level I Status does not exist and the Company's unsecured commercial paper notes that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such commercial paper notes that are rated by S&P and Moody's, JHCC's unsecured commercial paper notes that do not have the benefit of credit enhancement from any third party other than the Company) are rated the Level II Rating by S&P and Moody's. "Management Surplus" means, at any date, the sum at such date, without duplication, of (a) surplus of the Company and (b) AVR of the Company and any other reserve established and maintained by the Company with respect to its invested assets, either voluntarily or pursuant to requirements of applicable law, the NAIC, the Insurance Department of the Commonwealth of Massachusetts or any other state or federal regulatory authority having jurisdiction over the Company, in addition to or in substitution for or replacement of AVR (other than an interest maintenance reserve or other similar reserve). "Termination Date" means the Quarterly Date falling in March 1997. (b) The following definitions contained in Section 1.01 of the Agreement are hereby deleted: "Lead Managers", "MRVR" and "MSVR". (c) The following definitions shall be inserted in alphabetical order in Section 1.01 of the Agreement: "Amendment No. 1" means Amendment No. 1 dated as of May 1, 1994 among the Borrowers, the Banks listed on the signature pages thereof and the Agent. "AVR" means the Asset Valuation Reserve established and required to be maintained by the Company pursuant to, and as described in, the Purposes 2 and Procedures of the Securities Valuation Office of the NAIC, as such statement is amended from time to time. "Level II Rating" means, with respect to the rating of commercial paper notes by S&P and Moody's, Al (or higher) in the case of S&P and P1 in the case of Moody's. "Level III Status" exists on any date on which neither Level I Status nor Level II Status exists. SECTION 3. Amendment of Section 2.07 of the Agreement. Section ------------------------------------------ 2.07 of the Agreement shall be amended by deleting the definitions of "CD Margin" contained in subsection (b) thereof and "Euro--Dollar Margin" contained in subsection (c) thereof and inserting the following definitions in lieu thereof: "CD Margin" means: (i) for any day on which Level I Status exists, .3250 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .4000 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (ii) for any day on which Level II Status exists, .3500 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .4750 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; and (iii) for any day on which Level III Status exists, .4250 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .5500 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments. "Euro-Dollar Margin" means: (i) for any day on which Level I Status exists, .2000 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .2750 3 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; (ii) for any day on which Level II Status exists, .2250 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .3500 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; and (iii) for any day on which Level III Status exists, .3000 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% of the Commitments and .4250 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments. SECTION 4. Amendment of Section 2.08 of the Agreement. Section ------------------------------------------ 2.08 of the Agreement shall be amended by deleting it in its entirety and inserting the following in lieu thereof: SECTION 2.08. Facility Fee. The Company shall pay to the ------------ Agent for the account of the Banks ratably a facility fee at the rate of (i) for any day on which Level I Status exists, .1000 of 1% per annum, (ii) for any day on which Level II Status exists, .1250 of 1% per annum and (iii) for any day on which Level III Status exists, .1500 of 1% per annum. Such facility fee shall accrue from and including the Signing Date to but excluding the Termination Date (or, if later, the date the Loans shall be repaid in their entirety), on the daily average of the greater of (x) the aggregate of the Commitments (whether used or unused) and (y) the aggregate outstanding principal amount of the Loans; provided, however, that the provisions of Section 2.08 of the -------- ------- Agreement (as in effect prior to Amendment No. 1) shall apply to and including the effective date of Amendment No. 1. Accrued fees under this Section shall be payable quarterly in arrears on each Quarterly Date and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 5. Amendment of Section 4.04 of the Agreement. ------------------------------------------ Subsections (a) (i) and (ii) and (b) and (c) and (f) of Section 4.04 of the Agreement shall be amended by deleting the references therein to "1990" and inserting 4 references to "1993" in lieu thereof. Such subsection (f) shall be further amended by redesignating it as subsection (d) and deleting the reference to "Effective Date" therein and inserting in lieu thereof a reference to "the effective date of Amendment No. 1." Subsections (d) and (e) of Section 4.04 of the Agreement shall be deleted. SECTION 6. Amendment of Section 4.10 of the Agreement. Section ------------------------------------------ 4.10 of the Agreement shall be amended by (i) adding the phrase "and as of the date of Amendment No. 1" after the reference to the defined term "Effective Date" the first time it appears in the last sentence of Section 4.10 and (ii) deleting the phrase "or at the meeting of the Company with the Banks held at the offices of the Company on October 31, 1991" each time it appears therein. SECTION 7. Amendment of Section 5.08 of the Agreement. The ------------------------------------------ reference to "$1,500,000,000" contained in Section 5.08 of the Agreement shall be deleted and a reference to "$2,000,000,000" shall be inserted in lieu thereof. SECTION 8. Support Agreement. The Borrowers jointly and ----------------- severally represent and warrant that the Support Agreement has not been amended or supplemented or otherwise revised or replaced since the version thereof dated as of October 15, 1984, a copy of which is attached as Exhibit K to the Agreement. SECTION 9. Representations and Warranties. The Borrowers ------------------------------ jointly and severally make as of the date hereof the representations and warranties contained in Article IV of the Agreement and further represents and warrants that as of the date hereof no Default has occurred and is continuing. SECTION 10. Amendments to Exhibits to the Agreement. The --------------------------------------- phrase ", as amended," shall be inserted after each reference to "December 13, 1991" contained in Exhibits B, C, D and I to the Agreement. The phrase "as amended," shall be inserted before the word "the" contained in the parenthetical phrase "(the "Credit Agreement")" contained in Exhibit J to the Agreement. SECTION 11. Fees. Fees accrued to but not including the ---- effective date hereof pursuant to subsection (b) of Section 2.08 shall be paid on such date by the Company to the Agent for the benefit of each Bank which, upon the effectiveness of this Amendment, no longer has any Commitment under the Agreement. 5 SECTION 12. Governing Law. This Amendment shall be governed ------------- by and construed in accordance with the laws of the State of New York. SECTION 13. Counterparts; Effectiveness. This Amendment may --------------------------- be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date on which the Agent shall have received (i) duly executed counterparts hereof signed by the Borrowers and the Banks and the Agent (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution and delivery of a counterpart hereof by such party) and (ii) an opinion of each of Edward J. Crane, Jr., Second Vice President and Counsel of the Company, and Cleary, Gottlieb, Steen & Hamilton, special counsel for the Borrowers, substantially in the forms of Exhibits A-1 and A-2 hereto, respectively, and covering such additional matters relating to the transactions contemplated by this Amendment as the Required Banks may reasonably request. SECTION 14. Certain Banks. The parties hereto understand and ------------- agree that the banks signing below the signature of the Agent will no longer be Banks after the effective date hereof. 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Henry J. Desautel --------------------------------- Title: Second Vice President By /s/ Julie H. Indge --------------------------------- Title: Assistant Treasurer JOHN HANCOCK CAPITAL CORPORATION By /s/ Karen E. Liukkonen --------------------------------- Title: President By /s/ George A. Cardarelli --------------------------------- Title: Assistant Treasurer 7 Commitments - ----------- $17,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Anne M. Kelly ---------------------------------- Title: Vice President $13,000,000 J.P. MORGAN DELAWARE By /s/ Philip S. Detjens ---------------------------------- Title: Vice President $30,000,000 CITICPORP USA, INC. By /s/ Steven Zwick ---------------------------------- Title: Vice President $30,000,000 COMERICA BANK By /s/ Jon A. Bird ---------------------------------- Title: Vice President $30,000,000 SHAWMUT BANK, N.A. By /s/ Robert W. McClelland ---------------------------------- Title: Vice President 8 Commitments - ----------- $30,000,00 THE BANK OF TOKYO TRUST COMPANY By /s/ Alta M. Fleming ---------------------------------- Title: Vice President $30,000,000 THE FIRST NATIONAL BANK OF BOSTON By /s/ Elizabeth A. Walker ---------------------------------- Title: Vice President $30,000,000 THE SANWA BANK, LIMITED By /s/ Marjorie F. Futornick ---------------------------------- Title: Vice President $20,000,000 CHEMICAL BANK (as successor in interest to MANUFACTURES HANOVER TRUST COMPANY) By /s/ Luisa Hunnewell ---------------------------------- Title: Vice President $20,000,000 DEN DANSKE BANK ATKIESELSKAB Cayman Islands Branch By /s/ Sonia Kataria ---------------------------------- Title: International Banking Officer By /s/ John O'Neill ---------------------------------- Title: Vice President 9 Commitments - ----------- $20,000,000 FIRST INTERSTATE BANK OF CALIFORNIA By /s/ Stephen F. Marshall --------------------------------- Title: Vice President By /s/ Jonathan S. David --------------------------------- Title: Assistant Vice President $20,000,000 FLEET BANK OF MASSACHUSETTS, N.A. By /s/ David Cox --------------------------------- Title: Vice President $20,000,000 ROYAL BANK OF CANADA By /s/ Gary R. Overton --------------------------------- Title: Senior Manager $20,000,000 THE FUJI BANK, LIMITED By /s/ Chiqusa Tada --------------------------------- Title: Vice President and Manager 10 Commitments - ----------- 20,000,000 THE NORTHERN TRUST COMPANY By /s/ Dean V. Banick ----------------------------------- Title: Vice President $15,000,000 BANK OF MONTREAL By /s/ Melanie Shorofsky ----------------------------------- Title: Director $15,000,000 CREDIT LYONNAIS NEW YORK BRANCH By /s/ Robert Ivosevich ----------------------------------- Title: Senior President CREDIT LYONNAIS CAYMAN ISLAND BRANCH By /s/ Robert Ivosevich ----------------------------------- Authorized Signature $15,000,000 CREDIT SUISSE By /s/ Juerg Johner ----------------------------------- Title: Associate By /s/ Demian M. Gage ----------------------------------- Title: Associate 11 Commitments - ----------- $ 15,000,000 THE SUMITOMO BANK, LIMITED By /s/ Y. Kawamura --------------------------------------------- Title: Joint General Manager $ 15,000,000 WACHOVIA BANK OF GEORGIA, N.A. By /s/ Linda M. Harris --------------------------------------------- Title: Senior Vice President $ 10,000,000 STATE STREET BANK AND TRUST COMPANY By /s/ Edward M. Anderson --------------------------------------------- Title: Vice President $ 10,000,000 THE BANK OF NEW YORK By /s/ Lizanne T. Eberle --------------------------------------------- Title: Vice President $ 10,000,000 THE BANK OF NOVA SCOTIA By /s/ Terry Pitcher --------------------------------------------- Title: Authorized Signatory 12 Commitments - ----------- $ 10,000,000 THE CHASE MANHATTAN BANK, N.A. By /s/ Candace Lau-Hansen --------------------------------------------- Title: Vice President $ 10,000,000 TRUST COMPANY BANK, ATLANTA By /s/ Allison L. Vella --------------------------------------------- Title: Vice President $ 5,000,000 BANK OF HAWAII By /s/ Scott G. Balke --------------------------------------------- Title: Vice President $ 5,000,000 BANKERS TRUST COMPANY By /s/ Vincent J. Abrizzini --------------------------------------------- Title: Managing Director $ 5,000,000 BARNETT BANK OF CENTRAL FLORIDA, N.A. By /s/ Marisa Carnevale-Henderson --------------------------------------------- Title: Assistant Vice President 13 Commitments - ----------- $ 5,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ Samuel W. Bridges III --------------------------------------------- Title: Vice President $ 5,000,000 UNITED STATES NATIONAL BANK OF OREGON By /s/ Steven T. Williams --------------------------------------------- Title: Vice President _________________ Total Commitments $500,000,000 ============ MORGAN, GUARANTY TRUST COMPANY OF NEW YORK, As Agent By /s/ Anne M. Kelly --------------------------------------------- Title: Vice President As of the date hereof the undersigned hereby agree to and accept the provisions of this Amendment No. 1 CAISSE NATIONALE DE CREDIT AGRICOLE By /s/ Richard Manix ---------------------------------- Title: First Vice President 14 CIBC INC. By /s/ Gail M. Golightly ---------------------------------- Title: Vice President DG BANK DEUTSCHE GENOSSENSCHAFTSBANK By /s/ Linda J. O'Connell ---------------------------------- Title: Vice President By /s/ Karen A. Brinkman ---------------------------------- Title: Vice President NATIONSBANK OF NROTH CAROLINA, N.A. By /s/ Frank Callison ---------------------------------- Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE By /s/ Lillian Tung Lum ---------------------------------- Title: Vice President By /s/ Boris A. Borozan ---------------------------------- Title: Vice President - Manager 15 EXHIBIT A-1 OPINION OF EDWARD J. CRANE, JR., SECOND VICE PRESIDENT AND COUNSEL OF THE COMPANY May __, 1994 The Banks and the Agent listed on the signature pages of the below-referenced Agreement c/o Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260 Re: John Hancock Mutual Life Insurance Company and John Hancock Capital Corporation Credit Agreement ------------------------------------------------- I have acted as counsel for John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts ("John Hancock"), and John Hancock Capital Corporation, a Delaware corporation and an indirect, wholly-owned subsidiary of John Hancock ("JHCC"), in connection with the negotiation, execution and delivery by John Hancock and JHCC of the Credit Agreement, dated as of December 13, 1991, among John Hancock, JHCC, the Banks listed on the signature pages of such Credit Agreement (the "Banks") and Morgan Guaranty Trust Company of New York, as Agent (the "Agent") and Amendment No. 1 thereto, dated as of May 1, 1994 ("Amendment No. 1"). The Credit Agreement as amended by Amendment No. 1 is referred to herein as the "Agreement". All terms capitalized herein which are not otherwise defined have the meanings attributed thereto in the Agreement. In so acting, I have reviewed, among other things, the Credit Agreement, Amendment No. 1, the Notes and the Support Agreement and such other documents as I have deemed necessary or appropriate as a basis for the opinions expressed below. In my examination I have assumed the genuineness of all signatures (other than signatures of officers of John Hancock and JHCC), the authenticity of all documents submitted to me as originals (other than the Credit Agreement, Amendment No. 1, the Support Agreement and the Notes), the conformity to original documents of all documents submitted to me as certified or photostatic copies, and the authenticity of the originals of such copies. I have also examined and relied upon the representations and warranties as to factual matters contained in and made pursuant to the Credit Agreement and Amendment No. 1 and the Support Agreement and I have examined and relied upon the originals or copies certified, or otherwise identified to my satisfaction, of such records, documents, certificates and other instruments, and I have made such other investigations, as in my judgment are necessary or appropriate to enable me to render the opinion below. Subject to the qualifications discussed below, I am of the following opinion: 1. John Hancock. John Hancock is a legal reserve mutual life insurance ------------ company duly organized in 1862 pursuant to the Special Act and is validly existing and in good standing under the laws of the Commonwealth of Massachusetts, and has all powers, and to my knowledge, all material governmental licenses, consents and approvals required to carry on its business as now conducted and to execute and deliver Amendment No. 1. 2. JHCC. JHCC is a corporation duly incorporated, validly existing and ---- in good standing under the laws of the State of Delaware, and has all corporate powers and, to my knowledge, all material governmental licenses, consents and approvals required to carry on its business as now conducted and to execute and deliver Amendment No. 1. 3. Amendment No. 1. Amendment No. 1 has been duly authorized, executed --------------- and delivered by both John Hancock and JHCC. 4. Ranking. (a) The obligations of John Hancock under the Agreement, the ------- John Hancock Notes and the Support Agreement will rank equally with other unsecured and unsubordinated obligations of John Hancock, subject to the requirements of section one hundred and eighty F of Chapter 175 of the Massachusetts General Laws, which section establishes priorities of distribution in any liquidation proceeding begun in the Commonwealth of Massachusetts against an insolvent Massachusetts insurer, and (b) the obligations of JHCC under the Agreement and the JHCC Notes will rank equally with 2 other unsecured and unsubordinated obligations of JHCC. 5. Support Agreement. The Support Agreement constitutes the legal, ----------------- valid and binding obligation of John Hancock and JHCC enforceable against John Hancock or JHCC, as the case may be, in accordance with its terms, and the provisions thereof which purport to create a direct right of the holders of any JHCC Notes to enforce John Hancock's obligations under the Support Agreement in the event of JHCC's failure to meet its obligations under the JHCC Notes are legally effective for such purpose. 6. Governmental Consents. No consent or action of, or filing with, any --------------------- governmental or public regulatory body or authority, including, without limitation, the Executive Office of Consumer Affairs and Business Regulation, Division of Insurance, of the Commonwealth of Massachusetts, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance by John Hancock or JHCC of Amendment No. 1 or the performance by John Hancock and JHCC of the Agreement or the Support Agreement or their respective obligations thereunder. 7. Conflict with Instruments, Etc. Except as set forth in the following ------------------------------- paragraph, neither the execution and delivery by John Hancock and JHCC of Amendment No. 1 nor the performance by John Hancock and JHCC of the Agreement, the Notes or the Support Agreement, nor the fulfillment of, nor compliance with, the terms and provisions thereof, will violate any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality or result in any breach of any of the terms, conditions or provisions of, or constitute a default under, or result in the creation or imposition of, any mortgage, lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of John Hancock or JHCC pursuant to the terms of, the Special Act, the Certificate of Incorporation of JHCC, or the By- Laws of John Hancock or JHCC, or any mortgage, indenture, agreement or instrument of which I am aware and to which John Hancock or JHCC is a party or by which it is bound. Because of the holding of the United States Supreme Court in John ---- Hancock Mutual Life Insurance Company ------------------------------------- 3 v. Harris Trust, it is possible that the extension of credit by the --------------- Banks to John Hancock could be found to result in a prohibited transaction in violation of Section 406(a) (1) (B) of ERISA. However, in light of the Department of Labor's interpretive bulletin, I.B. 75- 2, which states that the assets of an insurance company general account are not plan assets for purposes of the prohibited transaction provisions of ERISA, if the issue were properly presented to a court of competent jurisdiction, such court should hold, basing its finding on I.B. 75-2, that the extension of credit by the Banks to John Hancock would not constitute a violation of the prohibited transaction provisions of ERISA. 8 Litigation. To my knowledge, there is no action, suit or proceeding ---------- pending or threatened against or affecting either Borrower before any court or arbitrator or any governmental body, agency or official (i) which, if adversely determined, would have a Material Adverse Effect or a material adverse effect on the ability of either Borrower to perform its respective obligations under the Support Agreement or (ii) which in any manner draws into question the validity or enforceability of Amendment No. 1 or the Agreement, the support Agreement or any of the Notes. 9. Not an Investment Company. John Hancock is not an investment company ------------------------- within the meaning of the Investment Company Act of 1940, as amended. JHCC has been exempted from all provisions of the Investment Company Act of 1940, as amended, including, without limitation, those relating to the offering and sale of securities by JHCC, by order of the Securities and Exchange Commission dated June 26, 1984 issued pursuant to Section 6(c) of such Act, and to my knowledge such order remains in full force and effect and has not in any way been modified or amended. The opinions expressed above are subject to the following qualifications: (a) I express no opinion as to any laws other than the laws of the Commonwealth of Massachusetts, the Federal laws of the United States of America and, to the extent set forth in the foregoing opinions with respect to JHCC, the corporate laws of the State of Delaware; 4 (b) I have assumed the requisite corporate power and authority on the part of the Agent and the Banks to enter into Amendment No. 1 and to make Loans under the Agreement and the due authorization, execution and delivery of Amendment No. 1 by the Agent and the Banks; (c) I express no opinion as to the effect on the opinions herein stated of (i) the compliance or noncompliance by the Agent or any Bank with any state, Federal or other laws or regulations applicable to it or (ii) the legal or regulatory status or the nature of the business of the Agent or any Bank; and (d) The enforceability of the Support Agreement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law), and with respect to the enforceability of the Support Agreement against John Hancock, such enforceability may be further limited by the requirements of section one hundred and eighty F of Chapter 175 of the Massachusetts General Laws, which section establishes priorities of distribution in any liquidation proceeding begun in the Commonwealth of Massachusetts against an insolvent Massachusetts insurer. I am delivering this opinion to you for your benefit pursuant to Section 13 of Amendment No. 1. Cleary, Gottlieb, Steen & Hamilton and Davis Polk & Wardwell may rely on this opinion as if it were addressed to them. No person other than you, Cleary, Gottlieb, Steen & Hamilton and Davis Polk & Wardwell is entitled to rely on this opinion without my prior written consent. This opinion does not address facts and circumstances or changes in law arising after the date hereof and I assume no responsibility to inform you of any such changes which may come to my attention. Very truly yours, Edward J. Crane, Jr. Second Vice President and Counsel 5 EXHIBIT A-2 OPINION OF CLEARY, GOTTLIEB, STEEN & HAMILTON, SPECIAL COUNSEL FOR THE BORROWERS --------------------------------- May __, 1994 The Banks and the Agent listed on the signature pages of the below-referred Agreement c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260-0060 Ladies and Gentlemen: We have acted as special New York counsel to John Hancock Mutual Life Insurance Company (the "Company") and John Hancock Capital Corporation ("JHCC") in connection with the Credit Agreement, dated as of December 13, 1991 (the "Credit Agreement"), among the Company, JHCC and you and Amendment No. 1 thereto, dated as of May 1, 1994 ("Amendment No. 1"), and are furnishing this opinion pursuant to Section 13 of Amendment No. 1. The Credit Agreement as amended by Amendment No. 1 is referred to herein as the "Agreement". Capitalized terms used and not defined herein have the meanings given them in the Agreement. In arriving at the opinions expressed below, we have examined and relied on (i) a counterpart original of each of the Credit Agreement and Amendment No. 1, executed by the Borrowers, (ii) originals of each of the Notes issued on December 13, 1991, executed by the Company or JHCC, as the case may be, and (iii) the documents delivered to you by the Borrowers at the closings on December 13, 1991 and today pursuant to Section 3.01 of the Credit Agreement and Section 13 of Amendment No. 1, and we have made such investigations of law as we have deemed appropriate as a basis for the opinions expressed below. In rendering the opinions expressed below, we have assumed and have not verified that the signatures on all documents that we have examined are genuine. We express no opinion other than as to the law of the State of New York. Insofar as this opinion involves matters arising under the law of the State of Delaware or the Commonwealth of Massachusetts, we have relied on the opinions of Edward J. Crane, Jr., Esq., Second Vice President and Counsel of the Company, delivered to you on December 13, 1991 and on the date hereof. Based on the foregoing, it is our opinion that: 1. Assuming due authorization, execution and delivery of the Credit Agreement and Amendment No. 1 by you, each of Amendment No. 1 and the Agreement is a legal, valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its respective terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). 2. Each Note dated December 13, 1991 is a legal, valid and binding obligation of the Borrower executing and delivering the same, enforceable against such Borrower in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). 3. The execution and delivery by the Borrowers of Amendment No. 1 and the performance by the Borrowers of the Agreement, the Support Agreement and the Notes do not require the consent, approval, authorization, registration or qualification of or with any governmental authority of the State of New York. We are furnishing this opinion letter to the Banks and the Agent solely for their benefit. This opinion letter is not to be used, circulated, quoted or otherwise referred to for any other purpose. Very truly yours, CLEARY, GOTTLIEB, STEEN & HAMILTON By: ______________________________ , a Partner 2 (CONFORMED COPY) $1,000,000,000 CREDIT AGREEMENT dated as of December 13, 1991 among John Hancock Mutual Life Insurance Company, John Hancock Capital Corporation, The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Agent TABLE OF CONTENTS*
Page ---- ARTICLE I DEFINITIONS SECTION 1.01. Definitions..................................................................... 1 1.02. Accounting Terms and Determinations............................................. 17 1.03. Types of Borrowings............................................................. 18 ARTICLE II THE CREDITS 2.01. Commitments to Lend............................................................. 18 2.02. Notice of Committed Borrowing................................................... 18 2.03. Money Market Borrowings......................................................... 19 2.04. Notice to Banks; Funding of Loans............................................... 24 2.05. Notes........................................................................... 24 2.06. Maturity of Loans............................................................... 25 2.07. Interest Rates.................................................................. 25 2.08. Fees............................................................................ 30 2.09. Optional Termination or Reduction of Commitments................................ 31 2.10. Method of Electing Interest Rates............................................... 31 2.11. Optional Prepayments............................................................ 33 2.12. General Provisions as to Payments............................................... 33 2.13. Funding Losses.................................................................. 34 2.14. Computation of Interest and Fees................................................ 35 2.15. Withholding Tax Exemption....................................................... 35 2.16. Regulation D Compensation....................................................... 36 ARTICLE III CONDITIONS SECTION 3.01. Effectiveness................................................................... 37 3.02. Borrowings...................................................................... 38
_____________ * The Table of Contents is not a part of this Agreement. -i-
Page ---- ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Existence and Power............................................................. 39 4.02. Authorization; No Contravention................................................. 39 4.03. Binding Effect.................................................................. 40 4.04. Financial Information........................................................... 40 4.05. Litigation...................................................................... 42 4.06. Compliance with ERISA........................................................... 42 4.07. Compliance with Laws............................................................ 42 4.08. Taxes........................................................................... 43 4.09. Not an Investment Company....................................................... 43 4.10. Full Disclosure................................................................. 43 ARTICLE V COVENANTS SECTION 5.01. Information..................................................................... 44 5.02. Maintenance of Property; Insurance.............................................. 48 5.03. Conduct of Business and Maintenance of Existence................................ 48 5.04. Compliance with Laws............................................................ 49 5.05. Compliance with ERISA........................................................... 49 5.06. Taxes........................................................................... 49 5.07. Subsidiary Debt................................................................. 49 5.08. Management Surplus.............................................................. 50 5.09. Capitalization Ratio............................................................ 50 5.10. Company Negative Pledge......................................................... 50 5.11. JHCC Negative Pledge............................................................ 51 5.12. Consolidations, Mergers and Sales of Assets..................................... 52 5.13. Support Agreement; Company Assumption Agreement; Guarantee Agreement............ 52 5.14. Use of Proceeds................................................................. 53 ARTICLE VI DEFAULTS SECTION 6.01. Events of Default............................................................... 54 6.02. Notice of Default............................................................... 58
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Page ---- ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization................................................... 58 7.02. Agent and Affiliates............................................................ 58 7.03. Action by Agent................................................................. 58 7.04. Consultation with Experts....................................................... 58 7.05. Liability of Agent.............................................................. 59 7.06. Indemnificatio.................................................................. 59 7.07. Credit Decision................................................................. 59 7.08. Successor Agent................................................................. 60 7.09. Agent's Fee..................................................................... 60 ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair........................ 60 8.02. Illegality...................................................................... 61 8.03. Increased Cost and Reduced Return............................................... 62 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loan........................ 64 8.05. Substitution of Bank............................................................ 65 ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices......................................................................... 65 9.02. No Waivers...................................................................... 66 9.03. Expenses; Documentary Taxes; Indemnification.................................... 66 9.04. Sharing of Set-Offs............................................................. 67 9.05. Amendments and Waivers.......................................................... 67 9.06. Successors and Assigns.......................................................... 68 9.07. Collateral...................................................................... 69 9.08. Waiver of Certain Claims........................................................ 70 9.09. Termination of JHCC as a Borrower............................................... 70 9.10. Governing Law; Submission to Jurisdiction....................................... 70 9.11. Counterparts; Integration....................................................... 71 9.12. Waiver of Jury Trial............................................................ 71
-iii- Exhibit A - Note Exhibit B - Money Market Quote Request Exhibit C - Invitation for Money Market Quotes Exhibit D - Money Market Quote Exhibit E - Company Assumption Agreement Exhibit F - Guarantee Agreement Exhibit G-1 - Opinion of the Second Vice President and Counsel of the Company Exhibit G-2 - Opinion of Special Counsel for the Borrowers Exhibit H - Opinion of Special Counsel for the Agent Exhibit I - Assignment and Assumption Agreement Exhibit J - JHCC Termination Notice Exhibit K - Support Agreement -iv- CREDIT AGREEMENT AGREEMENT dated as of December 13, 1991 among JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, JOHN HANCOCK CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. W I T N E S S E T H: - - - - - - - - - - WHEREAS, each Bank (as hereinafter defined), in entering into this Agreement, expressly relies on the Support Agreement (as hereinafter defined) pursuant to Section (6) thereof; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have ----------- the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "Adjusted CD Rate" has the meaning set forth in Section 2.07(b). "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Company) duly completed by such Bank. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks hereunder, and its successors in such capacity. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.07(b). "Assignee" has the meaning set forth in Section 9.06(c). "Authorized Officers" means, with respect to either Borrower, individuals described as such in the most recent certificate with respect thereto delivered to the Agent in accordance with Section 9.01 by the Secretary or an Assistant Secretary of such Borrower; provided that the Agent may -------- conclusively rely on any such certificate of a Borrower as to the Authorized Officers of such Borrower, whether or not, at any applicable time, any individual identified as an Authorized Officer of such Borrower in such certificate is, at such time, an officer of such Borrower, until and unless the Agent shall have received a new certificate from such Borrower which alters or supersedes such previous certificate. "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means (i) a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or the provisions of Article VIII or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means the Company or JHCC, as the context may require, and "Borrowers" means both of the foregoing; provided that if JHCC shall have been -------- terminated as a Borrower hereunder pursuant to Section 9.09, neither the term -2- "Borrower" nor the term "Borrowers" shall thereafter include or refer to JHCC. "Borrowing" has the meaning set forth in Section 1.03. "CD Base Rate" has the meaning set forth in Section 2.07(b). "CD Loan" means (i) a Committed Loan which bears interest at a CD Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or (ii) an overdue amount which was a CD Loan immediately before it became overdue. "CD Margin" has the meaning set forth in Section 2.07(b). "CD Rate" means a rate of interest determined pursuant to Section 2.07(b) on the basis of an Adjusted CD Rate. "CD Reference Banks" means NCNB National Bank of North Carolina, Credit Lyonnais and Morgan Guaranty Trust Company of New York. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.09 or terminated pursuant to Section 2.01 or 2.09. "Committed Loan" means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or - -------- subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Company" means John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts, and its permitted successors. -3- "Company Assumption Agreement" means an agreement entered into by the Company for the benefit of the Agent, the Banks and the holders from time to time of the Notes issued by JHCC, substantially in the form of Exhibit E hereto. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all obligations of such Person to purchase securities (or other property) which arise out of or in connection with the sale of the same or substantially similar securities (or other property), (vi) all non-contingent obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vii) all Debt of others secured by a Lien on the assets generally of such Person, whether or not such Debt is assumed by such Person, (viii) all Debt of others Guaranteed by such Person, and (ix) all redeemable preferred stock issued by such Person other than any such preferred stock redeemable at the sole option of such Person; provided, that the term Debt shall -------- not include (x) obligations of John Hancock Clearing Corporation, Tucker Anthony Incorporated or Sutro & Co., Incorporated, entered into in the ordinary course of their respective businesses, to purchase securities which arise out of or in connection with the sale of the same or substantially similar securities, (y) obligations recourse for the payment of which is limited to specified assets of such Person and (z) obligations of a Person which is an insurance company (1) which arise in connection with policies or contracts of insurance, funding agreements and other similar contracts entered into in the ordinary conduct of such Person's insurance business or (2) to the extent that recourse for the payment of such obligations is limited to assets held in separate accounts of such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Designated Deposit Account" means (i) in the case of the Company, the deposit account number 02693508 maintained with the Agent at the address of the Agent specified -4- in or pursuant to Section 9.01 or such other deposit account maintained with the Agent at such address as the Company shall specify in writing to the Agent and (ii) in the case of JHCC, the deposit account number 001-36-734 maintained with the Agent at such address or such other deposit account maintained with the Agent at such address as JHCC shall specify in writing to the Agent. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Company and the Agent; provided that any Bank may so designate -------- separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.07(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the clean-up or other remediation thereof. -5- "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Company and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company, are treated as a single employer under Section 414 of the Internal Revenue Code, but only to the extent that either Borrower could have liability under ERISA with respect to the actions or inactions of such members. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro- Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Company and the Agent. "Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or (ii) an overdue amount which was a Euro- Dollar Loan immediately before it became overdue. "Euro-Dollar Margin" has the meaning set forth in Section 2.07(c). "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.07(c) on the basis of a London Interbank Offered Rate. "Euro-Dollar Reference Banks" means the principal London offices of NCNB National Bank of North Carolina, Credit Lyonnais and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal -6- Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.01. "Excluded Subsidiary" means (i) a limited partnership of which any Subsidiary serves as general partner or a trust over which any Subsidiary exercises control, which limited partnership or trust was formed primarily for the purpose of making debt or equity investments in other entities and in which entities other than the Company and the Subsidiaries own, following the close of the syndication period with respect thereto, 20% or more of the equity or beneficial interest, as the case may be, and (ii) any Subsidiary the beneficial or equity interest in which is directly or indirectly acquired by the Company in connection with workouts, either in a bankruptcy proceeding or otherwise, of investments previously made by the Company or any Subsidiary. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic Business -------- Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted by two or more Federal funds brokers to Morgan Guaranty Trust Company of New York on such day on such transactions as determined in good faith by the Agent. "Fixed Rate Loans" means CD Loans, Euro-Dollar Loans or Money Market Loans (excluding CD Loans bearing interest at the Base Rate pursuant to the first sentence of Section 2.07(b) and Money Market LIBOR Loans bearing interest -7- at the Prime Rate pursuant to Section 8.01(a)) or any combination of the foregoing. "Group of Loans" means at any time a group of Loans made to a Borrower consisting of (i) all Committed Loans made to such Borrower which are Base Rate Loans, or CD Loans bearing interest at the Base Rate pursuant to the first sentence of Section 2.07(b), at such time or (ii) all Committed Loans made to such Borrower which are Fixed Rate Loans having the same Interest Period and bearing interest at the same type of interest rate at such time; provided that, -------- if Committed Loans of any particular Bank made to such Borrower are converted to or made as Base Rate Loans pursuant to Section 8.02 or 8.04, such Loans shall be included in the same Group or Groups of Loans from time to time as they would have been in if they had not been so converted or made. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include -------- endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantee Agreement" means an agreement entered into by the Company for the benefit of the Agent, the Banks and the holders from time to time of the Notes issued by JHCC, substantially in the form of Exhibit F hereto. "Interest Period" means: (1) with respect to each Euro-Dollar Loan, a period commencing on the date of Borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the applicable Borrower may elect in the applicable Notice; provided that: -------- -8- (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each CD Loan, the period commencing on the date of Borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending 30, 60, 90 or 180 days thereafter, as the applicable Borrower may elect in the applicable Notice; provided that: -------- (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (3) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter as the applicable Borrower may elect in accordance with Section 2.03; provided -------- that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which -9- case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; and (4) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than 14 days) as the applicable Borrower may elect in accordance with Section 2.03; provided that: -------- (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue code of 1986, as amended, or any successor statute. "Invitation for Money Market Quotes" has the meaning set forth in Section 2.03(c). "JHCC" means John Hancock Capital Corporation, a Delaware corporation, and its permitted successors. "JHSI" means John Hancock Subsidiaries, Inc., a Delaware corporation, and its successors. "Lead Managers" means Morgan Guaranty Trust Company of New York / J.P. Morgan Delaware, The First National Bank of Boston, Credit Lyonnais, First Interstate Bank of California, Manufacturers Hanover Trust Company and NCNB National Bank of North Carolina. -10- "Level I Rating" means, with respect to the rating of commercial paper notes by any rating agency, A1, in the case of S&P, P1, in the case of Moody's, and an equivalent rating, in the case of any other nationally recognized rating agency. "Level I Status" exists at any date (i) if, on such date, the Company's unsecured commercial paper notes that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such commercial paper notes that are rated by at least two nationally recognized rating agencies, JHCC's unsecured commercial paper notes that do not have the benefit of credit enhancement from any third party other than the Company) are rated by only two nationally recognized rating agencies, such commercial paper notes are rated at least the Level I Rating by both such rating agencies, or (ii) if, on such date, the Company's unsecured commercial paper notes that do not have the benefit of credit enhancement from any third party (or if, on such date, the Company has no such commercial paper notes that are rated by at least two nationally recognized rating agencies, JHCC's unsecured commercial paper notes that do not have the benefit of credit enhancement from any third party other than the Company) are rated by more than two nationally recognized rating agencies, such commercial paper notes are rated at least the Level I Rating by at least a majority of such rating agencies. "Level II Status" exists at any date on which Level I Status does not exist. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Company or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Domestic Loan, a Euro-Dollar Loan or a Money Market Loan, and "Loans" means Domestic Loans, Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. -11- "London Interbank Offered Rate" has the meaning set forth in Section 2.07(c). "Management Surplus" means, at any date, the sum, at such date, without duplication, of (a) surplus of the Company and (b) (i) MRVR of the Company, (ii) MSVR of the Company and (iii) any other reserve established and maintained by the Company with respect to its invested assets, either voluntarily or pursuant to requirements of applicable law, the NAIC, the Insurance Department of the Commonwealth of Massachusetts or any other state or federal regulatory authority having jurisdiction over the Company, in addition to or in substitution for or replacement of either or both of MRVR and MSVR. "Material Adverse Effect" means a material adverse effect on the ability of either Borrower to perform its obligations under this Agreement or the Notes. "Material Debt" means (i) for purposes of Section 6.01(e), Debt (other than the Notes or Permitted Collateralization Obligations) of one or both Borrowers, arising in one or more related or unrelated transactions, in an aggregate principal amount in excess of (A) for purposes of subsections 6.01(e) (i) (A) and 6.01(e) (ii), $50,000,000 and (B) for purposes of subsection 6.01(e) (i) (B), $75,000,000 and (ii) for purposes of Section 6.01(f), Debt (other than Permitted Collateralization Obligations) of one or more Subsidiaries of the Company each of which is not a Borrower, arising in one or more related or unrelated transactions, in an aggregate principal amount in excess of $75,000,000; provided that for purposes of this definition, Debt of the Company -------- or any Subsidiary referred to in the exception contained in the definition of "Permitted Collateralization Obligation" shall, at any date, be deemed to be in an amount equal to the amount of such Debt then due. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $75,000,000. "Material Subsidiary" means, at any date, (i) unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, JHCC and (ii) any Subsidiary the principal activities of which consist of activities other than the ownership or management of, or investment in, other Subsidiaries and the assets of which (other than, in the case of any Subsidiary that is an insurance company, assets held in separate accounts of such -12- Subsidiary) as of such date exceed 15% of the Company's assets (other than assets held in separate accounts of the Company), as reflected on the most recent statutory financial statements of the Company delivered or required to be delivered to the Banks pursuant to Section 4.04(a)(i) or 5.01(a) (i) "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Company and the Agent; provided that any Bank may from time to time by notice to the -------- Company and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Prime Rate pursuant to Section 8.01(a)) "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "Money Market Quote Request" has the meaning set forth in Section 2.03(b). "Moody's" means Moody's Investors Service, Inc., and its successors. "MRVR" means the voluntary Mortgage Loan and Real Estate Valuation Reserve established and maintained by the Company, determined on a basis comparable to the basis upon -13- which the Company determined the amount appearing on the overflow page for write-ins, page 3 of page 48, item 2510, in the Annual Statement of the Company as of December 31, 1990, as filed with the Insurance Department of the Commonwealth of Massachusetts. "MSVR" means the Mandatory Securities Valuation Reserve established and required to be maintained by the Company pursuant to, and as described in, the Purposes and Procedures of the Securities Valuation Office of the NAIC, as such statement is amended from time to time by the NAIC. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a) (3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NAIC" means the National Association of Insurance Commissioners or any entity succeeding to its function of advising insurance companies as to the values to be assigned to assets of such .insurance companies included within one or more categories of such assets. "Notes" means promissory notes of either or both Borrowers, substantially in the form of Exhibit A hereto, evidencing the obligations of such Borrower or Borrowers to repay the Loans made to it or them, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "Notice of Interest Rate Election" has the meaning set forth in Section 2.10. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b) "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. -14- "Permitted Collateralization Assets" means assets pledged to secure Permitted Collateralization Obligations. "Permitted Collateralization Obligation" means any obligation relating to REMICs, pass-through obligations, collateralized mortgage obligations, collateralized bond obligations or similar instruments, except an obligation of the Company or any Subsidiary (excluding any Subsidiary (other than JHCC, unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09) that is the issuer of the REMIC, pass-through obligation, collateralized mortgage obligation, collateralized bond obligation or similar instrument) to the extent that such obligation requires a cash payment by the Company or such Subsidiary, recourse for the payment of which is not limited to specific assets of the Company or such Subsidiary (excluding any obligation of the Company or such Subsidiary (i) to make advances in connection with the servicing of such REMIC, pass-through obligation, collateralized mortgage obligation, collateralized bond obligation or similar instrument or (ii) to repurchase collateral). "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Quarterly Date" means the last Euro-Dollar Business Day of each March, June, September and December. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. -15- "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "S&P" means Standard & Poor's Corporation, and its successors. "Senior Financial Officer" means (i) with respect to the Company, the Chief Financial Officer, the Controller, the Treasurer or the Second Vice President, Treasury Operations, of the Company and (ii) with respect to JHCC, the President, any Vice President or the Treasurer of JHCC. "Signing Date" means the date upon which the Agent shall have received counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of the execution and delivery of a counterpart hereof by such party). "Special Act" has the meaning set forth in Section 4.01. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "Support Agreement" means the Support Agreement dated as of October 15, 1984 between the Company and JHCC, a copy of which is attached hereto as Exhibit K, as the same may, subject to Section 5.13, be amended from time to time. "Tax Group" means, for any applicable period, both Borrowers and all corporations (within the meaning of the Internal Revenue Code) for the payment of the federal income taxes of which either Borrower is jointly and severally liable under the Internal Revenue Code for such period. "Termination Date" means the Quarterly Date falling in December 1994. -16- "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made and all financial statements required to be delivered hereunder shall be prepared in accordance with, in the case of the Company or any of its insurance Subsidiaries, accounting practices prescribed or permitted by insurance regulatory authorities (it being understood that as of the date hereof such accounting practices are considered by the Company's independent public accountants to be generally accepted accounting principles) and, in the case of each non-insurance Subsidiary of the Company, generally accepted accounting principles, in each case as in effect from time to time, applied on a basis consistent (except, in the case of the Company or any of its insurance Subsidiaries, for changes required by insurance regulatory authorities and, in the case of each non-insurance Subsidiary of the Company, for changes concurred in by the Company's independent public accountants) with the most recent comparable financial statements thereof delivered to the Banks pursuant to Section 4.04(a) or (b) or Section 5.01(a) or (b); provided that, if -------- the Company notifies the Agent that it wishes to amend any covenant in Article V to eliminate the effect of any change in, in the case of the Company or any of its insurance Subsidiaries, accounting practices prescribed or permitted by insurance regulatory authorities or, in the case of any non-insurance Subsidiary of the Company, generally accepted accounting principles, on the operation of such covenant (or if the Agent notifies the Company that the Required Banks wish to amend Article V for such purpose), then the Borrowers' compliance with such covenant shall be determined on the basis of, in the case of the Company and any of its insurance Subsidiaries, accounting practices prescribed or permitted by insurance regulatory authorities and, in the case of any non-insurance Subsidiary of the Company, generally accepted accounting principles, in each case in effect immediately before the relevant change in such accounting practices or accounting principles, as the case -17- may be, became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. SECTION 1.03. Types of Borrowings. The term "Borrowing" denotes the ------------------- aggregation of Loans of one or more Banks to be made to a single Borrower pursuant to Article II on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" ---- is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a ---- "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend. Each Bank severally agrees, on ------------------- the terms and conditions set forth in this Agreement, to make loans to either Borrower pursuant to this Section from time to time before the Termination Date in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding to both Borrowers shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $25,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(b)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, either Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time before the Termination Date under this Section. The Commitments shall terminate at the close of business on the Termination Date. SECTION 2.02. Notice of Committed Borrowing. The applicable Borrower ----------------------------- shall give the Agent notice executed on behalf of such Borrower by its Authorized Officers (a "Notice of Committed Borrowing"), not later than 10:00 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, -18- (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate, at a CD Rate or at a Euro-Dollar Rate, and (d) in the case of a Fixed Rate Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Money Market Borrowings. ----------------------- (a) The Money Market Option. In addition to Committed Borrowings ----------------------- pursuant to Section 2.01, either Borrower may, as set forth in this Section, request the Banks before the Termination Date to make offers to make Money Market Loans to such Borrower. The Banks may, but shall have no obligation to, make such offers and such Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When a Borrower wishes to request -------------------------- offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a request executed on behalf of such Borrower by its Authorized Officers (a "Money Market Quote Request") substantially in the form of Exhibit B hereto so as to be received no later than 10:00 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Company and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: -19- (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $25,000,000 or a larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(b)), (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. A Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Company and the Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a ---------------------------------- Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an invitation for Money Market Quotes (an "Invitation for Money Market Quotes") substantially in the form of Exhibit C hereto, which shall constitute an invitation by the requesting Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may ---------------------------------------------- submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:00 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Company -20- and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any affiliate of - -------- the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the requesting Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the requesting Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000 of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000 of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. -21- A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d) (ii); (B) contains qualifying, conditional or similar language (other than as contemplated in subclause (d) (ii) (B) (z)); (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d) (i). (e) Notice to Borrower. The Agent shall promptly notify the ------------------ requesting Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent's notice to the requesting Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:00 --------------------------------- A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Company and the Agent shall have mutually agreed and shall have notified to -22- the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the requesting Borrower shall notify the Agent in writing executed on behalf of such Borrower by its Authorized Officers of its acceptance or non- acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The requesting Borrower may accept any Money Market Quote in whole or in part; provided that: -------- (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $25,000,000 or a larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(b)), (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the requesting Borrower may not accept any offer that is described in subsection (d) (iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Agent. If offers are made by two or more Banks ------------------- with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. -23- SECTION 2.04. Notice to Banks; Funding of Loans. --------------------------------- (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 2:00 P.M. (New York City time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will deposit the funds so received from the Banks on the day received in the applicable Borrower's Designated Deposit Account. (c) Unless the Agent shall have received notice from a Bank prior to the date of (or, in the case of a Base Rate Borrowing, prior to 11:00 A.M. (New York City time) on the date of) any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the applicable Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to such Borrower until the date such amount is repaid to the Agent, at (i) in the case of such Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. Notes. (a) The Loans of each Bank to each Borrower shall ----- be evidenced by a single Note of such Borrower payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the -24- aggregate unpaid principal amount of such Bank's Loans to such Borrower. (b) Each Bank may, by notice to the Company and the Agent, request that its Loans of a particular type to a Borrower be evidenced by a separate Note of such Borrower in an amount equal to the aggregate unpaid principal amount of such Loans, in which case any Note then held by such Bank that would otherwise evidence Loans of such type shall be appropriately modified to reflect the fact that it does not evidence Loans of such type. