-----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, EFa+f6pCMLr/Wp/D81IbSZJ0a8wl5l9aB0NvmPJH9uE64TTyv+nt6dHcolrazZGd Dyw6nGZJnFzyI1n5KcKJdQ== 0001005477-01-003824.txt : 20010628 0001005477-01-003824.hdr.sgml : 20010628 ACCESSION NUMBER: 0001005477-01-003824 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010627 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN LIFE INSURANCE CO CENTRAL INDEX KEY: 0000917406 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 041414660 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 333-45862 FILM NUMBER: 1668273 BUSINESS ADDRESS: STREET 1: CORPORATE LAW DIVISION T-55 STREET 2: P O BOX 111 CITY: BOSTON STATE: MA ZIP: 02117 BUSINESS PHONE: 6175726000 MAIL ADDRESS: STREET 1: CORPORATE LAW DIVISION T-55 STREET 2: P O BOX 111 CITY: BOSTON STATE: MA ZIP: 02117 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN MUTUAL LIFE INSURANCE CO / MA DATE OF NAME CHANGE: 19940111 10-K/A 1 0001.txt FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NO. 333-45862 JOHN HANCOCK LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1414660 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) John Hancock Place Post Office Box 0111 Boston, Massachusetts 0111 (617) 572-6000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered NONE - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |_| No |X| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A |_|. Not Applicable. The registrant meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K/A and is therefore filing this Form 10-K/A with reduced disclosure format. At February 28, 2001 there were outstanding 1,000 shares of the registrant's common stock, $10,000 par value per share of the registrant, all of which are owned by John Hancock Financial Services, Inc. 1 Item 7 of this Form 10-K/A is being amended to revise certain information contained in Management's Discussion and Analysis of Financial Condition and Results of Segment Operations, principally to properly exclude amounts relating to an affiliate that we sold to our parent during 2000, and to correct certain clerical and mathematical errors. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Segment Operations Management's discussion and analysis reviews our consolidated segment financial condition as of December 31, 2000 and 1999, the consolidated results of operations for the years ended December 31, 2000, 1999, and 1998 and, where appropriate, factors that may affect future financial performance. This discussion should be read in conjunction with the audited consolidated financial statements and related notes, included elsewhere in this Form 10-K. Forward-Looking Statements The statements, analyses, and other information contained herein relating to trends in the Company's operations and financial results, the markets for the Company's products, the future development of the Company's business, and the contingencies and uncertainties to which the Company may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their effects on the Company and may not be those anticipated by management. John Hancock's actual results may differ materially from the results anticipated in these forward-looking statements. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the risks that (1) 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, (2) elimination of Federal tax benefits for our products and other changes in laws and regulations (including in particular the possible amendment or repeal of the Federal Estate Tax) which the Company expects would adversely affect sales of our insurance and investment advisory products, (3) Massachusetts insurance law may restrict the ability of John Hancock Variable Life Insurance Company to pay dividends to us, (4) 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, (5) 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 business, (6) our life insurance sales are highly dependent on a third party distribution relationship, (7) interest rate volatility may adversely affect our profitability, (8) 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, (9) the independent directors of our variable series trusts and of our mutual funds could reduce the compensation paid to us or could terminate our contracts to manage the funds, (10) under our Plan of Reorganization, we were required to establish the "closed block" a special arrangement for the benefit of a group of our policyholders and 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 any affiliate, or our stockholder, (11) 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, (12) we face risks relating to our investment portfolio, (13) we may experience volatility in net income due to changes in standards for accounting for derivatives, (14) we are subject to risk-based capital requirements and possible guaranty fund assessments, (15) the National Association of Insurance Commissioners' codification of statutory accounting practices will adversely affect our statutory surplus, (16) we may be unable to retain personnel who are key to our business, (17) we face risks from assumed reinsurance business in respect of personal accident insurance and the occupational accident component of workers compensation insurance, (18) litigation and regulatory proceedings may result in financial losses, harm our reputation and divert management resources, and (19) we face unforeseen liabilities arising from our acquisitions and dispositions of businesses. Readers are also directed to other risks and uncertainties discussed, as well as to further discussion of the risks described above, in other documents that may be filed by the Company with the United States Securities and Exchange Commission from time to time. The Company specifically disclaims any obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise. Overview John Hancock Life Insurance Company (the Company) is 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: o premiums on individual life insurance, individual and group long-term care insurance, annuities with life contingencies, single premium annuity contracts and group life insurance; o product charges from variable and universal life insurance products and annuities; o asset management fees from mutual fund and institutional investment management products; o sales charges and commissions derived from sales of investment and insurance products and distribution fees; and o 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 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. Premiums and deposits of our individual annuity products increased 37.7% to $2,061.4 million in 2000 as compared to 1999. Our variable life insurance product deposits in 2000 increased 11.1% to $922.0 million compared to 1999, while premiums on our individual and group long-term care insurance increased 44.3%, to $309.1 million in 2000 due to the acquisition of the long-term care business of Fortis, Inc. (Fortis) on March 1, 2000. Primarily due to aggressive marketing of both retail and institutional investment management services, new fund offerings, and refocusing the sales organization on regional broker/dealers and financial planners, mutual fund deposits and reinvestments increased $1,561.1 million, or 34.7%, to $6,066.2 million in 2000. In addition to the increase in sales and deposits, redemptions decreased $1,489.0 million, or 19.6%, to $6,111.7 million in 2000 due to conservation initiatives. We have reduced operating expenses to protect profit margins as we work to stabilize and grow assets under management in the mutual funds business. However, our mutual fund operations are impacted by general market trends, and a continued downturn in the mutual fund market may negatively affect our future operating results. Recent economic and industry trends also have affected the sales and financial results of our institutional business. Sales of fund-type products decreased $314.6 million, or 7.6%, to $3,830.4 million. The decrease is primarily due to declining demand for general account GICs in the 401(k) plan market. In response to this trend, we have created new products for the non-qualified institutional marketplace. Premiums from single premium annuity contracts increased to $598.5 million in 2000 from $286.3 million in 1999, driven by the sale of two significant single premium annuity contracts during the period. Moreover, our investment management services provided to domestic and international institutions include services such as investment advisory client portfolios, individually managed and pooled separate accounts, registered investment company funds, bond and mortgage securitizations, and mutual fund management capabilities. Assets under management of our Investment Management Segment decreased to $32,651.6 million as of December 31, 2000. The Reorganization The board of directors of John Hancock Mutual Life Insurance Company unanimously adopted the Plan of Reorganization on August 31, 1999. Under the terms of the Plan of Reorganization, effective February 1, 2000, John Hancock Mutual Life Insurance Company converted from a mutual life insurance company to a stock life insurance company and became a wholly owned subsidiary of John Hancock Financial Services, Inc., which is a holding company. In connection with the reorganization, John Hancock Mutual Life Insurance Company changed its name to John Hancock Life Insurance Company. Under the Plan of Reorganization, as of February 1, 2000, John Hancock Life Insurance Company, created a closed block for the benefit of policies included therein. 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. As of February 1, 2000, John Hancock Life Insurance Company segregated closed block assets of $9,343.0 million, an amount that is expected to produce cash flows which, together with anticipated revenues from policies included in the closed block, is expected to be 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. Total closed block liabilities were $12,118.3 million as of February 1, 2000. For additional information on the creation of the closed block see Note 6 to our audited consolidated financial statements. Costs relating to the demutualization, excluding costs relating to the offering, were $119.6 million net of income taxes, of which $7.5 million was recognized in the year ended December 31, 2000. Demutualization expenses include 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 as to the demutualization process and related matters. Transactions Affecting Comparability of Results of Operations Disposed Business 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 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 $21.4 million. John Hancock Bermuda was sold for its net book value which resulted in the recognition of no gain or loss. Corporate Account Asset Transfer We established a "corporate account" as part of our Corporate and Other Segment to facilitate our capital management process. The corporate account contains capital not allocated to support the operations of our business segments. Late in the fourth quarter of 1999, we transferred 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, subsequent to the conversion to a stock life insurance company, we centrally manage the performance of corporate purpose assets through the corporate account. We accounted 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 affected group participating contracts, we believe that the transfer of corporate purpose assets was analogous to their sale. Group participating contractholders are entitled to receive the proceeds from assets sold from the segment. As a result, we recognized an expense to increase our liability to affected group 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 was recorded as a capital adjustment by each segment. The transfer during the fourth quarter of 1999 resulted in a charge to operations in 1999 of $205.8 million, net of tax. The Company recorded a $5.7 million after-tax credit to operations in the first quarter of 2000 related to revised estimates for the transaction. Transactions Occurring Subsequent to Year End In February 2001, the Company announced that it signed letters of intent with two reinsurers covering 50% of its closed block business. The treaties are structured so they will not affect policyholder dividends or any other financial items reported within the closed block, which was established at the time of the Company's demutualization to protect the reasonable dividend expectations of certain participating life insurance policyholders. The reinsurance agreements cost is expected to be approximately $3.0 million pre-tax and result in making several hundred million dollars in statutory capital available for further business development or other purposes, the timing of which will be dependent on a number of circumstances. In addition, on March 2, 2001, the Company announced the sale of the retirement plan recordkeeping business operated out of the mutual fund subsidiary of the Company, John Hancock Funds. It is estimated that an after-tax charge of approximately $9 million will be recorded in the first quarter of 2001 and that the Company will initially sever 31 employees, with additional severances planned. The Company will continue to manage the assets of the business, the purchaser will assume the recordkeeping and support responsibility. Results of Operations The table below presents our consolidated results of operations and consolidated financial information for the years ended 2000, 1999 and 1998.
For the Year Ended December 31, --------------------------------------------------------------------- 2000 ----------------------------------------- (in millions) Non Closed Result of Block Closed Block Operations 1999 1998 --------------------------------------------------------------------- Revenues Premiums ................................. $2,190.4 $ 865.0 $3,055.4 $2,411.3 $2,109.0 Universal life and investment- type product charges ................... 746.7 -- 746.7 703.3 597.0 Net investment income .................... 3,251.0 591.6 3,842.6 3,568.5 3,328.0 Net realized investment gains (losses), net of related amortization of deferred policy acquisition costs and amounts credited to participating pension contractholders (1) .................... 83.9 11.7 95.6 175.2 106.1 Investment management revenues, commissions, and other fees ............ 764.8 -- 764.8 680.9 659.7 Other revenue (expense) .................. (13.9) (0.6) (14.5) 0.1 10.3 -------- -------- -------- -------- -------- Total revenues ......................... 7,022.9 1,467.7 8,490.6 7,539.3 6,810.1 Benefits and expenses Benefits to policyholders, excluding amounts related to net realized investment gains credited to participating pension contractholders (2) .................... 4,092.5 870.0 4,962.5 5,133.0 4,082.6 Other operating costs and expenses ............................... 1,507.7 (10.0) 1,497.7 1,384.4 1,357.8 Amortization of deferred policy acquisition costs, excluding amounts related to net realized investment gains (3) .............................. 183.8 76.5 260.3 164.2 261.2 Dividends to policyholders ............... 157.3 407.1 564.4 501.6 473.2 Demutualization expenses ................. 10.6 -- 10.6 96.2 18.0 -------- -------- -------- -------- -------- Total benefits and expenses ............ 5,951.9 1,343.6 7,295.5 7,279.4 6,192.8 -------- -------- -------- -------- -------- Income before income taxes, minority interest and cumulative effect of accounting change ...................... 1,071.0 124.1 1,195.1 259.9 617.3 Income taxes ............................... 344.4 -- 344.4 97.9 174.1 -------- -------- -------- -------- -------- Income before minority interest and cumulative effect of accounting change ...................... 726.6 124.1 850.7 162.0 443.2 Minority interest .......................... (10.6) -- (10.6) (1.6) (1.1) -------- -------- -------- -------- -------- Income before cumulative effect of accounting change ................. 716.0 124.1 840.1 160.4 442.1 Cumulative effect of accounting change ... -- -- -- (9.7) -- -------- -------- -------- -------- -------- Net income ................................. $ 716.0 $ 124.1 $ 840.1 $ 150.7 $ 442.1 ======== ======== ======== ======== ========
(1) Net of related amortization of deferred policy acquisition costs and amounts credited to participating pension contractholders of $6.0 million, $85.8 million, and $120.3 million for the years ended 2000, 1999, and 1998, respectively. (2) Excluding amounts related to net realized investment gains credited to participating pension contractholders of $6.9 million, $35.3 million, and $79.1 million for the years ended 2000, 1999, and 1998, respectively. (3) Excluding amounts related to net realized investment gains of $(0.9) million, $50.5 million, and $41.2 million for the years ended 2000, 1999, and 1998, respectively. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Consolidated income before income taxes, minority interest and cumulative effect of accounting change of $1,195.1 million for the year ended December 31, 2000 increased by $935.2 million, or 359.8%, as compared to consolidated income before income taxes, minority interest and cumulative effect of accounting change of $259.9 million for the year ended December 31, 1999. The increase was primarily attributable to increases in income before income taxes, minority interest and cumulative effect of accounting change of $235.2 million in the Guaranteed and Structured Financial Products Segment, $626.3 million in the Corporate and Other Segment, $65.9 million in the Asset Gathering Segment and $20.7 million in the Investment Management Segment. These increases were offset by a decrease in the Protection Segment of $12.9 million. The increase in the Guaranteed and Structured Financial Products Segment was primarily due to the recognition of a $345.5 million pre-tax charge in the prior year for compensation of group participating contractholders for assets transferred in conjunction with the formation of the corporate account. The increase in the Corporate and Other Segment was primarily due to a $208.6 million pre-tax charge in the prior year for our exposure to losses under our Workers' Compensation reinsurance programs, including Unicover Managers, Inc., that was associated with the group business we sold in 1998 and a $140.2 million pre-tax charge in the prior year in connection with the class action settlement. The increase in the Asset Gathering Segment was primarily due to an improvement in realized gains from the prior year: $15.4 million in realized gains were recognized in 2000 compared to $11.0 million in realized losses in 1999. In addition, demutualization and restructuring expenses decreased compared to the prior year. The increase in the Investment Management Segment was due primarily to higher investment advisory fees resulting from an incentive fee on contract restructuring and performance fees earned by the mezzanine fund manager. The decrease in the Protection Segment was primarily due to decreased realized gains. Premium revenue was $3,055.4 million for 2000, an increase of $644.1 million, or 26.7%, from $2,411.3 million in 1999. The increase was primarily due to an increase in premiums in the Guaranteed and Structured Financial Products Segment, including the sale of two significant single premium annuity contracts, and an increase in the Protection Segment primarily due to premiums on individual long-term care insurance products from the acquisition of a block of business. Universal life and investment-type product charges were $746.7 million for 2000, an increase of $43.4 million, or 6.2%, from $703.3 million in 1999. These product charges consist primarily of cost of insurance fees on our variable life insurance and universal life insurance products and mortality and expense fees on our variable annuity products. The increase was primarily due to higher cost of insurance fees resulting from growth in the average account values in universal life insurance products and higher average variable annuity liabilities and surrender fees. Net investment income was $3,842.6 million for 2000, an increase of $274.1 million, or 7.7%, from $3,568.5 million in 1999. Net investment income in the prior year includes $9.0 million in net investment income earned in operations of disposed businesses in 1999. The increase was primarily the result of higher average invested assets, which increased $3,423.2 million, or 7.3%, to $50,318.3 million in 2000, as compared to $46,895.1 million in 1999. The net yield on average invested assets increased to 7.64% in 2000. The increase in yield from the prior year is consistent with the average market rates in 2000 compared to 1999, the average 10-year U.S. Treasury rate in 2000 was 34 basis points higher than in 1999. Net realized gains on investments were $95.6 million for 2000, a decrease of $79.6 million from $175.2 million in 1999. Net realized gains in the prior year include $23.0 million in net realized losses in the operations of disposed businesses in 1999. The decrease was primarily the result of 1999 gains on sales of real estate relating to the planned program to divest the Company of much of its real estate portfolio. The Company recognized an estimated $115.1 million in realized gains from the sales of real estate in the prior year compared to net realized losses of approximately $21.1 million in 2000. Investment management revenues, commissions, and other fees were $764.8 million, an increase of $83.9 million, or 12.3%, from $680.9 million in 1999. The increase was the result of an increase in the Investment Management segment which increased $45.9 million primarily due to the $45.3 million incentive fee received on the restructuring of a timber management contract and the favorable settlement of a lawsuit.Underwriting and distribution fees increased $25.7 million primarily resulting from the increase in front-end load mutual fund sales, partially offset by a decrease in deferred sales charges due to improved retention of existing accounts. Mutual fund advisory fees declined $6.4 million in 2000, primarily due to lower average assets under management along with a slight decline in the average investment advisory fee rate, as fixed income assets, which