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to a "Note" or the "Notes" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Notes pursuant to Section 3.01(b), the Agent shall deliver such Notes by hand or overnight courier to such Bank. Each Bank shall record the date and amount of each Loan made by it to a Borrower and the date and amount of each payment of principal made by such Borrower with respect thereto, and prior to any transfer of its Note of a Borrower, shall endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan to such Borrower then outstanding; provided that the failure of any Bank to make any such recordation -------- or endorsement shall not affect the obligations of such Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by each Borrower so to endorse the Note of such Borrower and to attach to and make a part of the Note of such Borrower a continuation of any such schedule as and when required. SECTION 2.06. Maturity of Loans. (a) Each Committed Loan included in ----------------- any Committed Borrowing shall mature, and the principal amount thereof shall be due and payable, on the Termination Date. (b) Each Money Market Loan included in any Money Market Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear -------------- interest on the outstanding principal amount thereof, for each day from the date such Loan is made until -25- it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Date and on the date such Base Rate Loan is converted to a Fixed Rate Loan. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin applicable on such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD -------- Loan or any portion thereof shall, as a result of clause (2) (b) of the definition of Interest Period, have an Interest Period of less than 30 days, such portion shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin applicable on such day plus the Adjusted CD Rate applicable to such Loan and (ii) the rate applicable to Base Rate Loans for such day. "CD Margin" means: (i) for any day on which Level I Status exists, (x) 3/8 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 30% of the Commitments, (y) 1/2 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% but greater than 30% of the Commitments and (z) 5/8 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; and (ii) for any day on which Level II Status exists, (x) 1/2 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 30% of the Commitments, (y) 3/4 of 1% per annum for any day on which the aggregate outstanding principal amount of -26- the Loans is less than or equal to 50% but greater than 30% of the Commitments and (z) 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ------------ ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate ____________ * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. -27- "Assessment Rate" means for any Interest Period the net annual assessment rate (rounded upward, if necessary, to the next higher 1/100 of 1%) actually incurred by Morgan Guaranty Trust Company of New York to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of Morgan Guaranty Trust Company of New York in the United States during the most recent period for which such rate has been determined prior to the commencement of such Interest Period. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin applicable on such day plus the London Interbank Offered Rate applicable for such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means: (i) for any day on which Level I Status exists, (x) 1/4 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 30% of the Commitments, (y) 3/8 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% but greater than 30% of the Commitments and (z) 1/2 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments; and (ii) for any day on which Level II Status exists, (x) 3/8 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 30% of the Commitments, (y) 5/8 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is less than or equal to 50% but greater than 30% of the Commitments and (z) 7/8 of 1% per annum for any day on which the aggregate outstanding principal amount of the Loans is greater than 50% of the Commitments. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if -28- necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London inter-bank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the Euro-Dollar Margin applicable on such day plus the higher of (i) the London Interbank Offered Rate applicable to such Loan and (ii) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money -29- Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Prime Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the applicable Borrower and the participating Banks by telex or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.08. Fees. ---- (a) Participation Fees. The Company shall pay to the Agent on the ------------------ Signing Date for the account of the Banks, other than the Lead Managers, in proportion to their respective Commitments, participation fees in an amount equal to 1/16 of 1% of the aggregate amount of such Commitments. The Company shall pay to the Agent on the Signing Date for the account of the Lead Managers, in proportion to their respective Commitments, participation fees in an amount equal to 1/10 of 1% of the aggregate amount of such Commitments. (b) Facility Fee. The Company shall pay to the Agent for the account ------------ of the Banks ratably a facility fee at the rate of (i) for any day on which Level I Status exists, 3/16 of 1% per annum and (ii) for any day on which Level II Status exists, 1/4 of 1% per annum. Such facility fee shall accrue from and including the Signing Date to but excluding the Termination Date (or, if later, the date the Loans shall be repaid in their entirety), on the daily average of the greater of (x) the aggregate of the Commitments (whether used or unused) and (y) the aggregate outstanding principal amount of the Loans. Accrued fees under this subsection (b) shall be payable quarterly in arrears on each Quarterly Date and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). -30- SECTION 2.09. Optional Termination or Reduction of Commitments. (a) ------------------------------------------------ At any time prior to the Termination Date, the Company may, upon at least three Domestic Business Days' notice to the Agent, (i) terminate the Commitments in full at any time, if no Loans are outstanding at such time, or (ii) ratably reduce from time to time by (A) an aggregate amount of $25,000,000, (B) any larger multiple of $25,000,000 or (C) the full amount thereof, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. (b) Upon receipt of a notice of termination or reduction pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such reduction and such notice shall not thereafter be revocable by either Borrower. SECTION 2.10. Method of Electing Interest Rates. (a) The Loans --------------------------------- included in each Committed Borrowing shall bear interest initially at the type of rate specified by the applicable Borrower in the applicable Notice of Committed Borrowing. Thereafter, such Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans made to such Borrower (subject in each case to the provisions of Article VIII), as follows: (i) if such Loans are Base Rate Loans, such Borrower may elect to convert such Loans to CD Loans as of any Domestic Business Day or to Euro- Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are CD Loans, such Borrower may elect to convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to continue such Loans as CD Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans; and (iii) if such Loans are Euro-Dollar Loans, such Borrower may elect to convert such Loans to Base Rate Loans or CD Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice executed on behalf of the applicable Borrower by its Authorized Officers (a "Notice of Interest Rate Election") to the Agent at least three Euro-Dollar Business Days before the -31- conversion or continuation selected in such notice is to be effective (unless the relevant Loans are to be converted from Domestic Loans to Domestic Loans of the other type or continued as Domestic Loans of the same type for an additional Interest Period, in which case such notice shall be delivered to the Agent at least three Domestic Business Days before such conversion or continuation is to be effective). A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans -------- comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $25,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Fixed Rate Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as CD Loans or Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from a Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by such Borrower. If a Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Group of Fixed Rate Loans made to such Borrower, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. -32- SECTION 2.11. Optional Prepayments. (a) A Borrower may, upon at -------------------- least one Domestic Business Day's notice to the Agent, prepay a Group of Base Rate Loans (or a Money Market Borrowing bearing interest at the Prime Rate pursuant to Section 8.01(a)) made to such Borrower in whole at any time, or from time to time in part in amounts aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group or Borrowing. (b) A Borrower may, upon at least one Domestic Business Day's notice to the Agent, in the case of a Group of CD Loans made to such Borrower, or upon at least one Euro-Dollar Business Day's notice to the Agent, in the case of a Group of Euro-Dollar Loans made to such Borrower, prepay the Loans comprising such Group on the last day of any Interest Period applicable to such Group, in whole at any time, or from time to time in part in amounts aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group. (c) Except as provided in subsection (a) above, a Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. (d) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by either Borrower. SECTION 2.12. General Provisions as to Payments. (a) The Borrowers --------------------------------- shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date -33- for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from a Borrower prior to the date on which any payment is due from such Borrower to the Banks hereunder that such Borrower will not make such payment in full, the Agent may assume that such Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount, if any, then due such Bank from such Borrower. If and to the extent that such Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount, if any, distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.13. Funding Losses. If a Borrower makes any payment of -------------- principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a Base Rate Loan (pursuant to Article VI or VIII or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the end of an applicable period fixed pursuant to Section 2.07(d), or if a Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a) or 2.11(d), as applicable, such Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, Liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow or prepay, provided that such Bank shall have delivered to such -------- -34- Borrower a certificate signed by an officer of such Bank with knowledge of and responsibility for such matters which sets forth the amount of such loss or expense and a reasonable explanation of the basis therefor, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. Computation of Interest and Fees. Interest based on -------------------------------- the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. Withholding Tax Exemption. At least five Domestic ------------------------- Business Days prior to the first date on which interest or fees are payable by either Borrower hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Company and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments from both Borrowers under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Company and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Company or the Agent, in each case certifying that such Bank is entitled to receive payments from both Borrowers under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including, without limitation, any change in any treaty, law or regulation or in the interpretation or administration thereof) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Company and the Agent that it is not capable of receiving such payments without any deduction or withholding of United States federal income tax. -35- SECTION 2.16. Regulation D Compensation. For so long as any Bank ------------------------- is required, or is requested by any applicable regulatory authority, to maintain and does maintain reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans or Money Market LIBOR Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office or Money Market Lending Office, as the case may be) of making or maintaining its Euro-Dollar Loans or Money Market LIBOR Loans is increased, then such Bank may require the applicable Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans or Money Market LIBOR Loans made to such Borrower, additional interest on the related Euro-Dollar Loan or Money Market LIBOR Loan of such Bank for each day on which such Bank maintains such reserves at a rate per annum up to but not exceeding the excess of (i) (A) the London Interbank Offered Rate applicable to such Loan divided by (B) one minus the Euro-Dollar ----- Reserve Percentage for such day over (ii) the London Interbank Offered Rate applicable to such Loan. Any Bank wishing to require payment of such additional interest (x) shall so notify the Company and the Agent, in which case such additional interest on the Euro-Dollar Loans and Money Market LIBOR Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Company at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans or Money Market LIBOR Loans made to either Borrower a certificate signed by an officer of such Bank with knowledge of and responsibility for such matters setting forth the amount to which such Bank is then entitled from such Borrower under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it) and a reasonable explanation of the basis therefor. Each such certificate shall be accompanied by such information as the Company may reasonably request as to the computation set forth therein. -36- ARTICLE III CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become ------------- effective on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05): (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of the execution and delivery of a counterpart hereof by such party); (b) receipt by the Agent for the account of each Bank of a duly executed Note of each Borrower dated on or before the Effective Date complying with the provisions of Section 2.05; (c) the fact that all amounts payable by the Borrowers on or before the Effective Date (including the fees payable pursuant to Section 2.08(a)) shall have been paid in full; (d) receipt by the Agent of a copy of the Support Agreement, certified by the Company to be a true and complete copy thereof and to then be in full force and effect; (e) receipt by the Agent of an opinion of Edward J. Crane, Jr., Second Vice President and Counsel of the Company, and Cleary, Gottlieb, Steen & Hamilton, special counsel for the Borrowers, substantially in the form of Exhibits G-l and G-2 hereto, respectively, and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (f) receipt by the Agent of an opinion of Davis Polk & Wardwell, special counsel for the Agent, substantially in the form of Exhibit H -37- hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; and (g) receipt by the Agent of all documents it may reasonably request relating to the existence of each Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; provided that this Agreement shall not become effective or be binding on any - -------- party hereto unless all of the foregoing conditions are satisfied not later than December 31, 1991. The Agent shall promptly notify the Company and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Borrowings. The obligation of any Bank to make a ---------- Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be; (b) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (c) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; (d) the fact that the representations and warranties of each Borrower contained in this Agreement and, if the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, in such Company Assumption Agreement or Guarantee Agreement, as the case may be, shall be true on and as of the date of such Borrowing; and (e) the fact that (i) the Support Agreement shall not have been terminated pursuant to Section (8) thereof or otherwise and (ii) a notice of termination pursuant to Section (9) of the Support Agreement shall not have been given by either party -38- thereto, unless, in either case, the Company shall have, prior thereto, executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrowers on the date of such Borrowing as to the facts specified in clauses (b), (c), (d) and (e) of this Section. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrowers jointly and severally represent and warrant that: SECTION 4.01. Existence and Power. The Company is a legal reserve ------------------- mutual life insurance company duly organized in 1862 pursuant to a special act of the Legislature of the Commonwealth of Massachusetts (the "Special Act") and is validly existing and in good standing under the laws of the Commonwealth of Massachusetts, and has all powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Each Material Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. Authorization; No Contravention. The execution, ------------------------------- delivery and performance by each Borrower of this Agreement, the Support Agreement and its Notes are within such Borrower's powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or, in the case of the Company, the Special Act, as amended from time to time, and, in the case of JHCC, the certificate of incorporation of JHCC, or the by-laws of such Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon such Borrower or result in or require the crea- -39- tion or imposition of any Lien on any asset of the Company or any Material Subsidiary. SECTION 4.03. Binding Effect. Each of this Agreement and, unless -------------- the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, the Support Agreement constitutes a valid and binding agreement of each Borrower and the Notes of each Borrower, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of such Borrower. SECTION 4.04. Financial Information. --------------------- (a) (i) The Annual Statement of the Company as of December 31, 1990, as filed with the Insurance Department of the Commonwealth of Massachusetts, together with the related exhibits, schedules and explanations therein contained or thereto annexed, copies of which have been delivered to each of the Banks, are a full and true statement of all assets and liabilities and of the condition and affairs of the Company as of such date and of its income and deductions therefrom for the year then ended (within the meaning of applicable regulations and practices of the Insurance Department of the Commonwealth of Massachusetts), and such Annual Statement is accompanied by an opinion of the Corporate Actuary of the Company to the effect that the amounts carried in the balance sheet of the Company contained therein of certain actuarial items (A) are computed in accordance with commonly accepted actuarial standards consistently applied and are fairly stated in accordance with sound actuarial principles, (B) are based on actuarial assumptions which are in accordance with or stronger than those called for in policy provisions, (C) meet the requirements of the insurance laws of Massachusetts, (D) make a good and sufficient provision for all unmatured obligations of the Company guaranteed under the terms of the policies included in such items, (E) are computed on the basis of assumptions consistent with those used in computing the corresponding items in the Annual Statement as of the preceding year end (except as required or permitted under applicable regulations of the Insurance Department of the Commonwealth of Massachusetts) and (F) include provision for all actuarial reserves and related statement items which ought to be established; and (ii) the audited statements of financial position of the Company as of December 31, 1990 and the related summary of operations and changes in policyholders' contingency reserves and statement of cash flows for the fiscal year then ended, reported on by Ernst & Young, a copy of which has been, in each case, delivered to -40- each of the Banks, fairly present, in conformity with generally accepted accounting principles and reporting practices prescribed or permitted by insurance regulatory authorities, the financial position of the Company at such date and the results of operations and changes in policyholders' contingency reserves and cash flows of the Company for such year. (b) The audited balance sheet of JHCC as of December 31, 1990 and the related statements of income and retained earnings and cash flows for the fiscal year then ended, reported on by Ernst & Young, a copy of which has been, in each case, delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the financial position of JHCC as of such date and its results of operations and cash flows for such fiscal year. (c) The audited consolidated balance sheet of JHSI and its consolidated subsidiaries as of December 31, 1990 and the related consolidated statements of operations, shareholder's equity and cash flows for the fiscal year then ended, reported on by Ernst & Young, a copy of which has been, in each case, delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of JHSI and its consolidated subsidiaries as of such date and the consolidated results of operations and cash flows of JHSI and its consolidated subsidiaries for such fiscal year. (d) The Quarterly Statement of the Company as of September 30, 1991, as filed with the Insurance Department of the Commonwealth of Massachusetts, a copy of which has been delivered to each of the Banks, is (subject to year-end accounting and actuarial adjustments) a full and true statement, prepared on the basis of accounting and actuarial policies consistent with those used in preparation of the Annual Statement referred to in subsection (a) (i) of this Section, of all assets and liabilities and of the condition and affairs of the Company as of such date and of its income and deductions therefrom for the nine months then ended (within the meaning of applicable regulations and practices of the Insurance Department of the Commonwealth of Massachusetts). (e) The unaudited balance sheet of JHCC as of September 30, 1991 and the related statements of income for the nine months then ended, a copy of which has been, in each case, delivered to each of the Banks, fairly present, in -41- conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (b) of this Section, the financial position of JHCC as of such date and its results of operations for such nine month period (subject to normal year-end adjustments). (f) From but excluding December 31, 1990 through the Effective Date, there has been no material adverse change in the business, financial position, results of operations or prospects of either Borrower. SECTION 4.05. Litigation. There is no action, suit or proceeding ---------- pending against, or to the knowledge of either Borrower threatened against or affecting, the Company or any Subsidiary before any court or arbitrator or any governmental body, agency or official (i) which, if adversely determined, would have a Material Adverse Effect or a material adverse effect on the ability of either Borrower to perform its respective obligations under the Support Agreement or (ii) which in any manner draws into question the validity or enforceability of this Agreement, the Support Agreement or any of the Notes. SECTION 4.06. Compliance with ERISA. (a) Each member of the ERISA --------------------- Group has (i) fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and (ii) is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan and (b) no member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA, except where any failure to fulfill such obligations or comply with such provisions referred to in clause (a) above or any such waiver, failure or liability referred to in clause (b) above would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 4.07. Compliance with Laws. Each Borrower and each -------------------- Material Subsidiary is in compliance with all -42- applicable laws, including, without limitation, all Environmental Laws, except where any failure to comply with any such laws would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 4.08. Taxes. Each member of the Tax Group has filed all ----- United States Federal income tax returns and all other material tax returns which are required to be filed by it and has paid all taxes due pursuant to such returns or pursuant to any assessment received by any member of the Tax Group, except where the failure to file such returns or pay such taxes would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 4.09. Not an Investment Company. The Company is not an ------------------------- investment company within the meaning of the Investment Company Act of 1940, as amended. JHCC has been exempted from all provisions of the Investment Company Act of 1940, as amended, including, without limitation, those relating to the offering and sale of securities by JHCC, by order of the Securities and Exchange Commission dated June 26, 1984 issued pursuant to Section 6(c) of such Act, and such order remains in full force and effect and has not in any way been modified or amended. SECTION 4.10. Full Disclosure. All information heretofore --------------- furnished by either Borrower to all the Banks for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by either Borrower to all the Banks will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrowers have disclosed to the Banks in writing or at the meeting of the Company with the Banks held at the offices of the Company on October 31, 1991 any and all matters concerning the Borrowers (other than general economic, political and insurance-industry-wide conditions) which could reasonably be expected to result in a Material Adverse Effect or which materially and adversely affect or could reasonably be expected to affect materially and adversely (to the extent either Borrower can now reasonably foresee) the ability of either Borrower to perform its obligations under the Support Agreement. As of the Effective Date, the Borrowers have disclosed to the Banks in writing or at the meeting of the Company with the Banks held at the offices of the Company on October 31, 1991 any and all matters concerning the Borrowers (other than general economic, political and insurance-industry-wide conditions) which materially and adversely affect or could reasonably be expected to affect materially -43- and adversely (to the extent either Borrower can reasonably foresee as of the Effective Date) the business, results of operations or financial condition of the Company and the Material Subsidiaries, taken as a whole. ARTICLE V COVENANTS The Borrowers jointly and severally agree that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Company will deliver to each of ----------- the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, (i) the Annual Statement of the Company as of the end of such fiscal year, as filed with (and in the form required under applicable law and regulations of) the Insurance Department of the Commonwealth of Massachusetts (x) accompanied by an opinion of the Corporate Actuary of the Company covering amounts carried on the balance sheet of certain actuarial items of the Company in the form required under applicable law and regulations of the Insurance Department of the Commonwealth of Massachusetts and (y) certified by a Senior Financial Officer of the Company on behalf of the Company as to consistency with respect to accounting and actuarial policies and that such Annual Statement is a full and true statement of all the assets and liabilities and of the condition and affairs of the Company as of the end of such fiscal year and of its income and deductions therefrom for such fiscal year (within the meaning of applicable regulations and practices of the Insurance Department of the Commonwealth of Massachusetts); and -44- (ii) the audited statements of financial position of the Company as of the end of such fiscal year and the related audited summary of operations and changes in policyholders' contingency reserves and statement of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Ernst & Young or other independent public accountants of nationally recognized standing without qualification as to the scope of the audit performed or any material weakness noted in the Company's system of internal controls; (b) unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, as soon as available and in any event within 90 days after the end of each fiscal year of JHCC, the audited balance sheet of JHCC as of the end of such fiscal year and the related audited statements of income and retained earnings and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Ernst & Young or other independent public accountants of nationally recognized standing without qualification as to the scope of the audit performed or any material weakness noted in JHCC's system of internal controls; (c) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, the Quarterly Statement of the Company as of the end of such quarter, as filed with the Insurance Department of the Commonwealth of Massachusetts, certified (subject to year-end accounting and actuarial adjustments) on behalf of the Company by a Senior Financial Officer of the Company as to consistency with respect to accounting and actuarial policies and that such Quarterly Statement is a full and true statement of all the assets and liabilities and of the condition and affairs of the Company as of the end of such quarter, and of its income and deductions therefrom for such quarter and for the portion of the Company's fiscal year ended at the end of such quarter (within the meaning of applicable regulations and practices of -45- the Insurance Department of the Commonwealth of Massachusetts); (d) unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of JHCC, the unaudited balance sheet of JHCC as of the end of such quarter and the related unaudited statements of income for the portion of JHCC's fiscal year ended at the end of such quarter, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency, in each case by a Senior Financial Officer of JHCC; (e) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (c) above, a certificate of a Senior Financial Officer of the Company (i) setting forth in reasonable detail the calculations required to establish whether the Borrowers were in compliance with the requirements of Sections 5.08 and 5.09 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrowers are taking or propose to take with respect thereto; (f) within 15 days after any Senior Financial Officer of either Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of a Senior Financial Officer of the Company setting forth the details thereof and the action which the Borrowers are taking or propose to take with respect thereto; (g) promptly upon the mailing thereof to the policyholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (h) promptly upon the filing thereof, (i) in addition to the Annual Statement and Quarterly Statement referred to in clauses (a) (i) and (c) above, copies of all other financial statements of the Company filed with the Insurance Department of -46- the Commonwealth of Massachusetts, and (ii) copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents), if any, which the Company or, unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, JHCC shall have filed with the Securities and Exchange Commission with respect to debt securities or preferred or common stock issued by the Company or JHCC, as the case may be; (i) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of a Senior Financial Officer of the Company setting forth details as to such occurrence and action, if any, which the Company or applicable member of the ERISA Group is required or proposes to take; and -47- (j) from time to time such additional information regarding the financial position, results of operations or business of the Borrowers as the Agent, at the request of any Bank, may reasonably request. SECTION 5.02. Maintenance of Property; Insurance. ---------------------------------- (a) Each Borrower will keep, and the Company will cause each Material Subsidiary to keep, all property material to their respective businesses in good working order and condition, ordinary wear and tear excepted. (b) Each Borrower will maintain, and the Company will cause each Material Subsidiary to maintain (in the name of such Borrower or in such Material Subsidiary's own name, as applicable), with financially sound and responsible insurance companies, insurance on all their respective properties and against such other risks, in each case in at least such amounts (and with such risk retentions) as are usually insured against by companies of established repute engaged in the same or a similar business. SECTION 5.03. Conduct of Business and Maintenance of Existence. ------------------------------------------------ Each Borrower will continue, and the Company will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by such Borrower and such Material Subsidiary, as the case may be, and each Borrower will preserve, renew and keep in full force and effect, and the Company will cause each Material Subsidiary to preserve, renew and keep in full force and effect, its existence and its rights, privileges and franchises which are material to the conduct of such business; provided that nothing in this Section -------- shall prohibit: (a) any consolidation or merger of either Borrower permitted under Section 5.12(i); (b) any sale, lease or transfer of assets by JHCC permitted under Section 5.12(ii); (c) the consolidation or merger of a Material Subsidiary (other than JHCC, unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09) with or into another Person, if, after giving effect thereto, no Default shall have occurred and be continuing; or (d) the termination of the existence of a Material Subsidiary: -48- (i) pursuant to clause (a) or (c) above; (ii) in the case of JHCC (if JHCC is at such time a Borrower), if the Company shall have executed and delivered a Company Assumption Agreement; or (iii) in the case of any other Material Subsidiary (and, if JHCC has been terminated as a Borrower hereunder pursuant to Section 9.09 and is at the applicable time a Material Subsidiary, JHCC), if after giving effect thereto, no Default shall have occurred and be continuing. SECTION 5.04. Compliance with Laws. Each Borrower will comply, and the -------------------- Company will cause each Material Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities (including, without limitation, Environmental Laws and the rules, regulations and requirements thereunder), except where a failure to comply therewith would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 5.05. Compliance with ERISA. Each Borrower will fulfill, and --------------------- the Company will cause each member of the ERISA Group to fulfill, its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan, and each Borrower will comply, and the Company will cause each member of the ERISA Group to comply, with all applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan, except where such failure or non-compliance, alone or in the aggregate, would not have a Material Adverse Effect. SECTION 5.06. Taxes. Each member of the Tax Group will file all United ----- States Federal income tax returns and all other material tax returns which are required to be filed by it and will pay all taxes due pursuant to such returns or pursuant to any assessment received by it, except where a failure to file any such returns or pay any such taxes would not, alone or in the aggregate, have a Material Adverse Effect. SECTION 5.07. Subsidiary Debt. The Company will not permit any --------------- Subsidiary to incur, assume or at any time be liable with respect to any Debt except: -49- (a) Debt of JHCC under this Agreement and the Notes; (b) Debt, the proceeds of which are on-lent to the Company; (c) Debt owing to the Company or any other Subsidiary of the Company or any combination thereof; (d) Permitted Collateralization Obligations; (e) Debt of Excluded Subsidiaries; and (f) Debt not otherwise permitted by the foregoing clauses of this Section so long as the aggregate principal amount of such Debt outstanding at any time, together with the aggregate principal amount then outstanding of Debt secured by Liens permitted by clause (j) of Section 5.10, does not exceed $6,000,000,000. SECTION 5.08. Management Surplus. The Company will not, at any time, ------------------ permit Management Surplus to be less than $1,500,000,000. SECTION 5.09. Capitalization Ratio. The Company will not, at any -------------------- time, permit Management Surplus to be less than 5% of the assets of the Company (other than assets held in separate accounts of the Company). SECTION 5.10. Company Negative Pledge. The Company shall not create, ----------------------- assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it (other than assets held in separate accounts of the Company), except: (a) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within -------- 90 days after the acquisition thereof; (b) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Company and not created in contemplation of such event; (c) any Lien existing on any asset prior to the acquisition thereof by the Company and not created in contemplation of such acquisition; -50- (d) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is -------- not secured by any additional assets; (e) Liens on Permitted Collateralization Assets; (f) Liens, if any, arising out of loans of securities, in the ordinary course of the investment business of the Company; (g) any Liens arising in connection with policies or contracts of insurance, funding agreements and other similar contracts entered into in the ordinary conduct of the insurance business of the Company; (h) easements, rights-of-way and similar Liens on real property that do not in the aggregate materially impair the Company's use of such property; (i) Liens not otherwise permitted by the foregoing clauses of this Section which (i) do not secure Debt and (ii) do not secure obligations in an aggregate amount exceeding $5,000,000,000; and (j) Liens that secure Debt and that are not otherwise permitted by the foregoing clauses of this Section, so long as the aggregate principal amount at any time outstanding of the Debt secured thereby (together with the aggregate principal amount then outstanding of Debt permitted by clause (f) of Section 5.07) does not exceed $6,000,000,000. SECTION 5.11. JHCC Negative Pledge. Unless JHCC shall have been -------------------- terminated as a Borrower hereunder pursuant to Section 9.09, JHCC will not create, assume or suffer to exist any Lien that secures Debt on any asset now owned or hereafter acquired by it unless it shall make or cause to be made effective provision whereby the obligations of JHCC hereunder and under its Notes shall be secured equally and ratably with all other obligations secured thereby; and, if such provision is not made, and notwithstanding that such failure constitutes an Event of Default, an equitable Lien, -51- equally and ratably securing the obligations of JHCC hereunder and under its Notes, shall exist, to the extent permitted by law, on such asset. SECTION 5.12. Consolidations, Mergers and Sales of Assets. Neither ------------------------------------------- Borrower will (i) consolidate or merge with or into any other Person, except that: (a) JHCC may consolidate or merge with or into (A) the Company if the Company is the surviving corporation or (B) another Subsidiary if (1) JHCC is the surviving corporation or (2) (x) prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or (y) the Subsidiary that is the surviving corporation shall assume all of the obligations of JHCC hereunder and under the Notes and either (I) the Company agrees in writing that such Subsidiary shall have all of the benefits of the Support Agreement and that all of the obligations of such Subsidiary hereunder and under the Notes shall constitute Covered Credit (as defined in Section (5) of the Support Agreement) and that the Agent, each of the Banks and each holder from time to time of any Note issued by JHCC and assumed by such Subsidiary or issued by such Subsidiary shall constitute a Covered Creditor (as so defined) or (II) the Company executes a Guarantee Agreement modified in such manner as shall be satisfactory to the Required Banks to reflect the fact that such Subsidiary shall thereafter be a Borrower hereunder; provided that after giving effect -------- thereto, no Default shall have occurred and be continuing; and (b) the Company may consolidate or merge with or into any other Person so long as the Company shall be the surviving corporation and, after giving effect thereto, no Default shall have occurred and be continuing; or (ii) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any other Person except, in the case of JHCC, to the Company. SECTION 5.13. Support Agreement; Company Assumption Agreement; ----------------------------------------------- Guarantee Agreement. - ------------------- (a) No term or provision of the Support Agreement shall be amended, modified, waived or supplemented, and the Support Agreement shall not be terminated, novated or otherwise changed, without the express prior written consent of -52- the Required Banks unless, prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09. (b) The Company and JHCC hereby expressly agree with each other, the Agent, the Banks and the holders from time to time of the Notes that (i) the benefits of the Support Agreement shall extend to the Banks, the Agent and the holders from time to time of the Notes with respect to all obligations of JHCC hereunder or under the Notes, in either case whether now existing or hereafter arising, (ii) all of the obligations of JHCC hereunder or under the Notes, in either case whether now existing or hereafter arising, constitute Covered Credit (as defined in Section (5) of the Support Agreement) and the Agent, each of the Banks and each holder from time to time of any Note issued by JHCC constitutes a Covered Creditor (as so defined) and (iii) so long as any Bank has any Commitment hereunder, the Company will not terminate the Support Agreement, pursuant to Section (8) or (9) thereof or otherwise, unless, prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09. (c) If the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, no term or provision of such Company Assumption Agreement or Guarantee Agreement, as the case may be, shall be amended, modified, waived or supplemented, and such Company Assumption Agreement or Guarantee Agreement, as the case may be, shall not be terminated, novated or otherwise changed, without the express prior written consent of the Required Banks. SECTION 5.14. Use of Proceeds. --------------- (a) The proceeds of the Loans made under this Agreement will be used for general corporate purposes. (b) None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock", within the meaning of Regulation U, in violation of the Securities Exchange Act of 1934, as amended, or the applicable margin regulations of the Board of Governors of the Federal Reserve System, in each case as in effect from time to time, and following the application by the applicable Borrower of such -53- proceeds, the value of all "margin stock" owned by such Borrower (other than, in the case where the Company is the Borrower, "margin stock" held in separate accounts of the Company) will not exceed 25% of the assets of such Borrower (other than, in the case where the Company is the Borrower, assets held in separate accounts of the Company). ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following ----------------- events ("Events of Default") shall have occurred and be continuing: (a) either Borrower shall fail to pay when due any principal of any Loan, or shall fail to pay within five days of the due date thereof any interest, fees or other amount payable hereunder or under the Notes; (b) either Borrower shall fail to observe or perform any covenant contained in Sections 5.07 through 5.13, inclusive, and 5.14(b); (c) either Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Company by the Agent at the request of any Bank and for an additional 60 days thereafter if the Borrowers are diligently proceeding to cure such failure; (d) any representation or warranty made, or deemed made pursuant to Section 3.02, by either Borrower hereunder shall prove to have been incorrect in a material respect as of the date when made, or deemed made pursuant to Section 3.02, and shall continue to be incorrect in a material respect at the time it is discovered to have been incorrect; (e) (i) any event or condition shall occur and continue which (A) results in the acceleration of -54- the maturity of any Material Debt of the Borrowers prior to the date such Material Debt would otherwise be due and payable, which acceleration has not been waived, revoked, rescinded or annulled, or (B) enables (without further notice or opportunity to cure) the holder or holders of any such Material Debt or any Person acting on such holder's or holders' behalf to accelerate the maturity thereof or (ii) the principal amount of any such Material Debt shall otherwise be due in full and not paid; (f) any event or condition shall occur and continue which results in the acceleration of the maturity of any Material Debt of any Subsidiaries (other than JHCC, unless JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09, or any Excluded Subsidiary), prior to the date such Material Debt would otherwise be due and payable, which acceleration has not been waived, revoked, rescinded or annulled, or the principal amount of any such Material Debt shall otherwise be due in full and not paid; (g) the Support Agreement shall cease for any reason to be in full force and effect or either party thereto shall so assert in writing, unless, prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09; (h) either Borrower shall fail for any reason to remain in compliance with the terms of, or perform its obligations under, the Support Agreement, unless, prior thereto, the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement or JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09; (i) either Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, rehabilitation, conservatorship, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, rehabilitator, -55- conservator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (j) an involuntary case or other proceeding shall be commenced against either Borrower or any Material Subsidiary seeking liquidation, rehabilitation, conservatorship, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, rehabilitator, conservator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 90 days; or an order for relief shall be entered against either Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (k) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $75,000,000 which it shall have become liable to pay under Title IV of ERISA with respect to a Plan; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c) (5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more -56- members of the ERISA Group to incur a current payment obligation in excess of $75,000,000; (l) a judgment or order for the payment of money in excess of $250,000,000 shall be rendered against the Company or any Material Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 10 days; (m) any Person or group of related Persons shall have obtained (whether after the demutualization of the Company or otherwise) the right to vote more than 30% of the voting rights for the election of directors of the Company; (n) JHCC shall cease for any reason to be a wholly owned Subsidiary, unless (i) JHCC shall have been consolidated or merged with or into the Company or the Company shall have executed and delivered a Company Assumption Agreement, in either case in accordance with the terms hereof, or (ii) JHCC shall have been terminated as a Borrower hereunder pursuant to Section 9.09; (o) if the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, such Company Assumption Agreement or Guarantee Agreement, as the case may be, shall cease for any reason to be in full force and effect or the Company shall so assert in writing; or (p) if the Company shall have executed and delivered a Company Assumption Agreement or a Guarantee Agreement, the Company shall fail for any reason to remain in compliance with the terms of, or perform its obligations under, such Company Assumption Agreement or Guarantee Agreement, as the case may be; then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrowers terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrowers declare the Notes (together with accrued interest thereon) to be, and the Notes (together with accrued interest thereon) shall thereupon become, immediately due and payable -57- without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower; provided that in the case of any of the -------- Events of Default specified in clause (i) or (j) above with respect to either Borrower, without any notice to either Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower. SECTION 6.02. Notice of Default. The Agent shall give notice ----------------- to the Company under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization. Each Bank irrevocably ----------------------------- appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of -------------------- New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Company or any Subsidiary or any affiliate of any thereof as if it were not the Agent hereunder. SECTION 7.03. Action by Agent. The obligations of the Agent hereunder --------------- are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. Consultation with Experts. The Agent may consult with ------------------------- legal counsel (who may be counsel for either Borrower), independent public accountants and other -58- experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its ------------------ directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of either Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance --------------- with its Commitment, indemnify the Agent (to the extent not reimbursed by the Borrowers) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, --------------- independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. -59- SECTION 7.08. Successor Agent. The Agent may resign at any time by --------------- giving written notice thereof to the Banks and the Company. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 7.09. Agent's Fee. The Company shall pay to the Agent for its ----------- own account fees in the amounts and at the times previously agreed upon in writing between the Company and the Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or ------------------------------------------------- Unfair. If on or prior to the first day of any Interest Period for any CD Loan, - ------ Euro-Dollar Loan or Money Market LIBOR Loan: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of CD Loans or Euro-Dollar Loans, Banks having 50% or more of the aggregate principal amount of the affected Loans advise the Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Agent, will not adequately and -60- fairly reflect the cost to such Banks of funding their CD Loans or Euro- Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Company and the Banks, whereupon until the Agent notifies the Company that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, or to convert outstanding Loans into CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended and (ii) each outstanding CD Loan or Euro-Dollar Loan, as the case may be, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless a Borrower notifies the Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given by such Borrower that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Prime Rate for such day. SECTION 8.02. Illegality. If, on or after the date of this Agreement, ---------- the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans to either Borrower and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Company, whereupon until such Bank notifies the Company and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans to such Borrower, or to convert outstanding Loans made to such Borrower into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be other- -61- wise disadvantageous to such Bank. If such notice is given or a comparable notice is given by a Bank with respect to the maintenance or funding of its Money Market LIBOR Loans, (a) each Euro-Dollar Loan of such Bank made to such Borrower then outstanding shall be converted to a Base Rate Loan either (i) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Euro-Dollar Loan to such day or (ii) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Euro-Dollar Loan to such day and (b) if such Bank shall determine that it may not lawfully continue to maintain and fund any of its Money Market LIBOR Loans, each such Money Market LIBOR Loan of such Bank shall bear interest from and including the date of such notice to but excluding the last day of the Interest Period applicable thereto at the Prime Rate for such day. SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after --------------------------------- (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule, regulation or treaty, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans, or shall change the basis of taxation of payments to any Bank (or its Applicable Lending Office) of the principal of or interest on its Fixed Rate Loans or any other amounts due under this Agreement in respect of its Fixed Rate Loans or its obligation to make Fixed Rate Loans (except for changes in the rate of tax imposed, or the imposition of tax, on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Applicable Lending Office is located); or -62- (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (A) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (B) with respect to any Euro-Dollar Loan or Money Market LIBOR Loan, any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.16), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the applicable Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) Without duplication of any amounts paid under subsection (a) above or any amounts included in an applicable Domestic Reserve Percentage or amounts for which any Bank is entitled to compensation during the relevant Interest Period under Section 2.16, if any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on -63- capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the applicable Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Company and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder that is signed by an officer of such Bank with knowledge of and responsibility for such matters and that sets forth such amount or amounts and a reasonable explanation of the basis therefor shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate --------------------------------------------------- Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans - ----- to either Borrower has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) or 2.16 and the Company shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Company that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans to such Borrower which would otherwise be made by such Bank as (or continued as or converted into) CD Loans or Euro-Dollar Loans, as the case may be, shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and -64- (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, to such Borrower has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Company that the circumstances giving rise to such notice no longer apply, the principal amount of each such Base Rate Loan shall be subject to the provisions of Section 2.10 in the same manner as the CD Loans or Euro-Dollar Loans in the Group of Loans in which such Base Rate Loan is included, effective as of the first day of the next succeeding Interest Period applicable thereto. SECTION 8.05. Substitution of Bank. If (i) the obligation of any Bank -------------------- to make Euro-Dollar Loans to either Borrower has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation from either Borrower under Section 8.03 or 2.16, the Company shall have the right (a) with the assistance of and upon consultation with the Agent, to seek a substitute bank or banks (which may be one or more of the Banks) to purchase the Notes and assume the Commitment of such Bank or (b) to terminate the Commitment of such Bank; provided that after giving effect to such termination, the aggregate Commitments - -------- terminated pursuant to this subsection (b) do not exceed 20% of the initial aggregate amount of the Commitments (with appropriate adjustments to take account of optional reductions of Commitments pursuant to Section 2.09). ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other communications ------- to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of either Borrower or the Agent, at its address or telex or facsimile transmission number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telex or facsimile transmission number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telex or facsimile transmission number as such party may hereafter specify for the purpose by notice to the Agent and the Company. Each such notice, request or other communication shall be effective (i) if -65- given by telex, when such telex is transmitted to the telex number specified in or pursuant to this Section and the appropriate answer back is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in or pursuant to this Section; provided that notices to the Agent under Article II or Article VIII, -------- certificates as to the Authorized Officers of any Borrower and notices designating a new Designated Deposit Account shall not be effective until received. SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank ---------- in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise hereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a) The -------------------------------------------- Company shall pay (i) all reasonable and documented out-of-pocket expenses of the Agent, including all reasonable and documented fees and disbursements of special counsel for the Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable and documented out-of-pocket expenses incurred by the Agent and each Bank, including reasonable fees and disbursements of counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. The Company will indemnify each Bank against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement or the original issuance of any Note. (b) The Company agrees to indemnify each Bank and hold each Bank harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable and documented fees and disbursements of counsel, which may be incurred by any Bank (or by the Agent in connection with its actions as Agent hereunder) in connection with any investigative, administrative or judicial proceeding (whether or not such Bank shall be designated a party thereto) relating to or arising out of this Agreement or any actual or proposed use -66- of proceeds of Loans hereunder; provided that no Bank shall have the right to be -------- indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall, ------------------- by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note of a Borrower held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note of such Borrower held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes of such Borrower held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes of such Borrower held by the Banks shall be shared by the Banks pro rata; provided that -------- nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of such Borrower other than its indebtedness under the Notes. Each Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note of such Borrower, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Borrower in the amount of such participation. SECTION 9.05. Amendments and Waivers. Any provision of this Agreement ---------------------- or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by each Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that -------- no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment, or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required -67- for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.06. Successors and Assigns. (a) The provisions of this ---------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that neither Borrower may assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Company and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrowers and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrowers hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided -------- that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. Each Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VIII and Section 2.16 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part of all, of its rights and obligations under this Agreement and the Notes of each Borrower, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit I hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrowers and the Agent (which consent shall not, in any such case, be unreasonably withheld); provided that (i) no such consent -------- shall be required if such Assignee -68- is, prior to such assignment, a Bank hereunder, (ii) any such assignment shall be in respect of a portion of such transferor Bank's Commitment in an amount equal to or greater than $10,000,000 and (iii) any such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans. Subject to the foregoing, upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment (together, if such Assignee is, prior to such assignment, a Bank hereunder, with such Assignee's previously existing Commitment hereunder) as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrowers shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,000. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Company and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 2.15. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 2.16 or 8.03 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Company's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 9.07. Collateral. Each of the Banks represents to the Agent ---------- and each of the other Banks that it -69- in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.08. Waiver of Certain Claims. Each Borrower hereby expressly ------------------------ waives any claim, cause of action or remedy of such Borrower against the Agent, any Bank or any Participant arising out of or relating to, directly or indirectly, (i) any failure by any Bank to make any Loan or (ii) any failure by the Agent or any Bank to comply with any interest rate election, in any such case on account of or attributable to the fact that the applicable Notice of Borrowing, Money Market Quote Request or Notice of Interest Rate Election, as the case may be, was not signed by the Authorized Officers of such Borrower. SECTION 9.09. Termination of JHCC as a Borrower. The Borrowers --------------------------------- may, at any time (i) at which there shall be no Loans outstanding to JHCC or (ii) after the Company shall have executed and delivered a Company Assumption Agreement, upon written notice thereof to the Agent, executed on behalf of the Company and JHCC and substantially in the form of Exhibit J hereto, terminate JHCC as a Borrower hereunder. Immediately upon the receipt by the Agent of such notice, all commitments of the Banks to make Loans to JHCC, and all rights of JHCC hereunder, shall terminate and JHCC shall immediately cease to be a Borrower hereunder; provided that, unless the Company shall have executed and -------- delivered a Company Assumption Agreement, all obligations of JHCC as a Borrower hereunder arising in respect of any period in which JHCC was, or on account of any action or inaction by JHCC as, a Borrower hereunder shall survive such termination and if the Company shall have executed and delivered a Company Assumption Agreement, the liability of JHCC (but not of the Company) with respect to such obligations shall terminate. SECTION 9.10. Governing Law; Submission to Jurisdiction. THIS ----------------------------------------- AGREEMENT AND EACH NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EACH BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. -70- SECTION 9.11. Counterparts; Integration. This Agreement may be signed ------------------------- in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 9.12. Waiver of Jury Trial. EACH OF THE BORROWERS, THE AGENT -------------------- AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. -71- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ John T. Farady ------------------------------------ Title: Vice President & Treasurer By /s/ Karen E. Liukkonen ------------------------------------ Title: Assistant Treasurer 200 Clarendon Street, T-56 Boston, Massachusetts 02117 Attention: Treasurer Facsimile transmission numbers: (617) 572-1799 (617) 572-1899 Telex number: 62021772 JOHN HANCOCK CAPITAL CORPORATION By /s/ Karen E. Liukkonen -------------------------------------- Title: President By /s/ James E. Cruickshank ---------------------------------------- Title: Treasurer 200 Clarendon Street, T-56 Boston, Massachusetts 02117 Attention: Treasurer Facsimile transmission numbers: (617) 572-1799 (617) 572-1899 Telex number: 62021772 Commitments - ----------- $25,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Ann E. Darby ------------------------------------ Title: Vice President $25,000,000 J.P. MORGAN DELAWARE By /s/ Philip S. Detjens ------------------------------------ Title: Vice President $50,000,000 CREDIT LYONNAIS NEW YORK BRANCH By /s/ Robert Ivosevich ------------------------------------ Title: Senior Vice President CREDIT LYONNAIS CAYMAN ISLAND BRANCH By /s/ Robert Ivosevich ------------------------------------ Authorized Signature 50,000,000 FIRST INTERSTATE BANK OF CALIFORNIA By /s/ Stephen F. Marshall ------------------------------------ Title: Vice President By /s/ Margot E. Edel ------------------------------------ Title: Vice President Commitments - ----------- $50,000,000 MANUFACTURERS HANOVER TRUST COMPANY By /s/ Charles F. Titterton ------------------------------------ Title: Vice President $50,000,000 NCNB NATIONAL BANK OF NORTH CAROLINA By /s/ Michael J. Cerminaro ------------------------------------ Title: Vice President $50,000,000 THE FIRST NATIONAL BANK OF BOSTON By /s/ Elizabeth A. Walker ------------------------------------ Title: Vice President $50,000,000 THE BANK OF TOKYO TRUST COMPANY By /s/ Alta M. Fleming ------------------------------------ Title: Assistant Vice President $40,000,000 CREDIT SUISSE By /s/ Kathleen D. O'Brien ------------------------------------ Title: Associate By /s/ Lynn Allegaert ------------------------------------ Title: Member of Senior Management Commitments - ----------- $40,000,000 THE SANWA BANK, LIMITED By /s/ Dale C. Edmunds ------------------------------------ Title: Vice President $30,000,000 CIBC, Inc. By /s/ Susan S. Stang --------------------------------------- Title: Vice President $30,000,000 CITIBANK, N.A. By /s/ Gretchen M. Hansen ------------------------------------ Title: Vice President $30,000,000 CAISSE NATIONALE DE CREDIT AGRICOLE By /s/ Alain Le Louarn ------------------------------------ Title: Senior Vice President By /s/ Eric L. Sutton-Beattie ------------------------------------ Title: Vice President Commitments - ----------- $30,000,000 DEN DANSKE BANK AKTIESELSKAB Cayman Islands Branch By /s/ Peter Rasmussen ------------------------------------ Title: Vice President By /s/ George B. Wendell ------------------------------------ Title: Vice President $30,000,000 DG BANK DEUTSCHE GENOSSENSCHAFTSBANK By /s/ Linda J. Napolitano ------------------------------------ Title: Assistant Vice President By /s/ Karen A. Brinkman ------------------------------------ Title: Vice President $30,000,000 MANUFACTURERS BANK, N.A. By /s/ Julie M. Burke ------------------------------------ Title: Vice President $30,000,000 SHAWMUT BANK, N.A. By /s/ Robert P. Engvall, Jr. ------------------------------------ Title: Vice President Commitments - ----------- $30,000,000 THE BANK OF NOVA SCOTIA By /s/ Terry M. Pitcher -------------------------------------- Title: Vice President $30,000,000 THE CHASE MANHATTAN BANK, N.A. By /s/ J. Ryan O'Connell ------------------------------------ Title: Vice President $20,000,000 BANK OF HAWAII By /s/ Karl K.Y. Pan ------------------------------------ Title: Vice President $20,000,000 BANK OF MONTREAL By /s/ Ernest C. Cechetto ------------------------------------ Title: Vice President $20,000,000 BANKERS TRUST COMPANY By /s/ Thomas G. Weyburn ------------------------------------ Title: Vice President $20,000,000 BARNETT BANK OF CENTRAL FLORIDA, N.A. By /s/ Donald A. Bressoud ------------------------------------ Title: Vice President Commitments - ----------- $20,000,000 FLEET BANK OF MASSACHUSETTS, N.A. By /s/ David V. Cox ------------------------------------ Title: Assistant Vice President $20,000,000 ROYAL BANK OF CANADA By /s/ Harriet P. Higgins ------------------------------------ Title: Senior Manager $20,000,000 STATE STREET BANK AND TRUST COMPANY By /s/ Edward M. Anderson ------------------------------------ Title: Vice President $20,000,000 THE BANK OF NEW YORK By /s/ John F. Philbert ------------------------------------ Title: Vice President $20,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ Stuart Schonberger ------------------------------------ Title: Assistant Vice President $20,000,000 THE FUJI BANK, LIMITED By /s/ Atsushi Narikawa ------------------------------------ Title: Vice President & Manager Commitments - ----------- $20,000,000 THE NORTHERN TRUST COMPANY By /s/ Dean V. Banick ------------------------------------ Title: Vice President $20,000,000 THE SUMITOMO BANK, LIMITED By /s/ Tsuyoshi Okachi ------------------------------------ Title: Joint General Manager $20,000,000 UNITED STATES NATIONAL BANK OF OREGON By /s/ Jeffrey W. Jones ------------------------------------ Title: Vice President $20,000,000 WACHOVIA BANK OF GEORGIA, N.A. By /s/ Linda M. Harris ------------------------------------ Title: Vice President $20,000,000 WESTDEUTSCHE LANDESBANK GIROZENTRALE By /s/ Boris A. Borozan ------------------------------------ Title: Vice President and Manager By /s/ Charles E. Read ------------------------------------ Title: Managing Director _________________ Total Commitments $1,000,000,000 ================= MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Ann E. Darby ------------------------------------ Title: Vice President 60 Wall Street New York, New York 10260-0060 Attention: Ann E. Darby Telex number: 177615 EXHIBIT A NOTE New York, New York December 13, 1991 For value received, [John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts] [John Hancock Capital Corporation, a Delaware corporation] (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the Termination Date provided, or as otherwise provided, in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street New York, New York. All Loans made by the Bank and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding shall be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or - -------- endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of December 13, 1991 among the Borrower, [John Hancock Mutual Life Insurance Company] [John Hancock Capital Corporation], the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. [JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY] [JOHN HANCOCK CAPITAL CORPORATION] By:______________________ Title: By:______________________ Title: Note (Continued) LOANS AND PAYMENTS OF PRINCIPAL ________________________________________________________________________________ Amount of Date Amount of Principal Notation Loan Repaid Made By ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ -2- EXHIBIT B Form of Money Market Quote Request ---------------------------------- [Date] To: Morgan Guaranty Trust Company of New York (the "Agent") From: [John Hancock Mutual Life Insurance Company] [John Hancock Capital Corporation] (the "Borrower") Re: Credit Agreement (the "Credit Agreement") dated as of December 13, 1991 among the Borrower, [John Hancock Mutual Life Insurance Company] [John Hancock Capital Corporation], the Banks listed on the signature pages thereof and the Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: _________________ Principal Amount* Interest Period** - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin over or under the London Interbank Offered Rate] [Absolute Rate]. Terms used herein have the meanings assigned to them in the Credit Agreement. [JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY] [JOHN HANCOCK CAPITAL CORPORATION] By_________________________ Authorized Officer By_________________________ Authorized Officer ____________ * Amount must be $25,000,000 or a larger multiple of $1,000,000 (or the amount available in accordance with Section 3.02(b) of the Credit Agreement). ** Not less than one month (LIBOR Auction) or not less than 14 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. EXHIBIT C Form of Invitation for Money Market Quotes ------------------------------------------ To: [Name of Bank] Re: Invitation for Money Market Quotes to [John Hancock Mutual Life Insurance Company] [John Hancock Capital Corporation] (the "Borrower") Pursuant to Section 2.03 of the Credit Agreement dated as of December 13, 1991 among the Borrower, [John Hancock Mutual Life Insurance Company] [John Hancock Capital Corporation], the Banks parties thereto and the undersigned, as Agent, we are pleased, on behalf of the Borrower, to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount Interest Period - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin over or under the London Interbank Offered Rate] [Absolute Rate]. Please respond to this invitation by no later than [2:00 P.M.] [9:00 A.M.] (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By_______________________ Authorized Officer EXHIBIT D Form of Money Market Quote -------------------------- To: Morgan Guaranty Trust Company of New York, as Agent Re: Money Market Quote to [John Hancock Mutual Life Insurance Company] [John Hancock Capital Corporation] (the "Borrower") In response to your invitation on behalf of the Borrower dated _______ __ , 199_ ,we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ______________________________ 2. Person to contact at Quoting Bank: _____________________________ 3. Date of Borrowing: _________________* 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market Amount** Period*** [Margin****] [Absolute Rate*****] - --------- --------- --------------------------------- $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.]** __________ * As specified in the related Invitation. ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. (notes continued on following page) We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement dated as of December 13, 1991 among the Borrower, [John Hancock Mutual Life Insurance Company] [John Hancock Capital Corporation], the Banks listed on the signature pages thereof and yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated:__________ By:_________________________ Authorized Officer _________ *** Not less than one month or not less than 14 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". ***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%). -2- EXHIBIT E COMPANY ASSUMPTION AGREEMENT ---------------------------- AGREEMENT, dated as of _____________, 199_____, made by JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts (the "Company"), in favor of the Banks and the Agent party to the Credit Agreement referred to herein and the holders from time to time of the Notes issued by JHCC (as defined below) thereunder. W I T N E S S E T H: ------------------- WHEREAS, John Hancock Capital Corporation ("JHCC") is a party to a Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of December 13, 1991 among the Company, JHCC, the Banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as agent (the "Agent"); WHEREAS, the Company owns, directly or indirectly, all of the common stock of JHCC; and [WHEREAS, as of the date hereof [describe transaction by which JHCC's corporate existence is being terminated] [describe merger or consolidation of JHCC into another Subsidiary], and under Section [5.03] [5.12] of the Credit Agreement it is a condition to such [termination] [merger] [consolidation] that the Company execute and deliver this Agreement;] [WHEREAS, the Support Agreement, dated as of October 15, 1984 between JHCC and the Company (the "Support Agreement") is being terminated as of the date hereof, and under Section 5.13 of the Credit Agreement it is a condition to such termination that the Company execute and deliver this Agreement;] [WHEREAS, the Borrowers desire to terminate JHCC as a Borrower under the Credit Agreement as of the date hereof, and under Section 9.09 of the Credit Agreement it is a condition to such termination that the Company execute and deliver this Agreement;] NOW THEREFORE, in consideration of the premises the Company hereby agrees as follows: SECTION 1. Definitions. Capitalized terms used and not otherwise ----------- defined herein shall have the respective meanings given them in the Credit Agreement. SECTION 2. Assumption. The Company hereby unconditionally and ---------- irrevocably assumes, as principal obligor, all of the obligations of JHCC under the Credit Agreement and the Notes issued by JHCC thereunder, including, without limitation, the obligations of JHCC to pay in full when due (whether at stated maturity, upon acceleration or otherwise) the principal of and interest on such Notes and all other amounts payable by JHCC under the Credit Agreement. SECTION 3. Representations and Warranties. The Company hereby ------------------------------ represents and warrants that: (a) Authorization; No Contravention. The execution, delivery and ------------------------------- performance by the Company of this Agreement are within the Company's powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or the Special Act, as amended from time to time, or the by-laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or result in or require the creation or imposition of any Lien on any asset of the Company or any Material Subsidiary. (b) Binding Effect. This Agreement constitutes a valid and binding -------------- agreement of the Company. SECTION 4. Notices. All notices and other communications provided for ------- or permitted hereunder shall be made as specified in Section 9.01 of the Credit Agreement. SECTION 5. Priority. The obligations of the Company under this -------- Agreement, and the obligations assumed by the Company hereunder, are unsecured and rank equally with other unsecured and unsubordinated obligations of the Company, subject to the requirements of Section 180F, Chapter 175, of the Massachusetts General Laws as to priorities of distribution in any liquidation proceedings begun in Massachusetts against an insolvent Massachusetts insurer. SECTION 6. Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the Commonwealth of Massachusetts. SECTION 7. Severability. Any provision of this Agreement which is ------------ illegal, invalid, prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such illegality, invalidity, prohibition or unenfor- -2- ceability without invalidating the remaining provisions hereof and any such illegality, invalidity, prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 8. Entire Agreement. This Agreement and the Credit Agreement ---------------- embody the entire agreement of the Company with respect to the subject matter hereof and supersede any prior written or oral agreements and understandings relating to the subject matter hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and delivered by its officers thereunto duly authorized as of the date first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By:__________________________ Authorized Officer By:__________________________ Authorized Officer -3- EXHIBIT F GUARANTEE AGREEMENT ------------------- GUARANTEE AGREEMENT, dated as of _____________, 199___, made by JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts (the "Company"), in favor of the Banks and the Agent party to the Credit Agreement referred to herein and the holders from time to time of the Notes issued by JHCC (as defined below) thereunder. W I T N E S S E T H: ------------------- WHEREAS, John Hancock Capital Corporation ("JHCC") is a party to a Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of December 13, 1991 among the Company, JHCC, the Banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as agent (the "Agent"); WHEREAS, the Company owns directly or indirectly, all of the common stock of JHCC; and WHEREAS, the Support Agreement, dated as of October 15, 1984 between the Company and JHCC (the "Support Agreement") is being terminated as of the date hereof, and under Section 5.13 of the Credit Agreement it is a condition to such termination that the Company execute and deliver this Guaranty Agreement; NOW THEREFORE, in consideration of the premises, the Company hereby agrees as follows: SECTION 1. Definitions. Capitalized terms used and not otherwise ----------- defined herein shall have the respective meanings given them in the Credit Agreement. SECTION 2. Guarantee. The Company hereby unconditionally and --------- irrevocably guarantees as principal and not merely as surety the full and punctual payment when due (whether at stated maturity, upon acceleration or otherwise) of the principal of and interest on each Note issued by JHCC under the Credit Agreement and the full and punctual payment of all other amounts payable by JHCC under the Credit Agreement. SECTION 3. Guarantee Absolute. The Company agrees that the guarantee ------------------ contained in this Guarantee Agreement is a guarantee of payment and not of collection or collectibility, and that the obligations of the Company hereunder shall be primary, absolute and unconditional and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of JHCC under the Credit Agreement or any Note, by operation of law or otherwise; (ii) any modification or amendment of or supplement to the Credit Agreement or any Note; (iii) any release, non-perfection or invalidity of any direct or indirect security for any obligation of JHCC under the Credit Agreement or any Note; (iv) any change in the corporate existence, structure or ownership of JHCC, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting JHCC or its assets or any resulting release or discharge of any obligation of JHCC contained in the Credit Agreement or any Note; (v) the existence of any claim, set-off or other rights which the company may have at any time against JHCC, the Agent, any Bank or any other Person, whether in connection herewith or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim -------- by separate suit or compulsory counterclaim or with respect to obligations of the Company other than obligations hereunder; (vi) any invalidity or unenforceability relating to or against JHCC for any reason of the Credit Agreement or any Note, or any provision of applicable law or regulation purporting to prohibit the payment by JHCC of the principal of or interest on any Note or any other amount payable by JHCC under the Credit Agreement; or (vii) any other act or omission to act or delay of any kind by JHCC, the Agent, any Bank or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of the Company's obligations hereunder. -2- SECTION 4. Representations and Warranties. The Company hereby ------------------------------ represents and warrants that: (a) Authorization; No Contravention. The execution, delivery and ------------------------------- performance by the Company of this Guarantee Agreement are within the Company's powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or the Special Act, as amended from time to time, or the by- laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or result in or require the creation or imposition of any Lien on any asset of the Company or any Material Subsidiary. (b) Binding Effect. This Guarantee Agreement constitutes a valid and -------------- binding agreement of the Company. SECTION 5. Manner of Payment. Payment by the Company hereunder shall ----------------- be made in such funds, to such Persons and at such times and places as are specified for corresponding payments under the Credit Agreement. SECTION 6. Enforcement of Guarantee. In no event shall any Bank, the ------------------------ Agent or any other Person have any obligation to proceed against JHCC or any other Person or any property that may be pledged to secure the obligations of JHCC under the Credit Agreement or the Notes before seeking satisfaction from the Company. SECTION 7. Waiver. The Company hereby irrevocably waives promptness, ------ diligence, acceptance hereof, presentment, demand, protest and any and all other notice not provided for herein and any requirement that at any time any Bank, the Agent or any other Person exhaust any right or take any action against JHCC or any other Person and any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge, release or defense of the Company or that might otherwise limit recourse against the Company. SECTION 8. Waiver of Subrogation. The Company irrevocably waives any --------------------- and all rights to which it may be entitled, by operation of law or otherwise, upon making any payment hereunder to be subrogated to the rights of the payee against JHCC with respect to such payment or otherwise to be reimbursed, indemnified or exonerated by JHCC in respect thereof. -3- SECTION 9. Notices. All notices and other communications provided for ------- or permitted hereunder shall be made as specified in Section 9.01 of the Credit Agreement. SECTION 10. No Waiver; Remedies. No failure on the part of any Bank or ------------------- the Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 11. Continuing Guarantee; Reinstatement in Certain ---------------------------------------------- Circumstances. The guarantee contained in this Guarantee Agreement is a - ------------- continuing guarantee and the Company's obligations hereunder shall (i) unless the Company shall have executed and delivered a Company Assumption Agreement or JHCC shall have consolidated with or merged into the Company in accordance with Section 5.12(i)(a)(A) of the Credit Agreement, remain in full force and effect until the indefeasible payment in full of the principal of and interest on the notes issued by JHCC and all other amounts payable by JHCC under the Credit Agreement and the expiration or earlier termination of the Commitments with respect to JHCC under the Credit Agreement, (ii) be binding upon the Company and its successors and assigns, and (iii) inure to the benefit of and be enforceable by the Banks, the Agent and the holders from time to time of the Notes issued by JHCC and their respective successors, transferees and assigns. If at any time any payment of any of the principal of or interest on any Note or any other amount payable by JHCC under the Credit Agreement is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy or reorganization of JHCC or otherwise, the Company's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 12. Stay of Acceleration. If acceleration of the time for -------------------- payment of any amount payable by JHCC under the Credit Agreement or the Notes is stayed upon the insolvency, bankruptcy or reorganization of JHCC, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement shall nonetheless be payable by the Company hereunder forthwith on demand by the Agent made at the request of the requisite proportion of the Banks specified in Article VI of the Credit Agreement. SECTION 13. Priority. The obligations of the Company under this -------- Guarantee Agreement are unsecured and rank equally with other unsecured and unsubordinated obligations of the Company, subject to the requirements of Section 180F, Chapter 175, of the -4- Massachusetts General Laws as to priorities of distribution in any liquidation proceedings begun in Massachusetts against an insolvent Massachusetts insurer. SECTION 14. Governing Law. This Guarantee Agreement shall be governed ------------- by, and construed in accordance with, the laws of the Commonwealth of Massachusetts. SECTION 15. Severability. Any provision of this Guarantee Agreement ------------ which is illegal, invalid, prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such illegality, invalidity, prohibition or unenforceability without invalidating the remaining provisions hereof and any such illegality, invalidity, prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 16. Entire Agreement. This Guarantee Agreement and the Credit ---------------- Agreement embody the entire agreement of the Company with respect to the subject matter hereof and supersede any prior written or oral agreements and understandings relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the Company has caused this Guarantee Agreement to be duly executed and delivered by its officers thereunto duly authorized as of the date first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By:__________________________ Authorized Officer By:__________________________ Authorized Officer -5- EXHIBIT G-1 OPINION OF EDWARD J. CRANE, JR., SECOND VICE PRESIDENT AND COUNSEL OF THE COMPANY ------------------------- December 13, 1991 The Banks and the Agent listed on the signature pages of the below-referenced Credit Agreement c/o Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260 Re: John Hancock Mutual Life Insurance Company and John Hancock Capital Corporation Credit Agreement ------------------------------------------------- I have acted as counsel for John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts ("John Hancock"), and John Hancock Capital Corporation, a Delaware corporation and an indirect, wholly-owned subsidiary of John Hancock ("JHCC"), in connection with the negotiation, execution and delivery by John Hancock and JHCC of the Credit Agreement, dated as of December 13, 1991, among John Hancock, JHCC, the Banks listed on signature pages of such Credit Agreement (the "Banks") and Morgan Guaranty Trust Company of New York, as Agent (the "Agent") (the "Credit Agreement"), and the execution and issuance thereunder of the Notes of John Hancock (the "John Hancock Notes") and JHCC (the "JHCC Notes"). All terms capitalized herein which are not otherwise defined have the meanings attributed thereto in the Credit Agreement. Morgan Guaranty Trust Company -2- December 13, 1991 of New York In so acting, I have reviewed, among other things, the Credit Agreement, the Notes and the Support Agreement and such other documents as I have deemed necessary or appropriate as a basis for the opinions expressed below. In my examination I have assumed the genuineness of all signatures (other than signatures of officers of John Hancock and JHCC), the authenticity of all documents submitted to me as originals (other than the Credit Agreement, the Support Agreement and the Notes), the conformity to original documents of all documents submitted to me as certified or photostatic copies, and the authenticity of the originals of such copies. I have also examined and relied upon the representations and warranties as to factual matters contained in and made pursuant to the Credit Agreement and the Support Agreement and I have examined and relied upon the originals or copies certified, or otherwise identified to my satisfaction, of such records, documents, certificates and other instruments, and I have made such other investigations, as in my judgment are necessary or appropriate to enable me to render the opinion below. Subject to the qualifications discussed below, I am of the following opinion: 1. John Hancock. John Hancock is a legal reserve mutual life insurance ------------ company duly organized in 1862 pursuant to the Special Act and is validly existing and in good standing under the laws of the Commonwealth of Massachusetts, and has all powers, and to my knowledge, all material governmental licenses, consents and approvals required to carry on its business as now conducted and to execute and deliver the Credit Agreement, the John Hancock Notes and the Support Agreement. 2. JHCC. JHCC is a corporation duly incorporated, validly existing and in ---- good standing under the laws of the State of Delaware, and has all corporate powers and, to my knowledge, all material governmental licenses, consents and approvals required to carry on its business as now conducted and to execute and deliver the Credit Agreement, the JHCC Notes and the Support Agreement. Morgan Guaranty Trust Company -3- December 13, 1991 of New York 3. The Credit Agreement. The Credit Agreement has been duly authorized, -------------------- executed and delivered by both John Hancock and JHCC. 4. The John Hancock Notes. The John Hancock Notes have been duly ---------------------- authorized, executed and delivered by John Hancock. 5. The JHCC Notes. The JHCC Notes have been duly authorized, executed and -------------- delivered by JHCC. 6. Ranking. (a) The obligations of John Hancock under the Credit ------- Agreement, the John Hancock Notes and the Support Agreement will rank equally with other unsecured and unsubordinated obligations of John Hancock, subject to the requirements of section one hundred and eighty F of Chapter 175 of the Massachusetts General Laws, which section establishes priorities of distribution in any liquidation proceeding begun in the Commonwealth of Massachusetts against an insolvent Massachusetts insurer, and (b) the obligations of JHCC under the Credit Agreement and the JHCC Notes will rank equally with other unsecured and unsubordinated obligations of JHCC. 7. Support Agreement. The Support Agreement has been duly authorized, ----------------- executed and delivered by John Hancock and JHCC and constitutes the legal, valid and binding obligation of John Hancock and JHCC enforceable against John Hancock or JHCC, as the case may be, in accordance with its terms, and the provisions thereof which purport to create a direct right of the holders of any JHCC Notes to enforce John Hancock's obligations under the Support Agreement in the event of JHCC's failure to meet its obligations under the JHCC Notes are legally effective for such purpose. 8. Governmental Consents. No consent or action of, or filing with, any --------------------- governmental or public regulatory body or authority, including, without limitation, the Executive Office of Consumer Affairs and Business Regulation, Division of Insurance, of the Commonwealth of Massachusetts, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance by John Hancock or JHCC of the Credit Agreement or the Support Agreement or their respective obligations thereunder or by John Hancock of the John Hancock Notes or JHCC of the JHCC Notes or their respective obligations thereunder. 9. Conflict with Instruments, Etc. Neither the execution and ------------------------------- delivery by John Hancock and JHCC of the Credit Agreement, the Notes or the Support Agreement, nor the fulfillment of, nor compliance with, the terms and provisions thereof, will violate any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality or result in any breach of any of the terms, conditions or provisions of, or constitute a default under, or result in the creation or imposition of, any mortgage, lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of John Hancock or JHCC pursuant to the terms of, the Special Act, the Certificate of Incorporation of JHCC, or the By-Laws of John Hancock or JHCC, or any mortgage, indenture, agreement or instrument of which I am aware and to which John Hancock or JHCC is a party or by which it is bound. 10. Litigation. To my knowledge, there is no action, suit or ---------- proceeding pending or threatened against or affecting either Borrower before any court or arbitrator or any governmental body, agency or official (i) which, if adversely determined, would have a Material Adverse Effect or a material adverse effect on the ability of either Borrower to perform its respective obligations under the Support Agreement or (ii) which in any manner draws into question the validity or enforceability of the Credit Agreement, the Support Agreement or any of the Notes. 11. Not an Investment Company. John Hancock is not an investment ------------------------- company within the meaning of the Investment Company Act of 1940, as amended. JHCC has been exempted from all provisions of the Investment Company Act of 1940, as amended, including, without limitation, those relating to the offering and sale of securities by JHCC, by order of the Securities and Exchange Commission dated June 26, 1984 issued pursuant to Section 6(c) of such Act, and to my knowledge such order remains in full force and effect and has not in any way been modified or amended. The opinions expressed above are subject to the following qualifications: (a) I express no opinion as to any laws other than the laws of the Commonwealth of Massachusetts, the Federal laws of the United States of America and, to the extent set forth in the foregoing opinions with respect to JHCC, the corporate laws of the State of Delaware; (b) I have assumed the requisite corporate power and authority on the part of the Agent and the Banks to enter into the Credit Agreement and to make Loans thereunder and the due authorization, execution and delivery of the Credit Agreement by the Agent and the Banks; (c) I express no opinion as to the enforceability of Section 9.12 of the Credit Agreement; (d) I express no opinion as to the effect on the opinions herein stated of (i) the compliance or noncompliance by the Agent or any Bank with any state, Federal or other laws or regulations applicable to it or (ii) the legal or regulatory status or the nature of the business of the Agent or any Bank; and (e) The enforceability of the Credit Agreement, the Notes and the Support Agreement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law), and with respect to the enforceability of the Credit Agreement, the John Hancock Notes and the Support Agreement against John Hancock, such enforceability may be further limited by the requirements of section one hundred and eighty F of Chapter 175 of the Massachusetts General Laws, which section establishes priorities of distribution in any liquidation proceeding begun in the Commonwealth of Massachusetts against an insolvent Massachusetts insurer. I am delivering this opinion to you for your benefit pursuant to Section 3.01(e) of the Credit Agreement. Cleary, Gottlieb, Steen & Hamilton and Davis Polk & Wardwell may rely on this opinion as if it were addressed to them. No Person other than you and Cleary, Gottlieb, Steen & Hamilton and Davis Polk & Wardwell is entitled to rely on this opinion without my prior written consent. This opinion does not address facts and circumstances or changes in law arising after the date hereof and I assume no responsibility to inform you of any such changes which may come to my attention. Very truly yours, Edward J. Crane, Jr. Second Vice President and Counsel EXHIBIT G-2 OPINION OF CLEARY, GOTTLIEB, STEEN & HAMILTON, SPECIAL COUNSEL FOR THE BORROWERS --------------------------------- December 13, 1991 The Banks and the Agent listed on the signature pages of the below-referred Credit Agreement c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260-0060 Ladies and Gentlemen: We have acted as special New York counsel to John Hancock Mutual Life Insurance Company (the "Company") and John Hancock Capital Corporation ("JHCC") in connection with the Credit Agreement, dated as of December 13, 1991 (the "Agreement"), among the Company, JHCC and you, and are furnishing this opinion pursuant to Section 3.01(e) of the Agreement. Capitalized terms used and not defined herein have the meanings given them in the Agreement. In arriving at the opinions expressed below, we have examined and relied on (i) a counterpart original of the Agreement, executed by the Borrowers, (ii) originals of each of the Notes issued today, executed by the Company or JHCC, as the case may be, and (iii) the documents delivered to you by the Borrowers at the closing today pursuant to Section 3.01 of the Agreement, and we have made such investigations of law as we have deemed appropriate as a basis for the opinions expressed below. In rendering the opinions expressed below, we have assumed and have not verified that the signatures on all documents that we have examined are genuine. We express no opinion other than as to the law of the State of New York. Insofar as this opinion involves matters arising under the law of the State of Delaware or the Commonwealth of Massachusetts, we have relied on the opinion of Edward J. Crane, Jr., Esq., Second Vice President and Counsel of the Company, delivered to you on the date hereof. Based on the foregoing, it is our opinion that: 1. Assuming due authorization, execution and delivery of the Agreement by you, the Agreement is a legal, valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). 2. Each Note issued on the date hereof is a legal, valid and binding obligation of the Borrower executing and delivering the same, enforceable against such Borrower in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). 3. The execution, delivery and performance by the Borrowers of the Agreement, the Support Agreement and the Notes do not require the consent, approval, authorization, registration or qualification of or with any governmental authority of the State of New York. We are furnishing this opinion letter to the Banks and the Agent solely for their benefit. This opinion letter is not to be used, circulated, quoted or otherwise referred to for any other purpose. Very truly yours, CLEARY, GOTTLIEB, STEEN & HAMILTON By: ____________________________________ Alan S. Dunning, a Partner EXHIBIT H OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENT -------------------------------------- December 13, 1991 To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the Credit Agreement (the "Credit Agreement") dated as of December 13, 1991 among John Hancock Mutual Life Insurance Company, a legal reserve mutual life insurance company organized under the laws of the Commonwealth of Massachusetts and John Hancock Capital Corporation, a Delaware corporation (each, a "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01(f) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that the Credit Agreement constitutes a valid and binding agreement of each Borrower and that the Notes of each Borrower constitute valid and binding obligations of such Borrower. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York and the federal laws of the United States of America. Insofar as this opinion involves matters arising under the law of the Commonwealth of Massachusetts or the State of Delaware, we have relied without any independent investigation on the opinion of Edward J. Crane, Jr., Second Vice President and Counsel of the Company, delivered to you on the date hereof. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other person without our prior written consent. Very truly yours, EXHIBIT I ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _______________, 199___ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY (the "Company"), JOHN HANCOCK CAPITAL CORPORATION ("JHCC") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H - - - - - - - - - - WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Credit Agreement dated as of December 13, 1991 among the Company, JHCC (the Company and JHCC, collectively, the "Borrowers" and each, a "Borrower"), the Assignor and the other Banks party thereto, as Banks, and the Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrowers in an aggregate principal amount at any time outstanding not to exceed $_____________; WHEREAS, Committed Loans made to the Borrowers by the Assignor under the Credit Agreement in the aggregate principal amount of $___________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its commitment thereunder in an amount equal to $____________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined ----------- herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the ---------- Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, each Borrower and the Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale -------- contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds an amount equal to $_________.* It is understood that participation and facility fees accrued to the date hereof are for the account of the Assignor and facility fees accruing from and including the date hereof in respect of the Assigned Amount are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrowers and the Agent. Except as provided -------------------------------------- in Section 9.06(c) of the Credit Agreement, this Agreement is conditioned upon the consent of the Borrowers and the Agent pursuant to such Section 9.06(c). The execution ____________ * Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. of this Agreement by each Borrower and the Agent is evidence of this consent. Pursuant to Section 9.06(c) each Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no ------------------------ representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of either Borrower, or the validity and enforceability of the obligations of either Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrowers. SECTION 6. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the Commonwealth of Massachusetts. SECTION 7. Counterparts. This Agreement may be signed in any number of ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By:_________________________________ Title: [ASSIGNEE] By:_________________________________ Title: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By__________________________________ Authorized Officer By__________________________________ Authorized Officer JOHN HANCOCK CAPITAL CORPORATION By__________________________________ Authorized Officer By__________________________________ Authorized Officer MORGAN GUARANTY TRUST COMPANY OF NEW YORK By__________________________________ Title: EXHIBIT J JHCC TERMINATION NOTICE ----------------------- [Date] To: Morgan Guaranty Trust Company of New York (the "Agent") From: John Hancock Mutual Life Insurance Company (the "Company") and John Hancock Capital Corporation ("JHCC") Re: Credit Agreement (the "Credit Agreement") dated as of December 13, 1991 among the Company, JHCC, the Banks listed on the signature pages thereof and the Agent ------------------------------------------------ We hereby give notice pursuant to Section 9.09 of the Credit Agreement that, effective as of the date hereof, JHCC is terminated as a Borrower under the Credit Agreement and all commitments by the Banks to make Loans to JHCC under the Credit Agreement are hereby terminated. We hereby certify that the termination of JHCC as a Borrower under the Credit Agreement complies with Section 9.09 of the Credit Agreement for the reasons set forth below: [1. There are no Loans outstanding to JHCC. 2. All obligations of JHCC as a Borrower under the Credit Agreement arising in respect of any period in which JHCC was, or on account of any action of inaction of JHCC as, a Borrower under the Credit Agreement shall survive the termination effected by this notice.] * [1. The Company has executed and delivered a Company Assumption Agreement]. ________________ * Include this language if no Company Assumption Agreement has been executed and delivered. Terms used herein have the meanings assigned to them in the Credit Agreement. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By_____________________________________ Authorized Officer By_____________________________________ Authorized Officer JOHN HANCOCK CAPITAL CORPORATION By_____________________________________ Authorized Officer By_____________________________________ Authorized Officer EXHIBIT K SUPPORT AGREEMENT dated as of October 15, 1984 between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts corporation ("John Hancock"), and JOHN HANCOCK CAPITAL CORPORATION, a Delaware corporation ("Capital"). WHEREAS, John Hancock owns through John Hancock Subsidiaries, Inc., a Delaware corporation and a wholly-owned subsidiary of John Hancock, and presently intends to continue to own, either directly or through one or more wholly-owned subsidiaries, all of the outstanding shares of the capital stock of Capital having general voting power; and WHEREAS, it is in the interests of both John Hancock and Capital and in furtherance of Capital's corporate purposes that Capital be able to borrow money from banks, other financial institutions and others, including borrowings in the form of Commercial Paper (as hereinafter defined), and to incur such borrowings at the most favorable prevailing rates and terms, and in this regard Capital has requested John Hancock to enter into this Agreement; and WHEREAS, Capital intends to issue, from time to time, its short-term notes having maturities not exceeding nine months from their dates of issue (such notes herein referred to as "Commercial Paper') and to sell its Commercial Paper in the commercial paper market, and to incur, from time to time, other indebtedness for borrowed money, all in furtherance of its corporate purposes; and WHEREAS, Capital also intends to guarantee indebtedness for borrowed money (including such indebtedness in the form of bonds, notes and other transferable securities) incurred from time to time by John Hancock Overseas Finance N.V. and other direct or indirect subsidiaries of John Hancock (herein collectively referred to as "John Hancock companies"); and WHEREAS, Capital intends that the proceeds of any such borrowings incurred by it be used to make loans to John Hancock and the John Hancock companies; and WHEREAS, in furtherance of the foregoing objectives, John Hancock and Capital are entering into this Agreement for the express benefit of the holder or holders of the Commercial Paper of Capital, and, if and to the extent John Hancock may hereafter specifically agree in writing, the holder or holders of other indebtedness for borrowed money of Capital and the holder or holders of indebtedness for borrowed money incurred by one or more of the John Hancock companies which has been guaranteed by Capital. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, John Hancock and Capital hereby agree as follows: (1) Stock Ownership. John Hancock, during the term of this Agreement, will --------------- will continue to own, either directly or through one or more wholly-owned subsidiaries, the legal title to and beneficial interest in all outstanding shares of the capital stock of Capital having general voting power, and will not directly or indirectly pledge or in any way encumber or otherwise dispose of any such shares of stock. -2- (2) Maintenance of Tangible Net Worth. John Hancock, during the term of this --------------------------------- Agreement will take such action as may be required to enable Capital to have and maintain a "Tangible Net Worth" of at least $1,000,000. The term "Tangible Net Worth" shall mean an amount equal to the capital stock and surplus (including paid-in or capital surplus) accounts of Capital after deducting therefrom the book amount of all intangible assets of Capital, all determined in accordance with generally accepted accounting principles, except that any Subordinated Loan made by John Hancock or by any one or more of the John Hancock companies to Capital shall be considered part of such capital stock and surplus accounts. The term "Subordinated Loan" shall mean any loan or advance made to Capital by John Hancock or by any of the John Hancock companies which by its terms is subordinated in right of payment to all obligations for borrowed money issued or guaranteed by Capital, except Subordinated Loans. (3) Officer's Certificate; Payments to Capital. If at any time Capital shall ------------------------------------------ determine that its Tangible Net Worth shall be less than $1,000,000, Capital shall promptly deliver to John Hancock a certificate of the President or any Vice President or the Treasurer of Capital ("Officer's Certificate") setting forth the Tangible Net Worth of Capital as of the date of said certificate and the amount of the payment ("Deficiency Amount") required to be made under Section (2) in order to enable Capital -3- to have the amount of Tangible Net Worth provided for in Section (2), all in reasonable detail and determined in accordance with Section (2). John Hancock shall pay, or shall cause to be paid, subject to subsequent adjustment as provided for in Section (4), to Capital an amount equal to the Deficiency Amount immediately upon receipt of the Officer's Certificate. Any such payment shall be in the form of a capital contribution, the purchase of additional shares of capital stock of Capital or the making of Subordinated Loans, as John Hancock shall determine. (4) Adjustment of Deficiency Amount. John Hancock shall not be deemed to have ------------------------------- accepted an asserted Deficiency Amount certified to it under Section (3), if within ten (10) days after receipt of such certification, it shall give Capital written notice of its objections thereto and the reasons therefor ("Objection Notice"), provided that the giving of such Objection Notice shall not relieve John Hancock of its obligation to pay or cause to be paid, to Capital an amount equal to the asserted Deficiency Amount in accordance with Section (3). If such Objection Notice is given, John Hancock and Capital will attempt in good faith to agree upon the amount of such deficiency. If John Hancock and Capital cannot so agree within ten (10) days after the Objection Notice is given, then -4- John Hancock and Capital agree that Ernst & Whinney shall be requested to deliver to John Hancock and Capital, within thirty (30) days after the Objection Notice is given, a letter from Ernst & Whinney to John Hancock and Capital (A) stating the actual deficiency as of the date of the Officer's Certificate setting forth the asserted Deficiency Amount, as computed by Ernst & Whinney from the books and records of Capital, (B) demonstrating in reasonable detail the manner in which such actual deficiency was computed, and (C) stating that such computation was made in accordance with the terms of this Agreement. Such computation of the actual deficiency shall be binding and conclusive upon John Hancock and Capital. If the amount of the actual deficiency as finally determined under this Section (4) is different from the asserted Deficiency Amount, then the amount of the Deficiency Amount asserted under Section (3) shall be adjusted by refunds from Capital, or additional payments to Capital in the manner provided in Section (3), as may be required. John Hancock and Capital shall bear equally any fees and disbursements incurred by Ernst & Whinney in rendering any letter in accordance with the terms of this Section (4). John Hancock and Capital agree that other mutually acceptable nationally recognized certified public accounting firms may be substituted for Ernst & Whinney. -5- (5) Benefit of Agreement. This Agreement is made for the express benefit of the -------------------- holder or holders from time to time of Capital's Commercial Paper and, if and to the extent that John Hancock may hereafter agree with Capital in writing to expressly extend the benefits of this Agreement to the holder or holders of other indebtedness for borrowed money of Capital or the holder or holders of indebtedness for borrowed money incurred by one or more of the John Hancock companies which has been guaranteed by Capital, such holder or holders as may be specifically described in any such writing, and nothing in this Agreement shall be construed otherwise (such Commercial Paper; such other indebtedness of Capital and such indebtedness guaranteed by Capital being herein referred to as "Covered Credit"; such holder or holders being herein referred to as "Covered Creditors"). Capital agrees that it will not incur any indebtedness for borrowed money, other than with respect to Commercial Paper and Subordinated Loans, or guarantee any indebtedness incurred by one or more of the John Hancock companies, unless and until John Hancock shall have expressly agreed in writing that such indebtedness for borrowed money or such indebtedness guaranteed by Capital, as the case may be, shall be Covered Credit and the holder or holders of such indebtedness shall be Covered Creditors. -6- (6) Enforcement of Agreement. Capital agrees for the benefit of Covered ------------------------ Creditors that it will timely take any and all action under this Agreement necessary to require John Hancock to perform its obligations under this Agreement. Capital and John Hancock further agree that, if and to the extent that Capital shall fail to take such action, any Covered Creditor may do so. John Hancock hereby makes a continuing offer to each person who, in reliance on this Agreement and prior to the termination of this Agreement, becomes a Covered Creditor, to perform its obligations under Section (2) of this Agreement. Such offer shall be deemed to be accepted by the act of such person becoming a Covered Creditor and shall give rise to a direct right of action on the part of such person against John Hancock to enforce John Hancock's obligations under Section (2) of this Agreement in the event of Capital's failure to do so. (7) Not a Guaranty. This Agreement is not intended to be and is not, and -------------- nothing herein contained and nothing done by John Hancock pursuant to this Agreement shall be deemed to constitute, a guaranty by John Hancock of the payment of the interest or principal of any obligations, indebtedness or liability of any kind or character and howsoever evidenced or arising of Capital or any of the other John Hancock companies to any person or persons whomsoever. -7- (8) Termination By Deposit of Funds. If and to the extent that John Hancock ------------------------------- shall deposit or shall cause to be deposited, in trust at a bank or trust company organized under the laws of any State of the United States or a national bui1ding association, in any such case having capital stock, surplus and undivided profits aggregating at least $50,000,000 (hereinafter referred to as the "Depository"), money, or direct obligations of, or obligations secured fully by direct obligations of, or obligations unconditionally guaranteed as to payment of principal and interest by, the United States of America, the principal of and interest on which when due will provide funds in amount sufficient to pay when due and payable the principal of, and premium, if any, and interest on, all Covered Credit which is outstanding as of the close of business on the date of such deposit, and, if such deposit shall be accompanied by an irrevocable written direction from John Hancock to the Depository to apply such deposit to the payment of the principal of and premium, if any, and interest on, such Covered Credit as and when the same shall become due and payable, then this Agreement shall forthwith terminate and be of no further force and effect. (9) Amendment, Modification; Termination By Notice. This Agreement may be ---------------------------------------------- amended or modified only by an agreement in writing executed by both of the parties hereto, and, in addition to the termination provisions of Section (8), this Agreement may be terminated by either party hereto -8- by written notice given to the other party not less than thirty (30) days in advance of the date specified in such notice for such termination ("Cut- off Date"); provided, however, that no such amendment or modification, and no such termination shall relieve John Hancock of any of its obligations under this Agreement or in any way affect adversely the rights of Covered Creditors under this Agreement, unless and until all Covered Credit which is outstanding as of the close of business on the effective date of such amendment or modification or the Cut-off Date shall either (A) have been paid in full or (B) have been unconditionally guaranteed as to payment of principal, premium, if any, and interest by John Hancock pursuant to an agreement entered into between John Hancock and Capital for the benefit of Covered Creditors. (10) Communications. All communications provided for herein shall be delivered, -------------- or mailed (by first class mail, postage prepaid), addressed (A) if to John Hancock, to John Hancock Mutual Life Insurance Company, John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117, Attention: Vice President and --------- Treasurer, or (B) if to Capital, to John Hancock Capital Corporation, John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117, Attention: --------- President. (11) Other. This Agreement is intended to take effect as a sealed instrument. ----- This Agreement shall be binding upon John Hancock, its successors and assigns, and shall inure to the benefit of Capital, its successors and assigns. -9- This Agreement constitutes the entire agreement of John Hancock and Capital with respect to the subject matter hereof. The headings of this Agreement are for reference only and shall not affect the meaning hereof. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, John Hancock and Capital have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Edward J. Boudreau --------------------------------- By /s/ Christopher M. Meyer --------------------------------- JOHN HANCOCK CAPITAL CORPORATION By /s/ John T. Farady --------------------------------- By /s/ Henry J. Desautel --------------------------------- -10- EX-10.3 7 FISCAL AGENCY AGREEMENT EXHIBIT 10.3 ================================================================================ FISCAL AGENCY AGREEMENT between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY Issuer and THE FIRST NATIONAL BANK OF BOSTON Fiscal Agent __________________________ Dated as of February 25, 1994 __________________________ 7 3/8% Surplus Notes scheduled to mature on February 15, 2024 ================================================================================ TABLE OF CONTENTS ----------------- Page ---- 1. The Securities ...................................................... 1 (a) General ......................................................... 1 (b) Forms of Securities ............................................. 1 (c) Book-Entry Provisions ........................................... 2 (d) Denominations ................................................... 4 2. Fiscal Agent; Other Agents .......................................... 4 3. Authentication ...................................................... 5 4. Payment and Cancellation ............................................ 6 (a) Payment ......................................................... 6 (b) Cancellation .................................................... 7 5. Global Securities ................................................... 7 6. Registration, Transfer and Exchange of Securities ................... 9 7. Delivery of Certain Information ..................................... 12 (a) Rule 144A Information ........................................... 12 (b) Periodic Reports ................................................ 12 8. Conditions of Fiscal Agent's Obligations ............................ 12 (a) Compensation and Indemnity ...................................... 13 (b) Agency .......................................................... 13 (c) Advice of Counsel ............................................... 14 (d) Reliance ........................................................ 14 (e) Interest in Securities, etc. ..................................... 14 (f) Non-Liability for Interest ...................................... 14 (g) Certifications .................................................. 14 (h) No Implied Obligations .......................................... 15 9. Resignation, Removal and Appointment of Successor ................... 15 (a) Fiscal Agent and Paying Agent ................................... 15 (b) Resignation and Removal ......................................... 15 (c) Successors ...................................................... 16 (d) Acknowledgement ................................................. 17 (e) Merger, Consolidation, etc. ...................................... 17 10. Meetings and Amendments ............................................ 17 (a) Calling of Meeting, Notice and Quorum .......................... 17 (b) Approval ....................................................... 19 (c) Binding Nature of Amendments, Notices, Notations, etc. .......... 20 (d) "Outstanding" Defined .......................................... 21 -i- Page ---- 11. Governing Law ...................................................... 22 12. No Implied Obligations ............................................. 22 13. Notices ............................................................ 22 14. Separability ....................................................... 23 15. Headings ........................................................... 24 16. Counterparts ....................................................... 24 EXHIBIT A FORM OF SECURITY ............................................. A-1 EXHIBIT B FORM OF TRANSFER CERTIFICATE FOR EXCHANGE OR TRANSFER OF RESTRICTED DEFINITIVE SECURITY .......................................... B-1 -ii- FISCAL AGENCY AGREEMENT, dated as of February 25, 1994, between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a mutual life insurance company organized under the laws of the Commonwealth of Massachusetts (the "Issuer"), having its principal office at 200 Clarendon Street, Boston, MA 02117, and The First National Bank of Boston, a national banking association organized under the laws of the United States, as Fiscal Agent (together with any successor as Fiscal Agent hereunder, the "Fiscal Agent"). The Exhibits attached hereto shall be deemed to be a part of this Agreement. 1. The Securities. -------------- (a) General. This Agreement is made in respect of $450,000,000 aggregate ------- principal amount of 7 3/8% Surplus Notes scheduled to mature on February 15, 2024 (the "Notes" or the "Securities") of the Issuer. Claims based upon the Securities will rank below all Indebtedness, Policy Claims and Prior Claims (each as hereinafter defined) upon the terms and conditions set forth in Section 10 of the Notes. The payment by the Issuer of principal and interest on the Securities shall be conditioned upon the payment restrictions set forth in paragraphs 4 and 10 of the Securities (the "Payment Restrictions"). The Notes are scheduled to mature on February 15, 2024 (the "Scheduled Maturity Date"). Any reference herein to the term "scheduled maturity date" or other date for the payment of principal of the Notes shall include the date upon which any state or federal agency obtains an order or grants approval for the reorganization, rehabilitation, liquidation, conservation or dissolution of the Issuer. (b) Forms of Securities. The Securities are being offered and sold by the ------------------- Issuer pursuant to a Purchase Agreement, dated February 17, 1994 (the "Purchase Agreement"), between the Issuer and the Purchasers named therein (the "Purchasers") either (i) to "institutional investors" that are "accredited investors" ("Accredited Investors") within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act of 1933, as amended (the "Act"), in definitive, fully registered form without interest coupons ("Definitive Securities") or (ii) to qualified institutional buyers within the meaning of Rule 144A ("Rule 144A") under the Act in the form of global Securities (the "global Securities") in definitive, fully registered form without interest coupons. The Securities shall be substantially in the form of the Security attached as Exhibit A hereto, with such applicable legends as are provided for in Exhibit A. Each such global Security shall be registered in the name of The Depository Trust Company (together with any successor depositary, the "Depositary") or its nominee and deposited with the Fiscal Agent or its affiliate, as custodian for the Depositary, duly executed by the Issuer and authenticated by the Fiscal Agent as hereinafter provided. The aggregate principal amount of each global Security may from time to time be increased or decreased by adjustments made on the records of the Fiscal Agent, as custodian for the Depositary, as hereinafter provided. All Securities shall be issued substantially in the form of Security attached hereto as Exhibit A and shall be executed manually or in facsimile on behalf of the Issuer by (i) any two of Chief Financial Officer Thomas E. Moloney, Senior Vice President and Treasurer John T. Farady, Second Vice President Henry J. Desautel, or any one of the foregoing and Assistant Treasurer Julie H. Indge, Assistant Treasurer Karen E. Liukkonen or Assistant Treasurer Paul A. Meissner, Jr. or (ii) any other officer or officers of the Issuer that may be certified to the Fiscal Agent as being authorized to execute the Securities manually or in facsimile on behalf of the Issuer (the "Authorized Officers"), notwithstanding that such officers, or any of them, shall have ceased, for any reason, to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of any such Security. The Securities (i) may also have such additional provisions, omissions, variations or substitutions as are not inconsistent with the provisions of this Agreement, and (ii) may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with this Agreement, any law or with any rules made pursuant thereto or with the rules of any securities exchange, insurance regulatory or other governmental agency or depositary therefor or as may, consistently herewith, be determined by the Authorized Officers executing such Securities, in each case (i) and (ii) as conclusively evidenced by their proper execution of such Securities. (c) Book-Entry Provisions. This Section 1(c) shall apply to all global --------------------- Securities. The Issuer shall execute and the Fiscal Agent shall, in accordance with this Section 1(c), authenticate and deliver one or more global Securities as required to be issued pursuant to Section 1(b) hereof, which (A) shall be registered in the name of the Depositary or its nominee, (B) shall be delivered by the Fiscal Agent to the Depositary or pursuant to the Depositary's instructions and (C) shall bear legends substantially to the following effect: -2- "UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY] TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IN EXCHANGE FOR THIS SECURITY OR ANY PORTION HEREOF IS REGISTERED IN THE NAME OF [INSERT NAME OF NOMINEE OF DEPOSITARY] OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY] (AND ANY PAYMENT IS MADE TO [INSERT NAME OF NOMINEE OF DEPOSITARY] OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN [INSERT NAME OF DEPOSITARY] OR A NOMINEE THEREOF IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, [INSERT NAME OF NOMINEE OF DEPOSITARY], HAS AN INTEREST HEREIN." "THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE FISCAL AGENCY AGREEMENT. THIS GLOBAL SECURITY MAY NOT BE EXCHANGED, IN WHOLE OR IN PART, FOR A SECURITY REGISTERED IN THE NAME OF ANY PERSON OTHER THAN [INSERT NAME OF DEPOSITARY] OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES SET FORTH IN SECTION 5 OF THE FISCAL AGENCY AGREEMENT, AND MAY NOT BE TRANSFERRED, IN WHOLE OR IN PART, EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 6(B) OF THE FISCAL AGENCY AGREEMENT. BENEFICIAL INTERESTS IN THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SECTION 6(B) OF THE FISCAL AGENCY AGREEMENT." Neither any members of, or participants in, the Depositary ("Agent Members") nor any other persons on whose behalf Agent Members may act shall have any rights under this Fiscal Agency Agreement with respect to any global Security registered in the name of the Depositary or any nominee thereof, or under any such global Security, and the Depositary or such nominee, as the case may be, may be treated by the Issuer, the Fiscal Agent and any agent of the Issuer or the Fiscal Agent as the absolute owner and holder of such global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Fiscal Agent or any agent of the Issuer or the Fiscal Agent from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Agent Members and any other -3- person on whose behalf an Agent Member may act, the operation of customary practices of such persons governing the exercise of the rights of a holder of any Security. (d) Denominations. The Securities and beneficial interests in global ------------- Securities shall be issuable in minimum denominations of (i) $250,000, in the case of Securities offered and sold, or subsequently transferred, in reliance on Rule 144A, (ii) $500,000, in the case of Securities offered and sold, or subsequently transferred, to Accredited Investors or (iii) $500,000 the case of Securities subsequently transferred in reliance on Regulation S under the Act, and, in each case, any amount in excess thereof that is an integral multiple of $1,000. 2. Fiscal Agent; Other Agents. --------------------------- The Issuer hereby appoints The First National Bank of Boston, acting through its corporate trust office at Blue Hills Office Park, 150 Royall Street, Canton, Massachusetts 02021, attn: Corporate Trust Division and the office of its affiliate, BancBoston Trust Company of New York (for payments, exchanges and transfers) in the Borough of Manhattan, The City of New York (together, the "Corporate Trust Office"), as fiscal agent of the Issuer in respect of the Securities upon the terms and subject to the conditions herein set forth, and The First National Bank of Boston hereby accepts such appointment. The First National Bank of Boston, and any successor or successors as such fiscal agent qualified and appointed in accordance with Section 9 hereof, are herein called the "Fiscal Agent". The Fiscal Agent shall have the powers and authority granted to and conferred upon it in the Securities and hereby and such further powers and authority to act on behalf of the Issuer as may be mutually agreed upon in writing by the Issuer and the Fiscal Agent. The Fiscal Agent shall keep a copy of this Agreement available for inspection during normal business hours at its Corporate Trust Office. The Fiscal Agent or any Paying Agent (as defined below) shall also act as Transfer Agent (as defined below). All of the terms and provisions with respect to such powers and authority contained in the Securities are subject to and governed by the terms and provisions hereof. The Issuer may, at its discretion, appoint one or more agents (a "Paying Agent" or "Paying Agents") for the payment, to the extent permitted under the Payment Restrictions, of the principal of and any interest on the Securities, and one or more agents (a "Transfer Agent" or "Transfer Agents") for the transfer and exchange of Securities, at such place or places as the Issuer may -4- determine; provided, however, that the Issuer shall at all times maintain a -------- ------- Paying Agent and Transfer Agent in the Borough of Manhattan, The City of New York (which Paying Agent and Transfer Agent may be the Fiscal Agent or its affiliate). The Issuer hereby initially appoints the Fiscal Agent or its affiliate, as appropriate, at its respective Corporate Trust Office as principal Paying Agent, Transfer Agent, authenticating agent and securities registrar, and the Fiscal Agent or its affiliate, as appropriate, hereby accepts such appointment. Each Transfer Agent shall act as a security registrar and there shall be kept at the office of each Transfer Agent a register in which, subject to such reasonable regulations as the Issuer may prescribe, the Issuer shall provide for the registration of Securities and the registration of transfers of Securities. The Issuer shall promptly notify the Fiscal Agent of the name and address of any other Paying Agent or Transfer Agent appointed by it, and will notify the Fiscal Agent of the resignation or termination of any such Paying Agent or Transfer Agent. Subject to the provisions of Section 9(c) hereof, the Issuer may vary or terminate the appointment of any such Paying Agent or Transfer Agent at any time and from time to time upon giving not less than 90 days' notice to such Paying Agent or Transfer Agent, as the case may be, and to the Fiscal Agent. The Issuer shall cause notice of any resignation, termination or appointment of the Fiscal Agent or any Paying Agent or Transfer Agent and of any change in the office through which any such Agent will act to be provided to holders of Securities. 3. Authentication. -------------- The Fiscal Agent is authorized, upon receipt of Securities duly executed on behalf of the Issuer for the purposes of the original issuance of Securities, (i) to authenticate said Securities in an aggregate principal amount not in excess of $450,000,000, and to deliver said Securities in accordance with the written order or orders of the Issuer signed on its behalf by the Authorized Officers and (ii) thereafter to authenticate and deliver Securities in accordance with the provisions therein and hereinafter set forth. The Fiscal Agent may, with the consent of the Issuer, appoint by an instrument or instruments in writing one or more agents (which may include itself) for the authentication of the Securities and, with such consent, vary or terminate any such appointment upon written notice and approve any change in the office through which any authenticating agent acts. The Issuer (by written notice to the Fiscal Agent and the authenticating agent whose -5- appointment is to be terminated) may also terminate any such appointment at any time. The Fiscal Agent hereby agrees to solicit written acceptances from the entities concerned (in form and substance satisfactory to the Issuer) of such appointments. In its acceptance of such appointment, each such authenticating agent shall agree to act as an authenticating agent pursuant to the terms and conditions of this Agreement. 4. Payment and Cancellation ------------------------ (a) Payment. For so long as the Fiscal Agent is acting as a Paying Agent ------- hereunder, the Issuer, subject to the Payment Restrictions, shall provide to the Fiscal Agent, in immediately available funds on or prior to 10:00 a.m., New York time, on each date on which a payment of principal of or any interest on the Securities shall be scheduled, as set forth in the text of the Securities, such amount, in U.S. dollars, as is necessary to make such payment, and the Issuer hereby authorizes and directs the Fiscal Agent from funds so provided to it to make or cause to be made payment of the principal of and any interest, as the case may be, on the Securities in the manner, at the times and for the purposes set forth herein and in the text of said Securities; provided that (1) any -------- payment of principal of or any interest on the Securities may be made by dollar check mailed to the persons (the "registered holders") in whose names such Securities are registered on the register maintained pursuant to Section 6 hereof at the close of business on the record dates designated in the text of the Securities and (2) the Issuer will not provide any such funds to the Fiscal Agent prior to such time as the relevant payment of principal or interest is approved by the Commissioner of Insurance of the Commonwealth of Massachusetts (the "Commissioner", which term shall include such governmental officer, body or authority as may after the date hereof succeed such Commissioner as the primary regulator of the Issuer's financial condition under applicable law). The Fiscal Agent may rely on written notice of such approval, when received, without inquiry. Payments of principal of or any interest on the Securities may be made, in the case of a registered holder of at least $5,000,000 aggregate principal amount of Securities, by wire transfer to a dollar account maintained by the payee with a bank in accordance with Section 5(a) of the Securities if such registered holder so elects by giving written notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the date on which such payments are scheduled to be made, of such election and of the account to which payment is to be made. Unless such designation is revoked, any such -6- designation made by such registered holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such registered holder. The Issuer shall pay any reasonable administrative costs in connection with making any such payments. The Fiscal Agent shall arrange directly with any other Paying Agent who may have been appointed by the Issuer pursuant to the provisions of Section 2 hereof for the payment, subject to the Payment Restrictions, from funds so paid to it by the Issuer of the principal of and any interest on the Securities in the manner, at the times and for the purposes set forth herein and in the text of the Securities. Notwithstanding the foregoing, the Issuer may provide directly to a Paying Agent funds for the payment, subject to the Payment Restrictions, of the principal thereof and interest thereon under an agreement with respect to such funds containing substantially the same terms and conditions set forth in this Section 4(a) and in Section 8(b) hereof; and the Fiscal Agent shall have no responsibility with respect to any funds so provided by the Issuer to any such Paying Agent. Payments of principal of and interest on the Securities shall be made in the manner set forth in the Securities, including the Payment Restrictions set forth therein. (b) Cancellation. All Securities delivered to the Fiscal Agent (or any ------------ other Agent appointed by the Issuer pursuant to Section 2 hereof) for payment, redemption or registration of transfer or exchange as provided herein or in the Securities shall be marked "cancelled" and, in the case of any other such Agent, forwarded to the Fiscal Agent. All such Securities shall be destroyed by the Fiscal Agent or such other person as may be jointly designated by the Issuer and the Fiscal Agent, which shall thereupon furnish certificates of such destruction to the Issuer. 5. Global Securities. ----------------- (a) Notwithstanding any other provisions of this Agreement or the Securities, a global Security shall not be exchanged in whole or in part for a Security registered in the name of any person other than the Depositary or one or more nominees thereof, provided that a global Security may also be exchanged -------- for Securities registered in the names of any person designated by the Depositary in the event that (i) the Depositary has notified the Issuer that it is unwilling or unable to continue as Depositary for such global Security or such Depositary has ceased to be a "clearing agency" registered under the Securities Exchange -7- Act of 1934 (the "Exchange Act"), (ii) an event (as described in paragraph 14(a), or the first sentence of paragraph 14(b) of the Securities), has occurred and is continuing with respect to the Securities, or (iii) a request for an exchange of interests in the global Security for definitive certificates has been made upon 60 days' prior written notice given to the Fiscal Agent in accordance with the Depositary's customary procedures and a copy of such notice has been received by the Issuer from the Fiscal Agent. Any global Security exchanged pursuant to clause (i) above shall be so exchanged in whole and not in part and any global Security exchanged pursuant to clause (ii) or (iii) above may be exchanged in whole or from time to time in part as directed by the Depositary. Any Security issued in exchange for a global Security or any portion thereof shall be a global Security, provided that any -------- such Security so issued that is registered in the name of a person other than the Depositary or a nominee thereof shall not be a global Security. (b) Securities issued in exchange for a global Security or any portion thereof shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate principal amount equal to that of such global Security or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Depositary shall designate and shall bear the applicable legends provided for herein. Any global Security to be exchanged in whole shall be surrendered by the Depositary to the Transfer Agent or its affiliate. With regard to any global Security to be exchanged in part, either such global Security shall be so surrendered for exchange or, if the Fiscal Agent is acting as custodian for the Depositary or its nominee with respect to such global Security, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Fiscal Agent. Upon any such surrender or adjustment, the Fiscal Agent shall authenticate and deliver the Security issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof. Any Security delivered in exchange for the global Security or any portion thereof shall bear the legend regarding transfer restrictions applicable to the global Security set forth on the form of Security attached as Exhibit A hereto, unless, pursuant to Section 6(g) hereof, the Issuer determines that such legend may be removed. (c) Subject to the provisions of Section 1(c) above, the registered holder may grant proxies and otherwise authorize any person, including Agent Members and persons -8- that may hold interests through Agent Members, to take any action which a registered holder is entitled to take under this Agreement or the Securities. (d) In the event of the occurrence of any of the events specified in paragraph (a) of this Section 5, the Issuer will promptly make available to the Fiscal Agent a reasonable supply of certificated Securities in definitive, fully registered form without interest coupons. 6. Registration, Transfer and Exchange of Securities. -------------------------- (a) General. The Fiscal Agent or its affiliate, as appropriate, as agent ------- of the Issuer for this purpose, shall maintain at its Corporate Trust Office in the Borough of Manhattan, The City of New York, a register of Securities for the registration of Securities and the transfers and exchanges thereof. Subject to the provisions of this Section 6, upon presentation for transfer or exchange of any Security at the office of any Transfer Agent accompanied by a written instrument of transfer or exchange in the form approved by the Issuer (it being understood that, until notice to the contrary is given to holders of Securities, the Issuer shall be deemed to have approved the form of instrument of transfer or exchange, if any, printed on any Security), executed by the registered holder, in person or by such holder's attorney thereunto duly authorized in writing, such Security shall be transferred upon the register for the Securities, and a new Security shall be authenticated and issued in the name of the transferee. (b) Transfer of Global Securities and Interests Therein. A global Security --------------------------------------------------- may not be transferred, in whole or in part, to any person other than the Depositary or a nominee thereof, and no such transfer to any such other person may be registered; provided that this clause shall not prohibit any transfer of -------- a Security that is issued in exchange for a global Security but is not itself a global Security. No transfer of a Security to any person shall be effective under this Agreement or the Securities unless and until such Security has been registered in the name of such person. (c) Transfers of Restricted Definitive Securities. If a registered holder --------------------------------------------- of Definitive Securities that bear or are required to bear the legends set forth in the form of Security attached as Exhibit A hereto ("Restricted Definitive Securities") wishes at any time to transfer such Restricted Definitive Securities or to exchange such Restricted Definitive Securities, such -9- exchange or transfer may be effected only in accordance with the provisions of this Section 6(c). Upon the receipt by the Fiscal Agent or its affiliate, as appropriate, as Transfer Agent, at its Corporate Trust Office in The City of New York of (i) a Restricted Definitive Security accompanied by a written and executed instrument of transfer or exchange as provided in Section 6(a) and (ii) the following additional information and documents, as applicable: (1) if such Restricted Definitive Security is owned by the holder thereof and is being exchanged, without transfer, or if such Restricted Definitive Security is being transferred pursuant to an exemption from registration in accordance with Rule 144A, Rule 144 or Regulation S under the Act, a certification from such holder to that effect, substantially in the form of Exhibit B hereto; or (2) if the Restricted Definitive Security being transferred or exchanged contains a restrictive legend, certification to the effect that such transfer or exchange is in accordance with the restrictions contained in such legend, if required by the Fiscal Agent, the Fiscal Agent shall register the transfer of such Restricted Definitive Security or exchange such Restricted Definitive Security for an equal principal amount of Restricted Definitive Securities of other authorized denominations. To permit registrations of transfers and exchanges, the Issuer shall execute and the Fiscal Agent (or an authenticating agent appointed pursuant to Section 2) shall authenticate and deliver Definitive Securities at the Fiscal Agent's or any Transfer Agent's request. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment by the registered holder of a sum sufficient to cover any transfer tax or other governmental charge payable in connection with any registration of transfer or exchange. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Issuer, subject to the Payment Restrictions, evidencing the same debt, and the applicable provisions of this Agreement shall apply equally thereto, as the Securities surrendered upon such registration of transfer or exchange. -10- (d) Successive registrations and registrations of transfers and exchanges as aforesaid may be made from time to time as desired, and each such registration shall be noted on the Security register. No service charge shall be made to a registered holder for any registration of transfer or exchange of the Securities, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith and any other amounts required to be paid by the provisions of the Securities. (e) Any Transfer Agent appointed pursuant to Section 2 hereof shall provide to the Fiscal Agent such information as the Fiscal Agent may reasonably require in connection with the delivery by such Transfer Agent of Securities upon transfer or exchange of Securities. (f) No Transfer Agent shall be required to make registrations of transfer or exchange of Securities during any periods designated in the text of the Securities as periods during which such registration of transfer or exchanges need not be made. (g) If Securities are issued upon the transfer, exchange or replacement of Securities not bearing the legends required, as applicable, by the form of Security attached as Exhibit A hereto (collectively, the "Legend"), the Securities so issued shall not bear the Legend. If Securities are issued upon the transfer, exchange or replacement of Securities bearing the Legend, or if a request is made to remove the Legend on a Security, the Securities so issued shall bear the Legend, or the Legend shall not be removed, as the case may be, unless there is delivered to the Issuer such satisfactory evidence, which may include an opinion of independent counsel reasonably acceptable to the Issuer, as may be reasonably required by the Issuer that neither the Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A, Rule 144 or Regulation S under the Act or that such Securities are not "restricted securities" within the meaning of Rule 144 under the Act. Upon provision of such satisfactory evidence, the Fiscal Agent, at the direction of the Issuer, shall authenticate and deliver a Security that does not bear the Legend or may remove the Legend, as the case may be. The Issuer agrees to indemnify the Fiscal Agent for, and to hold it harmless against, any loss, liability or expense, including the fees and expenses of counsel, reasonably incurred, arising out of or in connection with actions taken or omitted by the Fiscal Agent in -11- reliance upon such legal opinion and the delivery of a Security that does not bear a Legend. (h) With the prior approval of the Commissioner, the Issuer and any person that constitutes an affiliate of the Issuer within the meaning of the Act, may at any time purchase Securities in the open market or otherwise at any price, for its own account or the account of others. Any Security so purchased by the Issuer or any such affiliate for its own account shall be promptly surrendered to the Fiscal Agent for cancellation, together with written notice of the approval of the Commissioner, as appropriate, and shall not thereafter be re- issued or resold. (i) The Securities may not be redeemed at the option of the Issuer or any registered holder thereof. 7. Delivery of Certain Information. ------------------------------- (a) Rule 144A Information. At any time when the Issuer is not subject to --------------------- Section 13 or 15(d) of the Exchange Act, upon the request of a holder of a Security or beneficial interest in a global Security, the Issuer shall promptly furnish or cause to be furnished "Rule 144A Information" (as defined below) to such holder, or to a prospective purchaser of such Security or interest designated by such holder, in order to permit compliance by such holder with Rule 144A under the Act in connection with the resale of such Security by such holder. "Rule 144A Information" shall be such information as is specified pursuant to paragraph (d)(4) of Rule 144A (or any successor provision thereto), as such provisions (or successor provision) may be amended from time to time. (b) Periodic Reports. The Issuer shall deliver (or shall cause the Fiscal ---------------- Agent to deliver) to each holder of a Security, promptly after such items are available, one copy of each annual report to policyholders of the Issuer. In addition, upon the written request of a holder of a Security or beneficial interest in a global Security, the Issuer shall promptly furnish or cause to be furnished to such holder one copy of the annual and quarterly statutory-basis financial statements of the Issuer as filed by the Issuer with the Massachusetts Insurance Department. 8. Conditions of Fiscal Agent's Obligations. ---------------------------------------- The Fiscal Agent accepts its obligations herein set forth upon the terms and conditions hereof, including the following, to all of which the Issuer agrees and all of -12- which are applicable to the Securities and the holders from time to time thereof: (a) Compensation and Indemnity. The Fiscal Agent and its affiliate shall -------------------------- be entitled to such compensation as shall be agreed with the Issuer for all services rendered by them hereunder, and the Issuer agrees promptly to pay such compensation and to reimburse the Fiscal Agent and its affiliate for the reasonable out-of-pocket expenses (including reasonable counsel fees and expenses) incurred by them in connection with or arising out of their services hereunder, or the issuance of the Securities and their offering and sale. The Issuer also agrees to indemnify the Fiscal Agent and its affiliate for, and to hold them harmless against, any loss, damages, claim, liability or expense, incurred without negligence or bad faith, arising out of or in connection with their acting as Fiscal Agent or affiliate hereunder, as well as the reasonable costs and expenses of defending against any claim of liability in the premises. The obligations of the Issuer under this Section 8(a) shall survive payment of all the Securities or the resignation or removal of the Fiscal Agent or its affiliate. The Fiscal Agent or its affiliate shall promptly notify the Issuer of any claim for which the Fiscal Agent or its affiliate may seek indemnity, including costs and expenses of defending the relevant party against any claim for liability arising from the exercise or performance of any of its powers or duties hereunder. The Issuer shall not be obligated to pay for any settlement of any such claim made without its consent. (b) Agency. In acting under this Agreement and in connection with the ------ Securities, the Fiscal Agent and its affiliate are acting solely as agents of the Issuer and do not assume any responsibility for the correctness of the recitals in the Securities (except for the correctness of the statement in its certificate of authentication thereon) or any obligation or relationship of agency or trust, for or with any of the registered holders of the Securities, except that all funds held by the Fiscal Agent or its affiliate for the payment of principal of and any interest on the Securities, to the extent permitted by the Payment Restrictions, shall be held in trust for such registered holders as set forth herein and in the Securities; provided, however, that monies held in -------- ------- respect of the Securities remaining unclaimed at the end of two years after such principal and such interest shall have become payable in accordance with the Payment Restrictions (whether at the Scheduled Maturity Date or otherwise) and monies sufficient therefor shall have been duly made available for payment shall, together with any interest made available for payment thereon, be repaid to -13- the Issuer. Upon such repayment, the aforesaid trust with respect to the Securities shall terminate and all liability of the Fiscal Agent and Paying Agents with respect to such funds shall thereupon cease. (c) Advice of Counsel. The Fiscal Agent and any Paying Agent or Transfer ----------------- Agent appointed by the Issuer pursuant to Section 2 hereof may consult with their respective counsel or other independent counsel satisfactory to them and to the Issuer, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by them hereunder in good faith and without negligence and in accordance with such opinion. (d) Reliance. The Fiscal Agent and any Paying Agent or Transfer Agent -------- appointed by the Issuer pursuant to Section 2 hereof each shall be protected and shall incur no liability for or in respect of any action taken or thing suffered by it in reliance upon any Security, notice, direction, consent, certificate, affidavit, statement, or other paper or document believed by it, in good faith and without negligence, to be genuine and to have been passed upon or signed by the proper parties. (e) Interest in Securities, etc. The Fiscal Agent, any Paying Agent or ---------------------------- Transfer Agent appointed by the Issuer pursuant to Section 2 hereof and their respective officers, directors and employees may become the owners of, or acquire any interest in, any Securities, with the same rights that they would have if they were not the Fiscal Agent, such other Paying Agent or Transfer Agent or such person, and may engage or be interested in any financial or other transaction with the Issuer, and may act on, or as depositary, trustee or agent for, any committee or body of holders of Securities or other obligations of the Issuer, as freely as if they were not the Fiscal Agent, such other Paying Agent or Transfer Agent or such person. (f) Non-Liability for Interest. Subject to any agreement between the -------------------------- Issuer and the Fiscal Agent to the contrary, absent bad faith or negligence, the Fiscal Agent and its affiliate shall not be under any liability for interest on monies at any time received by them pursuant to any of the provisions of this Agreement or the Securities. (g) Certifications. Whenever in the administration of this Agreement the -------------- Fiscal Agent shall deem it desirable that a matter of fact be proved or established prior to taking, suffering or omitting any action hereunder, the Fiscal Agent or its affiliate (unless other evidence be herein specifically prescribed) may, in the absence of bad -14- faith or negligence on its part, rely upon a certificate signed by the Authorized Officers and delivered to the Fiscal Agent as to such matter of fact. (h) No Implied Obligations. The duties and obligations of the Fiscal ---------------------- Agent, its affiliate and the Issuer with respect to matters governed by this Agreement shall be determined solely by the express provisions hereof, and neither the Fiscal Agent, its affiliate nor the Issuer shall be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement and the Securities, as applicable, and no implied covenants or obligations shall be read into this Agreement or the Securities against the Fiscal Agent, its affiliate or the Issuer. Nothing in this Agreement shall be construed to require the Fiscal Agent or its affiliate to advance or expend its own funds. 9. Resignation, Removal and Appointment of Successor. ------------------------------------------------- (a) Fiscal Agent and Paying Agent. The Issuer agrees, for the benefit of ----------------------------- the registered holders from time to time of the Securities, that there shall at all times be a Fiscal Agent hereunder which shall be a bank or trust company organized and doing business under the laws of the United States of America or the State of New York, in good standing and having, and acting either itself or through an affiliate, through an established place of business in the Borough of Manhattan, The City of New York, and authorized under such laws to exercise corporate trust powers, until all the Securities authenticated and delivered hereunder (i) shall have been delivered to the Fiscal Agent or its affiliate for cancellation or (ii) have become payable, with the approval of the Commissioner, and monies sufficient to pay the full principal of and any interest remaining unpaid on the Securities shall have been made available for payment and either paid or returned to the Issuer as provided herein and in such Securities. (b) Resignation and Removal. The Fiscal Agent may at any time resign by ----------------------- written notice to the Issuer of such intention on its part, specifying the date on which its desired resignation shall become effective, provided that such date shall not be less than 60 days from the date on which such notice is given, unless the Issuer agrees to accept shorter notice. The Fiscal Agent hereunder may be removed at any time by the filing with it of an instrument in writing signed on behalf of the Issuer and specifying such removal and the date when it shall become effective. Notwithstanding the dates of effectiveness of -15- resignation or removal, as the case may be, to be specified in accordance with the preceding sentences, such resignation or removal shall take effect only upon the appointment by the Issuer, as hereinafter provided, of a successor Fiscal Agent (which, to qualify as such, shall for all purposes hereunder be a bank or trust company organized and doing business under the laws of the United States of America or of the State of New York, in good standing and having and acting, either itself or through an affiliate, through an established place of business in the Borough of Manhattan, The City of New York, authorized under such laws to exercise corporate trust powers and having a combined capital and surplus in excess of $50,000,000) and the acceptance of such appointment by such successor Fiscal Agent. Upon its resignation or removal, the Fiscal Agent shall be entitled to payment by the Issuer pursuant to Section 8 hereof of compensation for services rendered and to reimbursement of reasonable out-of-pocket expenses incurred hereunder. (c) Successors. In case at any time the Fiscal Agent (or any Paying Agent ---------- if such Paying Agent is the only Paying Agent located in a place where, by the terms of the Securities or this Agreement, the Issuer is required to maintain a Paying Agent) shall resign, or shall be removed, or shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or shall file a voluntary petition in bankruptcy or make an assignment for the benefit of its creditors or consent to the appointment of a receiver of all or any substantial part of its property, or shall admit in writing its inability to pay or meet its debts as they severally mature, or if a receiver of it or of all or any substantial part of its property shall be appointed, or if an order of any court shall be entered approving any petition filed by or against it under the provisions of applicable receivership, bankruptcy, insolvency or other similar legislation, or if any public officer shall take charge or control of it or of its property or affairs, for the purpose of rehabilitation, conservation or liquidation, a successor Fiscal Agent or Paying Agent, as the case may be, qualified as aforesaid, shall be appointed by the Issuer by an instrument in writing, filed with the successor Fiscal Agent or Paying Agent, as the case may be, and the predecessor Fiscal Agent or Paying Agent, as the case may be. Upon the appointment as aforesaid of a successor Fiscal Agent or Paying Agent, as the case may be, and acceptance by such successor of such appointment, the Fiscal Agent or Paying Agent, as the case may be, so succeeded shall cease to be Fiscal Agent or Paying Agent, as the case may be, hereunder. If no successor Fiscal Agent or other Paying Agent, as the case may be, shall have been so appointed by the Issuer and shall have accepted appointment as hereinafter provided -16- within 60 days after such resignation, removal or disqualification, and, in the case of such other Paying Agent, if such other Paying Agent is the only Paying Agent located in a place where, by the terms of the Securities or this Agreement, the Issuer is required to maintain a Paying Agent, then any registered holder of a Security who has been a bona fide holder of a Security for at least six months (which Security, in the case of such other Paying Agent, is referred to in this sentence), on behalf of himself and all others similarly situated, or the Fiscal Agent, may petition any court of competent jurisdiction for the appointment of a successor fiscal or paying agent, as the case may be. The Issuer shall give prompt written notice to each other Paying Agent of the appointment of a successor Fiscal Agent. (d) Acknowledgement. Any successor Fiscal Agent appointed hereunder shall --------------- execute, acknowledge and deliver to its predecessor and to the Issuer an instrument accepting such appointment hereunder, and thereupon such successor Fiscal Agent, without any further act, deed or conveyance, shall become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor with like effect as if originally named as Fiscal Agent hereunder and all provisions hereof shall be binding on such successor Fiscal Agent, and such predecessor, upon payment of its compensation and reimbursement of its disbursements then unpaid, shall thereupon become obligated to transfer, deliver and pay over, and such successor Fiscal Agent shall be entitled to receive, all monies, securities, books, records or other property on deposit with or held by such predecessor as Fiscal Agent hereunder. (e) Merger, Consolidation, etc. Any bank or trust company into which the --------------------------- Fiscal Agent hereunder may be merged, or resulting from any merger or consolidation to which the Fiscal Agent shall be a party, or to which the Fiscal Agent shall sell or otherwise transfer all or substantially all the assets and business of the Fiscal Agent, provided that it shall be qualified as aforesaid, shall be the successor Fiscal Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto. 10. Meetings and Amendments. ----------------------- (a) Calling of Meeting, Notice and Quorum. A meeting of registered holders ------------------------------------- of Securities may be called at any time and from time to time to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement or the Securities to be made, given or taken by registered holders -17- of Securities or to modify, amend or supplement the terms of the Securities or this Agreement as hereinafter provided, and subject to the requirement hereinafter set forth that the Issuer and the Fiscal Agent may, only with the prior written approval of the Commissioner, modify, amend or supplement this Fiscal Agency Agreement or the terms of the Securities or give consents or waivers or take other actions with respect thereto. The Fiscal Agent may at any time call a meeting of holders of Securities for any such purpose to be held at such time and at such place in the Borough of Manhattan, The City of New York as the Fiscal Agent shall determine. Notice of every meeting of holders of Securities, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given as provided in the terms of the Securities, not less than 30 nor more than 60 days prior to the date fixed for the meeting (provided that, in the case of any -------- meeting to be reconvened after adjournment for lack of a quorum, such notice shall be so given not less than 10 nor more than 60 days prior to the date fixed for such meeting). In case at any time the Issuer or the registered holders of at least 10% in aggregate principal amount of the Outstanding Securities (as defined in subsection (d) of this Section) shall have requested the Fiscal Agent to call a meeting of the registered holders of Securities for any such purpose, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, the Fiscal Agent shall call such meeting for such purposes by giving notice thereof. To be entitled to vote at any meeting of registered holders of Securities, a person shall be a registered holder of Outstanding Securities or a person duly appointed by an instrument in writing as proxy for such a registered holder. The persons entitled to vote a majority in principal amount of the Outstanding Securities shall constitute a quorum. At the reconvening of any meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in principal amount of the Outstanding Securities shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. The Fiscal Agent may make such reasonable and customary regulations consistent herewith as it shall deem advisable for any meeting of registered holders of Securities with respect to the proof of the appointment of proxies in respect of registered holders of Securities, the record date for determining the registered holders of Securities who are entitled to vote at such meeting (which date shall be designated by the Fiscal Agent and set forth in the notice calling such meeting hereinabove referred to and which shall be not less than 10 nor more than 60 days prior to such -18- meeting, provided that nothing in this paragraph shall be construed to render -------- ineffective any action taken by registered holders of the requisite principal amount of Outstanding Securities on the date such action is taken), the adjournment and chairmanship of such meeting, the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. (b) Approval. (i) At any meeting of registered holders of -------- Securities duly called and held as specified above, upon the affirmative vote, in person or by proxy thereunto duly authorized in writing, of the registered holders of not less than a majority in aggregate principal amount of the Outstanding Securities, or (ii) with the written consent of the registered holders of not less than a majority in aggregate principal amount of the Securities then Outstanding, in each case (i) or (ii) the Issuer and the Fiscal Agent may, with the prior written approval of the Commissioner, modify, amend or supplement the terms of the Securities or this Agreement in any way, and the holders of Securities may make, take or give any request, demand, authorization, direction, notice, consent, waiver (including waiver of future compliance or past failure to perform) or other action provided by this Agreement or the Securities to be made, given or taken by holders of Securities; provided, -------- however, that no such action, modification, amendment or supplement, however effected, may, without the consent of the holder of each Security affected thereby, (A) change the Scheduled Interest Payment Date (as defined in the Securities) or stated maturity date of the principal of or any installment of interest on any Security, (B) reduce the principal amount of any Security or the interest rate thereon, (C) change the currency in which, or the required place at which, payment with respect to interest or principal in respect of the Securities is payable, (D) change the Issuer's obligations under Section 7(a) hereof in any manner adverse to the interests of the registered holder of a Security, (E) impair the right of a registered holder of a Security to institute suit for the enforcement of any payment, if such payment is permitted under the Payment Restrictions, on or with respect to any Security, (F) reduce the above- stated percentage of the principal amount of Outstanding Securities the vote or consent of the registered holders of which is necessary to modify, amend or supplement this Agreement or the terms and conditions of the Securities or to make, take or give any request, demand, authorization, direction, notice, consent, waiver (including waiver of any future compliance or past -19- failure to perform) or other action provided hereby or thereby to be made, taken or given, (G) reduce the percentage in aggregate principal amount of Outstanding Securities that constitutes the quorum required at any meeting of registered holders of Securities at which a resolution is adopted, (H) change the restrictions on payment set forth in the Securities in a manner adverse to such registered holder, or (I) change the provisions of Paragraph 10 of the Securities in a manner adverse to such registered holder. The Issuer and the Fiscal Agent may, with the prior written approval of the Commissioner, without the vote or consent of any holder of Securities, amend this Agreement or the Securities for the purpose of (a) adding to the covenants of the Issuer for the benefit of the holders of Securities, or (b) surrendering any right or power conferred upon the Issuer, or (c) securing the Securities or (d) evidencing the succession of another corporation to the Issuer and the assumption by such successor of the covenants and obligations of the Issuer herein and in the Securities as permitted by this Agreement and the Securities, or (e) modifying the restrictions on, and procedures for, resale and other transfers of the Securities to the extent required by any change in applicable law or regulation, or the interpretation thereof, or in practices relating to the resale or transfer of restricted securities generally, or (f) accommodating the issuance, if any, of Securities in book-entry or certificated form and matters related thereto which do not adversely affect the interest of any registered holder in any material respect, or (g) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Securities in a manner which does not adversely affect the interest of any registered holder in any material respect, or (h) effecting any amendment which the Issuer and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interest of any registered holder. It shall not be necessary for the vote or consent of the registered holders of Securities to approve the particular form of any proposed modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action, but it shall be sufficient if such vote or consent shall approve the substance thereof. The Fiscal Agent may request an opinion of counsel to the effect that all conditions contained herein with respect to any amendment or supplement entered into hereunder have been satisfied or waived. -20- (c) Binding Nature of Amendments, Notices, Notations, etc. Any ------------------------------------------------------ instrument given by or on behalf of any registered holder of a Security in connection with any consent to or vote for any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action shall be irrevocable once given and shall be conclusive and binding on all subsequent holders of such Security or any Security issued directly or indirectly in exchange or substitution therefor or in lieu thereof. Any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action taken, made or given in accordance with Section 10(b) hereof shall be conclusive and binding on all holders of Securities, whether or not they have given such consent or cast such vote or were present at any meeting, and whether or not notation of such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action is made upon the Securities. Notice of any modification or amendment of, supplement to, or request, demand, authorization, direction, notice, consent, waiver or other action with respect to the Securities or this Agreement (other than for purposes of curing any ambiguity or of curing, correcting or supplementing any defective provision hereof or thereof) shall be given to each registered holder of Securities affected thereby by the Fiscal Agent, in all cases as provided in the Securities; provided, however, that any failure to provide such notice with -------- respect to any action taken in accordance with this Agreement shall not affect the validity thereof. Securities authenticated and delivered after the effectiveness of any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action may bear a notation in the form approved by the Fiscal Agent and the Issuer as to any matter provided for in such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action. New Securities modified to conform, in the opinion of the Fiscal Agent and the Issuer, to any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action taken, made or given in accordance with Section 10(b) hereof may be prepared by the Issuer, authenticated by the Fiscal Agent and delivered in exchange for Outstanding Securities. (d) "Outstanding" Defined. For purposes of the provisions of ---------------------- this Agreement and the Securities, any Security authenticated and delivered pursuant to this Agreement shall, as of any date of determination, be deemed to be "Outstanding", except: ------ -21- (i) Securities theretofore cancelled by the Fiscal Agent or delivered to the Fiscal Agent for cancellation; (ii) Securities which have become payable, to the extent permitted under the Payment Restrictions, at the Scheduled Maturity Date or otherwise, and with respect to which, in each case, monies sufficient to pay the principal thereof and any interest thereon shall have been paid; and (iii) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to this Agreement; provided, however, that in determining whether the registered holders of the - -------- ------- requisite principal amount of Outstanding Securities are present at a meeting of registered holders of Securities for quorum purposes or have consented to or voted in favor of any request, demand, authorization, direction, notice, consent, waiver, amendment, modification or supplement hereunder, Securities owned directly or indirectly by the Issuer, or any affiliate of the Issuer, shall be disregarded and deemed not to be Outstanding. 11. Governing Law. ------------- THIS AGREEMENT AND THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. THE COMMISSIONER'S EXERCISE OF REGULATORY AUTHORITY, INCLUDING APPROVAL OF PAYMENTS UNDER THE SECURITIES, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS (OR, IF THE COMMISSIONER IS NOT AT THE TIME THE COMMISSIONER OF INSURANCE OF THE COMMONWEALTH OF MASSACHUSETTS, THE LAW OF SUCH OTHER JURISDICTION AS MAY ESTABLISH THE COMMISSIONER AS THE PRIMARY REGULATOR OF THE ISSUER'S FINANCIAL CONDITION) AND THE PARTIES HERETO SHALL SUBMIT ANY DISPUTES RELATED TO THE EXERCISE OF SUCH REGULATORY AUTHORITY TO A COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS. THE FOREGOING CHOICE OF LAW SHALL NOT AFFECT THE CHOICE OF LAW PROVISIONS OF ANY OTHER AGREEMENTS OR INSTRUMENTS OF THE ISSUER ENTERED INTO IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY. 12. No Implied Obligations. ---------------------- The obligations of the Issuer under this Agreement and the Securities shall be without recourse to any -22- policyholder, director, officer or employee of the Issuer, and no such person shall have any liability with respect thereto. 13. Notices. ------- All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing, shall specify this Agreement by name and date and shall identify the Securities, and if sent to the Fiscal Agent shall be delivered, transmitted by facsimile or telegraphed to it at 150 Royall Street, Mail Stop 45-02-15, Canton, Massachusetts 02021, Attn: Corporate Trust Division, telephone: (617) 575-2081, fax: (617) 575-2078 and if sent to the Issuer shall be delivered, transmitted by facsimile (with recorded delivery or certified mail, written receipt requested, to follow) or telegraphed to it at 200 Clarendon Street, Boston, Massachusetts 02117, Attention: Treasurer, telephone: (617) 572-1779, fax: (617) 572-1799. The foregoing addresses for notices or communications may be changed by written notice given by the addressee to each party hereto, and the addressee's address shall be deemed changed for all purposes from and after the giving of such notice. If the Fiscal Agent shall receive any notice or demand addressed to the Issuer by the holder of a Security, the Fiscal Agent shall promptly forward such notice or demand to the Issuer. 14. Separability. ------------ In case any provision in this Agreement or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 15. Headings. -------- The section headings herein are for convenience of reference only and shall not affect the construction hereof. 