bear a lower advisory fee than equity assets, increased as a percentage of total assets. Other revenue was $(14.5) million in 2000, a decrease of $14.6 million from $0.1 million reported in 1999. Other revenue in the prior year includes $2.9 million in other losses in the operations of disposed businesses in 1999. Benefits to policyholders were $4,962.5 million for 2000, a decrease of $170.5 million, or 3.3%, from $5,133.0 million in 1999. Benefits to policyholders in the prior year includes $243.6 million in the operations of disposed businesses in 1999. The decrease was primarily due to recognizing a $345.5 million pre-tax charge in the prior year for compensation of group participating contractholders for assets transferred in conjunction with the formation of the corporate account, a $208.6 million pre-tax charge in the prior year for our exposure to losses under our Workers' Compensation reinsurance programs, including Unicover Managers, Inc., that was associated with the group business we sold in a prior year, a $140.2 million pre-tax charge in the prior year in connection with the class action settlement involving individual life insurance policies sold from 1979 through 1996, and $61.7 million in reserves established in the prior year for incurred but unreported deaths identified as a result of the policyholder demutualization mailing. Partially offsetting these decreases in benefits to policyholders from the prior year were a $358.0 million increase in the Guaranteed and Structured Financial Products Segment primarily due to increased single premium annuity business, a $200.2 million increase primarily attributable to the acquisition of Aetna Canada which is included in our results for a full year in 2000, and a $72.0 million increase due to our Fixed Annuities business on the sales of single premium immediate annuities. In addition, we experienced an increase of $88.1 million increase in benefits on individual long-term care insurance products, primarily due to the acquisition of the long-term care business of Fortis, Inc. as of March 1, 2000. Other operating costs and expenses were $1,497.7 million for 2000, an increase of $113.3 million, or 8.2%, from $1,384.4 million for 1999. The increase was primarily due to the acquisition of Aetna Canada as of October 1, 1999 and the long-term care business of Fortis, Inc. as of March 1, 2000. In addition, other operating costs increased in the Investment Management Segment primarily resulting from the $15.7 million in incentive compensation payments related to incentive fees on a timber management contract and $9.1 million in performance fees paid for the management of the mezzanine fund. Amortization of deferred policy acquisition costs was $260.3 million for 2000, a increase of $96.1 million, or 58.5%, from $164.2 million for 1999. The increase was primarily due to higher amortization expense on non-traditional life insurance products resulting from higher current net investment income increasing margins in the business during 2000 which increased amortization of deferred acquisition costs. In addition, amortization expense increased in the Variable Annuity business, primarily resulting from poor separate account performance during 2000, which resulted in revised projections of estimated gross profits based upon decreases in estimated future margins thus increasing current amortization. Dividends to policyholders were $564.4 million in 2000, an increase of $62.8 million, or 12.5%, from $501.6 million in 1999. The increase primarily resulted from normal growth in dividends on traditional life insurance products. Demutualization expenses were $10.6 million for 2000, a decrease of $85.6 million, or 89.0%, from $96.2 million for 1999. The decrease was related to the extensive preparations for the demutualization occurring in 1999. These expenses include printing and mailing fees, fees of the regulators' advisors and our financial, legal, actuarial and accounting advisors. While demutualization expenses were previously classified as an extraordinary item in our financial results, recent accounting literature now requires demutualization expenses be classified as a single line item within income from continuing operations. Income taxes were $344.4 million in 2000, compared to $97.9 million for 1999. Income taxes in the prior year includes $113.8 million in income tax credits due to the loss from operations of disposed businesses in 1999. Our effective tax rate was 28.8% in 2000, as compared to 37.7% in 1999, taking into account the prior year income tax credit generated from operations of disposed businesses . We had been subject to the surplus tax (add-on 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 are no longer subject to the surplus tax. Minority interest of $10.6 million in 2000 increased from $1.6 million in 1999 primarily due to the sale of a portion of an affiliate to our parent company. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Consolidated income before income taxes, minority interest and cumulative effect of accounting change of $259.9 million for the year ended December 31, 1999 decreased by $357.4 million, or 57.9%, as compared to consolidated income before income taxes, minority interest and cumulative effect of accounting change of $617.3 million for the year ended December 31, 1998. The decrease was primarily attributable to decreases in income before income taxes and cumulative effect of accounting change of $208.8 million in the Guaranteed and Structured Financial Products Segment, $193.6 million in the Corporate and Other Segment, and $45.2 million in the Asset Gathering Segment. These decreases were offset by increases of $50.7 million in the Protection Segment and $39.5 million in the Investment Management Segment. The decrease in the Guaranteed and Structured Financial Products Segment was primarily due to recognizing a $345.5 million pre-tax charge for compensation of group participating contractholders for assets transferred in conjunction with the formation of the corporate account. The decrease in the Corporate and Other Segment was primarily due to a $208.6 million pre-tax charge for our exposure to losses under our Workers' Compensation reinsurance programs, including Unicover Managers, Inc., that was associated with the group business we sold in 1997 partially offset by lower pre-tax charges in connection with the class action settlement of $140.2 million in 1999 compared to $230.8 million in 1998. The decrease in the Asset Gathering Segment was primarily due to lower investment advisory fees earned from our mutual fund operations. 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 favorable claims experience on long-term care insurance products. The increase in the Investment Management Segment was due primarily to higher investment advisory fees resulting from growth in assets under management and higher realized investment gains on sales of mortgage loans. Premium revenue was $2,411.3 million for 1999, an increase of $302.3 million, or 14.3%, from $2,109.0 million in 1998. The increase was primarily due to an increase in premiums in the Guaranteed and Structured Financial Products Segment, including the sale of one significant single premium annuity contract during the period, and a $21.6 million increase, or 13.9%, in the Protection Segment for premiums on individual long-term care insurance products. Universal life and investment-type product charges were $703.3 million for 1999, an increase of $106.3 million, or 17.8%, from $597.0 million in 1998. These product charges consist primarily of cost of insurance fees on our variable life insurance and universal life insurance products and mortality and expense fees on our variable annuity products. The increase was primarily due to higher 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 was $3,568.5 million for 1999, an increase of $240.5 million, or 7.2%, from $3,328.0 million in 1998. The increase was primarily the result of higher average invested assets, which increased $3,584.8 million, or 8.0%, to $46,895.1 million in 1999, as compared to $43,310.3 million in 1998. The net yield on average invested assets was 7.62% for 1999 and 1998. Yields were positively impacted in 1999 from lower investment expenses offset by the general decline in market interest rates. Net realized gains on investments were $175.2 million for 1999, an increase of $69.1 million from $106.1 million in 1998. The increase was primarily the result of increased gains on sales of real estate relating 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 $66.6 million to $115.1 million in 1999 from $48.5 million in 1998. Investment management revenues, commissions, and other fees were $680.9 million, an increase of $21.2 million, or 3.2%, from $659.7 million in 1998. The increase was the result of higher institutional investment advisory fees which increased $18.3 million primarily due to growth in average institutional assets under management at Independence Investment Advisors, our investment advisory subsidiary. Average institutional assets under management increased 13.5% to $40,554.7 million in 1999. Underwriting and distribution fees increased $12.2 million primarily resulting from our acquisition of the Essex Corporation, a distributor of annuities and mutual funds through banks, in January 1999. Partially offsetting these increases, mutual fund advisory fees declined $8.1 million in 1999, primarily due to lower average assets under management along with a slight decline in the average investment advisory fee rate, as fixed income assets, which bear a lower advisory fee than equity assets, increased as a percentage of total assets. Other revenue was $0.1 million in 1999, a decrease of $10.2 million, or 99.0%, from $10.3 million reported in 1998. Benefits to policyholders were $5,133.0 million for 1999, an increase of $1,050.4 million, or 25.7%, from $4,082.6 million in 1998. The increase was primarily due to higher sales of single premium annuity contracts, a $345.5 million increase in benefits related to the compensation of group participating contractholders for assets transferred in conjunction with the formation of the corporate account, a $140.7 million increase in benefits on traditional life insurance products due to higher death benefits, including $61.7 million of reserves established for incurred but unreported deaths identified as a result of the policyholder demutualization mailing, a $113.2 million increase in benefits related to the settlement of a class action lawsuit involving individual life insurance policies sold from 1979 through 1996 and a $31.0 million increase in benefits on individual long-term care insurance products, resulting from higher sales. Other operating costs and expenses were $1,384.4 million for 1999, an increase of $26.6 million, or 2.0%, from $1,357.8 million for 1998. The increase was primarily due to $26.3 million in restructuring charges during 1999 and increased interest and related expenses of $9.0 million in the Investment Management Segment primarily resulting from the formation of a collateralized bond obligation during the second quarter of 1998. These increases were partially offset by a $20.9 million decrease in interest expense on prior year taxes. Amortization of deferred policy acquisition costs was $164.2 million for 1999, a decrease of $97.0 million, or 37.1% from $261.2 million for 1998. The decrease was primarily due to lower amortization expense on non-traditional life insurance products resulting from revised projections of estimated gross profits based upon increases in estimated future interest margins and mortality margins. In addition, amortization expense on traditional life insurance products decreased due to lower profits, primarily resulting from $61.7 million of previously unreported deaths identified as a result of the policyholder demutualization mailing. Dividends to policyholders were $501.6 million in 1999, an increase of $28.4 million, or 6.0%, from $473.2 million in 1998. The increase primarily resulted from normal growth in dividends on traditional life insurance products. Demutualization expenses were $96.2 million for 1999, an increase of $78.2 million, or 434.4%, from $18.0 million for 1998. The increase was related to the extensive preparations in 1999 for the demutualization. These expenses include printing and mailing fees, fees of the regulators' advisors and our financial, legal, actuarial and accounting advisors. While demutualization expenses were previously classified as an extraordinary item in our financial results, recent accounting literature now requires demutualization expenses be classified as a single line item within income from continuing operations. Income taxes were $97.9 million in 1999, compared to $174.1 million for 1998. Our effective tax rate before the surplus tax was 29.1% in 1999, as compared to 30.7% in 1998. We had been subject to the surplus tax (add-on 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 are no longer subject to the surplus tax. Minority interest of $1.6 million was consistent with the prior year balance of $1.1 million. Cumulative effect of accounting change, net of tax was $9.7 million in 1999. During 1999, we adopted Statement of Position 98-5, Reporting the Costs 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 1999. Results of Operations by Segment We evaluate segment performance and base management's incentives on segment 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, 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 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 segment after-tax operating income, as adjusted, to GAAP reported net income precedes each segment discussion.
For the Year Ended December 31, -------------------------------- 2000 1999 1998 ------ ------ ------ Segment Data: (1) (in millions) Segment after-tax operating income: Protection Segment ..................................... $252.2 $188.7 $166.1 Asset Gathering Segment ................................ 128.8 115.1 111.1 ------ ------ ------ Total Retail ........................................ 381.0 303.8 277.2 Guaranteed and Structured Financial Products Segment ... 211.6 201.7 145.7 Investment Management Segment .......................... 46.8 37.3 15.4 ------ ------ ------ Total Institutional ................................. 258.4 239.0 161.1 Corporate and Other Segment ............................ 104.0 67.8 56.3 ------ ------ ------ Total segment income ................................... 743.4 610.6 494.6 After-tax adjustments: (1) Realized investment gains, net (1) ..................... 64.5 120.0 93.7 Class action lawsuit ................................... -- (91.1) (150.0) Workers' compensation reinsurance reserve .............. -- (133.7) -- Restructuring charges .................................. (12.0) (17.0) --
For the Year Ended December 31, -------------------------------- 2000 1999 1998 ------ ------ ------ Segment Data: (1) (in millions) Corporate account asset transfer ....................... 5.7 (205.8) -- Demutualization expenses ............................... 2.5 (93.6) (11.7) Other demutualization related costs .................... (10.0) (6.8) -- Surplus tax ............................................ 46.0 (22.2) 15.5 ------ ------ ------ Total after-tax adjustments ............................ 96.7 (450.2) (52.5) ------ ------ ------ GAAP Reported: Income before cumulative effect ........................ 840.1 160.4 442.1 of accounting change Cumulative effect of accounting change ................. -- (9.7) -- ------ ------ ------ Net income ............................................. $840.1 $150.7 $442.1 ====== ====== ======
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. 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. A description of these adjustments follows. In all periods, net realized investment gains and losses, except for gains and losses from mortgage securitizations and investments backing our short-term funding agreements, have been excluded from segment after-tax operating income due to their volatility between periods and because such data are often excluded by analysts and investors when evaluating the overall financial performance of insurers. The volatility between periods can be impacted by fluctuations in the market, as well as by changes in the volume of activity which can be influenced by us and our investment decisions. Realized investment gains and losses from mortgage securitizations and investments backing our short-term funding agreements were not excluded from segment after-tax operating income because we view the related gains and losses as an integral part of the core business of those operations. Net realized investment gains have been reduced by: (1) amortization of deferred policy acquisition costs to the extent that such amortization results from realized gains and losses and (2) the portion of realized gains and losses credited to certain participating contractholder accounts. We believe presenting realized investment gains and losses in this format provides information useful in evaluating our operating performance. This presentation may not be comparable to presentations made by other insurers. Summarized below is a reconciliation of (a) net realized investment gains per the consolidated financial statements and (b) the adjustment made for net realized investment gains to calculate segment after-tax operating income for the years ended December 31, 2000, 1999 and 1998.