16. Counterparts. ------------ This Agreement may be executed in one or more counterparts, and by each party separately on a separate counterpart, and each such counterpart when executed and delivered shall be deemed to be an original. Such counterparts shall together constitute one and the same instrument. -23- IN WITNESS WHEREOF, the parties hereto have executed this Fiscal Agency Agreement as of the date first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: /s/ John T. Farady ------------------------------------------- Name: John T. Farady Title: Senior Vice President and Treasurer By: /s/ Karen E. Liukkonen ------------------------------------------- Name: Karen E. Liukkonen Title: Assistant Treasurer THE FIRST NATIONAL BANK OF BOSTON By: /s/ J. E. Mogavero -------------------------------------------- Name: J. E. Mogavero Title: Authorized Officer Agreed: BANCBOSTON TRUST COMPANY OF NEW YORK as the affiliate of the Fiscal Agent By: /s/ Gervasio A. DeChaves -------------------------------------------- Name: Gervasio A. DeChaves Title: President -24- EXHIBIT A FORM OF SECURITY THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM AND IN ACCORDANCE WITH THE FISCAL AGENCY AGREEMENT REFERRED TO HEREINAFTER, COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE CORPORATE TRUST OFFICE OF THE FISCAL AGENT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM SUCH REGISTRATION PROVIDED BY RULE 144A UNDER THE ACT (TOGETHER WITH ANY SUCCESSOR PROVISION AND AS SUCH MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "RULE 144A"). [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY] TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IN EXCHANGE FOR THIS SECURITY OR ANY PORTION HEREOF IS REGISTERED IN THE NAME OF [INSERT NAME OF NOMINEE OF DEPOSITARY] OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY] (AND ANY PAYMENT IS MADE TO [INSERT NAME OF NOMINEE OF DEPOSITARY] OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN [INSERT NAME OF DEPOSITARY] OR A NOMINEE THEREOF IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, [INSERT NAME OF NOMINEE OF DEPOSITARY], HAS AN INTEREST HEREIN.] [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE FISCAL AGENCY AGREEMENT. THIS GLOBAL SECURITY MAY NOT BE EXCHANGED, IN WHOLE OR IN PART, FOR A SECURITY REGISTERED IN THE NAME OF ANY PERSON OTHER THAN [INSERT NAME OF DEPOSITARY] OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES SET FORTH IN SECTION 5 OF THE FISCAL AGENCY AGREEMENT, AND MAY NOT BE TRANSFERRED, IN WHOLE OR IN PART, EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 6(B) OF THE FISCAL AGENCY AGREEMENT. BENEFICIAL INTERESTS IN THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SECTION 6(B) OF THE FISCAL AGENCY AGREEMENT.] A-1 [INCLUDE IF SECURITY IS A GLOBAL OR DEFINITIVE SECURITY OR SECURITY ISSUED IN EXCHANGE THEREFOR (UNLESS, PURSUANT TO SECTION 6(G) OF THE FISCAL AGENCY AGREEMENT, THE ISSUER DETERMINES THAT THE LEGEND MAY BE REMOVED)] -- THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) BY THE INITIAL INVESTOR (I) IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") IN A TRANSACTION IN ACCORDANCE WITH RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN A MINIMUM PRINCIPAL AMOUNT OF $500,000 IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT, OR (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT (IF AVAILABLE), OR (2) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (1) ABOVE AND, IN ADDITION, IN A MINIMUM PRINCIPAL AMOUNT OF $500,000 TO AN INSTITUTIONAL "ACCREDITED INVESTOR," AS DEFINED IN RULE 501(a)(1),(2),(3) or (7) UNDER THE SECURITIES ACT, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES, AND (B) THAT THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESTRICTIONS REFERRED TO IN (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY THAT, IF THE HOLDER PROPOSES TO SELL OR TRANSFER THIS SECURITY TO ANY EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED), THE HOLDER WILL COMPLY WITH THE RESTRICTIONS SET FORTH IN PARAGRAPH 9 HEREOF. A-2 PAYMENTS OF PRINCIPAL OF OR INTEREST ON THIS SECURITY MAY ONLY BE MADE WITH THE PRIOR APPROVAL OF THE COMMISSIONER OF INSURANCE OF THE COMMONWEALTH OF MASSACHUSETTS (OR SUCH OTHER GOVERNMENTAL OFFICIAL, BODY OR AUTHORITY AS MAY, AFTER THE DATE OF ISSUE OF THE SECURITIES, BECOME THE PRIMARY REGULATOR OF THE FINANCIAL CONDITION OF THE ISSUER UNDER APPLICABLE LAW, TOGETHER THE "COMMISSIONER"), IF, IN THE COMMISSIONER'S JUDGMENT, THE FINANCIAL CONDITION OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY WARRANTS THE MAKING OF SUCH PAYMENT. THERE ARE NO GUIDELINES OR INTERPRETATIONS AS TO THE EXTENT OF THE COMMISSIONER'S DISCRETION IN DETERMINING WHETHER TO APPROVE THE MAKING OF SUCH PAYMENTS. A-3 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY 7 3/8% Surplus Note scheduled to mature on February 15, 2024 CUSIP NO.: ---------- No. R- $ ---- ----------- JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a mutual life insurance company organized under the laws of the Commonwealth of Massachusetts (herein called the "Issuer"), for value received, hereby promises to pay, subject to the prior written approval of the Commissioner of Insurance of the Commonwealth of Massachusetts (or such other Governmental official body or authority as may, after the date of initial issue of this security (or its predecessor), become the primary regulator of the financial condition of the Issuer under applicable law, together the "Commissioner"), to ______________________, or registered assigns, the principal sum of ______________ United States dollars ($_________) [INCLUDE IF SECURITY IS A global Security: or such other amount (not to exceed __________ million dollars ($__________) when taken together with all of the Issuer's 7 3/8% Surplus Notes scheduled to mature on February 15, 2024 issued and outstanding in definitive certificated form or in the form of a global Security) as may from time to time represent the principal amount of the Issuer's 7 3/8% Surplus Notes scheduled to mature on February 15, 2024 in respect of which beneficial interests are held through the Depositary in the form of a global Security,] on February 15, 2024 (the "Scheduled Maturity Date"), and to pay interest thereon, subject to the prior written approval of the Commissioner, from February 25, 1994 or from the most recent Scheduled Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for, semi-annually in arrears on February 15 and August 15 in each year, commencing August 15, 1994 (each a "Scheduled Interest Payment Date"), at the rate of 7 3/8% per annum, until the principal hereof is paid or duly provided for. The date upon which any state or federal agency obtains an order or grants approval for the reorganization, rehabilitation, liquidation, conservation or dissolution of the Issuer shall also be deemed to be the Scheduled Maturity Date of this Security. As specified on the reverse hereof, all payments of principal of or interest on this Security may be made only with the prior written approval of the Commissioner. The interest so payable, and punctually paid or duly provided for, on any Scheduled Interest Payment Date shall be paid, in accordance with the terms of the Fiscal Agency Agreement hereinafter referred to, to the person (the "registered holder") in whose name A-4 this Security (or one or more predecessor Securities) is registered at the close of business on the February 1 or August 1 (whether or not a business day), as the case may be (each a "Regular Record Date"), next preceding such Scheduled Interest Payment Date. Interest on the Securities shall be calculated on the basis of a 360-day year of twelve 30-day months. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered holder on such Regular Record Date and shall be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on a special record date for the payment of such interest to be fixed by the Issuer, notice whereof shall be given to registered holders of the Securities not less than 10 days prior to such special record date. Principal of this Security shall be payable against surrender hereof at the corporate trust office of the Fiscal Agent or its affiliate hereinafter referred to and at the offices of such other Paying Agents as the Issuer shall have appointed pursuant to the Fiscal Agency Agreement. Payments of principal of the Securities shall be made only against surrender of the Securities. Payments of principal or interest on this Security may be made, in accordance with the foregoing and subject to applicable laws and regulations, by dollar check mailed on or before the Scheduled Interest Payment Date of such payment to the person entitled thereto at such person's address appearing on the register of Securities maintained by the Fiscal Agent or its affiliate pursuant to Section 6(a) of the Fiscal Agency Agreement. In the case of a registered holder of at least $5,000,000 aggregate principal amount of Securities, payments of principal or interest may be made by wire transfer to a dollar account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the applicable Scheduled Interest Payment Date or Scheduled Maturity Date hereof, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such registered holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such registered holder. The Issuer agrees that until this Security has been delivered to the Fiscal Agent for cancellation, or monies sufficient to pay the full principal of and interest remaining unpaid on this Security have been made available for payment and either paid or returned to the Issuer as provided herein, it will at all times maintain offices or agencies in the Borough of Manhattan, The City of New York for the payment of the A-5 principal of and interest on the Securities as herein provided. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security may be executed by the Issuer by manual or facsimile signatures, and such signatures may be executed on separate counterparts. Unless the certificate of authentication hereon has been executed by the Fiscal Agent by manual signature, this Security shall not be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. Dated: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: -------------------------- Name: Title: By: -------------------------- Name: Title: A-6 This is one of the Securities referred to in the within-mentioned Fiscal Agency Agreement. THE FIRST NATIONAL BANK OF BOSTON ---------------------------- as Fiscal Agent By: ------------------------- Authorized Signatory A-7 FORM OF REVERSE 1. This Security is one of a duly authorized issue of 7 3/8% Surplus Notes scheduled to mature on February 15, 2024 of the Issuer (herein called the "Securities" or "Notes"), limited in aggregate principal amount to $450,000,000. The Issuer and The First National Bank of Boston, as fiscal agent (the "Fiscal Agent"), have entered into a Fiscal Agency Agreement, dated as of February __, 1994 (such instrument, as it may be duly amended from time to time, is herein called the "Fiscal Agency Agreement"), which provides for the mechanism for issuing the Securities and, inter alia, sets forth certain duties of the Fiscal ----- ---- Agent in connection therewith. As used herein, the term "Fiscal Agent" includes any successor fiscal agent under the Fiscal Agency Agreement. Copies of the Fiscal Agency Agreement are on file and available for inspection at the corporate trust office of the Fiscal Agent or its affiliate in the Borough of Manhattan, The City of New York. Registered holders of Securities are referred to the Fiscal Agency Agreement for a statement of the terms thereof, including those relating to transfer, payment, exchanges and certain other matters. The Fiscal Agent or any Paying Agent shall also act as Transfer Agent and Securities registrar. Terms used herein which are defined in the Fiscal Agency Agreement but not otherwise defined herein shall have the meanings assigned to such terms in the Fiscal Agency Agreement. The Securities are direct and unsecured obligations of the Issuer and, subject to the payment restrictions contained in paragraphs 4 and 10 hereof (the "Payment Restrictions"), are scheduled to mature on February 15, 2024. 2. The Securities are issuable only in fully registered form without coupons. Securities are issuable in minimum denominations of [$250,000] [$500,000] and integral multiples of $1,000 above that amount. 3. The Issuer shall maintain, in the Borough of Manhattan, The City of New York, a Transfer Agent where Securities may be registered or surrendered for registration of transfer or exchange. The Issuer has initially appointed the corporate trust office of the Fiscal Agent or its affiliate as its Transfer Agent in the Borough of Manhattan, The City of New York. The Issuer shall cause each Transfer Agent to act as a Securities registrar and shall cause to be kept at the office of each Transfer Agent a register in A-8 which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Securities and registration of transfers of Securities. The Issuer reserves the right to vary or terminate the appointment of any Transfer Agent or to appoint additional or other Transfer Agents or to approve any change in the office through which any Transfer Agent acts, provided that there shall at all times be a Transfer Agent in the Borough of Manhattan, The City of New York. The Issuer shall cause notice of any resignation, termination or appointment of the Fiscal Agent or any Paying Agent or Transfer Agent and of any change in the office through which any such Agent shall act to be provided to registered holders of Securities. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, the transfer of a Security is registrable on the aforementioned register upon surrender of such Security at any Transfer Agent duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer duly executed by, the registered holder thereof or its attorney duly authorized in writing. Upon such surrender of this Security for registration of transfer, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities, dated the date of authentication thereof, of any authorized denominations and of a like aggregate principal amount. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, at the option of the registered holder upon request confirmed in writing, Securities may be exchanged for Securities of any authorized denominations and aggregate principal amount upon surrender of the Securities to be exchanged at the office of any Transfer Agent. Whenever any Securities are so surrendered for exchange, the Issuer shall execute, and the Fiscal Agent or its affiliate shall authenticate and deliver, the Securities which the registered holder making the exchange is entitled to receive. Any registration of transfer or exchange shall be effected upon the Issuer being satisfied with the documents of title and identity of the person making the request and subject to the restrictions set forth in the immediately following paragraph and such reasonable regulations as the Issuer may from time to time agree with the Fiscal Agent. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits, as the Securities surrendered upon such registration of transfer or exchange. No service A-9 charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Issuer, the Fiscal Agent and any agent of the Issuer or the Fiscal Agent may treat the person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer nor the Fiscal Agent nor any such agent shall be affected by notice to the contrary. 4. (a) Notwithstanding anything to the contrary set forth herein or in the Fiscal Agency Agreement, any payment of principal of, interest on or any monies owing with respect to this Security, whether at the Scheduled Interest Payment Date or Scheduled Maturity Date specified herein or otherwise, may be made only with the prior written approval of the Commissioner. The terms of the Commissioner's authorization, dated February 14, 1994 for the issuance of the Securities by the Issuer (the "Authorization") provided that such approval will only be granted if, in the Commissioner's judgment, the financial condition of the Issuer warrants the making of such payment. In addition, pursuant to the Authorization, any payment of principal of or interest on the Securities may be made only to the extent that at the time of such payment the Issuer's "unassigned funds (surplus)" (which at the time of the initial issuance of this Security (or its predecessor) was reflected on line 34 of the "Liabilities, Surplus and Other Funds" page of the Company's annual and quarterly statements filed with the Division of Insurance of the Commonwealth of Massachusetts) reflects sufficient funds to cover the amount of such payment. If the Commissioner does not approve the making of any payment of principal of or interest on this Security on the Scheduled Interest Payment Date or Scheduled Maturity Date thereof, as specified herein, the Scheduled Interest Payment Date or Scheduled Maturity Date, as the case may be, shall be extended until such time, if any, at which such conditions are met and such payment shall be made by the Issuer on the Business Day (as hereinafter defined) following the Business Day on which the Issuer shall have received the written approval of the Commissioner to make such payment. Interest will continue to accrue on any such unpaid principal through the actual date of payment at the rate of interest stated on the face hereof. Interest will not accrue on interest with respect to which the Scheduled Interest Payment Date has been extended, during the period of such extension. If the Commissioner approves a payment A-10 of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among registered holders as their interests may appear. - --- ---- (b) Any payment of principal of or interest on any Security as to which the written approval of the Commissioner has been obtained and which is not punctually paid or duly provided for on the Scheduled Interest Payment Date or Scheduled Maturity Date thereof, as set forth herein (such payment being referred to as an "Unpaid Amount"), will forthwith cease to be payable to the registered holder of this Security on the relevant regular record date designated herein, and such Unpaid Amount will instead be payable to the registered holder of this Security on a subsequent special record date. The Issuer shall fix the special record date and payment date for the payment of any Unpaid Amount. At least 15 days before the special record date, the Issuer shall mail to each registered holder of the Securities and the Fiscal Agent a notice that states the special record date, payment date and amount of interest or principal to be paid. On the payment date set forth in such notice, subject to the Payment Restrictions, the Paying Agent shall pay the amount of interest or principal to be so paid to each registered holder of the Securities in the manner set forth in Section 4(a) of the Fiscal Agency Agreement. 5. (a) For so long as the Fiscal Agent or its affiliate is acting as a Paying Agent hereunder, the Issuer shall provide, subject to the Payment Restrictions, to the Fiscal Agent in immediately available funds on or prior to 10:00 a.m., New York time, on each date on which a payment of principal of or any interest on this Security is payable, as set forth herein, such amounts as are necessary (with any amounts then held by the Fiscal Agent or its affiliate and available for the purpose) to make such payment, and the Issuer hereby authorizes and directs the Fiscal Agent or its affiliate from funds so provided to it to make or cause to be made payment of the principal of and any interest, as the case may be, on this Security as set forth herein and in the Fiscal Agency Agreement. Payments of principal of or any interest on the Securities may be made, in the case of a registered holder of at least $5,000,000 principal amount of Securities, by wire transfer to a dollar account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the date on which such payments are A-11 scheduled to be made, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such registered holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such registered holder. The Issuer shall pay any reasonable administrative costs in connection with making any such payments. The Fiscal Agent shall arrange directly with any other Paying Agent who may have been appointed by the Issuer pursuant to the provisions of Section 2 of the Fiscal Agency Agreement for the payment from funds so paid by the Issuer of the principal of and any interest on this Security. Any monies held in respect of this Security remaining unclaimed at the end of two years after such principal and such interest shall have become payable in accordance with the Payment Restrictions (whether at the Scheduled Maturity Date or otherwise) and monies sufficient therefor shall have been duly made available for payment shall, together with any interest made available for payment thereon, be repaid to the Issuer and upon such repayment all liability of the Fiscal Agent with respect thereto shall cease, without, however, limiting in any way any obligation the Issuer may have to pay the principal of and interest on this Security, subject to the Payment Restrictions. (b) In any case where the Scheduled Interest Payment Date or Scheduled Maturity Date of any Security shall be at any place of payment a day on which banking institutions are authorized or obligated by law or executive order to close, then payment of principal or interest need not be made on such date at such place but may be made on the next succeeding day at such place which is not a day on which banking institutions in the applicable jurisdiction are generally authorized or obligated by law or executive order to close (a "Business Day"), with the same force and effect as if made on the Scheduled Interest Payment Date or Scheduled Maturity Date thereof, and no interest shall accrue for the period after such date. 6. The Issuer shall pay all stamp and other duties, if any, which may be imposed by the United States of America or any governmental entity or any political subdivision thereof or taxing authority of or in the foregoing with respect to the Fiscal Agency Agreement or the initial issuance of this Security. Except as otherwise specifically provided in this Security, the Issuer shall not be required to make any payment with respect to any tax, duty, assessment or other governmental charge of whatever nature imposed or levied by any government or any political subdivision or taxing authority thereof or therein. A-12 7. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, (a) Except with respect to transactions covered by Paragraph 8 hereof, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, material rights (charter and statutory) and franchise; provided, however, that the Issuer shall not be -------- ------- required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and that the Issuer has used its best efforts to not disadvantage in any material respect the registered holders of the Securities, or that not preserving such right or franchise is in the best interest of the policyholders of the Issuer having considered the interests of the registered holders of the Securities. (b) The Issuer will not be or become an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended (the "Investment Company Act"), if such action would cause the Issuer to be in violation of the Investment Company Act at any time prior to payment in full of the Securities. (c) The Issuer shall use its best efforts to obtain the approval of the Commissioner for the payment by the Issuer of interest on and principal of the Securities on the Scheduled Interest Payment Date or Scheduled Maturity Date thereof, and, in the event any such approval has not been obtained for any such payment at or prior to the Scheduled Interest Payment Date or Scheduled Maturity Date thereof, as the case may be, to continue to use its best efforts to obtain such approval promptly thereafter. Not less than 45 days prior to the Scheduled Interest Payment Date or Scheduled Maturity Date thereof (excluding any such Scheduled Maturity Date which arises as a result of the obtaining of an order or the granting of approval for the reorganization, rehabilitation, liquidation, conservation or dissolution of the Issuer), the Issuer will inform the Commissioner that it seeks the Commissioner's approval to pay the full amount of interest and principal scheduled to be paid on such date. In addition, the Issuer shall notify or cause to be notified each registered holder and the Fiscal Agent promptly following any Scheduled Interest Payment Date for interest on or the Scheduled Maturity Date for principal of any Security in the event that the Commissioner has disapproved the making of any such payment A-13 on such Scheduled Interest Payment Date or such Scheduled Maturity Date and as a result thereof the Issuer shall have failed to make any such payment on any such Scheduled Interest Payment Date or such Scheduled Maturity Date. 8. For so long as any of the Securities remain Outstanding or any amounts remain unpaid on any of the Securities, the Issuer may convert itself from a mutual life insurance company into a stock life insurance company (such conversion, a "demutualization"), merge or consolidate with or into any other corporation or sell, convey, transfer or otherwise dispose of all or substantially all of its assets to any person, firm or corporation, if (i) (A) in the case of a merger or consolidation, the Issuer is the surviving corporation or (B) in the case of a merger, consolidation or demutualization where the Issuer is not the surviving corporation and in the case of any such sale, conveyance, transfer or other disposition, the successor corporation is a corporation organized and existing under the laws of the United States or a State thereof and such corporation expressly assumes by supplemental agreement all the obligations of the Issuer under the Securities and the Fiscal Agency Agreement, (ii) at the time of any such demutualization, merger or consolidation, or such sale, conveyance, transfer or other disposition, the Issuer shall not have failed to make payment of interest on or principal of the Securities after having received the Commissioner's prior approval to make such payment and (iii) the Issuer has delivered to the Fiscal Agent an officer's certificate stating that such demutualization, merger, consolidation, sale, conveyance, transfer or other disposition complies with this paragraph and that all conditions precedent herein provided for relating to such transaction have been complied with. In the event of the assumption by a successor corporation of the obligations of the Issuer as provided in clause (i)(B) of the immediately preceding sentence, such successor corporation shall succeed to and be substituted for the Issuer hereunder and under the Fiscal Agency Agreement and all such obligations of the Issuer shall terminate. 9. No employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the prohibited transaction provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as to which the Issuer or any of its subsidiaries is a party in interest or a disqualified person (each a "Plan"), and no person acting on behalf of a Plan, may acquire this Security, unless the acquisition of the Security is exempt under one or more of Prohibited Transaction exemptions 84-14, 90-1 or 91-38 (or any A-14 amendment thereof) or another applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The purchase by any person of this Security shall constitute a representation by such Person to the Issuer and the Fiscal Agent that such person either (i) is not a Plan or (ii) is a Plan, and may acquire this Security under an applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The restrictions on purchases of the Securities set forth in this Paragraph 9 are in addition to those otherwise set forth in Section 6 of the Fiscal Agency Agreement and under applicable law. 10. (a) The Issuer agrees, and each registered holder by accepting a Security agrees, that the indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this paragraph 10, to the prior payment in full of all Indebtedness, Policy Claims and Prior Claims (each as hereinafter defined). (b) Upon any distribution to creditors of the Issuer in any reorganization, rehabilitation, liquidation, conservation or dissolution proceeding relating to the Issuer or its property, the holders of Indebtedness, the holders of Policy Claims and the holders of Prior Claims will first be entitled to receive payment in full of all amounts due or to become due with respect thereto before the registered holders will be entitled to receive any payment in respect of the principal of or interest on the Securities. If a payment of principal of or interest on the Securities is approved in any such proceeding in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among registered holders as their interests may appear. (c) If a distribution is made to registered holders that, because of this paragraph 10, should not have been made to them, the registered holders who receive the distribution shall hold it in trust for holders of Policy Claims, Indebtedness and Prior Claims and pay it over to them as their interests may appear. (d) The Issuer shall promptly notify the Fiscal Agent and the Paying Agent of any facts known to the Issuer that would cause a payment of principal of or interest on the Securities to violate this paragraph 10. (e) This paragraph 10 defines the relative rights of registered holders, on the one hand, and holders of any A-15 other claims, in accordance with Sections 180A through 180L of Chapter 175 of the Massachusetts General Laws and any successor provisions, in each case as may be amended from time to time (the "Liquidation Act"), on the other hand. Nothing in this Security or the Fiscal Agency Agreement shall (i) impair, as between the Issuer and registered holders, the obligation of the Issuer which is, subject to the Payment Restrictions, absolute and unconditional to pay principal of and interest on the Securities in accordance with their terms; (ii) affect the relative rights of registered holders and creditors of the Issuer, other than holders of Policy Claims, Indebtedness or Prior Claims; or (iii) prevent the Fiscal Agent or any registered holder from exercising any available remedies upon a breach by the Issuer of its obligations hereunder, subject to the rights of holders of Policy Claims, Indebtedness or Prior Claims to receive distributions otherwise payable to registered holders. (f) No right of any registered holder of Policy Claims, Indebtedness or Prior Claims to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Issuer or by its failure to comply with the terms of the Fiscal Agency Agreement. (g) Each registered holder, by acceptance thereof, authorizes and directs the Fiscal Agent on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this paragraph 10 and appoints the Fiscal Agent its attorney-in-fact for any and all such purposes. As used herein, "Indebtedness" of the Issuer shall mean (i) all existing or future indebtedness of the Issuer for borrowed money, (ii) all existing or future indebtedness for borrowed money of other persons, the payment of which is guaranteed by the Issuer, (iii) all existing or future obligations of the Issuer under any agreement obligating the Issuer to cause another person to maintain a minimum level of net worth, or otherwise to ensure the solvency of such person and (iv) all other claims or amounts owed, to the extent that the payment of principal of, interest on and any other amount due with respect to the Securities is required by the Liquidation Act or otherwise by law to be subordinated to the prior payment of any such claim or amount. Any indebtedness of the Issuer which by its express terms is subordinated in right of payment to, or ranks equally with, the Securities shall not constitute Indebtedness. In addition, any future surplus notes or similar obligations of the Issuer which by their terms rank A-16 pari passu with, or are subordinate in right of payment to, the Securities - ---- ----- shall not constitute Indebtedness. As used herein, "Policy Claims" shall mean all existing or future claims of policyholders, beneficiaries, and insureds arising from and within the coverage of and not in excess of the applicable limits of any and all existing or future policies, endorsements, riders and other contracts of insurance, annuity contracts (including, without limitation, guaranteed investment contracts) and funding agreements, issued, assumed or renewed by the Issuer on or prior to the date hereof or hereafter created, all claims under separate account agreements to the extent such claims are not fully discharged by the assets held by the Issuer in the applicable separate accounts and all claims of the Massachusetts Insurer's Insolvency Fund, the Massachusetts Life and Health Insurance Guaranty Association, or any similar organization in another state against the Issuer. As used herein, "Prior Claims" shall mean all other claims against the Issuer which, pursuant to the Liquidation Act, have priority over claims with respect to the Securities. 11. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, the Issuer shall, in accordance with Rule 144A, comply with the terms of the agreements set forth in Section 7 of the Fiscal Agency Agreement. The provisions of Section 7 of the Fiscal Agency Agreement are hereby incorporated mutatis mutandis herein. ------- -------- 12. In case this Security shall become mutilated, defaced, destroyed, lost or stolen, the Issuer will execute and upon the Issuer's request the Fiscal Agent or its affiliate shall authenticate and deliver a new Security, having a number not contemporaneously outstanding, of like tenor (including the same date of issuance) and equal principal amount, registered in the same manner, dated the date of its authentication and bearing interest from the date to which interest has been paid on this Security, in exchange and substitution for this Security (upon surrender and cancellation thereof) or in lieu of and substitution for this Security. In the case where this Security is destroyed, lost or stolen, the applicant for a substituted Security shall furnish to the Issuer and the Fiscal Agent such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft of this Security, the applicant shall also furnish to the Issuer satisfactory evidence of the destruction, loss or theft of this Security and of the A-17 ownership thereof, provided, however, that if the registered holder hereof is, -------- ------- in the judgment of the Issuer, an institution of recognized responsibility, such registered holder's written agreement of indemnity shall be deemed to be satisfactory for the issuance of a new Security in lieu of and substitution for this Security. The Fiscal Agent or its affiliate shall authenticate any such substituted Security and deliver the same only upon written request or authorization of the Issuer. Upon the issuance of any substituted Security, the Issuer may require the payment by the registered holder thereof of a sum sufficient to cover fees and expenses connected therewith. In case this Security has matured or is about to mature and shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, subject to the Payment Restrictions, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except if this Security is mutilated or defaced) upon compliance by the registered holder with the provisions of this Paragraph 12 as hereinabove set forth. 13. Section 10 of the Fiscal Agency Agreement, which Section is hereby incorporated by reference herein, provides that, with certain exceptions as therein provided and with the consent of the registered holders of a majority of the principal amount of the Outstanding Securities present at a meeting duly called pursuant thereto or by written consent of such percentage of the principal amount of all Outstanding Securities, the Issuer and the Fiscal Agent may, with the prior written approval of the Commissioner, modify, amend or supplement the Fiscal Agency Agreement or the terms of the Securities or may, with the prior written approval of the Commissioner, give consents or waivers or take other actions with respect thereto. Any such modification, amendment, supplement, consent, waiver or other action shall be conclusive and binding on the registered holder of this Security and on all future registered holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation thereof is made upon this Security. The Fiscal Agency Agreement and the terms of the Securities may, with the prior written approval of the Commissioner, be modified or amended by the Issuer and the Fiscal Agent, without the consent of any registered holders of Securities, for the purpose of (a) adding to the covenants of the Issuer for the benefit of the registered holders of Securities, or (b) surrendering any right or power conferred upon the Issuer, or (c) securing the Securities pursuant to the requirements hereof, thereof or otherwise, or (d) evidencing the succession of another corporation to the Issuer and the A-18 assumption by such successor of the covenants and obligations of the Issuer herein and in the Fiscal Agency Agreement as permitted by the Securities and the Fiscal Agency Agreement, or (e) modifying the restrictions on, and procedures for, resale and other transfers of the Securities to the extent required by any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or transfer of restricted securities generally, or (f) accommodating the issuance, if any, of Securities in book-entry or certificated form and matters related thereto which do not adversely affect the interest of any registered holder in any material respect, or (g) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Fiscal Agency Agreement in a manner which does not adversely affect the interest of any registered holder in any material respect, or (h) effecting any amendment which the Issuer and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interest of any registered holder, to all of which each registered holder of any Security, by acceptance thereof, consents. 14. Registered holders of Securities may enforce the Fiscal Agency Agreement or the Securities only in the manner set forth below. (a) In the event that any state or federal agency shall obtain an order or grant approval for the reorganization, rehabilitation, liquidation, conservation or dissolution of the Issuer, the Securities will upon the obtaining of such an order or the granting of such approval immediately mature in full without any action on the part of the Fiscal Agent or any registered holder of the Securities, with payment thereon being subject to the Payment Restrictions, and any restrictions imposed as a consequence of, or pursuant to, such proceedings. Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, in no event shall the Fiscal Agent or any registered holder of the Securities be entitled to declare the Securities to immediately mature or otherwise be immediately payable. (b) In the event that the Commissioner approves in whole or in part a payment of any interest on or principal of any Securities and the Issuer fails to pay the full amount of such approved payment on the date such amount is scheduled to be paid, such approved amount will be immediately payable on such date without any action on the part of the Fiscal Agent or any registered holder of Securities. In the event that the Issuer fails to perform any of its other obligations hereunder or under the Fiscal Agency Agreement, each registered holder of the A-19 Securities may pursue any available remedy to enforce the performance of any provision of such Securities or the Fiscal Agency Agreement, provided, however, -------- that such remedy shall in no event include the right to declare the Securities immediately payable. A delay or omission by any registered holder in exercising any right or remedy accruing as a result of the Issuer's failure to perform its obligations hereunder or under the Fiscal Agency Agreement and the continuation thereof shall not impair such right or remedy or constitute a waiver of or acquiescence in such non-performance by the Issuer. To the extent permitted by law, no remedy is exclusive of any other remedy and all remedies are cumulative. (c) Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, the right of any registered holder of Securities to receive payment of the principal of and interest on such registered holder's Securities on or after the respective Scheduled Interest Payment Date or Scheduled Maturity Date expressed in such Securities, or to bring suit for the enforcement of any such payment on or after such respective Scheduled Interest Payment Date or Scheduled Maturity Dates, in each case subject to such payment on such date having received the written approval of the Commissioner pursuant to the Payment Restrictions, is absolute and unconditional and shall not be impaired or affected without the consent of the registered holder. 15. No reference herein to the Fiscal Agency Agreement and no provision of this Security or of the Fiscal Agency Agreement shall alter or impair the obligation of the Issuer, subject to the Payment Restrictions, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. 16. This Security shall be governed by, and construed in accordance with, the law of the State of New York. The Commissioner's exercise of regulatory authority, including approval of payments under this Security, shall be governed by, and construed in accordance with, the law of the Commonwealth of Massachusetts and the parties hereto shall submit any disputes related to the exercise of such regulatory authority to a court of competent jurisdiction in the Commonwealth of Massachusetts (or, if the Commissioner is not at the time the Commissioner of Insurance of the Commonwealth of Massachusetts, the law of such other jurisdiction as may establish the Commissioner as the primary regulator of the Issuer's financial condition). A-20 EXHIBIT B FORM OF TRANSFER CERTIFICATE FOR EXCHANGE OR TRANSFER OF RESTRICTED DEFINITIVE SECURITY (Transfers and exchanges pursuant to (S) 6(c) of the Fiscal Agency Agreement) The First National Bank of Boston as Fiscal Agent Blue Hills Office Park 150 Royall Street Canton, Massachusetts 02021 Re: John Hancock Mutual Life Insurance Company, 7 3/8% Surplus Notes due February 15, 2024 (the "Securities") -------------------------------------------- Reference is hereby made to the Fiscal Agency Agreement, dated as of February 25, 1994 (the "Fiscal Agency Agreement"), between John Hancock Mutual Life Insurance Company, as Issuer, and The First National Bank of Boston, as Fiscal Agent. Capitalized terms used but not defined herein shall have the meanings given to them in the Fiscal Agency Agreement. This letter relates to $_________________ principal amount of Restricted Definitive Securities held in definitive form by [insert name of transferor] (the "Transferor"). The Transferor has requested an exchange or transfer of such Securities. In connection with such request and in respect of such Securities, the Transferor does hereby certify that:* [_] (i) such Securities are owned by the Transferor and are being exchanged without transfer, [_] (ii) such transfer has been effected pursuant to and in accordance with Rule 144 under the United States Securities Act of 1933, as amended (the "Securities Act"), [_] (iii) such transfer has been effected pursuant to and in accordance with Rule 144A under the Securities Act and, accordingly, the Transferor does hereby further certify that the Securities are being transferred to a person that the - ------------------------ * Check applicable box. B-1 Transferor reasonably believes is purchasing the Securities for its own account, or for one or more accounts with respect to which such person exercises sole investment discretion, and such person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction; or [_] (iv) such transfer has been effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act, and, accordingly, the Transferor does hereby further certify that: (1) the offer of the Securities was not made to a person in the United States; (2) either: (A) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was outside the United States, or (B) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. B-2 This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and the Purchasers. Terms used in this certificate and not otherwise defined in the Fiscal Agency Agreement have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By: ------------------------ Name: Title: Dated: , -------------- ---- cc: John Hancock Mutual Life Insurance Company B-3 EX-10.4 8 REINSURANCE AGREEMENT EXHIBIT 10.4 REINSURANCE AGREEMENT THIS REINSURANCE AGREEMENT (this "Agreement"), made the 30th day of July, 1992 by and between John Hancock Mutual Life Insurance Company, a Massachusetts mutual life insurance company (the "Company"), and Provident Life and Accident Insurance Company, a Tennessee insurance company (the "Reinsurer"), WITNESSETH THAT IN CONSIDERATION of the mutual covenants and promises, and upon the terms and conditions set forth in this Agreement, the parties agree as follows: ARTICLE I BUSINESS REINSURED 1. The Company hereby cedes to the Reinsurer, and the Reinsurer hereby reinsures, 100% of the Policy Liabilities (as defined in Article V below) of the Disability Line (as defined in the Acquisition Agreement referred to in Article IV below) and all contracts or other agreements which are part of the Disability Line that are listed on Attachment A-1 on the Closing Date (as defined in Article IV below). All such policies and contracts described on Attachment A-1 are hereafter referred to as the "Policy" or "Policies." 2. All Policy Liabilities for which the Reinsurer is liable under this Agreement are subject in all respects to the same terms, conditions, interpretations, waivers, modifications, alterations and cancellations as the Policies. The Reinsurer reinsures the Policy Liabilities subject to all defenses, setoffs and counterclaims to which the Company would be entitled with respect to the Policies. It is expressly understood and agreed by the parties that no A-1 such defenses, setoffs or counterclaims are waived by the execution of this Agreement or the consummation of the transactions contemplated under this Agreement, and that on the Closing Date the Reinsurer shall be fully subrogated to all such defenses, setoffs and counterclaims. 3. Nothing in this Agreement creates any obligations on, or establishes any rights against, the Reinsurer in favor of any person not a party to this Agreement. 4. Prior to the Closing Date, the Company and the Reinsurer shall obtain all the consents or approvals of insurance regulatory authorities (whether through positive notification of approval or non-objection), if any, which are necessary for the consummation on the Closing Date of the transactions contemplated by this Agreement to be consummated on the Closing Date. After the Closing Date, the Company and the Reinsurer shall obtain all the consents or approvals of insurance regulatory authorities (whether through positive notification of approval or non-objection), if any, which are necessary for the consummation after the Closing Date of the transactions contemplated by this Agreement to be consummated after the Closing Date. The respective transactions shall not be consummated unless and until the applicable consents or approvals are obtained. 5. The Reinsurer shall, at all times during the term of this Agreement, take all actions consistent with state laws and regulations necessary to insure that the Company is permitted to take full reserve credits relating to the Policies reinsured. The Reinsurer will assume responsibility for computing reserves (i.e., unearned premiums reserve, active life reserves and claim reserves) in accordance with minimum statutory reserve standards for the liability it assumes under this Agreement. A-2 ARTICLE II REINSURANCE 1. The Company has taken or will take action to terminate existing reinsurance agreements as to the Disability Line. Such termination will be effective on or before the Closing Date. It is agreed that certain existing claims, which remain in effect as of the Closing Date, shall continue on a reinsured basis as outlined in the Acquisition Agreement. 2. The Company shall assist the Reinsurer in the Administration of these claims and shall aid the Reinsurer in collecting all amounts due from other reinsurers and shall forward to the Reinsurer any funds collected from other reinsurers on the Policies. ARTICLE III TERRITORY This Agreement shall apply only to Policies having their situs in the United States (including its territories and possessions) except the state of New York. ARTICLE IV TERM This Agreement shall become effective at 12:01 A.M., Boston, Massachusetts time, on the date of the Closing (the "Closing Date") of the transactions provided for in the Acquisition Agreement, dated July 30, 1992, between the Company and the Reinsurer (the "Acquisition Agreement") and shall continue in effect until and unless terminated in accordance with Article XIII of this Agreement. A-3 ARTICLE V LIABILITY The term "Policy Liabilities" means the gross liability of the Company on the Policies. Policy Liabilities do not include Excluded Liabilities (as defined in the Acquisition Agreement). ARTICLE VI POLICY ADMINISTRATION The Company and the Reinsurer will collect all due premiums, perform all policy administration and service all of the Policies reinsured under this Agreement pursuant to terms of the Administrative Services Agreement dated July 30, 1992 between the Company and the Reinsurer (the "Administrative Services Agreement"). Pursuant to applicable law, the Company grants to the Reinsurer authority in all matters relating to policy administration as set out in the Administrative Services Agreement. The Company hereby nominates and appoints the Reinsurer as the attorney-in-fact of the Company with respect to the rights, duties, privileges and obligations of the Company under the Policies, with full power and authority to act in the name, place and stead of the Company. This power and authority includes without limitation the power to service all Policies, to defend, settle and pay all claims and to take such other actions as may be necessary or desirable to effect the transactions contemplated by this Agreement. ARTICLE VII PREMIUMS; CONSIDERATION 1. The Reinsurer is entitled to 100% of all premiums and other consideration, including premiums collected on and after August 1, 1992, with respect to any and all Policies which have been billed, but as to which premiums remain unpaid as of Closing, attributable to the Policies, less ceding A-4 allowances as outlined in Exhibit A to this Agreement. If the Company receives premiums and other consideration after the Closing Date it shall promptly remit such premiums and consideration to the Reinsurer, along with pertinent information such as the nature of the payment, the source of funds, the policy number, the period to which the remittance relates and any special rates or instructions. The amount of expense allowance as outlined on Exhibit A will be adjusted by the Reinsurer from time to time as required to reflect the allocation of policy administration functions then being performed by the Company. 2. Except as may be provided in the Acquisition Agreement, the Reinsurer assumes no liability for dividends that may be granted under the Policies reinsured, or any other amounts which may be treated as or deemed to be a dividend to the policyholder. Any such dividends to policyholders shall be treated as paid solely by the Company. 3. As outlined in the Acquisition Agreement, the Reinsurer shall allow to the Company, as consideration for reinsurance of the Policies, an amount equal to 47.98888% of the annualized modal premium in force (the "Purchase Price") with respect to the Policies as of the Closing Date. 4. As consideration for the Reinsurer's 100% reinsurance of the Policy Liabilities, the Company shall allow to the Reinsurer as of the Closing Date an amount equal to the Final Reserves as outlined in the Acquisition Agreement. ARTICLE VIII RECORDS AND ACCOUNTING 1. As soon as practicable after the Closing Date, the Company shall forward to the Reinsurer all reports, records, underwriting files, claim files and other data or information ("Records") relating to the Policies as required A-5 by the Reinsurer pursuant to terms of the Administrative Services Agreement and shall cooperate with the Reinsurer in the administration of the Policies. The Company shall use its best efforts to maintain the Policies and the Records in the manner in which the Reinsurer requires. The Company shall also grant to the Reinsurer such access to Records maintained on the computer systems of the Company as is necessary to administer the payment of claims under the Policies and for such other purposes as may be mutually agreed upon by the Company and the Reinsurer. 2. All reserves will be accounted for by the Company as ceded reinsurance and by the Reinsurer as assumed reinsurance. 3. The Reinsurer will be credited with 100% of the total premiums received on the policies reinsured and debited with the ceding allowances outlined in Exhibit A to this Agreement. ARTICLE IX RESERVES 1. The Reinsurer shall maintain active life, unearned premium, claim, and other reserves (including reserves for losses incurred but not reported), consistent with the law of any jurisdiction having regulatory authority with respect to the Policies. 2. At any point in time, the Reinsurer will owe to the Company, an amount equal to the ceding allowances outlined in Exhibit A to this Agreement multiplied by the amount of premiums recorded as paid by the Company but not yet transferred to the Reinsurer. A-6 ARTICLE X ADJUSTMENT FOR FEDERAL INCOME TAXES There shall be no sharing or proration of the federal income tax benefits or payments which may accrue to the Reinsurer or Company as a result of this Agreement. ARTICLE XI REINSURANCE ACCOUNTING The Company and the Reinsurer shall administer the Policies hereunder and shall perform all accounting for such Policies. Within the time frames as specified in Exhibit B the Company and the Reinsurer each shall provide to the other such information as is necessary to complete monthly, quarterly, or annual financial statements. The particulars of this financial/accounting process are contained in Exhibit B to this Agreement. ARTICLE XII INSOLVENCY In the event of the Company's insolvency, the Reinsurer is obligated to make payments of its liability under this Agreement without diminution because of the insolvency. It is agreed that any liquidator, receiver or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company on any Policy within a reasonable time after the claim is filed in the insolvency proceeding. During the pendency of any such claim the Reinsurer may investigate the claim and may, at its own expense, interpose any defense which the Reinsurer considers to be available to the Company or its liquidator, receiver or statutory successor. A-7 ARTICLE XIII TERMINATION This Agreement may not be cancelled by either party acting alone but shall remain in full force and effect until such time as all liabilities under this Agreement and under the Policies have been discharged or have otherwise expired. This Agreement may be terminated at any time by written instrument signed by both parties. ARTICLE XIV GENERAL PROVISIONS 1. All notices and other communications shall be in writing and shall be delivered personally or mailed postage prepaid, certified or registered mail, return receipt requested, to the party at the address set forth after its respective name below: If to the Company, addressed to: John Hancock Mutual Life Insurance Company John Hancock Place, 200 Clarendon Street Post Office Box 111 Boston, Massachusetts 02117-0111 Attention: Joseph A. Tomlinson Vice President With a copy to: Bryan M. Cadel Assistant Counsel John Hancock Mutual Life Insurance Company John Hancock Place, 200 Clarendon Street Post Office Box 111 Boston, Massachusetts 02117-0111 If to the Reinsurer, addressed to: Provident Life and Accident Insurance Company One Fountain Square Chattanooga, TN 37402 Attention: David S. Cox Vice President, Acquisitions and Reinsurance Accident Department A-8 With a copy to: Henry T. Hardin, III Senior Counsel Provident Life and Accident Insurance Company One Fountain Square Chattanooga, TN 37402 or to another place and with other copies as a party may designate for itself by written notice to the other. 2. If any provision or portion of this Agreement is invalid or unenforceable for any reason, the Agreement shall be read as though it includes such minor changes in the provision or portion as are necessary to make it valid or enforceable. That any provision or portion of the Agreement is invalid or unenforceable shall not affect the validity or enforceability of the other provision or portions of the Agreement. 3. This Agreement: (a) together with the Acquisition Agreement, the PLC Coinsurance Agreement between the Company and Provident Life and Casualty Insurance Company and the Administrative Services Agreement constitute the entire agreement and supersedes all prior agreements, understandings, and negotiations, both written and oral, between the parties with respect to the subject matter of this Agreement; (b) may be executed in counterparts, each of which shall be deemed an original and all of which constitute one and the same instrument; (c) shall be binding upon and inure to the benefit of the parties and their respective successors and assigns; (d) may not be assigned by either party without written consent of the other party hereto; (e) shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts; and A-9 (f) shall be construed and interpreted in a manner consistent with, and not contrary to, the terms and conditions of the Acquisition Agreement. In the event of any conflict between the provision of the Acquisition Agreement and this Agreement, the provisions of the Acquisition Agreement shall prevail. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY Witness: /s/ Elaine M. Tallini BY: /s/ Joseph A. Tomlinson ------------------------------- ----------------------------- Name: Joseph A. Tomlinson Title: Vice President PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY Witness: /s/ Henry T. Hardy, III BY: /s/ Ralph J. Christiana ------------------------------- ----------------------------- Name: Ralph J. Christiana Title: Vice President and Chief Officer, Accident Department A-10 Attachment A-1 DESCRIPTION OF REINSURED POLICIES A-11 EXHIBIT A COINSURANCE CEDING ALLOWANCES A-12 JOHN HANCOCK COINSURANCE CEDING ALLOWANCES
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 & Following ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------------- Commission Allowance/A/ 10.00% 10.00% 9.00% 8.00% 7.25% 6.50% 5.75% 5.00% 4.50% 4.25% 4.00% Expense Allowance 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% Premium Tax Allowance 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