For the Year Ended December 31, -------------------------------- 2000 1999 1998 ------ ------ ------ (in millions) Net realized investment gains ....................... $ 89.9 $261.0 $226.4 Add capitalization/less (amortization) of deferred policy acquisition costs related to net realized investment gains .................... 0.9 (50.5) (41.2) Less amounts credited to participating pension contractholder accounts .......................... (6.9) (35.3) (79.1) ------ ------ ------
For the Year Ended December 31, -------------------------------- 2000 1999 1998 ------ ------ ------ (in millions) Net realized investment gains, net of related amortization of deferred policy acquisition costs and amounts credited to participating pension contractholders per consolidated financial statements ............................. 83.9 175.2 106.1 Less realized investment (losses) attributable to mortgage securitizations and investments backing short-term funding agreements ............ 3.2 (27.7) (42.1) Net realized investment gains in the closed block ... 11.7 -- -- Less gain on sale of business ....................... -- (33.0) -- ------ ------ ------ Realized investment gains, net - pre-tax ............ 92.4 169.9 148.2 adjustment to calculate segment operating income Less income tax effect .............................. (27.9) (49.9) (54.5) ------ ------ ------ Realized investment gains (losses), net - after-tax adjustment to calculate segment operating income ................................. $ 64.5 $120.0 $ 93.7 ====== ====== ======
During 2000 and 1999, we incurred restructuring charges to reduce costs and increase future operating efficiency by consolidating portions of our operations. For additional information regarding restructuring charges see Note 1 to our audited consolidated financial statements, included elsewhere in this Form 10-K. During 2000 and 1999, we recorded amounts for the transfer of certain assets from the Guaranteed and Structured Financial Products Segment to the corporate account. These assets included investments in certain subsidiaries and the home office real estate complex (collectively referred to as "corporate purpose assets"). Certain group contracts have participating features, under which crediting rates and dividends are affected directly by portfolio earnings. Certain participating contractholders participate in contract experience related to net investment income and realized capital gains and losses in the general account. These participating contractholders were 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 were credited to affected participating contractholders through the crediting rates and dividends on their contracts. In December 2000, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts." The SOP, which was adopted with respect to accounting for demutualization expenses by the Company on December 15, 2000, requires that demutualization related expenses be classified as a single line item within income from continuing operations and should not be classified as an extraordinary item. The adoption of SOP 00-3 resulted in the reclassification of demutualization expenses previously recorded as an extraordinary item in 1999 and 1998 of $93.6 million and $11.7 million, respectively (net of tax of $2.6 million and $6.3 million, respectively). In addition, the Company recognized $6.8 million (net of tax of $3.8 million) of demutualization expenses for the year ended December 31, 2000. The Company considers demutualization expenses to be an adjustment to GAAP recorded net income. During 2000 and 1999, we incurred demutualization related expenses to improve our financial analysis and financial reporting abilities. These charges primarily included consulting fees and planning and expense management costs. 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 in the Legal Proceedings section of this Form 10-K. 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 $172.8 million and $496.6 million at December 31, 2000 and 1999, 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 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 estimated with precision. 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 widespread disputes. During the fourth quarter of 1999 and early 2000, we received additional information about our exposure to losses under the various reinsurance programs. As a result of this additional information and in connection with global settlement discussions initiated in late 1999 with other parties involved in the reinsurance programs, our present best estimate of our remaining loss exposure to this issue is $133.7 million, after-tax, which we recognized in 1999. The Company believes that any exposure to loss from this issue, in addition to amounts already provided for as of December 31, 2000, would not be material. We had 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 are no longer subject to surplus tax and have excluded the surplus tax from segment after-tax operating income in all periods. Amortization of Goodwill The excess of cost over the fair value of the net assets of businesses acquired was $228.6 million and $155.3 million at December 31, 2000 and 1999, respectively. Goodwill is amortized on systematic basis over periods not exceeding 40 years, which correspond with the benefits estimated to be derived from the acquisitions. Accumulated amortization was $63.6 million and $43.3 million at December 31, 2000 and 1999, respectively. Amortization expense included in other operating costs and expenses was $20.3 million, $9.7 million, and $9.1 million in 2000, 1999 and 1998, respectively. The Company reevaluates the recoverability of recorded goodwill based on the undiscounted cash flows of the related business whenever significant events or changes indicate an impairment may exist. If the undiscounted cash flows do not support the amount recorded, an impairment is recognized by a charge to current operations to reduce the carrying value of the goodwill based on the expected discounted cash flows of the related business. The following table shows the amount of goodwill amortization for each applicable segment:
For the Year Ended December 31, ------------------------------- 2000 1999 1998 ----- ----- ----- (in millions) Amortization of Goodwill: Protection Segment ..................................... $ 3.8 $ -- $ -- Asset Gathering Segment ................................ 6.8 6.8 6.5 ----- ----- ----- Total Retail ........................................ 10.6 6.8 6.5 Guaranteed and Structured Financial Products Segment ... -- -- -- Investment Management Segment .......................... 1.1 1.1 1.1 ----- ----- ----- Total Institutional ................................. 1.1 1.1 1.1 Corporate and Other Segment ............................ 8.6 1.8 1.5 ----- ----- ----- Total goodwill amortization expense .................... $20.3 $ 9.7 $ 9.1 ===== ===== =====
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 owned by 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. Retail-Protection Segment The following table presents certain summary financial data relating to the Protection Segment for the periods indicated.
For the Year Ended December 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- (in millions) Operating Results: Revenues Premiums ............................................. $1,295.6 $1,291.0 $1,262.5 Universal life and investment-type product charges ............................................ 388.3 361.1 333.3 Net investment income (1) ............................ 1,196.4 1,101.9 1,061.2 Other revenue ........................................ (7.1) 2.9 10.6 -------- -------- -------- Total revenues (1) ................................. 2,873.2 2,756.9 2,667.6 Benefits and expenses Benefits to policyholders ........................... 1,503.5 1,595.0 1,424.4 Other operating costs and expenses .................. 383.8 381.0 418.3 Amortization of deferred policy acquisition costs, excluding amounts related to net realized investment gains ................................... 132.0 69.2 165.4 Dividends to policyholders ............................ 475.6 452.0 422.8 -------- -------- -------- Total benefits and expenses ........................ 2,494.9 2,497.2 2,430.9 Segment pre-tax operating income (2) ................... 378.3 259.7 236.7 Income taxes ........................................... 126.1 71.0 70.6 -------- -------- -------- Segment after-tax operating income (2) ................ 252.2 188.7 166.1 After-tax adjustments:(2) Realized investment (losses) gains, net ............. (11.5) 108.6 49.0 Restructuring charges ............................... (6.7) (8.6) -- Demutualization expenses ............................ 1.6 (61.3) (7.9) Other demutualization related costs ................. (6.8) (4.6) -- Surplus tax ......................................... 20.8 (12.5) 11.7 -------- -------- -------- Total after-tax adjustments ....................... (2.6) 21.6 52.8 -------- -------- -------- GAAP Reported: Net income ............................................. $ 249.6 $ 210.3 $ 218.9 ======== ======== ======== Amortization of goodwill, net of tax ................... 2.2 -- -- -------- -------- -------- Net income before amortization of goodwill ............. $ 251.8 $ 210.3 $ 218.9 ======== ======== ======== Other Data: Segment after-tax operating income (loss) Non-traditional life (variable life and universal life) ............................................. $ 97.0 $ 92.8 $ 74.6 Traditional life ..................................... 110.5 68.2 73.0 Individual long-term care ............................ 39.9 25.9 15.7 Group long-term care ................................. 6.7 0.7 2.3 Other ................................................ (1.9) 1.1 0.5
For the Year Ended December 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- (in millions) Statutory premiums (3) Variable life ........................................ $ 922.0 $ 829.8 $ 810.8 Universal life (4) ................................... 173.5 117.9 436.8 Traditional life ..................................... 965.5 1,043.6 1,051.3 Individual long-term care ............................ 277.3 177.3 152.6 Group long-term care ................................. 14.7 18.9 31.0
(1) The consolidated statement of income includes in revenues the contribution from the closed block of $124.1 million for the period ended December 31, 2000. The contribution from the closed block includes closed block revenues of $1,467.7 million and closed block benefits and expenses of $1,343.6 million for the period ended December 31, 2000. For purposes of this Management's Discussion and Analysis the impact of the closed block is represented within each line of operations of the Protection Segment. For details of closed block activity as of and for the period ended December 31, 2000 see Note 6 -- Closed Block to the audited consolidated financial statements as of the same time period. (2) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. (3) Statutory data have been derived from the annual statements of John Hancock Life Insurance Company (formerly John Hancock Mutual Life Insurance Company), John Hancock Variable Life Insurance Company and Investors Partner Life (formerly John Hancock Life Insurance Company of America) as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. (4) Includes bank owned life insurance premiums of $340.0 million for the year ended December 31, 1998, respectively. There were no bank owned life insurance premiums for the years ended December 31, 1999 and 2000, respectively. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income was $252.2 million in 2000, an increase of $63.5 million, or 33.6%, from $188.7 million in 1999. Non-traditional life insurance segment after-tax operating income increased $4.2 million, or 4.5%, primarily due to an increase in net investment income resulting from higher yields on higher net average invested assets. Traditional life insurance segment after-tax operating income increased $42.3 million, or 62.0%, primarily resulting from higher net investment income due to higher portfolio rates, lower operating expenses, and not repeating a $29.3 million charge, net of deferred acquisition costs, taken in 1999 for previously unreported claims associated with the demutualization. Individual long-term care insurance segment after-tax operating income increased $14.0 million, or 54.1%, resulting from an increase in net investment income due to the addition of the Fortis business and growth in average net invested assets. Group long-term care insurance segment after-tax operating income increased by $6.0 million. Total revenues were $2,873.2 million in 2000, an increase of $116.3 million, or 4.2%, from $2,756.9 million in 1999. Premiums increased $4.6 million, or 0.4%, primarily due to an increase in individual long-term care insurance premiums from both additional premiums assumed relating to the acquisition of Fortis and continued growth in the business. Partially offsetting this increase was a decline in traditional life insurance premiums. Universal life and investment-type product charges consist primarily of cost of insurance fees and separate account fees and were $388.3 million in 2000, an increase of $27.2 million, or 7.5%, from $361.1 million in 1999. The increase was primarily due to growth in average account values. Net investment income increased $94.5 million, or 8.6%, primarily due to increases in average net invested assets and portfolio yields. Total benefits and expenses were $2,494.9 million in 2000, an decrease of $2.3 million, or 0.1%, from $2,497.2 million in 1999. Benefits to policyholders decreased $91.5 million, or 5.7%, due to several offsetting items, including a decrease of $193.8 million in benefits to policyholders on traditional life insurance products due to improved mortality, and not repeating the prior year $61.7 million higher benefits to policyholders for previously unreported death claims identified as part of the demutualization. Offsetting this decrease was an increase in benefits to policyholders in the individual long-term care insurance business due to both the acquisition of Fortis and growth in the business. Other increases in benefits to policyholders included a $20.7 million increase on non-traditional life insurance products and an increase in group long-term care insurance. Other operating costs and expenses increased $2.8 million, or 0.7%, to $383.8 million in 2000 from $381.0 million in 1999, primarily due to an increase of $18.7 million in operating expenses associated with the individual long-term care business due to the acquisition of Fortis and growth in the business. Amortization of deferred policy acquisition costs of $132.0 million in 2000 increased $62.8 million, or 90.7%, from $69.2 million in 1999. The increase resulted from lower amortization of deferred acquisition costs in the prior year for Traditional life products due to revised projections of estimated gross profits based on the recording of additional unreported claims to the demutualization. In addition, amortization expense on Non-Traditional life products increased due to revised projections of estimated gross profits based upon changes in estimated future interest margins. Dividends to policyholders increased $23.6 million, or 5.2%, primarily due to aging of the in-force business on traditional life insurance products. The segment's effective tax rate increased to 33.3% in 2000 from 27.3% in 1999, primarily due to the transfer of tax-preferenced assets to the Corporate and Other Segment in the fourth quarter of 1999. Amortization of goodwill in 2000 relates to the acquisition of the individual long-term care business from Fortis. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Segment after-tax operating income was $188.7 million in 1999, an increase of $22.6 million, or 13.6%, from $166.1 million in 1998. Non-traditional life insurance segment after-tax operating income increased $18.2 million, or 24.4%, primarily due to an increase in universal life and investment-type product charges due to growth in variable life insurance in-force. Traditional life insurance segment after-tax operating income decreased $4.8 million, or 6.6%, primarily resulting from higher death benefits and a $29.3 million charge net of deferred acquisition costs for the incurred but not reported reserve associated with the demutualization, partially offset by a decrease in interest expense on prior year taxes. Individual long-term care insurance segment after-tax operating income increased $12.5 million, or 93.3%, primarily due to higher net investment income resulting from an increase in invested assets, partially offset by unfavorable persistency. Group long-term care insurance segment after-tax operating income decreased by $3.9 million, or 84.8%. Total revenues were $2,756.9 million in 1999, an increase of $89.3 million, or 3.3%, from $2,667.6 million in 1998. Premiums increased $28.5 million, or 2.2%, primarily due to an increase in individual long-term care insurance premiums. Universal life and investment-type product charges consist primarily of cost of insurance fees and separate account fees and were $361.1 million in 1999, an increase of $27.8 million, or 8.3%, from $333.3 million in 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 10.7% to $54,622.0 million in 1999 from $49,364.1 million in 1998. Net investment income increased $40.7 million, or 3.8%, primarily due to an increase in the segment's average invested assets and lower investment expenses. Total benefits and expenses were $2,497.2 million in 1999, an increase of $66.3 million, or 2.7%, from $2,430.9 million in 1998. Benefits to policyholders increased $170.6 million, or 12.0%, primarily due to a $140.7 million increase in benefits on traditional life insurance products due to higher death benefits, including $61.7 million of benefits from previously unreported deaths identified as a result of the policyholder demutualization mailing, and a $31.0 million increase in benefits on individual long-term care insurance products, due to higher sales. Other operating costs and expenses decreased $37.3 million, or 8.9%, to $381.0 million in 1999 from $418.3 million in 1998, primarily due to a decrease in interest expense on prior year taxes. Amortization of deferred policy acquisition costs of $69.2 million in 1999 decreased $96.2 million, or 58.2%, from $165.4 million in 1998. The decrease was primarily due to lower amortization expense on non-traditional life insurance products resulting from revised projections of estimated gross profits based upon increases in estimated future interest margins and mortality margins. In addition, amortization expense on traditional life insurance products decreased due to lower profits, primarily resulting from $61.7 million of previously unreported death claims identified as a result of the policyholder demutualization mailing. Dividends to policyholders increased $29.2 million, or 6.9%, primarily due to normal growth of dividends on traditional life insurance products. The segment's effective tax rate declined to 27.3% in 1999 from 29.8% in 1998, due to non-deductible losses in 1998. Retail-Asset Gathering Segment The following table presents certain summary financial data relating to the Asset Gathering Segment for the periods indicated.