The above percentage allowance factors will be multiplied by the dollar amount of premiums recorded as paid less returned premiums and waiver premiums. /A/Reflects savings from John Hancock's annualization of commissions during 1991. A-13 EXHIBIT B FINANCIAL/ACCOUNTING PROCESS FOR REINSURANCE AGREEMENT I. Information to be supplied monthly by the Company A. Net premiums recorded as paid for the preceding month - a summary of premiums paid less any returned premiums for the second preceding month B. Premium billed and due but not yet paid - this information needs to be separated into the following categories 1. Billed but not yet paid within the 31-day grace period 2. Premiums billed and due but more than 31 days past due but less than 90 days 3. Premiums billed and due but 90 days or more past due C. Waived premiums during the preceding month D. Allowances for commissions, administration and premium taxes - each allowance will be computed by multiplying (a) the net premiums recorded as paid less returned premiums less premiums waived by (b) the appropriate percentage factor as shown in the attached schedule. E. The IDH master policy file for all policies F. The computer datasets are to be shipped to the Reinsurer, guaranteed next day delivery, on the 1st working day of each month; accounting information is due by the 4th day of each month. All information shall reflect transactions as of the last day of the month next preceding. II. Data to be supplied by the Reinsurer A. Monthly ------- 1. Claim payments made during the preceding month B. Quarterly --------- 1. Claim reserves on in-process claims 2. Claim reserves for IBNR 3. Active life reserves 4. Unearned premium reserves 5. F. I. T. Tax basis reserves A-14 The information in A above is to be telecopied on the 3rd working day of each month, as of the last day of the month next preceding. The information in B above is due no late than the 7th working day of the month as of the last day of the calendar quarter next preceding. C. Annually -------- 1. A & H policy form exhibit 2. Experience by policy series for state of New York 3. Annual statement information The information in C(1) and C(2) is due by March 15 of each year; the information in C(3) is due by January 31 of each year. A-15 EX-10.5 9 REINSURANCE AGREEMENT Exhibit 10.5 EXHIBIT B REINSURANCE AGREEMENT THIS REINSURANCE AGREEMENT (this "Agreement"), made the 30th day of July, 1992 by and between John Hancock Mutual Life Insurance Company, a Massachusetts mutual life insurance company (the "Company"), and Provident Life and Casualty Insurance Company, a Tennessee insurance company (the "Reinsurer"), WITNESSETH THAT IN CONSIDERATION of the mutual covenants and promises, and upon the terms and conditions set forth in this Agreement, the parties agree as follows: ARTICLE I BUSINESS REINSURED 1. The Company hereby cedes to the Reinsurer, and the Reinsurer hereby reinsures, 100% of the Policy Liabilities (as defined in Article V below) of the Disability Line (as defined in the Acquisition Agreement referred to in Article IV below) and all contracts or other agreements which are part of the Disability Line that are listed on Attachment B-1 on the Closing Date (as defined in Article IV below). All such policies and contracts described on Attachment B-1 are hereafter referred to as the "Policy" or "Policies." 2. All Policy Liabilities for which the Reinsurer is liable under this Agreement are subject in all respects to the same terms, conditions, interpretations, waivers, modifications, alterations and cancellations as the Policies. The Reinsurer reinsures the Policy Liabilities subject to all defenses, setoffs and counterclaims to which the Company would be entitled with respect to the Policies. It is expressly understood and agreed by the parties that no B-1 such defenses, setoffs or counterclaims are waived by the execution of this Agreement or the consummation of the transactions contemplated under this Agreement, and that on the Closing Date the Reinsurer shall be fully subrogated to all such defenses, setoffs and counterclaims. 3. Nothing in this Agreement creates any obligations on, or establishes any rights against, the Reinsurer in favor of any person not a party to this Agreement. 4. Prior to the Closing Date, the Company and the Reinsurer shall obtain all the consents or approvals of insurance regulatory authorities (whether through positive notification of approval or non-objection), if any, which are necessary for the consummation on the Closing Date of the transactions contemplated by this Agreement to be consummated on the Closing Date. After the Closing Date, the Company and the Reinsurer shall obtain all the consents or approvals of insurance regulatory authorities (whether through positive notification of approval or non-objection), if any, which are necessary for the consummation after the Closing Date of the transactions contemplated by this Agreement to be consummated after the Closing Date. The respective transactions shall not be consummated unless and until the applicable consents or approvals are obtained. 5. The Reinsurer shall, at all times during the term of this Agreement, take all actions consistent with state laws and regulations necessary to insure that the Company is permitted to take full reserve credits relating to the Policies reinsured. The Reinsurer will assume responsibility for computing reserves (i.e., unearned premium reserves, active life reserves, and claim reserves) in accordance with minimum statutory reserve standards for the liability it assumes under this Agreement. B-2 ARTICLE II REINSURANCE 1. The Company has taken or will take action to terminate existing reinsurance agreements as to the Disability Line. Such termination will be effective on or before the Closing Date. It is agreed that certain existing claims, which remain in effect as of the Closing Date, shall continue on a reinsured basis as outlined in the Acquisition Agreement. 2. The Company shall assist the Reinsurer in the administration of these claims and shall aid the Reinsurer in collecting all amounts due from other reinsurers and shall forward to the Reinsurer any funds collected from other reinsurers on the Policies. ARTICLE III TERRITORY This Agreement shall apply only to Policies having their situs in the state of New York. ARTICLE IV TERM This Agreement shall become effective at 12:01 A.M., Boston, Massachusetts time, on the date of the Closing (the "Closing Date") of the transactions provided for in the Acquisition Agreement, dated July 30, 1992, between the Company and the Reinsurer (the "Acquisition Agreement") and shall continue in effect until and unless terminated in accordance with Article XIII of this Agreement. B-3 ARTICLE V LIABILITY The term "Policy Liabilities" means the gross liability of the Company on the Policies. Policy Liabilities do not include Excluded Liabilities (as defined in the Acquisition Agreement). ARTICLE VI POLICY ADMINISTRATION 1. The Company and the Reinsurer will collect all due premiums, perform all policy administration and service all of the Policies reinsured under this Agreement pursuant to terms of the Administrative Services Agreement dated July 30, 1992 between the Company and the Reinsurer (the "Administrative Services Agreement"). Pursuant to applicable law, the Company grants to the Reinsurer authority in all matters relating to policy administration as set out in the Administrative Services Agreement. The Company hereby nominates and appoints the Reinsurer as the attorney-in-fact of the Company with respect to the rights, duties, privileges and obligations of the Company under the Policies, with full power and authority to act in the name, place and stead of the Company. This power and authority includes without limitation the power to service all Policies, to defend, settle and pay all claims and to take such other actions as may be necessary or desirable to effect the transactions contemplated by this Agreement. 2. Notwithstanding the provisions of this Agreement, the Acquisition Agreement, the Administrative Services Agreement, or any other agreement related to this transaction, it is expressly understood and agreed by the Reinsurer and the Company, that as to Policies covered by this Agreement the Company retains final authority in matters of claim administration. The Company agrees that it shall consult with the Reinsurer in making any decision B-4 it is called upon or required to make in connection with the administration of claim payments under of this Agreement. ARTICLE VII PREMIUMS; CONSIDERATION 1. The Reinsurer is entitled to 100% of all premiums and other consideration, including premiums collected on and after August 1, 1992, with respect to any and all Policies which have been billed, but as to which premiums remain unpaid as of Closing, attributable to the Policies, less ceding allowances as outlined in Exhibit A to this Agreement. If the Company receives premiums and other consideration after the Closing Date it shall promptly remit such premiums and consideration to the Reinsurer, along with pertinent information such as the nature of the payment, the source of funds, the policy number, the period to which the remittance relates and any special rates or instructions. The amount of expense allowance as outlined on Exhibit A will be adjusted by the Reinsurer from time to time as required to reflect the allocation of policy administration functions then being performed by the Company. 2. Except as may be provided in the Acquisition Agreement, the Reinsurer assumes no liability for dividends that may be granted under the Policies reinsured, or any other amounts which may be treated as or deemed to be a dividend to the policyholder. Any such dividends to policyholders shall be treated as paid solely by the Company. 3. As outlined in the Acquisition Agreement, the Reinsurer shall allow to the Company, as consideration for reinsurance of the Policies, an amount equal to 47.98888% of the annualized modal premium in force (the "Purchase Price") with respect to the Policies as of the Closing Date. B-5 4. As consideration for the Reinsurer's 100% reinsurance of the Policy Liabilities, the Company shall allow to the Reinsurer as of the Closing Date an amount equal to the Final Reserves as outlined in the Acquisition Agreement. ARTICLE VIII RECORDS AND ACCOUNTING 1. As soon as practicable after the Closing Date, the Company shall forward to the Reinsurer duplicate copies of all reports, records, underwriting files, claim files and other data or information ("Records") relating to the Policies as required by the Reinsurer pursuant to terms of the Administrative Services Agreement and shall cooperate with the Reinsurer in the administration of the Policies. The original records with respect to the Policies will be maintained by the Company. The Company shall use its best efforts to maintain the Policies and the Records in the manner in which the Reinsurer requires. The Company shall also grant to the Reinsurer such access to Records maintained on the computer systems of the Company as is necessary to administer the payment of claims under the Policies and for such other purposes as may be mutually agreed upon by the Company and the Reinsurer. 2. All reserves will be accounted for by the Company as ceded reinsurance and by the Reinsurer as assumed reinsurance. 3. The Reinsurer will be credited with 100% of the total premiums received on the policies reinsured and debited with the ceding allowances outlined in Exhibit A to this Agreement. ARTICLE IX RESERVES 1. The Reinsurer shall maintain active life, unearned premium, claim, and other reserves (including reserves for losses incurred but not reported), B-6 consistent with the law of any jurisdiction having regulatory authority with respect to the Policies. 2. At any point in time, the Reinsurer will owe to the Company, an amount equal to the ceding allowances outlined in Exhibit A to this Agreement, multiplied by the amount of premiums recorded as paid by the Company, but not yet transferred to the Reinsurer. ARTICLE X ADJUSTMENT FOR FEDERAL INCOME TAXES There shall be no sharing or proration of the federal income tax benefits or payments which may accrue to the Reinsurer or Company as a result of this Agreement. ARTICLE XI REINSURANCE ACCOUNTING The Company and the Reinsurer shall administer the Policies hereunder and shall perform all accounting for such Policies. Within the time frames as specified in Exhibit B the Company and the Reinsurer each shall provide to the other such information as is necessary to complete monthly, quarterly, or annual financial statements. The particulars of this financial/accounting process are contained in Exhibit B to this Agreement. ARTICLE XII INSOLVENCY In the event of the Company's insolvency, the Reinsurer is obligated to make payments of its liability under this Agreement without diminution because of the insolvency. It is agreed that any liquidator, receiver or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company on any Policy within a reasonable time after the claim is filed in the insolvency proceeding. During B-7 the pendency of any such claim the Reinsurer may investigate the claim and may, at its own expense, interpose any defense which the Reinsurer considers to be available to the Company or its liquidator, receiver or statutory successor. ARTICLE XIII TERMINATION This Agreement may not be cancelled by either party acting alone but shall remain in full force and effect until such time as all liabilities under this Agreement and under the Policies have been discharged or have otherwise expired. This Agreement may be terminated at any time by written instrument signed by both parties. ARTICLE XIV GENERAL PROVISIONS 1. All notices and other communications shall be in writing and shall be delivered personally or mailed postage prepaid, certified or registered mail, return receipt requested, to the party at the address set forth after its respective name below: If to the Company, addressed to: John Hancock Mutual Life Insurance Company John Hancock Place, 200 Clarendon Street Post Office Box 111 Boston, Massachusetts 02117-0111 Attention: Joseph A. Tomlinson Vice President With a copy to: Bryan M. Cadel Assistant Counsel John Hancock Mutual Life Insurance Company John Hancock Place, 200 Clarendon Street Post Office Box 111 Boston, Massachusetts 02117-0111 B-8 If to the Reinsurer, addressed to: Provident Life and Casualty Insurance Company One Fountain Square Chattanooga, TN 37402 Attention: David S. Cox Vice President, Acquisitions and Reinsurance Accident Department With a copy to: Henry T. Hardin, III - Senior Counsel Provident Life and Casualty Insurance Company One Fountain Square Chattanooga, TN 37402 or to another place and with other copies as a party may designate for itself by written notice to the other. 2. If any provision or portion of this Agreement is invalid or unenforceable for any reason, the Agreement shall be read as though it includes such minor changes in the provision or portion as are necessary to make it valid or enforceable. That any provision or portion of the Agreement is invalid or unenforceable shall not affect the validity or enforceability of the other provision or portions of the Agreement. 3. This Agreement: (a) together with the Acquisition Agreement, the Coinsurance Agreement between the Company and Provident Life and Accident Insurance Company and the Administrative Services Agreement constitute the entire agreement and supersedes all prior agreements, understandings, and negotiations, both written and oral, between the parties with respect to the subject matter of this Agreement; (b) may be executed in counterparts, each of which shall be deemed an original and all of which constitute one and the same instrument; (c) shall be binding upon and inure to the benefit of the parties and their respective successors and assigns; B-9 (d) may not be assigned by either party without the written consent of the other party hereto. (e) shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts; and (f) shall be construed and interpreted in a manner consistent with, and not contrary to, the terms and conditions of the Acquisition Agreement. In the event of any conflict between the provisions of the Acquisition Agreement and this Agreement, the provisions of the Acquisition Agreement shall prevail. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY Witness: /s/ Elaine M. Tallini BY: /s/ Joseph A. Tomlinson --------------------------- ---------------------------- Name: Joseph A. Tomlinson Title: Vice President PROVIDENT LIFE AND CASUALTY INSURANCE COMPANY Witness: /s/ Henry T. Hardy, III BY: /s/ Ralph J. Christiana ---------------------------- ---------------------------- Name: Ralph J. Christiana Title: Vice President and Chief Officer, Accident Department B-10 Attachment B-1 Description of Reinsured Policies B-11 EXHIBIT A COINSURANCE CEDING ALLOWANCES B-12 JOHN HANCOCK COINSURANCE CEDING ALLOWANCES
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 & Following ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------------- Commission Allowance/A/ 10.00% 10.00% 9.00% 8.00% 7.25% 6.50% 5.75% 5.00% 4.50% 4.25% 4.00% Expense Allowance 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% Premium Tax Allowance 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
The above percentage allowance factors will be multiplied by the dollar amount of premiums recorded as paid less returned premiums and waiver premiums. /A/ Reflects savings from John Hancock's annualization of commissions during 1991. B-13 EXHIBIT B FINANCIAL/ACCOUNTING PROCESS FOR REINSURANCE AGREEMENT I. Information to be supplied monthly by the Company A. Net premiums recorded as paid for the preceding month - a summary of premiums paid less any returned premiums for the second preceding month B. Premium billed and due but not yet paid - this information needs to be separated into the following categories 1. Billed but not yet paid within the 31-day grace period 2. Premiums billed and due but more than 31 days past due but less than 90 days 3. Premiums billed and due but 90 days or more past due C. Waived premiums during the preceding month D. Allowances for commissions, administration and premium taxes - each allowance will be computed by multiplying (a) the net premiums recorded paid less returned premiums less premiums waived by (b) the appropriate percentage factor as shown in the attached schedule. E. The IDH master policy file for all policies F. The computer datasets are to be shipped, guaranteed next day delivery, on the 1st working day of each month; accounting information is due by the 4th day of each month. All information shall reflect transactions as of the last day of the month next preceding. II. Data to be supplied by the Reinsurer A. Monthly ------- 1. Claim payments made during the preceding month B. Quarterly --------- 1. Claim reserves on in-process claims 2. Claim reserves for IBNR 3. Active life reserves 4. Unearned premium reserves 5. F.I.T. tax basis reserves B-14 The information in A above is to be telecopied on the 3rd working day of each month, as of the last day of the month next preceding. The information in B above is due no later than the 7th working day of the month as of the last day of the calendar quarter next preceding. C. Annually -------- 1. A & H Policy Form Exhibit 2. Experience by policy series for state of New York 3. Annual statement information The information in C(1) and C(2) is due by March 15 of each year; the information in C(3) is due by January 31 of each year. B-15 EX-10.6 10 COINSURANCE AGREEMENT EXHIBIT 10.6 COINSURANCE AGREEMENT between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and UNICARE LIFE & HEALTH INSURANCE COMPANY TABLE OF CONTENTS Page ---- ARTICLE I. DEFINITIONS ................................................ 2 ARTICLE II. REINSURANCE CLOSING; CONDITIONS TO REINSURANCE CLOSING ..................................... 9 2.1 Reinsurance Closing ................................................ 9 2.2 Conditions to Reinsurance Closing .................................. 9 ARTICLE III. COINSURED POLICIES ......................................... 10 3.1 Coinsured Policies ................................................. 10 3.2 Liability of Reinsurer ............................................. 10 3.3 Regulatory Filings and Approvals ................................... 11 ARTICLE IV. GBO EXCLUDED BUSINESS ...................................... 11 4.1 Coinsurance Agreement Inapplicable to GBO Excluded Business ............................................... 11 4.2 Company's Indemnification for GBO Excluded Business ........................................................ 11 ARTICLE V. EXISTING GBO POLICIES ...................................... 11 5.1 Reinsurance of Existing GBO Policies at Effective Time .................................................. 11 5.2 Value of Reserves .................................................. 11 5.3 Reinsurer's Indemnification for Existing GBO Policies .................................................... 12 5.4 Company's Indemnification for Existing GBO Policies ........................................................ 12 ARTICLE VI. TRANSITION GBO POLICIES .................................... 12 6.1 Issuance of Transition GBO Policies by the Company ......................................................... 12 6.2 Reinsurance of Transition GBO Policies ............................. 13 6.3 Reinsurer's Indemnification for Transition GBO Policies .................................................... 13 6.4 Company's Indemnification for Transition GBO Policies .................................................... 13 6.5 Maintenance of Licenses ............................................ 14 6.6 Limitations on Writing of Transition GBO Policies ........................................................ 14 ARTICLE VI. GENERAL PROVISIONS ......................................... 15 7.1 Reinsurer's Recordation of Liabilities ............................. 15 i Page ---- 7.2 Administration ..................................................... 15 7.3 Authorized Representatives ......................................... 15 7.4 Maintenance and Inspection of Records .............................. 16 7.5 Misunderstandings and Oversights ................................... 16 7.6 Age, Sex and Other Adjustments ..................................... 16 7.7 Reinstatements ..................................................... 16 7.8 Contract Changes or Reserve Assumption Changes ........................................................ 17 7.9 Litigation ......................................................... 17 ARTICLE VIII. CONSIDERATION FOR REINSURANCE AND POLICY PREMIUMS ........................................... 18 8.1 Assets to be Transferred at Effective Time ......................... 18 8.2 Transition GBO Policies ............................................ 18 8.3 Policy Premiums and Other Amounts .................................. 18 ARTICLE IX. BENEFITS AND OTHER PAYMENTS BY REINSURER ............................................... 18 9.1 Benefits ........................................................... 18 9.2 Claims ............................................................. 19 9.3 Claims Payments .................................................... 19 9.4 Remittance of Third Party Reinsurance .............................. 19 9.5 Allowance for Commissions and Expenses ............................. 20 9.6 Experience Rating Refunds .......................................... 20 ARTICLE X. DUTY OF COOPERATION ........................................ 20 10.1 Duty of Cooperation .................................................20 ARTICLE XI. ACCOUNTING AND SETTLEMENT .................................. 21 11.1 Remittances ........................................................ 21 11.2 Quarterly Report ................................................... 21 11.3 Amounts Due Either Party ........................................... 21 11.4 Interest on Delayed Payments ....................................... 21 ARTICLE XII. DURATION AND TERRITORY ..................................... 22 12.1 Duration ........................................................... 22 12.2 Reinsurer's Liability .............................................. 22 12.3 Territory .......................................................... 22 ARTICLE XIII. INSOLVENCY ................................................. 22 13.1 Payments by Reinsurer .............................................. 22 13.2 Claims ............................................................. 22 ARTICLE XIV. ARBITRATION ................................................ 23 14.1 General ............................................................ 23 ii Page ---- ARTICLE XV. INDEMNIFICATION ............................................ 23 15.1 The Reinsurer ...................................................... 23 15.2 The Company ........................................................ 24 15.3 Indemnification Procedures ......................................... 24 15.4 Survival of Article ................................................ 24 ARTICLE XVI. MISCELLANEOUS PROVISIONS ................................... 24 16.1 No Third Party Beneficiaries ....................................... 24 16.2 Headings and Exhibit ............................................... 25 16.3 Notices ............................................................ 25 16.4 Severability ....................................................... 26 16.5 Assignment ......................................................... 26 16.6 Successors and Assigns ............................................. 26 16.7 Execution in Counterparts .......................................... 26 16.8 Amendments ......................................................... 27 16.9 Waiver ............................................................. 27 16.10 Interpretation ..................................................... 27 16.11 Entire Agreement ................................................... 27 16.12 Governing Law ...................................................... 27 EXHIBIT A QUARTERLY/ANNUAL REPORT iii Exhibit 10.6 COINSURANCE AGREEMENT This Coinsurance Agreement (the "Coinsurance Agreement") is made and entered into as of the Effective Time (as hereinafter defined), between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a mutual life insurance company organized under the laws of Massachusetts (the "Company"), and UNICARE LIFE & HEALTH INSURANCE COMPANY, a stock life insurance company organized under the laws of Delaware (the "Reinsurer"). WHEREAS, the Company and WellPoint Health Networks Inc., a California corporation ("WellPoint") and the indirect parent of the Reinsurer, have entered into a Purchase and Sale Agreement, dated as of October 10, 1996, as amended, (the "Purchase Agreement"), which provides for the sale by the Company to WellPoint and the Reinsurer of the GBO Included Business (as hereinafter defined); and WHEREAS, to effect such sale of the GBO Included Business, the Purchase Agreement provides for, among other things, the sale and transfer by the Company to WellPoint or the Reinsurer of the GBO Division Assets (as hereinafter defined) and the assignment by the Company, and assumption by WellPoint or the Reinsurer, of the GBO Division Liabilities (as hereinafter defined), as well as the sale by John Hancock Subsidiaries, Inc., a wholly-owned subsidiary of the Company, of the GBO Subsidiary Shares (as hereinafter defined) to WellPoint; and WHEREAS, certain of the GBO Division Assets are to be sold and transferred by the Company to the Reinsurer, and certain of the GBO Division Liabilities are to be transferred by the Company and assumed by the Reinsurer, under this Coinsurance Agreement; and WHEREAS, the Company has agreed to cede to the Reinsurer, and the Reinsurer has agreed to accept and indemnity reinsure, on a 100% coinsurance basis, all of the Reserves and Liabilities (as hereinafter defined) arising under or with respect to the Coinsured Policies (as hereinafter defined) as contemplated by the Purchase Agreement and this Coinsurance Agreement; and WHEREAS, the Reinsurer has agreed to perform administrative services with respect to the Coinsured Policies pursuant to an administration agreement (the "Administration Agreement") entered into between the Company and the Reinsurer as of the Effective Time; and WHEREAS, the Company and the Reinsurer may, at the option of the Reinsurer, enter into an Assumption Agreement substantially in the form attached as Annex C to the Purchase Agreement (the "Assumption Agreement"), under which Reinsurer may, in its sole discretion, assumption reinsure such Coinsured Policies, with a concurrent novation and complete release of the Company from any liability under such Coinsured Policies, on a state by state basis after the Effective Time upon the receipt of any and all applicable regulatory approvals and notice to relevant policyholders followed by expiration of the applicable period with no opt out by such policyholders or the obtaining of required consents from such policyholders, as the case may be. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements set forth herein, the Company and the Reinsurer mutually agree as follows: ARTICLE I. DEFINITIONS As used in this Coinsurance Agreement, the following capitalized terms shall have the following meanings (definitions are applicable to both the singular and the plural forms of each term defined in this Article I): "ACCOUNTING PERIOD" means a calendar quarter, except that the first Accounting Period shall be the period commencing with the Effective Time and ending with the last day of then current calendar quarter, and the final Accounting Period shall be the period commencing with the first day of the calendar quarter that includes the day on which the Company's liability under the last Coinsured Policy either terminates or is novated, and ending on such day. "ADMINISTRATION AGREEMENT" shall have the meaning set forth in the fifth recital hereof. "AFFILIATE" of a specified Person means a Person that (at the time when the determination is to be made) directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the specified Person. As used in the foregoing 2 sentence, the terms "control" (including, with correlative meaning, the terms "controlling," "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "ASO CONTRACT" means a Contract issued by the Company pursuant to which the Company provides only administrative services to customers of the GBO Business. "ASSUMPTION AGREEMENT" shall have the meaning set forth in the sixth recital hereof. "BENEFITS" shall have the meaning set forth in Section 9.1 hereof. "BUSINESS DAY" means any day (other than a Saturday or Sunday) on which banks are permitted to be open and transact business in Boston, Massachusetts and Los Angeles, California. "CLOSING GAAP BALANCE SHEET" shall have the meaning set forth in Section 1.5(a) of the Purchase Agreement. "COINSURED POLICIES" means the Existing GBO Policies and the Transition GBO Policies. "COMMISSIONS" means all sales commissions, production bonuses or other payments in cash or kind payable to agents in the ordinary course of business with respect to the origination or renewal of any Coinsured Policies. "CONTRACTS" means all agreements or contracts, including, without limitation, all ASO Contracts, reinsurance agreements, coinsurance agreements, pooling agreements, network agreements, agents', brokers' and other intermediaries' agreements, mortgages, indentures, notes, guarantees, leases, purchase agreements and sale agreements. "EFFECTIVE TIME" shall have the meaning set forth in Section 2.1 hereof. "EXISTING GBO POLICIES" means all GBO Business Policies other than GBO Excluded Business Policies issued by the Company before the Effective Time which are in effect on the Effective Time and such GBO Business Policies not in effect on the Effective Time, for which Reserves have been 3 established on the Closing GAAP Balance Sheet, which will be coinsured by Reinsurer at the Effective Time (but excluding all coverages other than life, accidental death and dismemberment, survivor income benefits, long-term disability and short-term disability coverages which expired more than three (3) years prior to the Effective Time and which are part of the GBO Included Business) pursuant to this Coinsurance Agreement. "EXTRA CONTRACTUAL OBLIGATIONS" means (i) liabilities which arise from negligence or bad faith in claims practices with respect to Coinsured Policies, or (ii) liabilities for loss in excess of the limit of the Company's original policy applicable to any Coinsured Policy. Notwithstanding the foregoing, the Reinsurer shall have no liability for any Extra Contractual Obligations to the extent they arise out of or are based on bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its Affiliates (without attributing to the Company or its Affiliates the actions of the Reinsurer or its Affiliates). "GBO BUSINESS" means the United States, Puerto Rico and Guam group benefit operations of the Company, including the ASO Contracts business, the group health, group dental, group vision, group long-term disability, group short-term disability, group accident and sickness, and group pharmacy business, the business conducted by the GBO Subsidiaries, network arrangements, group life businesses, group accidental death and dismemberment business, individual accident and health converted business and individual life converted business, but EXCLUDING the business conducted by HealthPlan Management Services, Inc., long-term care insurance, group creditor insurance and all insurance business written outside of the United States by the International Group Program business unit of the Company either directly by the Company or through John Hancock Services Internacionais S/C Limitada, John Hancock International Services, S.A. and John Hancock International Services Pte, Ltd., by the Maritime Life Assurance Company, by P.T Asuransi Jiwa Bumiputera John pancock, by P.T. Indras Insan Jaya Utama, by John Hancock Life Insurance (Malaysia) Berhad, by John Hancock Life Assurance Company, Ltd., and by The Interlife Assurance Public Company Ltd. or otherwise by the Company or any of its Affiliates. "GBO BUSINESS POLICIES" means all Insurance Policies issued in the United States, Puerto Rico or Guam by the Company as part of the GBO Business. 4 "GBO DIVISION ASSETS" means the GBO Included Assets held directly by the Company. "GBO DIVISION LIABILITIES" means the GBO Included Liabilities which are direct obligations of the Company. "GBO EXCLUDED BUSINESS" means (i) all group life insurance business and/or group accidental death and dismemberment business constituting part of the GBO Business engaged in directly by the Company ("Life or ADD") but issued to clients of the GBO Business who are not also clients of the GBO Business with respect to ASO Contracts business, group health, group dental, group vision, group long-term disability, group short-term disability, group accident and sickness, group pharmacy or network arrangements business engaged in directly by the Company ("Accident and Health") PROVIDED, HOWEVER, that notwithstanding the foregoing, the following shall constitute GBO Excluded Business: (w) any Life or ADD policy which after June 30, 1996 and prior to the date of the Purchase Agreement is sold to or committed to a client (and disclosed to WellPoint) which was an Accident and Health client of the GBO Business as of June 30, 1996, regardless as to when such Life or ADD policy is actually effective, executed or delivered; (x) any Life or ADD policy which became effective prior to July 1, 1996 with respect to a client which subsequent to June 30, 1996 and prior to the Effective Time becomes an Accident and Health client of the GBO Business; (y) all guaranteed access accounts constituting part of the GBO Business, other than such accounts affiliated with the Company, Ford Motor Company and Digital Equipment Corporation; and (z) all supplementary contracts without life contingencies constituting part of the GBO Business, other than such contracts with Ford Motor Company; and (ii) all individual life converted insurance policies issued prior to the Effective Time relating to or arising from the GBO Business. 5 "GBO EXCLUDED BUSINESS POLICIES" means all Insurance Policies constituting part of the GBO Excluded Business. "GBO INCLUDED ASSETS" means all right, title and interest in and to (i) every species of property other than cash and Investment Assets, real, personal and mixed, tangible and intangible, used primarily or exclusively in the conduct of the GBO Included Business as of the Effective Time with such modifications and adjustments as are set forth in Section 1.1(a) of the Purchase Agreement, and the rights under all GBO Included Contracts as of the Effective Time, and (ii) such amount of cash and Investment Assets as are required to be transferred from the Company to WellPoint and/or the Reinsurer under Section 8.1 of this Coinsurance Agreement and Section 1.5 of the Purchase Agreement. "GBO INCLUDED BUSINESS" means the GBO Business other than the GBO Excluded Business. "GBO INCLUDED CONTRACT" means a Contract relating primarily or exclusively to the GBO Included Business and to which the Company or one of the GBO Subsidiaries is a party and which is in effect as of the Effective Time. "GBO INCLUDED LIABILITIES" means those liabilities and obligations of the Company and the GBO Subsidiaries under the GBO Included Contracts and those liabilities and obligations as of the Effective Time of the GBO Included Business for which, in accordance with the Company's past accounting practices and procedures, amounts would be included within the categories of liabilities identified on the Form of Closing GAAP Balance Sheet, with such modification and adjustments as are set forth in Section 1.1(a) of the Purchase Agreement. All of the GBO Included Liabilities shall have been incurred by the Company or the GBO Subsidiaries, as the case may be, in the ordinary course of business and shall be within the categories reflected in the Closing GAAP Balance Sheet. "GBO SUBSIDIARIES" means Cost Care, Inc., TriState, Inc. and Hancock Association Services Group, Inc. "GBO SUBSIDIARY SHARES" means all of the capital stock of Cost Care, Inc. and Hancock Association Services Group, Inc., and the 60% of the capital stock of TriState, Inc. owned by John Hancock Subsidiaries, Inc. 6 "INSURANCE POLICIES" means all insurance policies, contracts, binders or certificates of insurance (including certificates issued with respect to group insurance policies), and all riders, endorsements and amendments thereto. "INVESTMENT ASSETS" means United States treasury securities or publicly traded bonds of United States corporations rated NAIC Category 1 or 2 by the Securities Valuation Office of the National Association of Insurance Commissioners. "PERMITTED JURISDICTIONS" means the fifty states of the United States, the District of Columbia, Puerto Rico and Guam. "PERSON" means any corporation, individual, joint stock company, joint venture, partnership, unincorporated association, governmental regulatory entity, country, state or political subdivision thereof, trust or other entity. "POLICYHOLDER" means a holder of a Coinsured Policy. "PURCHASE AGREEMENT" shall have the meaning set forth in the first recital hereof. "QUARTERLY REPORT" shall have the meaning set forth in Section 11.2 hereof. "REINSURANCE CLOSING" shall have the meaning set forth in Section 2.1 hereof. "REINSURANCE CLOSING DATE" shall have the meaning set forth in Section 2.1 hereof. "RESERVES" means the Company's reserves computed as of a specified date and relating to the Company's business with respect to the Coinsured Policies for all amounts of (i) unearned premiums and (ii) all losses and all loss adjustment expenses, net of Third Party Reinsurance, calculated under SAP and as would be described in the Company's Statutory Annual Statement on exhibits 8, 9, 10 or 11 (or any other exhibit then applicable) to such Annual Statement of "Liabilities, Surplus and Other Funds" as if such Annual Statement were being filed as of such specified date. "RESERVES AND LIABILITIES" means all of the Reserves and other liabilities and associated rights and obligations arising under the Coinsured Policies INCLUDING, but not 7 limited to, liabilities for Benefits, surrenders, returns and premium refunds, but EXCLUDING liabilities for guaranty fund assessments and taxes that arise from or relate to the Existing GBO Policies and are incurred during the period ending with the Effective Time. "SAP" means statutory accounting practices prescribed or permitted by the Insurance Department of the Commonwealth of Massachusetts for the preparation of annual and quarterly statements by life insurance companies. "SERVICE AGREEMENT" means the Service Agreement entered into by the Company, as service provider, and Reinsurer as of the Effective Time. "THIRD PARTY REINSURANCE" shall mean all contracts of reinsurance with The Maritime Life Assurance Company and with independent parties unaffiliated with the Company or any of its Affiliates under which the Company's Reserves and Liabilities with respect to the Coinsured Policies or some portion thereof are transferred, whether or not such contracts of reinsurance are also applicable to business other than the Coinsured Policies. "TRANSITION GBO POLICIES" means all GBO Business Policies that are issued or renewed by the Company after the Effective Time and coinsured by the Reinsurer pursuant to Article VI hereof. "TRANSITION TERMINATION DATE" means, with respect to Coinsured Policies in each Permitted Jurisdiction, the earliest of (i) ninety (90) days after the date that Reinsurer has obtained all licenses and form and rate approvals necessary to write all of the GBO Business Policies other than group life insurance policies and group accidental death and dismemberment insurance policies in such jurisdiction, (ii) the date of consummation of assumption reinsurance of, and novation by the Company with respect to, all Coinsured Policies in such jurisdiction, and (iii) twenty-four (24) months from the Reinsurance Closing Date with respect to group life, group accidental death and dismemberment, long-term disability and survivor income Coinsured Policies, and thirty (30) months from the date of the Reinsurance Closing Date with respect to all other Coinsured Policies. 8 ARTICLE II. REINSURANCE CLOSING; CONDITIONS TO REINSURANCE CLOSING 2.1 REINSURANCE CLOSING. The closing hereunder for the reinsurance of the Existing GBO Policies (the "Reinsurance Closing") shall take place upon the date of satisfaction of the conditions set forth in Section 2.2 below at the offices of Rogers & Wells, 200 Park Avenue, New York, New York 10166 unless the parties shall have agreed in writing to another date (such date being hereinafter referred to as the "Reinsurance Closing Date"). This Coinsurance Agreement shall become effective as of 12:02 A.M. Eastern Time on the Reinsurance Closing Date (the "Effective Time") or such other time and date as may be agreed by the parties hereto. 2.2 CONDITIONS TO REINSURANCE CLOSING. The consummation of the transactions contemplated under this Coinsurance Agreement on the Reinsurance Closing Date and the related obligations of the Company and the Reinsurer with respect thereto are subject to the prior satisfaction of the following conditions, unless waived in writing by both the Company and the Reinsurer: (a) the Purchase Agreement shall have been executed and delivered by the Company and WellPoint. (b) the Administration Agreement shall have been executed and delivered by the Company and the Reinsurer, as service provider; and (c) the Service Agreement shall have been executed and delivered by the Company, as service provider, and the Reinsurer; and (d) the Assumption Agreement shall have been executed and delivered by the Company and the Reinsurer; and (e) consummation of all other transactions contemplated under the Purchase Agreement, excluding those transactions contemplated under the Assumption Agreement to be consummated after the Reinsurance Closing Date, but including, without limitation, payment by the Reinsurer of the Purchase Price as required by Section 1.1(b) of the Purchase Agreement, the transfer of all of the GBO Division Assets and GBO Division Liabilities required to be transferred at the closing under the 9 Purchase Agreement and not transferred under this Coinsurance Agreement, as well as the sale of the GBO Subsidiary Shares and the receipt by the Company or the Reinsurer, as the case may be, of any and all governmental approvals necessary for the consummation of the transactions contemplated under this Coinsurance Agreement and the Purchase Agreement. ARTICLE III. COINSURED POLICIES 3.1 COINSURED POLICIES. (a) From and after the Effective Time, the Company hereby cedes and the Reinsurer hereby assumes on the terms and conditions and for the considerations hereinafter contained, a 100% coinsurance share of the Company's Reserves and Liabilities, after reduction for Third Party Reinsurance, with respect to Existing GBO Policies and Transition GBO Policies to be issued or entered into by the Company in the future pursuant to this Article III, paragraph (c) and Article VI, but excluding (i) the GBO Excluded Business Policies and (ii) liabilities to the extent arising out of, based upon or relating to bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its Affiliates (without attributing to the Company or its Affiliates the actions of the Reinsurer or its Affiliates). (b) It is understood and agreed that the portion of the Coinsured Policies consisting of the Existing GBO Policies shall be ceded by the Company and reinsured by the Reinsurer in accordance with the terms, conditions and limitations specified in Article V herein. (c) It is further understood and agreed that the portion of the Coinsured Policies consisting of the Transition GBO Policies shall be issued and automatically and immediately thereupon ceded by the Company and reinsured by the Reinsurer in accordance with the terms, conditions and limitations specified in Article VI herein. 3.2 LIABILITY OF REINSURER. The liability of the Reinsurer with respect to each cession shall commence obligatorily and simultaneously with that of the Company according to the terms, conditions and limitations hereinafter 10 set forth. The Reinsurer shall benefit from all reductions of losses by compromise, Third Party Reinsurance or otherwise. 3.3 REGULATORY FILINGS AND APPROVALS. The Company and the Reinsurer agree to cooperate in good faith and use their commercially reasonable efforts to make all necessary insurance regulatory filings and to obtain all insurance regulatory approvals required for the consummation of the transactions contemplated by this Coinsurance Agreement. ARTICLE IV. GBO EXCLUDED BUSINESS 4.1 COINSURANCE AGREEMENT INAPPLICABLE TO GBO EXCLUDED BUSINESS. This Coinsurance Agreement does not apply to and specifically excludes the GBO Excluded Business. The Company shall retain any and all liabilities and risks with respect to the GBO Excluded Business Policies, and all profit, loss or expense from the GBO Excluded Business shall be for the account of the Company. 4.2 COMPANY'S INDEMNIFICATION FOR GBO EXCLUDED BUSINESS. The Company shall assume and indemnify fully the Reinsurer and its Affiliates for any and all damages, costs and expenses, including reasonable attorneys' fees and disbursements, arising out of, based upon or relating to the GBO Excluded Business. ARTICLE V. EXISTING GBO POLICIES 5.1 REINSURANCE OF EXISTING GBO POLICIES AT EFFECTIVE TIME. Effective as of the Effective Time, the Company shall cede, and the Reinsurer shall accept, on a 100% coinsurance basis, all of the Company's Reserves and Liabilities, and all risks, past, present and future, except as otherwise provided herein, with respect to the Existing GBO Policies, after reduction for Third Party Reinsurance. 5.2 VALUE OF RESERVES. The value of the Company's Reserves as of the Effective Time with respect to the Existing GBO Policies shall be established by the Closing GAAP Balance 11 Sheet audited by Coopers & Lybrand, pursuant to the terms and conditions set forth in Section 1.5 of the Purchase Agreement. 5.3 REINSURER'S INDEMNIFICATION FOR EXISTING GBO POLICIES. The Reinsurer shall assume and indemnify fully the Company for any and all damages, costs and expenses, including reasonable attorneys' fees and disbursements, arising out of, based upon or relating to the Existing GBO Policies so transferred to the Reinsurer as of the Effective Time under this Coinsurance Agreement, including, without limitation, liabilities for Extra Contractual Obligations; PROVIDED, HOWEVER, that the Reinsurer shall have no obligation to indemnify hereunder for liabilities to the extent such damages, costs and expenses arise out of, are based on or are related to any bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its Affiliates (without attributing to the Company or its Affiliates the actions of the Reinsurer or its Affiliates). 5.4 COMPANY'S INDEMNIFICATION FOR EXISTING GBO POLICIES. The Company shall assume and indemnify fully the Reinsurer for any and all damages, costs and expenses, including reasonable attorneys' fees and disbursements, arising out of, based upon or relating to the Existing GBO Policies to the extent such damages, costs and expenses arise out of or are based on any bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its Affiliates (without attributing to the Company or its Affiliates the actions of the Reinsurer or its Affiliates). ARTICLE VI. TRANSITION GBO POLICIES 6.1 ISSUANCE OF TRANSITION GBO POLICIES BY THE COMPANY. Subject to the limitations contained in Section 6.6 hereof, the Company shall be obligated to issue Transition GBO Policies in the Permitted Jurisdictions consisting of GBO Business Policies that are (i) GBO Business Policies issued to Persons that are not Policyholders as of the Effective Time excluding group term life insurance policies and group accidental death and dismemberment policies; PROVIDED, HOWEVER, that no such new GBO Business Policies shall be issued in Puerto Rico or Guam, (ii) renewal GBO Business Policies (including but not limited to those required to be issued by law) excluding renewals with respect to the GBO Excluded Business, (iii) individual converted accident and 12 health policies issued pursuant to a group GBO Business Policy, and (iv) individual converted life policies issued pursuant to a group GBO Business Policy other than any group GBO Business Policy constituting part of the GBO Excluded Business. The Company shall have no other obligations to issue new or renewal or converted policies as Transition GBO Policies. In addition, any renewal or converted policies issued by the Company as required by law after the applicable Transition Termination Date arising directly or indirectly with respect to any policy previously reinsured under this Coinsurance Agreement shall constitute Transition GBO Policies and automatically and immediately be ceded under this Coinsurance Agreement. 6.2 REINSURANCE OF TRANSITION GBO POLICIES. The Company shall cede and the Reinsurer shall accept, on a 100% coinsured basis, all of the Company's Reserves and Liabilities, after reduction for Third Party Reinsurance, if any, and all risks, past, present and future, except as otherwise provided herein, with respect to the Transition GBO Policies. All Transition GBO Policies shall be automatically and immediately ceded to the Reinsurer as of the date such Transition GBO Policies are issued as provided herein. 6.3 REINSURER'S INDEMNIFICATION FOR TRANSITION GBO POLICIES. The Reinsurer shall assume and indemnify fully the Company for any and all damages, costs and expenses, including reasonable attorneys' fees and disbursements, arising out of, based upon or relating to the Transition GBO Policies so transferred to the Reinsurer under this Coinsurance Agreement, including, without limitation, liabilities for Extra Contractual Obligations; PROVIDED, HOWEVER, that the Reinsurer shall have no obligation to indemnify hereunder for liabilities to the extent they arise out of, are based on or are related to any bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its Affiliates (without attributing to the Company or its Affiliates the actions of the Reinsurer or its Affiliates). 6.4. COMPANY'S INDEMNIFICATION FOR TRANSITION GBO POLICIES. The Company shall assume and indemnify fully the Reinsurer for any and all damages, costs and expenses, including reasonable attorneys' fees and disbursements, arising out of, based upon or relating to the Transition GBO Policies to the extent such damages, costs and expenses arise out of, are based on or are related to any bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its Affiliates (without attributing to the 13 Company or its Affiliates the actions of the Reinsurer or its Affiliates). 6.5 MAINTENANCE OF LICENSES. The Company shall use its commercially reasonable efforts to maintain its licenses and other approvals in the Permitted Jurisdictions to the extent necessary to issue and cede the Transition GBO Policies pursuant to the terms of this Coinsurance Agreement. 6.6 LIMITATIONS ON WRITING OF TRANSITION GBO POLICIES. Unless otherwise agreed to by the parties hereto, the Company shall not be required to issue and cede Transition GBO Policies in any amount in any jurisdiction after the Transition Termination Date for that jurisdiction; except with respect to any renewal or conversion policies issued by the Company as required by law after the Transition Termination Date arising directly or indirectly with respect to any Coinsured Policy previously reinsured under this Coinsurance Agreement. Notwithstanding any other provision of this Coinsurance Agreement, prior to the last Transition Termination Date, the Company shall not be required to issue and cede (i) any Transition GBO Policies if upon issuance thereof the original gross written premiums for the aggregate of all Transition GBO Policies issued under this Coinsurance Agreement during the first year after the Effective Time, determined in accordance with SAP, would exceed an amount equal to 125% of the original gross written premiums for GBO Included Business during 1996, determined in accordance with SAP, (ii) any Transition GBO Policies if upon issuance thereof the original gross written premiums for the aggregate of all Transition GBO Policies issued under this Coinsurance Agreement during the eighteen (18) months after the termination of the first year after the Effective Time, determined in accordance with SAP, would exceed an amount equal to 100% of the original gross written premiums for GBO Included Business during 1996, determined in accordance with SAP, (iii) any Transition GBO Policies at any time that the Delaware Insurance Department has issued a corrective order regarding the risk based capital level of the Reinsurer and the subject matter of such corrective order has gone uncured for a period of thirty (30) consecutive days, (iv) any Transition GBO Policies to the extent that any applicable law, regulation, rule or stated position of a regulatory authority would prohibit the insurance or reinsurance of such Transition GBO Policies as contemplated hereunder, or (v) any Transition GBO Policies issued in a Permitted Jurisdiction, in the event that the Reinsurer's certificate of authority to do business in such Permitted Jurisdiction has not been obtained or has 14 been revoked or suspended; PROVIDED, HOWEVER, that the Company shall issue and cede as Transition GBO Policies renewals of Existing GBO Policies issued in Maine, New Hampshire, Guam and Puerto Rico. The Company and the Reinsurer agree that upon the occurrence of any such event described in clause (iv) of the first sentence of this Section, they will (y) use all commercially reasonable efforts to construct an arrangement substantially similar to the reinsurance of the Transition GBO Policies contemplated herein which avoids the adverse consequences described in the immediately preceding sentence, in form and substance and with such indemnities as shall be mutually acceptable to the parties, or (z) use their respective commercially reasonable efforts to effect as soon as reasonably practicable the complete transfer to the Reinsurer of the Transition GBO Policies, and all other Coinsured Policies, with respect to which any of the adverse effects described in the immediately preceding sentence apply, together with a novation with respect to the Company for all such Transition GBO Policies and other Coinsured Policies through assumption reinsurance, cancellation and rewriting of insurance policies or another arrangement mutually satisfactory to the parties. ARTICLE VII. GENERAL PROVISIONS 7.1 REINSURER'S RECORDATION OF LIABILITIES. The Reinsurer shall record all Reserves and Liabilities assumed under the terms of this Coinsurance Agreement on its books and SAP financial statements in accordance with SAP. 7.2 ADMINISTRATION. The Reinsurer, as service provider, shall perform administration services with respect to the Coinsured Policies in accordance with the terms and provisions of the Administration Agreement. 7.3 AUTHORIZED REPRESENTATIVES. The Company and the Reinsurer shall each appoint from time to time one or more individuals who shall serve as contact person(s) and authorized representative(s) of such party for the purpose of carrying out this Coinsurance Agreement. Such representatives shall be authorized to act on behalf of their respective parties as to matters pertaining to this Coinsurance Agreement. Each party shall notify the other, in writing, as to the name, address and telephone number for every such 15 designated contact person and authorized representative, and for every replacement thereof. 7.4 MAINTENANCE AND INSPECTION OF RECORDS. The Company shall retain possession of all books, records, papers or any other documents relating to the Coinsured Policies that are required by law to be retained in the possession of the Company in segregated files, in an orderly and organized condition and in its principal offices in Boston, Massachusetts. All other books, records, papers and documents relating to the Coinsured Policies shall be maintained by the Reinsurer, as service provider, pursuant to the terms and conditions of the Administration Agreement. Each party and its designated representatives shall have the right to inspect, review and copy the papers and any and all other books or documents relating to the Coinsured Policies maintained by the other party under this Coinsurance Agreement or the Administration Agreement. The rights of the parties under this Section shall survive termination of this Coinsurance Agreement. 7.5 MISUNDERSTANDINGS AND OVERSIGHTS. If any delay, omission, error or failure to pay amounts due or to perform any other act required by this Coinsurance Agreement is unintentional and caused by misunderstanding or oversight, the Company and the Reinsurer will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The party first discovering such misunderstanding or oversight, or act resulting from the misunderstanding or oversight, will notify the other party in writing promptly upon discovery thereof, and the parties shall act to correct such misunderstanding or oversight within thirty (30) Business Days of receipt of such notice. However, this Section shall not be construed as a waiver by either party of its right to enforce strictly the terms of this Coinsurance Agreement. 7.6 AGE, SEX AND OTHER ADJUSTMENTS. If the Company's liability under any of the Coinsured Policies is changed because of a misstatement of age or sex or any other material fact, the Reinsurer's liability under such Coinsured Policies shall be changed in an identical amount. 7.7 REINSTATEMENTS. If a Coinsured Policy that is or has been reduced, terminated, or lapsed is reinstated while this Coinsurance Agreement is in force, the reinsurance for such Coinsured Policy shall be reinstated automatically to the amount that would be in force if the Coinsured Policy had not 16 been reduced, terminated, or lapsed. The Company will pay to the Reinsurer in accordance with the Administration Agreement all amounts received by the Company in connection with the reinstatement. 7.8 CONTRACT CHANGES OR RESERVE ASSUMPTION CHANGES. The Company shall not change (a) the terms and conditions of any Coinsured Policies, or (b) the assumptions, including the statutory Reserve rate assumptions, used by the Company to establish the Reserves and Liabilities with respect to such Coinsured Policies without the prior written approval of the Reinsurer as to such change, except for changes required by any regulatory authority having jurisdiction over the Coinsured Policies or as otherwise required by law. In the event that the foregoing terms and conditions or assumptions, as the case may be, are required to be changed by any regulatory authority having jurisdiction over the Coinsured Policies, or as otherwise required by law, the Company shall immediately notify the Reinsurer of such required changes. 7.9 LITIGATION. The Reinsurer shall be responsible for all costs and expenses relating to litigation of claims under the Coinsured Policies. The Company shall have the right to make ultimate decisions regarding the conduct, costs and expenses of such litigation. The Reinsurer shall be bound by all such ultimate decisions of the Company, provided that: (i) the Company shall consult with the Reinsurer prior to the Company's exercise of its decision-making authority pursuant to this Section 7.9, (ii) all decisions of the Company made hereunder shall (w) comply with the terms of the Coinsured Policies, (x) comply with all material laws, regulations and orders applicable to the Company with respect to the Coinsured Policies and to the conduct of the activities contemplated hereby, (y) be consistent with prudent management practices in the life and health insurance industry generally, and (z) comply with the Standards of Performance as referenced and described in the Administration Agreement, and (iii) the Reinsurer shall have no liability for costs and expenses for any litigation arising out of, based on or related to any bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its Affiliates (without attributing to the Company or its Affiliates the actions of the Reinsurer or its Affiliates). In the event the Company intends to exercise its decision-making authority hereunder, it shall give prompt notice of such intention to the Reinsurer, but in no event later than ten (10) Business Days prior to the date of such exercise of authority, or such 17 lesser period as is commercially reasonable for the Company and the Reinsurer under the circumstances. ARTICLE VIII. CONSIDERATION FOR REINSURANCE AND POLICY PREMIUMS 8.1 ASSETS TO BE TRANSFERRED AT EFFECTIVE TIME. In consideration for the assumption by the Reinsurer of the Company's Reserves and Liabilities with respect to the Existing GBO Policies, as of the Effective Time, the Company will transfer and assign to the Reinsurer, and the Reinsurer shall acquire and accept from the Company, cash and/or Investment Assets with a fair market value as of close of business on the date immediately preceding the Closing Date in an amount equal to $449,746,000.00. 8.2 TRANSITION GBO POLICIES. Except as provided in Section 8.3 hereof, no commission or reinsurance premium shall be due or payable in connection with the issuance of the Transition GBO Policies by the Company, and the reinsurance of the Transition GBO Policies by Reinsurer, pursuant to Article VI of this Coinsurance Agreement. 8.3 POLICY PREMIUMS AND OTHER AMOUNTS. As consideration for the reinsurance of the Coinsured Policies hereunder, the Company shall, on and after the Effective Time, collect and remit to the Reinsurer any and all gross premiums, contract fees and any other amounts received on and after the Effective Time with respect to the Coinsured Policies, less returns and net of premium for Third Party Reinsurance to the extent such premium relates to the reinsurance of Coinsured Policies. Notwithstanding the foregoing, it is understood and agreed to by the parties hereto that the Company's obligation to collect premiums, contract fees and other amounts with respect to the Coinsured Policies shall be delegated to the Reinsurer in accordance with the terms of the Administration Agreement. ARTICLE IX. BENEFITS AND OTHER PAYMENTS BY REINSURER 9.1 BENEFITS. Subject to the other provisions of this Coinsurance Agreement, the Reinsurer shall assume 18 liability for all benefit obligations with respect to Coinsured Policies, including interest payable thereon (such benefits are herein referred to as "Benefits"). 9.2 CLAIMS. Upon receipt of any information regarding a claim for Benefits on any Coinsured Policy, the Company will immediately notify the Reinsurer of such claim. The reinsured claim and copies of notifications, claim papers, and proofs will be promptly furnished by the Company to the Reinsurer as provided in the Administration Agreement. 9.3 CLAIMS PAYMENTS. The review, payment, settlement or compromise of all claims and losses relating to the Coinsured Policies shall be handled by the Reinsurer, in its capacity as service provider, in accordance with the terms and conditions of the Administration Agreement. The Company shall have the right to make ultimate decisions regarding the contesting, compromise, or settlement of a claim with respect to a Coinsured Policy. The Reinsurer shall be bound by all such ultimate decisions of the Company, provided that: (i) the Company shall consult with the Reinsurer prior to the Company's exercise of its decision-making authority pursuant to this Section 9.3, (ii) all decisions of the Company made hereunder shall (w) comply with the terms of the Coinsured Policies, (x) comply with all material laws, regulations and orders applicable to the Company with respect to the Coinsured Policies and to the conduct of the activities contemplated hereby, (y) be consistent with prudent management practices in the life and health insurance industry generally, and (z) comply with the Standards of Performance as referenced and described in the Administration Agreement, and (iii) the Reinsurer shall have no liability for costs and expenses incurred hereunder that arise out of, are based on or related to any bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its Affiliates (without attributing to the Company or its Affiliates the actions of the Reinsurer or its Affiliates). In the event the Company intends to exercise its decision-making authority hereunder, it shall give prompt notice to the Reinsurer of such action, but in no event later than ten (10) Business Days prior to the date of such exercise of authority, or such lesser period as is commerically reasonable for the Company and the Reinsurer under the circumstances. 9.4 REMITTANCE OF THIRD PARTY REINSURANCE. The Company shall promptly pay the Reinsurer all amounts owing from Third Party Reinsurance with respect to the Coinsured Policies irrespective of the Company's ability to collect such 19 amounts from any other party to such Third Party Reinsurance. The Reinsurer shall pay all premiums, Commissions or other amounts due for Third Party Reinsurance to the extent attributable to reinsurance of Coinsured Policies. The Company shall have the right to terminate any and all Third Party Reinsurance with respect to the Coinsured Policies at any time or from time to time on or after one year following the Effective Time; PROVIDED, HOWEVER, that the Company shall give the Reinsurer at least ninety (90) days' prior notice of its intention to cancel any such Third Party Reinsurance. 9.5 ALLOWANCE FOR COMMISSIONS AND EXPENSES. The Reinsurer shall assume, on an indemnity basis, liability for all Commissions, taxes and guaranty fund assessments imposed on or with respect to premiums earned under the Coinsured Policies after the Effective Time; PROVIDED, HOWEVER, the Reinsurer shall not pay the Company any allowances or amounts for liabilities for guaranty fund assessments or taxes that arise from or relate to the Existing GBO Policies and are incurred during the period ending with the Effective Time. 9.6 EXPERIENCE RATING REFUNDS. The Reinsurer shall assume, on an indemnity basis, liability for policyholder experience rating refunds with respect to the Coinsured Policies relating to periods prior to the Effective Time. A dividend liability for policyholder experience rating refunds will be established on the Closing GAAP Balance Sheet. ARTICLE X. DUTY OF COOPERATION 10.1 DUTY OF COOPERATION. Each party hereto shall cooperate fully with the other in all reasonable respects in order to accomplish the objectives of, and consummate the transactions contemplated under, this Coinsurance Agreement. This duty to cooperate shall include, but not be limited to, making available any Coinsured Policy records which either party subsequently may require to resolve issues related to claims or Reserves or Liabilities. 20 ARTICLE XI. ACCOUNTING AND SETTLEMENT 11.1 REMITTANCES. In connection with all balances under this Coinsurance Agreement with respect to premiums and Benefits and other amounts received or to be paid subsequent to the Effective Time, in accordance with the Administration Agreement, the Company and the Reinsurer shall establish an account with a bank or trust company with respect to which the Reinsurer shall have the authority to make deposits and withdrawals. The Company shall have no authority to make deposits or withdrawals with respect to such account. This account shall be financed by the Reinsurer for the benefit of the Company and the Reinsurer. Interest and any other income accruing on this account shall be retained by the Reinsurer for its own account. 11.2 QUARTERLY REPORT. Within thirty (30) Business Days after the end of each Accounting Period, the Reinsurer, as service provider under the Administration Agreement, shall supply the Company with a report that shall provide data which shall account for all funds flowing through the account established pursuant to Section 11.1 during such Accounting Period and the net amount due by the Company or the Reinsurer, as appropriate under this Coinsurance Agreement at the end of such Accounting Period. The data shall be prepared substantially in the form attached hereto as Exhibit A; provided, however, that the parties may agree from time to time on the precise format and data which must be supplied on Exhibit A. 11.3 AMOUNTS DUE EITHER PARTY. Any net amount due from the Company to the Reinsurer at the end of any Accounting Period shall be paid no later than ten (10) Business Days after the date on which the Quarterly Report showing such net amount, as described in Section 11.2 hereof, is due. Any net amount due from the Reinsurer to the Company shall be paid no later than ten (10) Business Days following the receipt of such quarterly report from the Reinsurer. If amounts due to be paid cannot be determined at such dates on an exact basis, such payments may be determined on an estimated basis, with adjustments made at the end of subsequent Accounting Periods for actual amounts ultimately determined to be due. 11.4 INTEREST ON DELAYED PAYMENTS. Should any payment due to either the Company or the Reinsurer be delayed, such delayed payment (including any amount constituting a 21 difference between an estimated and actual amount, as described in Section 11.3 hereof) will accrue interest at the interest rate for thirty (30) day United States Treasury bills as reported in THE WALL STREET JOURNAL as of the day on which any payment is due for the period that payment is overdue. ARTICLE XII. DURATION AND TERRITORY 12.1 DURATION. This Coinsurance Agreement shall remain in full force and effect for an unlimited time until all obligations hereunder have been discharged or until the Company and the Reinsurer shall have agreed in writing to a commutation or termination hereof. 12.2 REINSURER'S LIABILITY. The Reinsurer's liability with respect to any Coinsured Policy will terminate when the Company's liability under the Coinsured Policy is terminated. 12.3 TERRITORY. This Coinsurance Agreement shall apply to Coinsured Policies covering lives and risks wherever resident or situated. ARTICLE XIII. INSOLVENCY 13.1 PAYMENTS BY REINSURER. The Reinsurer hereby agrees that, as to all reinsurance made, ceded or otherwise becoming effective hereunder, the reinsurance shall be payable by the Reinsurer on the basis of the liability of the Company under the Coinsured Policies, without diminution because of the insolvency, liquidation or rehabilitation of the Company or the appointment of a conservator, receiver, liquidator or statutory successor of the Company, directly to the Company or to its conservator, receiver, liquidator, or other statutory successor. 13.2 CLAIMS. It is agreed that the conservator, receiver, liquidator or statutory successor of the Company shall give prompt written notice to the Reinsurer of the pendency or submission of a claim under any Coinsured Policies. During the pendency of such claim, the Reinsurer 22 may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense available to the Company or its conservator, receiver, liquidator or statutory successor. The expense thus incurred by the Reinsurer is chargeable against the Company as a part of the expense of insolvency, liquidation or rehabilitation to the extent of a proportionate share of the benefit which accrues to the Company solely as a result of the defense undertaken by the Reinsurer. If two or more assuming reinsurers are involved in the same claim and a majority in interest elect to interpose defenses to such claim, the expense shall be apportioned in accordance with the terms of this Section 13.2 as though such expense had been incurred by the Company. ARTICLE XIV. ARBITRATION 14.1 GENERAL. Any dispute or difference between the parties with respect to the operation or interpretation of, or arising from or relating to, this Coinsurance Agreement on which an amicable understanding cannot be reached shall be decided by binding arbitration. Arbitration hereunder shall be pursuant to and in accordance with the terms, conditions and procedures set forth in Article XV of the Purchase Agreement. ARTICLE XV. INDEMNIFICATION 15.1 THE REINSURER. The Reinsurer hereby agrees on demand to indemnify and hold harmless the Company and its Affiliates, and their respective officers, directors and employees from and against any and all demands, actions, proceedings, suits (by any Person, entity or group, including, without limitation, any Governmental Entity) and Liabilities, paid or incurred (including reasonable attorneys' fees), resulting from or arising out of the breach of or failure to perform any of the duties, obligations, covenants or agreements of the Reinsurer contained in this Coinsurance Agreement. 23 15.2 THE COMPANY. The Company hereby agrees on demand to indemnify and hold harmless the Reinsurer and its Affiliates, and their respective officers, directors and employees from and against any and all demands, actions, proceedings, suits (by any Person, entity or group, including, without limitation, any Governmental Entity) and Liabilities, paid or incurred (including reasonable attorneys' fees), resulting from or arising out of the breach of or failure to perform any of the duties, obligations, covenants or agreements of the Company contained in this Coinsurance Agreement. 15.3 INDEMNIFICATION PROCEDURES. Indemnification under Section 15.1 and 15.2 shall be made using the procedures, terms and conditions contained in Sections 14.2 and 14.3 of the Purchase Agreement as if fully set forth herein, with (i) references in Section 14.2(a) to "indemnification under Section 14.1 of this Agreement" changed to refer to "indemnification under Section 15.1 or 15.2, as the case may be, of this Coinsurance Agreement", (ii) the phrase "except as provided in Section 14.1(g) and" deleted in Section 14.2(c), (iii) references in Section 14.3 to "this Article XIV" shall be changed to refer to "this Section 15.1" or "this Section 15.2", as the case may be, and (iv) the phrases "and, in any event, within the time period referred to in Section 14.1(g)" and "So long as Indemnitee provides the Indemnity Notice within the time period referred to in Section 14.1(g)," deleted from the text of Section 14.3; PROVIDED, HOWEVER, that such indemnification shall be on a first dollar basis and be without regard to the aggregate of all indemnifiable losses. 15.4 SURVIVAL OF ARTICLE. This Article shall survive termination of this Coinsurance Agreement. ARTICLE XVI. MISCELLANEOUS PROVISIONS 16.1 NO THIRD PARTY BENEFICIARIES. This Coinsurance Agreement is between the Company and the Reinsurer, and the performance of the obligations of each party under this Coinsurance Agreement shall be rendered solely to the other party. In no instance shall anyone other than the Company or the Reinsurer, or their successors or permitted assigns, have any rights, benefits or remedies under this Coinsurance Agreement. Until the Reinsurer has reinsured 24 a Coinsured Policy on an assumption reinsurance basis pursuant to the Assumption Agreement, the Reinsurer shall not be liable to any insured, contract owner, or beneficiary under any Coinsured Policy. 16.2 HEADINGS AND EXHIBIT. Headings used herein are inserted solely for the convenience of reference and are not a part of this Coinsurance Agreement and shall not affect the terms hereof. The attached Exhibit and Schedule are a part of this Coinsurance Agreement. 16.3 NOTICES. All notices hereunder shall be in writing, addressed as follows, or to such other address as may, from time to time, be given in accordance with this Coinsurance Agreement: IF TO THE COMPANY: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY 200 Clarendon Street Boston, MA 02117 Attention: Thomas E. Moloney, Chief Financial Officer Telephone: (617) 572-0600 Fax: (617) 572-5170 With copies to: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY 200 Clarendon Street Boston, MA 02117 Attention: Michael H. Studley, Esq. Telephone: (617) 572-9253 Fax: (617) 572-1565 Rogers & Wells 200 Park Avenue New York, NY 10166 Attention: Paul C. Meyer, Esq. Telephone: (212) 878-8176 Fax: (212) 878-8375 IF TO THE REINSURER: UNICARE LIFE & HEALTH INSURANCE COMPANY 21555 Oxnard Street Woodland Hills, CA 91367 Attention: Leonard D. Schaeffer, Chairman and Chief Executive Officer Telephone: (818) 703-3145 Fax: (818) 703-3253 25 With copies to: UNICARE LIFE & HEALTH INSURANCE COMPANY 21555 Oxnard Street Woodland Hills, CA 91367 Attention: Thomas C. Geiser, Esq., General Counsel Telephone: (818) 703-2412 Fax: (818) 703-4406 Brobeck, Phleger & Harrison LLP Spear Street Tower One Market San Francisco, CA 94105 Attention: Ronald B. Moskovitz, Esq. Telephone: (415) 442-0900 Fax: (415) 442-1400 Notices shall be sent by United States mail, by registered or certified mail, and shall be deemed to have been received three (3) Business Days after deposit in the mail. Notices may also be sent by hand, by telefax, or by overnight delivery service, and if so given, shall be deemed received when delivered if a receipt of delivery is obtained. 16.4 SEVERABILITY. If any term or provision of this Coinsurance Agreement shall be held void, illegal, or unenforceable, the validity of the remaining portions or provisions of this Coinsurance Agreement shall not be affected thereby. 16.5 ASSIGNMENT. This Coinsurance Agreement may not be assigned by either party without the prior written consent of the other and any attempted assignment without such consent shall be void. 16.6 SUCCESSORS AND ASSIGNS. The provisions of this Coinsurance Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. 16.7 EXECUTION IN COUNTERPARTS. This Coinsurance Agreement may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate 26 counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 16.8 AMENDMENTS. This Coinsurance Agreement may be amended only by written amendment hereto executed by the parties. 16.9 WAIVER. The failure of the Company or Reinsurer to insist on strict compliance with this Coinsurance Agreement, or to exercise any right or remedy under this Coinsurance Agreement, shall not constitute a waiver of any rights provided under this Coinsurance Agreement, nor stop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising such a right or remedy in the future. 16.10 INTERPRETATION. No provision of this Coinsurance Agreement shall be construed against any party on the ground that such party drafted the provision or caused it to be drafted. 16.11 ENTIRE AGREEMENT. This Coinsurance Agreement constitutes the entire agreement and understanding between the parties hereto, and supersedes all prior agreements, whether oral or written, between the parties, with respect to the subject matter hereof. 16.12 GOVERNING LAW. This Coinsurance Agreement shall be governed by the laws of the Commonwealth of Massachusetts, without giving effect to principles of conflicts of law thereof. 27 IN WITNESS WHEREOF, the parties hereto have caused this Coinsurance Agreement to be duly executed by their respective officers thereunto duly authorized, as of the first day of March, 1997. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: /s/ Thomas Moloney -------------------------- Name: Thomas E. Moloney Title: Chief Financial Officer UNICARE LIFE & HEALTH INSURANCE COMPANY By: /s/ D. Mark Weinberg -------------------------- Name: D. Mark Weinberg Title: President 28 EXHIBIT A COINSURANCE AGREEMENT between THE COMPANY and REINSURER Effective Date ------------- BULK ACCOUNTING STATEMENT STATEMENT FOR ACCOUNTING PERIOD BEGINNING ------------ SUMMARY OF MONETARY TRANSACTIONS (1) CONSIDERATION FOR REINSURANCE --------------------------------- (2) COMMISSIONS --------------------------------- (3) EXPENSE ALLOWANCES --------------------------------- (4) BENEFITS (including interest) --------------------------------- (5) EXPERIENCE RATING REFUNDS --------------------------------- NET AMOUNT DUE TO THE COMPANY --------------------------------- NET AMOUNT DUE TO REINSURER --------------------------------- EX-10.7 11 LETTER OF CREDIT AGREEMENT EXHIBIT 10.7 LETTER OF CREDIT AGREEMENT dated as of January 2, 1997 among John Hancock Mutual Life Insurance Company, The Banks listed herein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent TABLE OF CONTENTS/1/ Page ARTICLE I DEFINITIONS SECTION 1.01. Definitions.............................................. 2 ----------- ARTICLE II THE LETTER OF CREDIT SECTION 2.01. Issuance of Letter of Credit............................. 5 ---------------------------- SECTION 2.02. Amount Available......................................... 6 ---------------- SECTION 2.03. Reimbursement of Payments................................ 6 ------------------------- SECTION 2.04. Reimbursement Obligations Unconditional.................. 7 --------------------------------------- SECTION 2.05. Indemnification.......................................... 8 --------------- SECTION 2.06. Fees and Expenses........................................ 9 ----------------- SECTION 2.07. Increased Cost; Reduced Return; Substitute Bank.......... 10 ----------------------------------------------- SECTION 2.08. General Provisions as to Payments........................ 12 --------------------------------- ARTICLE III CONDITIONS SECTION 3.01. Letter of Credit Agreement Closing....................... 12 ---------------------------------- SECTION 3.02. Issuance................................................. 13 -------- ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Each Party............................................... 14 ---------- SECTION 4.02. Issuing Bank............................................. 14 ------------ ARTICLE V _______________ /1/ The Table of Contents is not a part of this Agreement. 1 COVENANTS OF THE COMPANY SECTION 5.01. First Loss.............................................. 15 ---------- SECTION 5.02. Enforcement of Reinsurer's Obligations; -------------------------------------- Assignment of Coinsurance Obligations................... 15 ------------------------------------- SECTION 5.03. Merger, Consolidation, Etc.............................. 16 -------------------------- ARTICLE VI THE AGENT SECTION 6.01. Appointment and Authorization........................... 17 ----------------------------- SECTION 6.02. Agent and Affiliates.................................... 17 -------------------- SECTION 6.03. Action by Agent......................................... 17 --------------- SECTION 6.04. Consultation with Experts............................... 17 ------------------------- SECTION 6.05. Liability of Agent...................................... 18 ------------------ SECTION 6.06 Indemnification......................................... 18 --------------- SECTION 6.07 Credit Decision......................................... 18 --------------- SECTION 6.08 Successor Agent......................................... 18 --------------- ARTICLE VII MISCELLANEOUS SECTION 7.01. Notices................................................. 19 ------- SECTION 7.02. No Waivers.............................................. 19 ---------- SECTION 7.03. Expenses................................................ 20 -------- SECTION 7.04. Sharing................................................. 20 ------- SECTION 7.05. Amendments and Waivers.................................. 20 ---------------------- SECTION 7.06. Successors and Assigns.................................. 21 ---------------------- SECTION 7.07. Governing Law; Submission to Jurisdiction............... 22 ----------------------------------------- SECTION 7.08. Counterparts; Integration; Effectiveness................ 22 ---------------------------------------- SECTION 7.09. WAIVER OF JURY TRIAL.................................... 22 -------------------- Commitment Schedule Exhibit A - Letter of Credit Exhibit B - Opinion of Counsel for the Company Exhibit C - Opinion of Counsel for the Issuing Bank 2 LETTER OF CREDIT AGREEMENT LETTER OF CREDIT AGREEMENT dated as of January 2, 1997 between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a mutual life insurance company organized under the laws of Massachusetts (together with its successors, the "Company"), the BANKS party hereto and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as issuing bank (together with its successors, the "Issuing Bank"), and agent (together with its successors in such capacity, the "Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and WellPoint Health Networks Inc., a California corporation ("WellPoint") and the indirect parent of Unicare Life & Health Insurance Company, a stock life insurance company organized under the laws of Delaware (the "Reinsurer"), have entered into a Purchase and Sale Agreement, dated as of October 10, 1996 (as amended from time to time in accordance with the terms thereof and hereof, the "Purchase Agreement"), which provides for the sale by the Company to WellPoint of the "GBO Included Business" (as defined in the Purchase Agreement); WHEREAS, in connection with the Purchase Agreement, the Company and the Reinsurer propose to enter into a Coinsurance Agreement, substantially in the form of Annex B to the Purchase Agreement, pursuant to which the Company has agreed to cede to the Reinsurer, and the Reinsurer has agreed to accept and indemnity reinsure, on a 100% coinsurance basis, all of the Reserves and Liabilities (as defined in the Coinsurance Agreement) arising under or with respect to the Coinsured Policies (as defined in the Coinsurance Agreement) as contemplated by the Purchase Agreement (as amended from time to time in accordance with the terms thereof and hereof, the "Coinsurance Agreement"); WHEREAS, the Company has requested the Issuing Bank to agree to issue a Letter of Credit (as defined below) in order to support payments to be made by the Company in the event that the Reinsurer fails to make any payment with respect to the Coinsured Policies pursuant to the Coinsurance Agreement; and WHEREAS, the Issuing Bank is willing to enter into this Agreement only if the Company and the Banks enter into this Agreement; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have ----------- the following meanings: "Agreement" means this Letter of Credit Agreement, as it may be amended from time to time in accordance with Section 7.05. "Amount Available" means (i) at any time after the issuance of the Letter of Credit, the amount available thereunder and (ii) at any time at or prior to the issuance of the Letter of Credit, the amount determined in accordance with Section 2.02. "Bank" means each bank listed in the Commitment Schedule and its successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City or Wilmington, Delaware are authorized or required by law to close. "Coinsured Policies" has the meaning set forth in the Coinsurance Agreement. "Commitment Percentage" means as to each Bank the percentage set forth opposite the name of such Bank in the Commitment Schedule. "Contractual Obligation" as applied to any Person, means any provision of any security issued by such Person or of any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which such 2 Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "Effective Date" means the date this Agreement becomes effective in accordance with Section 7.08 "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the -------- Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Agent. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Issuing Bank" has the meaning set forth in the introductory paragraph hereof. "Letter of Credit" means a letter of credit, substantially in the form of Exhibit A hereto and completed in accordance with Section 2.01, issued pursuant to this Agreement. "Letter of Credit Agreement Closing Date" has the meaning set forth in Section 3.01. "Letter of Credit Liabilities" means, for any Bank and at any time, such Bank's Commitment Percentage of the sum of (x) the amounts drawn under the Letter of Credit and not reimbursed by the Company and (y) the amount then available for drawing under the Letter of Credit. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. "Parent" means, with respect to any bank or trust company, any Person controlling such bank or trust company. 3 "Participant" has the meaning set forth in Section 7.06(b). "Permitted Assignee" means any Person into which the Company is merged or consolidated, or to which all or substantially all of the assets of the Company are conveyed, in each case in accordance with Section 5.03. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Prime Rate" means the rate of interest publicly announced by the Agent in New York City from time to time as its Prime Rate. "Purchase Closing Date" means the date of the closing under the Purchase Agreement. "Purchase Closing Deadline Date" has the meaning set forth in Section 2.01. "Required Banks" means at any time Banks having Commitment Percentages aggregating at least 66 2/3%. "Requirement of Law" means, as to any Person, the certificate of incorporation or equivalent and by-laws of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Reserves and Liabilities" has the meaning set forth in the Coinsurance Agreement. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "Termination Date" means (i) unless on or prior thereto the Letter of Credit shall have been issued, the date on which the obligation of the Issuing Bank to issue the Letter of Credit terminates in accordance with Section 2.01(b) or Section 2.02(c) and (ii) if the Letter of Credit shall have been issued on or prior to the date specified in clause (i), the date the Letter of Credit expires in accordance with its terms. 4 "Transaction Documents" means the Purchase Agreement, the Coinsurance Agreement and each other agreement entered into by the Company in connection therewith. ARTICLE II THE LETTER OF CREDIT SECTION 2.01. Issuance of Letter of Credit. (a) From and after the ---------------------------- Letter of Credit Agreement Closing Date, the Issuing Bank agrees, on the terms and conditions hereinafter set forth, to issue the Letter of Credit to the Company upon the request of the Company subject to the conditions set forth in Article III. The Letter of Credit shall be dated its date of issuance, shall have a stated expiry date of the fifth anniversary of the Purchase Closing Date and shall be in an initial Amount Available determined pursuant to Section 2.02 as of the date of issuance, reducing thereafter in accordance with the schedule specified in Section 2.02(a). Simultaneously with the issuance by the Issuing Bank of the Letter of Credit, the Issuing Bank shall be deemed, as between the Issuing Bank and each other Bank, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, as between the Issuing Bank and each other Bank, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in the Letter of Credit and the related Letter of Credit Liabilities in an amount equal to such Bank's Commitment Percentage of the Amount Available. (b) The obligation of the Issuing Bank to issue the Letter of Credit shall terminate on the fifth anniversary of the Purchase Closing Date; provided -------- that if the Purchase Closing Date shall not have occurred by the Purchase Closing Deadline Date, such obligation shall terminate on the Purchase Closing Deadline Date. For this purpose, "Purchase Closing Deadline Date" means (i) January 31, 1997 or (ii) if on or prior to the Purchase Closing Deadline Date specified in clause (i) or previously specified pursuant to this clause (ii), the Company notifies the Agent that the Company and WellPoint have agreed to postpone the Purchase Closing Date to a date specified in such notice, the date so specified; provided that in no event shall the Purchase Closing Deadline Date -------- be later than March 29, 1997. The Company shall immediately notify the Agent, which shall thereupon notify each Bank, of the occurrence of the Purchase Closing Date, and such notice from the Agent shall be conclusive and binding on all parties hereto. 5 SECTION 2.02. Amount Available. (a) The Amount Available shall ---------------- initially be $397,000,000. On each date set forth below prior to the issuance of the Letter of Credit, unless previously reduced to the same or a lesser amount pursuant to subsection (b) below, the Amount Available will be automatically reduced immediately following the close of business on such date, without requirement of notice or other action by any party, to the amount set forth opposite such date: Date Amount Available ---- ---------------- Third Anniversary of the Purchase Closing Date $272,000,000 Fourth Anniversary of the Purchase Closing Date $127,000,000 Fifth Anniversary of the Purchase Closing Date $ 0 (b) Prior to the issuance of the Letter of Credit, upon at least three Business Days' notice to the Agent, the Company may at any time or from time to time at its option permanently reduce the Amount Available by a minimum amount of $20,000,000 or, if the Amount Available is less than $20,000,000, by such amount. The Agent shall promptly notify the Banks of any such notice received by it. (c) In the event the Amount Available is reduced to zero in accordance with the foregoing provisions of this Section 2.02, the obligation of the Issuing Bank to issue the Letter of Credit shall terminate on the effective date of such reduction. (d) Subsequent to the issuance of the Letter of Credit, the Amount Available shall be subject to scheduled and optional reductions in accordance with the terms of the Letter of Credit. SECTION 2.03. Reimbursement of Payments. (a) Upon receipt of any ------------------------- drawing under the Letter of Credit, the Issuing Bank shall promptly notify the Agent and each other Bank as to the amount to be paid as a result of such drawing and the payment date thereof. Each Bank will pay to the Agent, for the account of the Issuing Bank, an amount equal to such 6 Bank's Commitment Percentage of the amount of such drawing on the date which is the later of (i) the date of payment specified in such notice and (ii) the date of the Issuing Bank's notice of such payment (or, if such notice is given after 12:00 Noon (New York City time) on any date, the next succeeding Business Day). Any amount not paid by any Bank on the date specified in the preceding sentence shall bear interest from and including such date to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate (or, if such amount remains unpaid more than three Business Days, a rate per annum equal to the Base Rate plus 2%). The Issuing Bank or the Agent, as the case may be, will pay to each Bank its Commitment Percentage of all amounts received pursuant to Section 5.02 for application in payment of its reimbursement obligations in respect of the Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of the Letter of Credit pursuant hereto. (b) The Company shall be obligated to reimburse the Issuing Bank for amounts paid by it in respect of drawings under the Letter of Credit (together with interest for each day from and including the date of such payment to but not including the date reimbursement is made in full at a rate per annum equal to the sum of the Base Rate for such day plus, for each such day more than three months after the date of the related drawing, 2%) if and to the extent, and only if and to the extent, the Company collects any amounts owed by the Reinsurer in connection with its defaulted obligations under the Coinsurance Agreement. SECTION 2.04. Reimbursement Obligations Unconditional. Subject to --------------------------------------- and except, as to the Company, as otherwise provided in Section 2.03(b), the reimbursement obligations of the Company and each Bank under this Agreement shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (a) any lack of validity or enforceability of any Transaction Document, or the loss or destruction of the Letter of Credit; (b) any claim that any payment under the Letter of Credit was not made pursuant to a valid or enforceable obligation of the Issuing Bank; (c) any amendment or waiver of or any consent to departure from all or any of the provisions of any Transaction Document; 7 (d) the existence of any claim, set-off, defense or other rights that the Company may have at any time against the Banks (including the Issuing Bank) or any other Person, whether in connection with this Agreement, any Transaction Document or any unrelated transactions; (e) any statement or any other document presented under the Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever, provided that the determination that documents presented under the Letter -------- of Credit are not forged, fraudulent or invalid or any statement therein is not untrue shall not have constituted gross negligence or willful misconduct of the Issuing Bank; (f) payment by the Issuing Bank under the Letter of Credit against presentation of a draft or certificate that does not comply with the terms of such Letter of Credit, provided that the determination that documents -------- presented under the Letter of Credit comply with the terms thereof shall not have constituted gross negligence or willful misconduct of the Issuing Bank; or (g) to the extent permitted by applicable law, any other act or omission to act or delay of any kind by the Company, the Issuing Bank, any other Bank or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this Section, constitute a legal or equitable discharge of the Company's or any Bank's obligations hereunder. SECTION 2.05. Indemnification. (a) The Company agrees to indemnify --------------- and hold harmless each Bank (including the Issuing Bank and the Agent in such capacities) from and against any and all losses, claims, damages, liabilities, reasonable costs, charges and expenses whatsoever that such Bank may incur (or that may be claimed against such Bank by any Person whatsoever) by reason of or in connection with (i) the existence of any claim, set-off, defense or other right which the Reinsurer may have at any time against the Company in connection with any claim by the Company against the Reinsurer seeking to enforce the obligations of the Reinsurer pursuant to the Coinsurance Agreement (including, without limitation, the absence of a claim of the Company against the Reinsurer under the Coinsurance Agreement due to bad faith claims practices, willful misconduct, fraud or gross negligence of the Company or its affiliates); (ii) any invalidity or unenforceability relating to any claim of the Company against the Reinsurer seeking to enforce the obligations of the Reinsurer pursuant to the Coinsurance 8 Agreement; (iii) any failure by the Company to assert any claim or demand against the Reinsurer, or to enforce the obligations of the Reinsurer, in accordance with Section 5.02; (iv) any amendment, waiver or other modification of the Coinsurance Agreement from the proposed form thereof delivered to each of the Banks prior to the date of this Agreement, or any amendment, waiver or other modification of any other Transaction Document to the extent the same adversely affects the rights or obligations of such Bank hereunder or (v) otherwise in connection with this Agreement or the Letter of Credit; provided that the -------- Company shall not be required by virtue of this clause (v) to indemnify any Bank for any claims, damages, losses, liabilities, reasonable costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of any Bank, (y) the failure of the Issuing Bank or any other Bank to perform its obligations hereunder and under the Letter of Credit or (z) the failure of the Reinsurer to make timely payments under the Coinsurance Agreement for any reason other than those specified in clauses (i) through (iii) above. (b) The parties intend that the Issuing Bank and the other Banks shall assume, subject to Section 5.01, the credit risk of the Reinsurer, but that the Company shall assume any risk associated with the legal validity or enforceability of the payment obligations under the Coinsurance Agreement, and the obligations of the Company under this Section 2.05 shall be so construed. In the event of a dispute between the parties with respect to any claim pursuant to Section 2.05, the parties agree to negotiate in good faith to seek a mutually satisfactory determination of the extent to which a loss suffered by the Banks for which indemnity is requested under this Section 2.05 is attributable to a defect in the legal validity or enforceability of the payment obligations under the Coinsurance Agreement assumed by the Company or the extent to which it is attributable to the credit risk of the Reinsurer assumed by the Issuing Bank and the other Banks. SECTION 2.06. Fees and Expenses. ----------------- (a) The Company shall pay to the Agent (i) for the account of each Bank a letter of credit fee for each day from and including the Purchase Closing Date to but excluding the Termination Date at the rate of 0.50% per annum on such Bank's Commitment Percentage of the Amount Available and (ii) for the account of the Issuing Bank a letter of credit fronting fee for each day from and including the Purchase Closing Date to but excluding the Termination Date at the rate per annum heretofore mutually agreed between the Company and the Issuing Bank on the Amount Available. Accrued fees under this 9 paragraph (a) shall be payable quarterly in arrears on the last day of each March, June, September and December and on the Termination Date. Such fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed. (b) The Company shall pay to the Agent for the account of each Bank a commitment fee at the rate of 0.15% per annum, accruing from and including the Effective Date to but excluding the earlier of (i) the Purchase Closing Date and (ii) the Termination Date, on such Bank's Commitment Percentage of the Amount Available. Such commitment fee shall be calculated on the basis of a year of 360 days and paid on the earlier of the Purchase Closing Date and the Termination Date for the actual number of days then elapsed. (c) The Company shall pay to the Issuing Bank, with respect to any amendment to the Letter of Credit and each drawing made thereunder, documentary and processing charges in accordance with the Issuing Bank's standard schedule for such charges in effect at the time of such amendment or drawing, as the case may be, which charges shall be payable on demand as incurred. SECTION 2.07. Increased Cost; Reduced Return; Substitute Bank. ----------------------------------------------- (a) If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (including the Issuing Bank) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject such Bank to any tax, duty or other charge with respect to the Letter of Credit, or shall change the basis of taxation of payments to such Bank in respect of the Letter of Credit or any other amounts due under this Agreement (except for changes in the rate of tax on the overall net income of such Bank imposed by the United States, any state thereof or any local governmental body, agency or authority therein); or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) against letters of credit issued by, or assets 10 of, deposits with or for the account of, or credit extended by, the Bank or shall impose on such Bank any other condition affecting the Letter of Credit; and the result of any of the foregoing is to increase the cost to such Bank of issuing or maintaining the Letter of Credit or making payments thereunder or to reduce the amount of any sum received or receivable by such Bank under this Agreement, by an amount deemed by such Bank to be material, then, within 30 days after demand by such Bank, the Company shall pay to the Agent for the account of such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) Without duplication of any amounts paid under subsection (a) above, if any Bank (including the Issuing Bank) shall have determined that, on or after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations under the Letter of Credit to a level below that which it could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 30 days after demand by such Bank, the Company shall pay to the Agent for the account of such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank (including the Issuing Bank) will promptly notify the Company and the Agent of any event of which it has knowledge, occurring on or after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will change the office at which its participation hereunder is booked if such change will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of such Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder that is signed by an officer of such Bank with knowledge of and responsibility for such matters and that sets forth such amount or amounts and a reasonable explanation of the basis therefor shall be conclusive in the absence of manifest error. In determining 11 such amount, such Bank may use any reasonable averaging and attribution methods. (d) If any Bank has demanded compensation under this Section, the Company shall have the right, with the assistance of the Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to assume the obligations of such Bank under this Agreement. SECTION 2.08. General Provisions as to Payments. (a) Any payment to --------------------------------- be made by the Company under any provision of this Agreement shall be made not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 7.01. (b) Whenever any payment under this Agreement shall be due on a day that is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for payment of any reimbursement obligation hereunder is extended by operation of law or otherwise, interest thereon shall be payable for such extended time at the specified rate. ARTICLE III CONDITIONS SECTION 3.01. Letter of Credit Agreement Closing. The closing ---------------------------------- hereunder shall be subject to the following conditions precedent (the date such conditions are satisfied, the "Letter of Credit Agreement Closing Date"): (a) receipt by the Agent of an opinion of Edward J. Crane, Jr., Second Vice President and Counsel of the Company, substantially in the form of Exhibit B hereto; (b) receipt by the Agent of all documents the Agent may reasonably request relating to the existence of the Company, the corporate authority for and the validity of this Agreement and any other matters relevant hereto, all in form and substance reasonably satisfactory to the Agent; and (c) receipt by the Agent for its own account and the respective accounts of the Banks of payment of all fees and other amounts then payable by the Company. 12 The Agent shall promptly notify the Company and each Bank of the occurrence of the Letter of Credit Agreement Closing Date, and such notice shall be conclusive and binding on all parties hereto. On the Letter of Agreement Closing Date the Issuing Bank shall deliver to the Company an opinion of Claire G. Keyles, Vice President and Assistant General Counsel of the Issuing Bank, substantially in the form of Exhibit C hereto. SECTION 3.02. Issuance. (a) The obligation of the Issuing Bank to -------- issue the Letter of Credit is subject to the conditions that (i) the Letter of Credit Agreement Closing Date and the Purchase Closing Date shall have occurred on or prior to the Purchase Closing Deadline Date and (ii) the Agent shall have received from the Company a certificate signed by a duly authorized officer of the Company (A) stating that the Company has determined that it is or may be unable to obtain reinsurance credit for all or any portion of the gross reserves maintained by it with respect to all of the Reserves and Liabilities ceded by it to the Reinsurer under the Coinsurance Agreement and (B) identifying the requested date of issuance of the Letter of Credit, which shall be not less than five Business Days after the date of delivery of such certificate. (b) Subject to satisfaction of the conditions set forth in subsection (a) above, the obligation of the Issuing Bank to issue the Letter of Credit under this Agreement shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (i) any lack of validity or enforceability of any Transaction Document or this Agreement; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of any Transaction Document or this Agreement; (iii) the existence of any claim, set-off, defense or other rights that the Issuing Bank or any Bank may have at any time against the Company, the Banks or any other Person, whether in connection with this Agreement, any Transaction Document, this Agreement or any unrelated transactions; (iv) any default by the Company or any Bank in its obligations hereunder, or any insolvency, receivership or similar proceedings with respect to the Company, the Agent, the Reinsurer or any Bank; or 13 (v) to the extent permitted by applicable law, any other act or omission to act or delay of any kind by the Company, the Agent, the Reinsurer, the Issuing Bank, any Bank or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this Section, constitute a legal or equitable discharge of the Issuing Bank's obligations hereunder or under any Transaction Document. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Each Party. The Company and each Bank hereby severally ---------- represents and warrants solely as to itself, for the benefit of each other party hereto, that: (a) Authorization, etc. Such party has all requisite corporate power ------------------ and authority to make, deliver and perform this Agreement and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. No consent or authorization of, filing (other than informational filings) with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. This Agreement has been duly executed and delivered on behalf of such party and constitutes a legal, valid and binding agreement of such party, enforceable against such party in accordance with its terms, except as may be limited by applicable receivership, insolvency or similar laws affecting the enforcement of creditors' rights generally and by equitable principles of general applicability. (b) No Conflicts. The execution, delivery and performance of this ------------ Agreement do not and will not (i) violate any material Requirement of Law or any material Contractual Obligation of such party, (ii) result in or constitute (with or without the giving of notice, lapse of time or both) any default or event of default under any such material Contractual Obligation or (iii) result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any material Requirement of Law or material Contractual Obligation. SECTION 4.02. Issuing Bank. The Issuing Bank hereby represents and ------------ warrants that: 14 (a) Authorization, etc. The Issuing Bank has all requisite corporate ------------------ power and authority to issue the Letter of Credit hereunder and has taken all necessary corporate action to authorize such issuance on the terms and conditions of this Agreement. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with such issuance. This Agreement has been duly executed and delivered on behalf of the Issuing Bank and constitutes, and the Letter of Credit, when executed and delivered pursuant to this Agreement will constitute, a legal, valid and binding agreement of the Issuing Bank, enforceable against the Issuing Bank in accordance with its terms, except as may be limited by applicable receivership, insolvency or similar laws affecting the enforcement of creditors' rights generally and by equitable principles of general applicability. (b) No Conflicts. The issuance of the Letter of Credit hereunder does ------------ not and will not (i) violate any material Requirement of Law or any material Contractual Obligation of the Issuing Bank, (ii) result in or constitute (with or without the giving of notice, lapse of time or both) any default or event of default under any such material Contractual Obligation or (iii) result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any material Requirement of Law or material Contractual Obligation. ARTICLE V COVENANTS OF THE COMPANY SECTION 5.01. First Loss. The Company covenants and agrees that it ---------- will not make any drawing under the Letter of Credit unless (and then only to the extent that) at the time of such drawing the aggregate amount then due from the Reinsurer with respect to the Coinsured Policies under the Coinsurance Agreement which the Reinsurer has failed to pay exceeds the sum of (i) $113,000,000 plus (ii) the aggregate unreimbursed amount of any prior drawings under the Letter of Credit. SECTION 5.02. Enforcement of Reinsurer's Obligations; Assignment of ----------------------------------------------------- Coinsurance Obligations. (a) The Company covenants and agrees that in the event - ----------------------- of any drawing under the Letter of Credit, it will, in accordance with subsection (c) below, enforce the obligations of the Reinsurer under the Coinsurance Agreement at the expense of and for the account of the Banks ratably in proportion to their Commitment 15 Percentages in accordance with the reasonable instructions of the Agent (amounts received through any such enforcement shall be applied: first, to the reasonable ----- expenses of obtaining the same; second, to accrued but unpaid interest on ------ unreimbursed drawings under the Letter of Credit, calculated in accordance with Section 2.03; third, to unreimbursed drawings under the Letter of Credit; and ----- fourth, if all the foregoing amounts have been paid in full, to be retained by - ------ the Company). (b) Upon 10 Business Days' prior written receipt of notice from the Agent at the request of the Required Banks, the Company will assign, as security for payment of unreimbursed drawings under the Letter of Credit, its rights to receive payments under the Coinsurance Agreement to the Agent on behalf of the Banks for enforcement thereof by the Agent on behalf of the Banks and the Company in lieu of enforcement thereof by the Company. In such event, the Banks will, and will instruct the Agent to, enforce the assigned rights in a manner which is commercially reasonable, and the Agent will enforce such assigned rights in accordance with such instructions and will promptly remit to the Company any amounts received through any such enforcement in excess of the amounts set forth in clauses first through third of subsection (a) above. ----- ----- (c) The following provisions shall apply to the Company in the performance of its enforcement duties under Section 5.02(a): (i) The Company shall act or refrain from acting in accordance with the written instructions of the Agent (and the Company may, as a condition thereto, require indemnification from the Banks severally against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability that the Company may suffer or incur in connection with the exercise of its duties and rights under this Section 5.02 and, at the Company's option, require from time to time the deposit by the Banks of adequate funds to cover such indemnification obligations, all in form and substance reasonably satisfactory to the Company). (ii) The Company shall not be obligated to take any action so instructed if the Company determines on the basis of advice of counsel that such action would violate a Requirement of Law. The Company may consult with legal counsel and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel. 16 (iii) The Company shall not be liable for any action taken or not taken in accordance with the instructions of the Agent as contemplated by subsection (a) except for its own gross negligence or willful misconduct. SECTION 5.03. Merger, Consolidation, Etc. The Company will not (i) --------------------------- consolidate with or merge with or into any other Person or (ii) sell, assign, lease, transfer or otherwise dispose of all or substantially all of its assets to any other Person, unless the Person surviving such merger or consolidation, if not the Company, or to which all or substantially all of the assets of the Company are transferred, as the case may be, executes and delivers to the Agent an instrument reasonably satisfactory to the Agent pursuant to which such Person assumes all of the Company's obligations under this Agreement. ARTICLE VI THE AGENT SECTION 6.01. Appointment and Authorization. Each Bank irrevocably ----------------------------- appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Letter of Credit as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 6.02. Agent and Affiliates. Morgan Guaranty Trust Company of -------------------- New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Company or affiliate of the Company as if it were not the Agent hereunder. SECTION 6.03. Action by Agent. The obligations of the Agent hereunder --------------- are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VII. SECTION 6.04. Consultation with Experts. The Agent may consult with ------------------------- legal counsel (who may be counsel for the 17 Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 6.05. Liability of Agent. Neither the Agent nor any of its ------------------ affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or the issuance of the Letter of Credit; (ii) the performance or observance of any of the covenants or agreements of the Company; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a bank wire, telex or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 6.06. Indemnification. Each Bank shall, ratably in accordance --------------- with its Commitment Percentage, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Company) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. SECTION 6.07. Credit Decision. Each Bank acknowledges that it has, --------------- independently and without reliance upon the Agent, the Company or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent, the Company or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. 18 SECTION 6.08. Successor Agent. The Agent may resign at any time, with --------------- the consent of the Company (which consent shall not be unreasonably withheld), by giving written notice thereof to the Banks and the Company. Upon any such resignation, the Required Banks shall have the right, with the consent of the Company, to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 6.09. Agent's Fees. The Company shall pay to the Agent for its ------------ own account fees in the amounts and at the times previously agreed upon between the Company and the Agent pursuant to the commitment letter dated as of November 19, 1996 between the Company and the Agent. ARTICLE VII MISCELLANEOUS SECTION 7.01. Notices. All notices, requests and other communications ------- hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to the Company, the Agent, the Issuing Bank or any Bank at its address or telex or facsimile number set forth on the signature pages hereof or such other address or telex or facsimile number as such party may hereafter specify for the purpose by notice to the other party. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when received at the address specified in this Section. 19 SECTION 7.02. No Waivers. No failure or delay by the Company, the ---------- Agent, the Issuing Bank or any Bank in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Subject to and except as otherwise provided in Sections 2.03, 2.04 and 3.02(b), the rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 7.03. Expenses. (a) The Company shall pay (i) all reasonable -------- out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation of the Agreement and the Letter of Credit, any waiver or consent hereunder or any amendment hereof and (ii) if the Company defaults hereunder, all reasonable out- of-pocket expenses incurred by the Agent or any Bank, including reasonable fees and disbursements of counsel, in connection with such default collection and other enforcement proceedings resulting therefrom. (b) Neither Section 2.05 nor this Section 7.03 shall require the Company to pay the reasonable fees and disbursements of more than one counsel to act on behalf of the Agent and all Banks (which counsel shall be selected by the Agent) unless the representation of all such parties by one counsel would not be appropriate under applicable rules of professional responsibility, in which case the Company may be required to pay the reasonable fees and disbursements of not more than one additional counsel. SECTION 7.04. Sharing. Each Bank agrees that if it shall receive payment ------- of a proportion of the aggregate amount of principal and interest due with respect to any Letter of Credit Liabilities which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Letter of Credit Liabilities held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Letter of Credit Liabilities held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments with respect to the Letter of Credit Liabilities held by the Banks shall be shared by the Banks in proportion to their respective Commitment Percentages. SECTION 7.05. Amendments and Waivers. Any provision of this Agreement ---------------------- may be amended or waived if, but only if, such amendment or waiver is in writing and is signed 20 by the Company and the Required Banks (and, if the rights or duties of the Agent or the Issuing Bank are affected thereby, by the Agent or the Issuing Bank, as relevant); provided that no such amendment or waiver shall, unless signed by all -------- the Banks, (i) increase the Amount Available, increase or decrease the Commitment Percentage of any Bank or subject any Bank to any additional obligation, (ii) reduce the amount to be reimbursed in respect of the Letter of Credit or interest thereon or any fees hereunder, (iii) postpone the date fixed for any payment of the amount to be reimbursed in respect of the Letter of Credit or interest thereon or any fees hereunder, or the Purchase Closing Deadline Date or the Termination Date, (iv) change Section 2.05 or (v) change the definition of Required Banks or the provisions of this Section. SECTION 7.06. Successors and Assigns. The provisions of this Agreement ---------------------- shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, but only to the extent permitted by the following provisions of this Section: (a) The Company may assign its rights under this Agreement to a Permitted Assignee; provided that such assignment shall in no way affect any of -------- the Company's obligations under this Agreement. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in any or all of its Letter of Credit Liabilities. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Company, the Agent and the Issuing Bank, such Bank shall remain responsible for the performance of its obligations hereunder and under the Letter of Credit, and the Company, the Agent and the Issuing Bank shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Company hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation -------- agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 7.05 without the consent of the Participant. (c) Any Bank may assign to one or more banks or other institutions (each an "Assignee") all, or a 21 proportionate part (equivalent to a Commitment Percentage of 3% or greater) of all, of its rights and obligations under this Agreement and the Letter of Credit, with (and subject to) the subscribed consent of the Company, which shall not be unreasonably withheld, and the Agent; provided that the foregoing shall -------- not be applicable in the case of, and this subsection (c) shall not restrict, an assignment or other transfer by any Bank to an affiliate of such Bank or to another Bank. Upon execution and delivery of an instrument of assignment and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment Percentage as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. SECTION 7.07. Governing Law; Submission to Jurisdiction. This ----------------------------------------- Agreement shall be governed by and construed in accordance with the laws of the State of New York. Each of the Company, the Banks, the Issuing Bank and the Agent hereby submit to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Company, the Banks, the Issuing Bank and the Agent irrevocably waive, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 7.08. Counterparts; Integration; Effectiveness. This ---------------------------------------- Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof, subject to Section 6.09. This Agreement shall become effective on the date of receipt by the Agent of a counterpart hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). 22 SECTION 7.09. WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE ISSUING -------------------- BANK, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Thomas E. Moloney ------------------------ Name: Thomas E. Moloney Title: Chief Financial Officer 200 Clarendon Street Boston, MA 02117 Attention: John T. Farady Senior Vice President & Treasurer Phone: 617-572-1779 Facsimile number: 617-572-0011 Copies of notices to: John Hancock Mutual Life Insurance Company Investment Law Floor T-50 200 Clarendon Street Boston, MA 02117 Attention: Alan Seghezzi Phone: 617-572-4610 Facsimile number: 617-572-9268 Rogers & Wells 200 Park Avenue New York, New York 10166 Attention: Alan M. Christenfeld, Esq. Phone: 212-878-8000 Facsimile number: 212-878-8375 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Bank, Issuing Bank and Agent By /s/ Ann E. Darby ---------------------- Title: Vice President For Business and Credit Matters: 60 Wall Street New York, NY 10260-0060 Attention: Ann E. Darby Vice President Phone: 212-648-6732 Facsimile number: 212-648-5249 For Administrative Matters: c/o J.P. Morgan Services, Inc. Loan Operations-3rd Floor/OPS2 500 Stanton Christiana Road Newark, DE 19713 Attention: Robert Kearns Associate Credit Administrator Phone: 302-634-4203 Facsimile number: 302-634-1092/1094 Backup Attention: Nancy M. Douglas Associate Credit Administrator Phone: 302-634-4189 Facsimile Number: 302-634-1092/1094 THE FIRST NATIONAL BANK OF BOSTON By /s/ Lawrence C. Bigelow ------------------------ Title: Managing Director 100 Federal Street MS-01-10-08 Boston, MA 02110 Attention: Lawrence C. Bigelow Managing Director Phone: 617-434-8868 Facsimile number: 617-434-1537 FLEET NATIONAL BANK By /s/ Robert E. Meditz ---------------------- Title: Assistant Vice President 777 Main Street Hartford, CT 06115 Attention: Robert E. Meditz Assistant Vice President Phone: 860-986-5600 Facsimile number: 860-986-1264 THE FUJI BANK, LIMITED LOS ANGELES AGENCY By /s/ Hiro - Toshi Naito ----------------------- Title: Joint General Manager 333 S. Hope Street, Suite 3900 Los Angeles, CA 90071 Attention: Steve Brennan Phone: 213-253-4174 Facsimile number: 213-253-4198 THE SANWA BANK, LIMITED By /s/ Yutaka Higashino ---------------------- Title: Senior Vice President For Credit Matters: One Financial Center, Suite 2812 Boston, MA 02111 Attention: Dale C. Edmunds Vice President Phone: 617-654-1430 Facsimile number: 617-350-7212 For Administrative Matters: Park Avenue Plaza 55 E. 52nd Street New York, NY 10055 Attention: Renko Hara Vice President Phone: 212-339-6390 Facsimile number: 212-754-2368 WACHOVIA BANK OF GEORGIA, N.A. By /s/ M. Eugene Wood, III ------------------------ Title: Vice President 191 Peachtree Street, N.E. Atlanta, GA 30303 Attention: U.S. Corporate Banking Todd J. Eagle Vice President Phone: 404-332-4332 Facsimile number: 404-332-6898 STATE STREET BANK AND TRUST COMPANY By /s/ Edward M. Anderson ----------------------- Title: Vice President 108 Myrtle Street N. Quincy, MA 02171 Attention: Edward Anderson Vice President Phone: 617-985-5301 Facsimile Number: 617-985-5082 BANQUE NATIONALE DE PARIS LOS ANGELES BRANCH By /s/ Clive Bettles ----------------------- Title: Senior Vice President & Manager By /s/ Mitchell Ozawa ---------------------- Title: Vice President For Credit Matters: 725 South Figueroa Street Suite 2090 Los Angeles, CA 90017 Attention: Mitchell Ozawa Vice President Phone: 213-488-9120 Facsimile number: 213-488-9602 For Administrative Matters: 180 Montgomery Street San Francisco, CA 94104 Attention: Treasury Department Don Hart Vice President Phone: 415-956-2511 Facsimile number: 415-989-9041 With a copy to: 725 South Figueroa Street Suite 2090 Los Angeles, CA 90017 Attention: Mitchell Ozawa Vice President Phone: 213-488-9120 Facsimile number: 213-488-9602 THE SUMITOMO BANK, LIMITED NEW YORK BRANCH By /s/ John Kissinger ---------------------- Title: Joint General Manager 277 Park Avenue New York, NY 10172 Attention: Yukimi Konno Assistant Vice President Phone: 212-224-4123 Facsimile number: 224-5188 THE BANK OF NOVA SCOTIA By /s/ James S. York ---------------------- Title: Vice President 580 California Street Suite 2100 San Francisco, CA 94104 Attention: James S. York Office Head Phone: 415-986-1100 Facsimile number: 415-397-0791 Commitment Schedule Bank Commitment Amount Commitment Percentage - ---- ----------------- --------------------- Morgan Guaranty $152,000,000.00 38.28% Trust Company of New York The First National $ 50,000,000.00 12.58% Bank of Boston Banque Nationale $ 30,000,000.00 7.56% de Paris Los Angeles Branch Fleet National $ 30,000,000.00 7.56% Bank The Fuji Bank, $ 30,000,000.00 7.56% Limited The Sanwa Bank, $ 30,000,000.00 7.56% Limited Wachovia Bank $ 30,000,000.00 7.56% of Georgia, N.A. State Street Bank $ 20,000,000.00 5.04% and Trust Company The Sumitomo Bank, $ 15,000,000.00 3.78% Limited New York Branch The Bank of Nova $ 10,000,000.00 2.52% Scotia ----------------- --------------------- $397,000,000.00 100.00% EXHIBIT A LETTER OF CREDIT Issuance Date: ,____ Letter of Credit No. ____________ Amount: USD $ Beneficiary: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY 200 Clarendon Street Boston, MA 02117 Amount in Words: Ladies and Gentlemen: We hereby open in your favor, effective , , our Irrevocable Standby Letter of Credit for an amount of U.S. Dollars $ ([amount in words] U.S. Dollars). To the extent not theretofore reduced to the same or a lesser amount pursuant to the second following paragraph of this Letter of Credit, the amount available hereunder will be automatically reduced, without requirement of notice or other action by any party, on each date set forth below to the amount set forth opposite such date: Date Amount Available ---- ---------------- The amount available hereunder at any time, determined in accordance with this paragraph and the second following paragraph, is hereinafter referred to as the "Amount Available". This Letter of Credit will expire on the earlier of (i) [stated expiry date], or if such date is not a Business Day, the next succeeding Business Day, and (ii) the date on which the Amount Available is reduced to zero. You are authorized to draw on us from time to time on or after the date hereof by your draft at sight in substantially the form attached hereto as Annex I. Upon our honoring of any draft presented by you hereunder, the Amount Available under this Letter of Credit shall be automatically and permanently reduced by the amount drawn under such draft. Additionally, the Amount Available shall be reduced upon our receipt of written notification purportedly from your authorized officer instructing us to permanently reduce the Amount Available and indicating the amount of such reduction. Each draft presented hereunder shall be dated the date of its presentation and each such draft shall be presented on a business day. A draft may be presented by mail, by facsimile transmission or by physical or courier delivery. Drafts and documents presented by mail or facsimile transmission should be sent to Morgan Guaranty Trust Company of New York, c/o J.P. Morgan Services, Inc., P.O. Box 6071 Newark, Delaware, 19714-9857, Attention: International Trade Services (Facsimile No. 302-634-1838/39). Courier or physical deliveries should be addressed to Morgan Guaranty Trust Company of New York, c/o J.P. Morgan Services, Inc., 500 Stanton Christiana Road, Newark, Delaware, 19713-2107, Attention: International Trade Services. Although we prefer physical presentations be made to our Newark, Delaware location, our 15 Broad Street, New York, New York, 10015 location is also available for your physical presentations. Should you use our 15 Broad Street location for physical presentations, letters of credit/documents must be directed to, the Brokers Loan Unit, Basement A, Attention: International Trade Services. If we receive any draft at the appropriate office specified above, all in strict conformity with the terms and conditions of this Letter of Credit, not later than 12:00 noon (New York time) on a business day on or prior to the termination hereof, we will honor the same by initiating the wiring of funds by 2:00 p.m. (New York time) on the same day in accordance with your payment instructions. If we receive any draft at such office, all in strict conformity with the terms and conditions of this Letter of Credit, after 12:00 noon (New York time) on a business day prior to the termination hereof, we will honor the same by 12:00 noon (New York time) on the next succeeding business day in accordance with your payment instructions. As used herein, "business day" means a day other than a Saturday, Sunday or other day on which banks in New York City or Wilmington, Delaware are authorized or required by law to close. This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein. Except as otherwise provided herein, this Letter of Credit shall be governed by and construed in accordance with the Uniform Customs and Practice for Documentary Credits (1993 revisions), International Chamber of Commerce Publication No. 500 and, to the extent not inconsistent therewith, the laws of the State of New York. Communications with respect to this Letter of Credit other than presentations of drafts hereunder shall be in writing and shall be addressed to us at our address for mail presentation set forth above, specifically referring to the number of this Letter of Credit. This Letter of Credit is transferable in its entirety (but not in part) to any "Permitted Assignee" under the Letter of Credit Agreement dated as of January 2, 1997 (as such agreement may heretofore have been or hereafter be amended, supplemented or otherwise modified from time to time) among you, the Banks party thereto and the undersigned and such transferred Letter of Credit may be successively transferred. Transfer of this Letter of Credit to such transferee shall be effected upon the presentation to us of this Letter of Credit accompanied by the transfer form attached hereto as Annex II. Very truly yours, MORGAN GUARANTY TRUST COMPANY OF NEW YORK By:___________________________ ANNEX I TO LETTER OF CREDIT ---------------- [FORM OF DRAFT] __________, 19__ $ [aggregate amount] -------------------- At sight of this Draft To Morgan Guaranty Trust Company of New York Pay to the order of the undersigned, as beneficiary under the Letter of Credit referred to below, the amount $_____ ([INSERT AMOUNT IN WORDS] Dollars). Drawn under Irrevocable Letter of Credit No. __________. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By:_______________________ Name: Title: By:_______________________ Name: Title: ANNEX II TO LETTER OF CREDIT Morgan Guaranty Trust Company of New York c/o J. P. Morgan Services, Inc. P.O. Box 6071 Newark, Delaware 19714-9857 Attention: International Trade Services Ladies and Gentlemen: For value received, the undersigned beneficiary hereby irrevocably transfers to: (Name of Transferee) (Address) all rights of the undersigned beneficiary under the above Letter of Credit. Said transferee is a "Permitted Assignee" under the Letter of Credit Agreement (as such agreement may heretofore have been or hereafter be amended, supplemented or otherwise modified from time to time) dated as of January 2, 1997 among you, the Banks party thereto and the undersigned. By this transfer, all rights of the undersigned beneficiary in such Letter of Credit are transferred to the transferee and the transferee shall have the sole rights as beneficiary thereof, including sole rights relating to any amendments whether increases or extensions or other amendments and whether now existing or hereafter made. All amendments are to be advised direct to the transferee without necessity of any consent of or notice to the undersigned beneficiary. The Letter of Credit is returned herewith, and we ask you to endorse the transfer on the reverse thereof, and forward it direct to the transferee with your customary notice of transfer. Yours very truly, SIGNATURE AUTHENTICATED _______________________ ___________________________ (Bank) Signature of Beneficiary _______________________ (Authorized Signature) EXHIBIT B OPINION OF COUNSEL FOR THE COMPANY ----------------------- [LETTER OF CREDIT AGREEMENT CLOSING DATE] To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York 60 Wall Street New York, New York 10260 Ladies and Gentlemen: I am Second Vice President and Counsel of John Hancock Mutual Life Insurance Company, a mutual life insurance company (the "Company"), and am delivering this opinion in connection with the Letter of Credit Agreement (the "Agreement") dated as of January 2, 1997 among the Company, the banks party thereto (the "Banks") and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent. Terms defined in the Agreement are used herein as therein defined. In connection with the opinions expressed below, I or attorneys under my general supervision have examined originals or copies, certified or otherwise identified to my or their satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. In such examinations and investigations, I have assumed the genuineness of all signatures (other than signatures of officers of the Company), the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified or photostatic copies, and the authenticity of the originals of such documents. As to any facts material to such opinions, I have, to the extent that the relevant facts were not independently established by me, relied upon certificates of public officials and certificates, representations and declarations of officers or other representatives of the Company. In giving the opinions expressed below, I have assumed (i) the due authorization, execution and delivery by all parties, other than the Company, of all documents to which they are a party, (ii) the legal right and power of all parties, other than the Company, under all applicable laws and regulations to enter into, execute, deliver and perform their respective obligations under the documents to which they are a party, and (iii) that all documents entered into, executed and delivered by parties other than the Company, are legal, valid, binding and enforceable against all such parties in accordance with their respective terms. Based upon and subject to the foregoing and subject to the qualifications discussed below, I am of the following opinion: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has the corporate power and authority to own and operate its property and to conduct the business in which it is currently engaged. 2. The execution, delivery and performance by the Company of the Agreement are within the Company's corporate powers, have been duly authorized by all necessary corporate action, require no consent or authorization of, action by or in respect of, or filing (other than informational filings) with, any federal or state Governmental Authority and to my knowledge after due inquiry, do not (i) violate any material Requirement of Law or any material Contractual Obligation of the Company; (ii) result in or constitute (with or without the giving of notice, lapse of time or both) any default or event of default under any such material Contractual Obligation, or (iii) result in, or require, the creation or imposition of any Lien (other than Liens created or to be created in the future pursuant to the Agreement) on any of its or their respective properties or revenues pursuant to any material Requirement of Law or material Contractual Obligation. 3. The Agreement constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as may be limited by applicable receivership, liquidation, rehabilitation, moratorium, fraudulent conveyance, insolvency or similar laws affecting the enforcement of creditors' rights generally and by equitable principles of general applicability (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The opinions expressed above are subject to the following qualifications: (a) I am a member of the Bar of the Commonwealth of Massachusetts. I express no opinion as to any laws other than the laws of the Commonwealth of Massachusetts and the federal laws of the United States of America. For purposes of this opinion, I have assumed that the Agreement is governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts, notwithstanding any provision of the Agreement to the contrary. (b) Whenever any opinion expressed herein is based upon "my knowledge after due inquiry", such knowledge is limited to information obtained by me from a general inquiry of the members of the Law Sector of John Hancock which inquiry only inquired as to the actual knowledge of such members of the Law Sector without further investigation or inquiry and I have not conducted any investigation, nor do I intend to undertake for purposes of this opinion any investigation, of any facts that may be ascertained by the examination of any files or third parties. Such level of inquiry in my opinion is reasonable in its scope under the circumstances. (c) I express no opinion as to the effect of the opinions herein stated of (i) compliance or non-compliance by any party, other than the Company, with any Requirement of Law applicable to any such party or (ii) the legal or regulatory status or the nature of the business of any such party. (d) I express no opinion herein as to whether a federal or state court outside the State of New York would give effect to the choice of New York law provided for the Agreement. (e) The opinions expressed herein are qualified to the extent that the validity, binding nature and enforceability against the Company of the Agreement may be limited or otherwise affected by the unenforceability under certain circumstances of (i) provisions indemnifying, or prospectively releasing, a party where a release or indemnification provision is contrary to public policy, and (ii) provisions expressly or by implication waiving broadly or vaguely stated rights, unknown future rights, defenses to obligations or rights granted by law, where such waivers are contrary to public policy. I am delivering this opinion to you for your benefit. No Person other than you is entitled to rely on this opinion without my prior written consent. This opinion does not address facts and circumstances or changes in applicable laws or regulations arising after the date hereof and I assume no responsibility to inform you of any such changes which may come to my attention. Very truly yours, Edward J. Crane, Jr. Second Vice President and Counsel EXHIBIT C [LETTER OF CREDIT AGREEMENT CLOSING DATE] OPINION OF COUNSEL FOR THE ISSUING BANK --------------------------------------- To: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Dear Sirs: This opinion is furnished to you in connection with the Letter of Credit Agreement dated as of January 2, 1997 among John Hancock Mutual Life Insurance Company, the Banks listed therein and Morgan Guaranty Trust Company of New York (the "Bank"), as Agent (the "Agreement"). Terms defined in the Agreement and used but not defined herein have the meanings given to them in the Agreement. I am Vice President and Assistant General Counsel of the Bank. In connection with the delivery of this opinion, I have examined (a) a copy of the Agreement and the form of Letter of Credit attached thereto as Exhibit A (the "Letter of Credit") and (b) copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments, and have conducted such investigation of fact and law, as I have deemed necessary or appropriate for the opinions expressed herein. In rendering the opinions expressed below, I have assumed and have not verified that the signatures (other than signatures of officers of the Bank) on all documents that I have examined are genuine. Based on the foregoing, I am of the opinion that: (1) the Bank is a corporation, duly organized, validly existing and in good standing under the laws of the State of New York. (2) the Bank has full corporate power and authority to execute and deliver the Agreement and the Letter of Credit and to perform its obligations thereunder, the Agreement and the Letter of Credit have been duly authorized by the Bank and the Agreement has been duly executed and delivered by the Bank. (3) No consents, authorizations or approvals are required for the execution and delivery by the Bank of the Agreement and the Letter of Credit and the performance of its obligations thereunder, and no other action by, and no notice to or filing with, any governmental authority or regulatory body is required for such execution, delivery or performance. (4) The execution, delivery and performance by the Bank of the Agreement and the Letter of Credit do not and will not contravene any law or governmental regulation or order presently binding on the Bank or its articles of incorporation or bylaws or contravene any provision of or constitute a default under any indenture, contract or other instrument to which the Bank is a party or by which the Bank is bound. (5) The Agreement constitutes, and the Letter of Credit if and when issued in accordance with the Agreement will constitute, the legal, valid and binding obligation of the Bank enforceable in accordance with its terms (except as enforcement thereof may be limited by bankruptcy, reorganization, insolvency, moratorium or other laws affecting the enforcement of creditors' rights generally). The opinions expressed above are subject to the following qualifications: (a) I express no opinion as to the effect on the opinions herein stated of (i) compliance or non-compliance by any party, other than the Bank, with any Requirement of Law applicable to any such party or (ii) the legal or regulatory status or the nature of the business of any such party. (b) I express no opinion herein as to whether a federal or state court outside the State of New York would give effect to the choice of New York law provided for the Agreement. (c) The opinions expressed herein are qualified to the extent that the validity, binding nature and enforceability against the Bank of the Agreement may be limited or otherwise affected by the unenforceability under certain circumstances of (i) provisions indemnifying, or prospectively releasing, a party where a release or indemnification provision is contrary to public policy, and (ii) provisions expressly or by implication waiving broadly or vaguely stated rights, unknown future rights, defenses to obligations or rights granted by law, where such waivers are contrary to public policy. I am a member of the bar of the State of New York and the opinions expressed herein are limited to the laws of the State of New York and the federal laws of the United States of America. I am furnishing this letter to you in my capacity as Counsel for the Bank and this opinion may not be relied upon by any other person without my prior written consent. Very truly yours, EX-10.8 12 LONG TERM INCENTIVE COMPENSATION PLAN EXHIBIT 10.8 LONG-TERM INCENTIVE PLAN FOR SENIOR EXECUTIVES Section 1. PURPOSE. To provide a long-term incentive opportunity for certain -------- members of senior management based on the Company's success over a period of years. Section 2. ELIGIBILITY AND PARTICIPATION. The term "Eligible Employee" shall ------------------------------ mean a member of the Policy Committee, a Senior Vice President or Vice President and other Senior Officers of the Company or officers of a subsidiary selected by and on such terms as the Senior Committee may determine. An Eligible Employee participating in any Performance Cycle shall be a Participant for purposes of that Cycle. Section 3. PERFORMANCE CYCLES. There will be overlapping three-year ------------------- Performance Cycles. A new Performance Cycle will commence each January 1. Each calendar year will be a factor in three Performance Cycles. Section 4. GOALS FOR PERFORMANCE CYCLES. The Director's Compensation ----------------------------- Committee, in consultation with the Chairman of the Board and the President, shall establish a goal for each Performance Cycle as early in the first year of such cycle as is practicable. As soon as practicable following the end of each Performance Cycle, the Chairman of the Board and the President will report to the Committee on the Company's performance during such cycle and the extent to which the goal has been attained, and, on the basis of its findings in such respect, the Committee shall determine the amount of the liability and recommend to the Board of Directors the appropriation described in Section 8. In establishing goals and determining such liability, the Committee shall, from time to time, adopt such methods and apply such standards as it shall deem relevant and suitable, taking into consideration both the internal needs of the Company and the effect upon it of anticipated external developments including the performance of its competitors. Such methods and standards shall be included in the principles of the Plan which the Committee shall approve. 1 Section 5. EQUITY RIGHTS. -------------- A. At the commencement of each Performance Cycle, Participant will be awarded Equity Rights. The number of Equity Rights awarded to each Participant shall be determined by dividing his or her Target Award by 100. B. Employees who first become eligible to participate during a Performance Cycle may be granted Equity Rights which are prorated according to the number of months left in the Performance Cycle. Participants who are promoted during a Performance Cycle may be granted additional Equity Rights which are prorated according to the number of months left in the Performance Cycle. C. In the event that the goal described in Section 4 is exactly met at the end of any Performance Cycle, each Equity Right will be worth $100.00. The maximum value of an Equity Right at the end of any Performance Cycle shall be $300.00. If the Value of the Equity Right is zero at the end of any Performance Cycle, all Equity Rights will be eliminated for that Performance Cycle. D. At the end of a Performance Cycle, the value of an Equity Right between zero and $300.00 will be determined on a leveraged basis in accordance with the principles of the Plan. Thereafter, the value of Equity Rights for a completed Performance Cycle will vary in accordance with the performance measure described in the principles of the Plan. Equity Rights shall be valued as of each Vesting Date. Valuations shall be published as soon thereafter as practicable. Section 6. TARGET AWARD. ------------- A. The Target Award for each Participant for a Performance Cycle shall be the Participant's salary as of the first pay period in the first year of each Performance Cycle multiplied by that percentage determined as follows: For members of the Policy Committee, the percentage determined for each by the Board of Directors on the recommendation of the Directors' Compensation Committee. For Senior Vice Presidents, the percentage determined for each by the Directors' Compensation Committee. For each other Participant, the percentage determined by the Senior Committee. 2 B. The Target Award which shall be determined for each Participant may be zero or more, but in general shall be based on the following guideline percentage of a Participant's salary: Chairman of the Board and President 100% Vice Chairman 85% Other Policy Committee Members 70% Senior Vice President 50 - 70% Vice President 20 - 45% Second Vice Presidents and Other 0 - 30%, (as determined by Eligible Employees the Chairman of the Board and President) C. Notwithstanding the above or other provisions of the Plan, the Board of Directors, for members of the Policy Committee, and the Compensation Committee, for all other eligible Participants, may, in its discretion, establish Special Target Awards, on a case by case basis, for specified individuals for a particular Performance Cycle. The Equity Rights associated with these Special Target Awards shall vest at the end of the third Vesting Date described in Section 7 and shall be surrendered and become payable, subject to the election under Section 7.C., as soon thereafter as practicable. For Special Target Awards awarded to individuals who were within 5 years of their normal retirement date on June 8, 1998, a Performance Cycle in progress at the time of the individual's normal retirement under the Company's pension plan shall continue to it's normal completion and payments of the Equity Rights associated with these Special Target Awards shall be surrendered and become payable, subject to the election under Section 7.C., as soon as practicable after the later of the end of the Performance Cycle or the participant's date of retirement. The special Target Awards and rules established under this subparagraph shall be in lieu of a participant's general Target Awards under the Plan. Section 7. VESTING, SURRENDER AND DEFERRAL OF EQUITY RIGHTS. ------------------------------------------------- A. Vesting. The Vesting Date for each year shall be January 1. Except as -------- otherwise provided herein, Equity Rights for each Performance Cycle shall vest in three installments commencing upon the completion of the 3 Performance Cycle. One-third shall vest on the Vesting Date next following the end of the Performance Cycle, and one-third shall vest on each of the two succeeding Vesting Dates. B. Surrender. Equity Rights not subject to an election under paragraph C of ---------- this section shall be deemed surrendered on the Vesting Date, and payment therefore shall be made in cash as soon thereafter as practicable. C. Deferral. A Participant may irrevocably elect to defer the surrender of --------- Equity Rights in order to keep such rights in the Plan until (1) a specific Vesting Date not less than five years from the date of election or (2) the Vesting Date next following the Participant's retirement. Notwithstanding an election to defer the surrender of Equity Rights to a specific Vesting Date, the deferral period shall end as of the Vesting Date next following the Participant's actual retirement if earlier than the specified Vesting Date. An election to defer must be made, on a form and in a manner approved by the Company, on or before the last day of the calendar year preceding the year in which Equity Rights become vested. Vested Equity Rights remaining in the Plan will be adjusted in value as of each Vesting Date. Except as otherwise provided herein, Equity Rights shall be deemed surrendered on the Vesting Date which ends the deferral period, and payment therefor shall be made in cash as soon thereafter as practicable. D. Distributions. If a deferral election is made in accordance with Paragraph -------------- C of this Section, the Participant may elect during the calendar year preceding the year in which the deferral ends, one of the following methods of payment: 1) lump sum, 2) annual installments for a period specified by the Participant, commencing on a date selected by the Participant, provided such installments begin within five (5) years from the Vesting Date next following the election of the distribution method and terminate no later than twenty (20) years from said Vesting Date. If a Participant fails to make this election, payment shall be made in a lump sum as provided in Paragraph C of this Section. 4 If a Participant elects to receive annual installments, payments shall be made in January of each years or as soon thereafter as practicable. Interest shall be added to and shall become part of the balance of unpaid installments as of December 31 of the year in which the deferral ends and as of each succeeding December 31 in an amount equal to the product of (1) times (2), where: (1) is the average annual rate of interest for that year for ten-year Treasury Constant Maturities: and (2) is the balance of unpaid installments on December 31 of such year prior to adding such interest. SECTION 8. Appropriations. At its next regularly scheduled meeting following --------------- each date on which the valuation is published, the Board of Directors shall appropriate a sum of money sufficient to pay for all vested Equity Rights surrendered in that year, including those payable to retired, disabled or terminated Participants. In order to assure the orderly operation of the Plan, the Board of Directors in its discretion may require that payment for Equity Rights surrendered in any year be spread out over an appropriate number of years not to exceed seven and in such even may in its discretion cause interest to be paid on the withheld amounts. The value of such surrendered Equity Rights will continue to be the value upon surrender. SECTION 9. Beneficiaries. Participants may elect a beneficiary or -------------- beneficiaries to receive payments under the Plan in the event of the Participant's death. The beneficiary or beneficiaries shall be designated on a form provided by the Company. In the event that no beneficiary is designated, payments shall be made to the estate of the Participant. SECTION 10. Retirement or Disability. For each Performance Cycle in progress ------------------------ at a Participant's retirement under the Company's pension plan, or permanent and total disability as determined by the Company, the Participant shall retain that portion of the Equity Rights equal to the elapsed portion of the Performance Cycle on the date of the retirement or disability. The balance of the Participant's Equity Rights for such cycles shall be forfeited. Upon completion of a Performance Cycle, vesting, surrender, and deferral will occur as provided in Section 7. SECTION 11. Death. Upon the death of an active or retired Participant, all ------ Equity Rights for completed Performance Cycles which have not previously vested shall vest. 5 For each Performance Cycle in progress at a Participant's death, that portion of the deceased Participant's Equity Rights equal to the elapsed portion of the Performance Cycle at the date of the death shall vest. The balance of the deceased Participant's Equity Rights for Performance Cycles in progress shall be forfeited. All vested Equity Rights subject to a deferral under Section 7C shall be surrendered by the Company and, along with any unpaid installments under Section 7D, will be paid in a lump sum as soon as practicable after the Participant's death. Vesting, where applicable, surrender and valuation of Equity Rights shall occur on the Vesting Date next following the date of death (or on the date of death if it is also a Vesting Date). Payment shall be made as soon thereafter as practicable. SECTION 12. HARDSHIP DISTRIBUTION PROVISIONS. A hardship distribution may be --------------------------------- paid from deferred vested Equity Rights remaining in the Plan pursuant to Section 7 upon a finding by the Savings Plans Administrative Committee of the Company that a Participant has incurred a Financial Hardship, as defined below. An amount reasonably necessary to meet the Financial Hardship, up to 100% of the value of such Equity Rights, may be paid, and the value of the deferred Vested Equity Rights remaining in the Plan shall be appropriately reduced to reflect the amount of any such hardship distribution. The hardship distribution shall be made in a lump-sum payment. Applications for hardship distributions shall be made in writing. The Savings Plans Administrative Committee shall issue a written determination with respect to such application. Written proof of a Financial Hardship may be requested. The Savings Plans Administrative Committee will determine the date of payment for a hardship distribution. For purposes of this section, a Financial Hardship is any unforeseen, anticipated emergency that is caused by an event beyond the control of the participant and that would result in severe financial hardship to the individual if early withdrawal was not permitted. SECTION 13. TERMINATION. Participants whose employment with the Company ------------ terminates, other than by retirement, disability or death, shall forfeit all non-vested Equity Rights. All vested Equity Rights, including rights subject to a deferral under Section 7C, shall be surrendered at the Vesting Date next following termination (or on the date of termination if it is also a Vesting Date) and payment thereafter shall be made at the valuation as of that Vesting Date in cash as soon thereafter as practicable. If not so surrendered, the Company reserves the right to declare them forfeited. 6 SECTION 14. OPERATION, AMENDMENT AND TERMINATION. ------------------------------------- A. The Chairman of the Board and the President acting in concert shall carry out provisions of this Plan and are authorized to designate appropriate employees of the Company to act in its behalf for all purposes hereof. In questions involving the operation or interpretation of any provision of the Plan, the determination of the Company shall be final. B. The Chairman of the Board and the President, with the approval of the Board of Directors, may, in appropriate individual cases, vary the provisions of Sections 10, 11 and 13 to accommodate special circumstances. C. The Board of Directors may at any time terminate this Plan and from time to time amend it or vary its provisions as they apply to any class; provided that the establishment, determination or variation of annual goals or the principles of the Plan referred to in Section 4, shall not be considered an amendment or variation of the Plan. In addition, the Compensation Committee may from time to time amend this Plan or vary its provisions as they apply to any class below the level of the Policy Committee. Notwithstanding the foregoing, the termination of the Plan, any amendments thereto, or any variance in its provisions, goals or principles shall in no way reduce the number of Equity Rights in which a Participant is vested or which have been allocated to any participant with respect to a Performance Cycle which has been completed prior to the date of such termination, amendment or variance. D. Upon termination of the Plan, all Equity Rights for a completed Performance Cycle shall vest. Non-vested Equity Rights shall be forfeited. Vested Equity Rights must be surrendered for cash at their value on the Vesting Date next preceding the effective date of the Plan termination of the effective date if it is also a Vesting Date. The provisions of Section 8 shall apply in the event of a Plan termination. E. Equity Rights and amounts received upon surrender of Equity Rights shall be excluded from the base for computing benefits under, or contribution to, benefits plans maintained by the Company for its employees. 7 EX-10.9 13 FORM OF EMPLOYMENT CONTINUATION AGREEMENT EXHIBIT 10.9 EMPLOYMENT CONTINUATION AGREEMENT THIS AGREEMENT between John Hancock Mutual Life Insurance Company, a Massachusetts corporation (the "Company"), and ______________ (the "Executive"). For all purposes, this Agreement shall be deemed to be dated as of the Effective Date defined herein. W I T N E S S E T H : WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his/her financial and job security; WHEREAS, the Company desires to assure itself of the Executive's services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his/her position without undue distraction and to exercise his/her judgment without bias due to his/her personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section 1(b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section 1(a), if (i) the Executive's employment is terminated by - the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and (ii) a -- Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his/her rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person (as defined below) has acquired, "beneficial ownership" (within the meaning of Rule 13d-3, as promulgated under Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing 30% or more of the combined Voting Power (as defined below) of the Company's securities; (ii) as a result of a solicitation subject to Rule 14a-11 under the Exchange Act (or any successor rule thereto), the persons who were directors of the Company immediately before such solicitation shall cease to constitute at least a majority of the Board or the board of directors of any successor to the Company; or (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the "Company Shareholders") shall not hold, directly or indirectly, immediately following such Corporate Event a majority of the Voting Power of (x) in the - case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in - - the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that, such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: -2- (i) a Person commences a tender offer (with adequate financing) for securities representing at least 20% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) at a time at which the Company is subject to the proxy disclosure rules of Section 14 of the Exchange Act, proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. (c) Person Defined. For purposes of this Section 2, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act; provided, however, that Person shall not include (i) the Company or any subsidiary of the Company or - (ii) any employee benefit plan sponsored by the Company or any subsidiary of the -- Company. (d) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within - 30 days following such demotion and (ii) prior to the occurrence of a Potential -- Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section -3- 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote his/her full attention during normal business hours to the business and affairs of the Company and to use his/her best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in - managing his/her personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he/she is entitled. It is -- expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he/she is serving or with which he/she is otherwise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a plan participation level that is commensurate with the Executive's participation in such plans immediately prior to the -4- Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his/her dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. -5- 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or - plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross -- misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated --- material violations by the Executive of his/her obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his/her employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he/she performed his/her services specified under the provisions of -6- Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 180 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) - indicates the specific termination provision in this Agreement relied upon, (ii) -- sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt --- of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his/her rights hereunder. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of - Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other -- cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his/her beneficiary or estate) (i) the Executive's full Base Salary through - the Date of Termination (the "Earned Salary"), (ii) any vested amounts or -- benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid -7- by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the --- Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a - single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in -- accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the "Pro-Rated Annual Incentive") equal to the target annual bonus applicable to the Executive for the fiscal year in which the Date of Termination occurs, multiplied by a fraction, the numerator of which is the number of completed months in such fiscal year which have elapsed on or before (and including) the Date of Termination and the denominator of which is 12; and (C) an aggregate amount (the "Pro-Rated Long Term Incentives") equal to the sum of the amounts awarded to the Executive in respect of each performance cycle, whether or not vested, then in progress (i.e., each performance cycle which includes as part of the --- performance period the fiscal year in which the Date of Termination occurs), pro-rated in each case by multiplying such amount by a fraction, the numerator of which is the number of completed months in the applicable performance period which have elapsed on or before (and including) the Date of Termination -8- and the denominator of which is the total number of months in such performance period; and (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; and - (2) an amount equal to the target annual bonus applicable to the - Executive for the fiscal year in which the Change of Control occurs; (3) an amount equal to the long term incentive award granted to - the Executive with respect to most recent performance period commencing prior to the Change of Control, provided that, the amount described in this Section 7(c)(i)(D)(3) shall be zero if the Effective Date of this Agreement occurs on or after the third calendar year ending after the date on which the Executive receives a grant of a stock option or performance shares (or similar stock based) award under any compensatory plan of the Company following the occurrence of an underwritten public offering of the Company's common stock. The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Pro-Rated Annual Incentive and Pro-Rated Long Term Incentives shall each be paid in cash as soon as practicable after the amount of each such payment (or any portion thereof) can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his/her employment for Good Reason, the Executive (and, to the extent applicable, his/her dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third - anniversary of the Date of Termination (the "End Date") and (2) the date - the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or -9- program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Enhanced Retirement Benefits. In determining the defined benefit retirement benefits made available to the Executive, the Executive shall be entitled to receive the additional benefits that would have been payable or available to the Executive under any employee benefit plan based on (x) the service (but not the age) the Executive would have attained or completed had the Executive continued in the Company's employ until the End Date and, (y) where compensation is a relevant factor, his/her pensionable compensation at the Date of Termination. Notwithstanding the foregoing, the Executive shall not receive any service credit for any period after the Executive has attained age 65. (iv) Payment of Mandatorily Deferred Incentive Compensation Payments. To the extent not earlier paid in accordance with the terms and conditions of the governing plan documents, all amounts, if any, that had been determined to be payable to the Executive under any long term incentive compensation program, but the payment of which was mandatorily deferred under the terms and conditions of such governing documents, shall be paid (plus all earnings credited with respect thereto) in a single lump sum payment, as soon as practicable after the next succeeding valuation date under the applicable plans, but in no event later than the first March 15 following the Executive's Date of Termination. (v) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his/her level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Termination by the Executive for Good Reason. If, during the Employment Period, the Executive terminates his/her employment for Good Reason, the Company shall pay to the Executive the same amounts as would be payable to the Executive under Section 7(c) if such termination were a termination by the Company without Cause. (e) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(e), the amounts payable to the Executive pursuant to this Section 7 following termination of his/her employment shall be in full and complete -10- satisfaction of the Executive's rights under this Agreement and any other claims he/she may have in respect of his/her employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(e) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (f) Certain Further Payments by the Company. (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(f)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(f), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute -11- payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. -12- In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(f)(i) above shall be paid to the Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. -13- 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his/her reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he/she would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information; Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his/her - employment by the Company or any of its affiliated companies and (ii) not -- otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees. The Executive agrees that for two years after the Date of Termination, he/she will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof. (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his/her control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company -14- shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11. These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the States of Delaware, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of Boston, Massachusetts and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, -15- oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he/she is entering into this Agreement of his/her own free will and accord, and with no duress, that he/she has read this Agreement and that he/she understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: If to the Company: 200 Clarendon Street Boston, Massachusetts Attn.: Bruce E. Skrine Sr. Vice President & Deputy General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his/her rights hereunder on any occasion or series of occasions. -16- (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Deputy General Counsel, all as of the day and year first above written. -------------------------- By: Title: ATTEST: - ------------------------------------- Bruce Edward Skrine Sr. Vice President & Deputy General Counsel -17- EX-10.12 14 INCENTIVE COMPENSATION PLAN EXHIBIT 10.12 INCENTIVE COMPENSATION PLAN FOR EMPLOYEES OF JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY Section 1. Appropriation ------------- At a December meeting of the Policy Committee in each year, the Policy Committee may, for purposes of this Plan, appropriate a sum of money, not in excess of an amount reflecting the extent to which the goals previously determined by the Directors' Compensation Committee shall have been attained for such year, as an amount to be allocated as hereinafter provided among Eligible Employees as compensation in addition to their salaries for services rendered by them during such year. Section 2. Goals ----- The Directors' Compensation Committee, in consultation with the Chairman of the Board and the President, shall establish goals for each year as early as is practicable therein. Immediately following the end of each year, the Chairman and the President will report to the Committee on the Company's performance during such year and the extent to which goals have been attained, and, on the basis of its findings in such respect, the Committee shall finalize the appropriation described in Section 1. In establishing goals and finalizing such appropriation, the Committee shall adopt such methods and apply such standards as it shall deem relevant and suitable, taking into consideration both the internal needs of the Company and the effect upon it of anticipated external developments including the growth rates of its competitors. Section 3. Eligibility and Classes ----------------------- a. As used in this Plan, the term "Eligible Employee" for any year shall mean any person who (i) on the last day of the final pay cycle of the calendar year or (ii) on the last day of the calendar month preceding the date within such year of such person's death or retirement was a salaried employee of the Company in one of the classes described in paragraph c. of this Section, and who, on whichever of such dates was applicable, was not an eligible participant in another incentive compensation plan or arrangement approved by either the Directors' Compensation Committee or the Senior Committee, other than the Long- Term Incentive Compensation Plan for Senior Executives. b. The Directors' Compensation Committee may in its discretion exclude any otherwise Eligible Employee from receiving an allocation under this Plan for any year if, not later than the date on which allocations for such year are finally approved, the Committee has recommended or approved supplemental compensation in lieu thereof for such individual for the year of exclusion. c. For the purposes of the allocations to be made pursuant to Section 5, every Eligible Employee shall in each year be a member of whichever of the following classes describes his or her status on the date in such year applicable for determining his or her eligibility: Class 1. Chairman of the Board Class 2. President Class 3. Vice Chairman Class 4. Chief Financial Officer Class 5. Policy Committee Members not in Classes 1, 2, 3 or 4 Class 6. All Senior Vice Presidents Class 7. All Vice Presidents Class 8. All Second Vice Presidents Class 9. Employees in Grades E2 - E4 not in Class 14 Class 10. Employees in Grade E not in Class 14 Class 11. Employees in Grade D not in Class 15 Class 12. Employees in Grades A - C not in Class 16 Class 13. All other employees except those who are: (a) part time or temporary, (b) Marketing Representatives, (c) Agency or Sales Managers, (d) in the General Agency System, or (e) in Class 17. Individuals who are either in Information Technology Services ("ITS") or assigned to Investors Partner Life Insurance Company ("IPL") and who are also on the Programming/Systems Salary Ranges ("P/S Salary Ranges") shall be members of whichever of the following classes describes his or her status on the date in such year applicable for determining his or her eligibility: Class 14. Employees in Grade E who are in ITS or IPL and on P/S Salary Ranges. Class 15. Employees in Grade D who are in ITS or IPL and on P/S Salary Ranges. Class 16. Employees in Grade A - C who are in ITS or IPL and on P/S Salary Ranges. Class 17. Employees in grade 13-16 who are in ITS or IPL and on P/S Salary Ranges. Section 4. Target Awards ------------- In a year in which goals are precisely met, the average or target award for each class shall be as follows: Class 1. Chairman of the Board 100% of Salary Class 2. President 85% of Salary Class 3. Vice Chairman 70% of Salary Class 4. Chief Financial Officer 60% of Salary Class 5. Policy Committee Members 55% of Salary not in Classes 1, 2, 3 or 4 Class 6. All Senior Vice Presidents 50% of Salary Class 7. All Vice Presidents 40% of Salary Class 8. All Second Vice Presidents 35% of Salary Class 9. Employees in Grades E2 - E4 25% of Salary not in Class 14 Class 10. Employee in Grade E not in 20% of Salary Class 14 Class 11. Employees in Grade D not in 15% of Salary Class 15 Class 12. Employees in Grades A - C 10% of Salary not in Class 16 Class 13. All other employees except 5% of Salary those who are: (a) part time or temporary, (b) Marketing Representatives, (c) Agency or Sales Managers, (d) in the General Agency System, or (e) in Class 17 Class 14. Employees in Grade E who are 25% of Salary in ITS or IPL and on P/S Salary Ranges Class 15. Employees in Grade D who are 20% of Salary in ITS or IPL and on P/S Salary Ranges Class 16. Employees in Grades A - C who 15% of Salary are in ITS or IPL and on P/S Salary Ranges Class 17. Employees in Grades 13 - 16 10% of Salary who are in ITS or IPL and on P/S Salary Ranges Section 5. Allocation ---------- Any amount appropriated pursuant to Section 1 shall, as soon as is practicable after the end of the year, be allocated among such Eligible Employees and in such amounts as shall have been determined: a. in the case of members of Classes 1, 2, 3, 4 and 5 by the Board of Directors, b. in the case of Class 6 by the Directors' Compensation Committee, c. in the case of members of Classes 7 and 8 by the Senior Committee, and d. in the case of members of all other Classes, by the officers having personnel authority over such employees. acting in each case in accordance with the principles of the Plan as approved by the Directors' Compensation Committee, and in consultation with the Chairman of the Board and the President. Each amount so allocated shall be paid to the employee in cash no later than March 15, or the next business day if March 15 falls on a Saturday, Sunday or holiday. Awards may be given to all Eligible Employees. Awards allocated to individual employees may vary from the target award, and any employee may be denied an award for poor performance or other reasons. Section 6. Benefits -------- a. The amounts paid under this Plan shall be excluded from the base for computing benefits under, or contributions to, benefit plans maintained by the Company for its employees, with the exception of the following: John Hancock Mutual Life Insurance Company Employee Welfare Plan (only Group Life Insurance, Group Accidental Death and Dismemberment Insurance and Group Survivor Income Insurance), the John Hancock Mutual Life Insurance Company Pension Plan, and any Company non-qualified pension plan covering Eligible Employees. b. Benefits attributable to amounts paid under this Plan shall be as described in each of the plans providing for such benefits as they may be determined from time to time. Section 7. Operation, Amendment, Termination --------------------------------- a. The Chairman of the Board and the President acting in concert shall carry out the provisions of this Plan, and are authorized to designate appropriate officers of the Company to act in its behalf for all purposes hereof. b. The Board of Directors or the Directors' Compensation Committee may at any time terminate this Plan and from time to time amend it, or, for any year prior to the appropriation being voted pursuant to Section 1, vary its provisions as they apply to any Class; provided that the establishment, determination or variation of annual goals in accordance with Section 2 or the principles referred to in Section 5 shall not be considered an amendment or variation of the Plan. Notwithstanding the foregoing, the termination of the Plan, any amendments thereto, or any variance in its provisions, goals or principles shall in no way change the amount of the allocation to any Eligible Employee approved prior to the date of such termination, amendment or variance. c. The Senior Committee may amend the Plan as to matters which are not reserved to the Board or the Directors' Compensation Committee and which do not affect the target awards or compensation for Classes 1 through 8, inclusive. EX-23.1 15 CONSENT OF ERNST AND YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated April 26, 1999, relating to John Hancock Mutual Life Insurance Company and subsidiaries in the Registration Statement (Form S- 1) and related Prospectus of John Hancock Financial Services, Inc. Our audit also included the financial statement schedules of John Hancock Mutual Life Insurance Company and subsidiaries listed in Item 16(b). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP --------------------- Ernst & Young LLP Boston, Massachusetts September 14, 1999 EX-23.3 16 CONSENT OF GODFREY PERROTT, F.S.A., M.A.A.A. EXHIBIT 23.3 [LETTERHEAD OF MILLIMAN & ROBERTSON, INC.] MILLIMAN & ROBERTSON, INC. Actuaries and Consultants Internationally Woodrow Milliman September 17, 1999 Re: John Hancock Financial Services, Inc. Consent of Milliman & Robertson, Inc. We consent to the use in this registration statement of Mr. Perrott's opinion letter as Annex A to the prospectus and to the references made to Mr. Perrot, to such letter and to Milliman & Robertson, Inc., under the following captions in the prospectus: The Reorganization: Payment of Consideration to Eligible Policyholders Closed Block Assets and Liabilities Experts Milliman & Robertson, Inc. /s/ Godfrey Perrott By: _________________________________ Godfrey Perrott, F.S.A., M.A.A.A. Principal and Consulting Actuary Wakefield,Massachusetts September 17, 1999 EX-27.1 17 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 15,222 14,463 12,978 12,712 13,922 13,566 1,064 954 9,616 9,296 1,483 2,036 43,778 42,442 1,876 1,037 1,634 1,736 2,759 2,563 76,967 71,418 27,071 25,833 374 341 886 958 14,672 13,638 1,031 1,191 0 0 0 0 0 0 4,981 4,695 76,967 71,418 2,198 2,474 3,331 3,191 98 116 1,275 1,165 4,152 4,303 250 312 1,383 1,284 644 590 184 106 460 483 0 0 12 0 0 0 448 483 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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