For the Year Ended December 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- (in millions) Operating Results: Revenues Premiums ............................................ $ 63.4 $ 17.2 $ 19.8 Investment-type product charges ..................... 138.3 120.6 99.9 Net investment income ............................... 445.8 388.6 378.0 Investment management revenues, commissions, and other fees ......................................... 547.1 528.8 516.8 Other revenue ....................................... 1.3 2.1 0.8 -------- -------- -------- Total revenues .................................... 1,195.9 1,057.3 1,015.3 Benefits and expenses Benefits to policyholders ........................... 371.3 299.3 296.3 Other operating costs and expenses .................. 552.9 529.3 504.9 Amortization of deferred policy acquisition costs, excluding amounts related to net realized investment gains ..................... 78.8 53.4 46.8 Dividends to policyholders .......................... 0.1 0.1 0.1 -------- -------- -------- Total benefits and expenses ....................... 1,003.1 882.1 848.1 Segment pre-tax operating income (1) .................. 192.8 175.2 167.2 Income taxes .......................................... 64.0 60.1 56.1 -------- -------- -------- Segment after-tax operating income (1) ................ 128.8 115.1 111.1 After-tax adjustments (1): Realized investment gains (losses), net ............. 18.6 (6.9) 12.0 Restructuring charges ............................... (1.4) (7.3) -- Demutualization expenses ............................ 0.4 (13.0) (1.8) Other demutualization related costs ................. (1.3) (0.9) -- Surplus tax ......................................... 0.6 (1.0) 0.3 -------- -------- -------- Total after-tax adjustments ...................... 16.9 (29.1) 10.5 -------- -------- --------
For the Year Ended December 31, --------------------------------------- 2000 1999 1998 --------- --------- --------- (in millions) GAAP Reported: Income before cumulative effect of accounting change ............................ 145.7 86.0 121.6 Cumulative effect of accounting change ............. -- (9.6) -- --------- --------- --------- Net income ........................................... $ 145.7 $ 76.4 $ 121.6 ========= ========= ========= Amortization of goodwill, net of tax ................. 4.5 4.4 4.2 --------- --------- --------- Net income before amortization of goodwill ........... $ 150.2 $ 80.8 $ 125.8 ========= ========= ========= Other Data: Segment after-tax operating income Annuity .......................................... $ 87.5 $ 67.0 $ 53.2 Mutual funds ..................................... 46.3 46.9 57.0 Other ............................................ (5.0) 1.2 0.9 Annuity premiums and deposits (2) Fixed ............................................ $ 854.3 $ 621.0 $ 360.6 Variable ......................................... 1,145.8 847.7 882.7 Mutual fund assets under management, end of year ..... $31,725.8 $32,696.6 $34,945.2
- ---------- (1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. (2) Statutory data have been derived from the annual statements of John Hancock Life Insurance Company and John Hancock Variable Life Insurance Company, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income was $128.8 million in 2000, an increase of $13.7 million, or 11.9%, from $115.1 million in 1999. Annuity segment after-tax operating income increased $20.5 million, or 30.6%, primarily due to an increase in investment spread and higher invested assets on fixed annuity products, partially offset by a decrease in after-tax operating income in the variable annuity business. Spreads increased 18 basis points to 2.28% for the year ended December 31, 2000. Mutual fund segment after-tax operating income decreased $0.6 million, or 1.3%, primarily due to an increase in operating expenses, partially offset by a 1.0% increase in management advisory fees. Total revenues increased $138.6 million, or 13.1%, to $1,195.9 million in 2000 from $1,057.3 million in 1999. Premiums increased $46.2 million, or 268.6%, due to increased sales of immediate fixed annuities with life contingencies. Investment-type product charges increased $17.7 million, or 14.7%, due to growth in average variable annuity liabilities, which increased 3.6% from 1999 and increased fees earned on surrenders. Mortality and expense fees as a percentage of average account balances increased 6 basis points in 2000. Net investment income increased $57.2 million, or 14.7%, primarily due to a higher level of invested assets backing fixed annuity products, and an increase in the average investment yield on invested assets backing fixed annuity products. The average investment yield on invested assets backing fixed annuity products increased 43 basis points from 1999, reflecting higher market interest rates on new fixed income investments. Investment management revenues, commissions, and other fees increased $18.3 million, or 3.5%, to $547.1 million in 2000 from $528.8 million in 1999. Average mutual fund assets under management decreased $742.8 million, or 2.2%, to $32,605.2 million in 2000 from $33,348.0 million in 1999, primarily due to market depreciation of $476.4 million and fees in 2000. During 2000 sales increased $1,561.1 million and redemptions decreased $1,489.0 million compared to the prior year. The result was net redemptions of $45.5 million for the year ended December 31, 2000 compared to net redemptions of $3,095.6 million for the year ended December 31, 1999, an improvement of $3,050.1 million. The improvement in sales and redemptions is primarily due to the aggressive marketing of both retail and institutional investment management services in addition to the launch of a multi-sector fund in September 2000 and lower redemptions in the financial sector funds and private managed accounts from the prior year. Investment advisory fees decreased $6.4 million, or 3.1%, to $193.9 million in 2000 and were 0.59% and 0.61% of average mutual fund assets under management for the years ended December 31, 2000 and 1999, 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 $25.7 million, or 9.2%, to $304.6 million in 2000 primarily due to the increase in front-end load mutual fund sales, and accordingly, commission revenue. The increase in front-end load charges was partially offset by a decrease in deferred sales charges due to improved retention of existing accounts. Shareholder service and other fees were $48.6 million in 2000 compared to $49.6 million in 1999, primarily reflecting lower assets under management. Total benefits and expenses increased $121.0 million, or 13.7%, to $1,003.1 million in 2000 from $882.1 million in 1999. Benefits to policyholders increased $72.0 million, or 24.1%, primarily due to an increase in benefits paid on immediate annuities and interest credited on fixed annuity account balances. The increase in benefits paid on immediate annuities is the result of increased premiums in this business. Premiums on immediate annuities increased $45.0 million, or 316.9%, for the year ended December 31, 2000. Interest credited on fixed annuity account balances increased primarily due to higher average fixed annuity account balances of $5,211.6 million in 2000, as compared to $4,862.2 million in 1999. In addition to the increase in average fixed annuity account balances, the average interest credited rate on fixed annuity account balances increased to 5.83% in 2000 from 5.59% in 1999. 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 $23.6 million, or 4.5%, to $552.9 million in 2000 from $529.3 million in 1999. The increase was primarily due to an increase in the commission fees incurred in the mutual funds business, primarily the result of increased front-end load charge mutual fund sales. In addition, other operating costs and expenses increased due to increased commission expense in Signator, partially offset by a decrease in the annuities business. The increase in other operating costs were partially offset by additional deferrals of acquisition expenses in the annuities business. Amortization of deferred policy acquisition costs increased $25.4 million, or 47.6%, to $78.8 million in 2000 from $53.4 million in 1999, primarily due to poor separate account performance and increased surrenders in the variable annuities business which accelerated current amortization. The segment's effective tax rate was 33.2% and 34.3% in 2000 and 1999, respectively. Amortization of goodwill increased $0.1 million in 2000 as compared to 1999. No new acquisitions were entered into by the Asset Gathering Segment in 2000. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Segment after-tax operating income was $115.1 million in 1999, an increase of $4.0 million, or 3.6%, from $111.1 million in 1998. Annuity segment after-tax operating income increased $13.8 million, or 25.9%, primarily due to an increase in variable annuity product charges, resulting from higher average account balances, and higher investment spread on fixed annuity products, primarily resulting from a decline in the average interest credited rate. Mutual fund segment after-tax operating income decreased $10.1 million, or 17.7%, primarily due to lower advisory fees as a result of lower assets under management and exiting the New Mexico Capital Management business, partially offset by a decline in operating expenses. Total revenues increased $42.0 million, or 4.1%, to $1,057.3 million in 1999 from $1,015.3 million in 1998. Premiums decreased $2.6 million, or 13.1%, due to lower sales of immediate fixed annuities with life contingencies. Investment-type product charges increased $20.7 million, or 20.7%, due to growth in average variable annuity separate account liabilities, which increased 21.3% to $6,955.7 million in 1999 from $5,736.0 million in 1998. Mortality and expense fees as a percentage of average account balances were 1.41% and 1.37% for the years ended December 31, 1999 and 1998, respectively. Net investment income increased $10.6 million or 2.8%, primarily due to 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 7.77% in 1999 compared to 7.91% in 1998, reflecting lower market interest rates on new fixed income investments. Investment management revenues, commissions, and other fees increased $12.0 million, or 2.3%, to $528.8 million in 1999 from $516.8 million in 1998. Average mutual fund assets under management decreased $882.0 million, or 2.6%, to $33,348.0 million in 1999 from $34,230.0 million in 1998, primarily due to net redemptions of $3,095.6 million in 1999 compared to net sales of $3,107.2 million in 1998. Investment advisory fees decreased $8.1 million, or 3.9%, to $200.3 million in 1999 and were .60% and .62% of average mutual fund assets under management for the years ended December 31, 1999 and 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 $12.2 million, or 4.6%, to $278.9 million in 1999 primarily due to our acquisition of the Essex Corporation, a distributor of annuities and mutual funds through banks, in January 1999. Shareholder service and other fees were $49.6 million in 1999 compared to $41.7 million in 1998, primarily reflecting the increase in average number of customer accounts. Total benefits and expenses increased $34.0 million, or 4.0%, to $882.1 million in 1999 from $848.1 million in 1998. Benefits to policyholders increased $3.0 million, or 1.0%, primarily due to an increase in interest credited on fixed annuity account balances. Interest credited on fixed annuity account balances increased primarily due to higher average fixed annuity account balances of $4,862.2 million in 1999, as compared to $4,673.2 million in 1998. The increase in average fixed annuity account balances was partially offset by a decline in the average interest credited rate on fixed annuity account balances to 5.59% in 1999 from 5.96% in 1998. 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 $24.4 million, or 4.8%, to $529.3 million in 1999 from $504.9 million in 1998. The increase was primarily due to our acquisition of the Essex Corporation and higher amortization of mutual fund deferred selling commissions, resulting from higher redemptions in 1999. These increases were partially offset by a decrease in operating expenses related to our mutual fund operations and annuities operations. Amortization of deferred policy acquisition costs increased $6.6 million, or 14.1%, to $53.4 million in 1999 from $46.8 million in 1998, primarily due to higher profits. The segment's effective tax rate was 34.3% and 33.6% in 1999 and 1998, respectively. Amortization of goodwill increased $0.2 million in 1999 as compared to 1998 due to the acquisition of the Essex Corporation in 1999. 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 Year Ended December 31, ------------------------------------ 2000 1999 1998 -------- -------- -------- (in millions) Operating Results: Revenues Premiums ............................................. $ 620.3 $ 298.2 $ 121.4 Investment-type product charges ...................... 64.7 79.3 71.4 Net investment income ................................ 1,741.9 1,681.3 1,576.3 Realized investment losses, net (1) .................. -- (31.2) (37.7) Other expense ........................................ (17.5) (5.8) (0.2) -------- -------- -------- Total revenues ..................................... 2,409.4 2,021.8 1,731.2 Benefits and expenses Benefits to policyholders, excluding amounts related to net realized investment gains credited to participating pension contractholders ............ 1,972.4 1,614.4 1,411.5 Other operating costs and expenses ................... 70.8 85.6 92.6 Amortization of deferred policy acquisition costs .................................. 2.6 3.1 3.7 Dividends to policyholders ........................... 43.5 25.9 20.8 -------- -------- -------- Total benefits and expenses ........................ 2,089.3 1,729.0 1,528.6 Segment pre-tax operating income (1) ................... 320.1 292.8 202.6 Income taxes ........................................... 108.5 91.1 56.9 -------- -------- -------- Segment after-tax operating income (1) ................. 211.6 201.7 145.7 After-tax adjustments: (1) Realized investment (losses) gains, net .............. (40.5) 58.4 17.2 Restructuring charges ................................ (2.6) (0.6) -- Corporate account asset transfer ..................... 5.7 (205.8) -- Demutualization expenses ............................. 0.4 (16.1) (1.5) Other demutualization related costs .................. (1.7) (1.1) -- Surplus tax .......................................... 6.5 (6.5) 2.0 -------- -------- -------- Total after-tax adjustments ....................... (32.2) (171.7) 17.7 -------- -------- -------- GAAP Reported: Net income ............................................. $ 179.4 $ 30.0 $ 163.4 ======== ======== ======== Amortization of goodwill, net of tax ................... -- -- -- -------- -------- -------- Net income before amortization of goodwill ............................................ $ 179.4 $ 30.0 $ 163.4 ======== ======== ======== Other Data: Segment after-tax operating income Spread-based products GIC's and funding agreements ..................... $ 133.1 $ 131.5 $ 83.7 Single premium annuities ......................... 45.0 32.5 33.8 Fee-based products .................................. 33.5 37.7 28.2 Statutory premiums and deposits (2) Spread-based products GICs and funding agreements ....................... 4,457.3 4,917.4 4,995.0 Single premium annuities .......................... 741.6 451.8 111.8 Fee-based products Participating contracts and conversion annuity contracts .................. 467.0 527.9 566.7 Separate account GICs ............................. 50.3 615.7 459.9 Other separate account contracts .................. 242.6 272.7 145.6
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. (2) Statutory data has been derived from the annual statements, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income was $211.6 million in 2000, an increase of $9.9 million, or 4.9% from $201.7 million in 1999. Spread-based products' segment after-tax operating income increased $14.1 million, or 8.5%, to $178.1 million primarily due to higher investment spread as a result of an increase in average invested assets backing spread-based products. Fee-based products' segment after-tax operating income decreased $4.2 million, or 11.1%, to $33.5 million in 2000 from $37.7 million in 1999 primarily due to lower separate account GIC fees partially offset by increased gains from non-participating annuities. Total revenues increased $387.6 million, or 19.2%, to $2,409.4 million in 2000 from $2,021.8 million in 1999, primarily due to a $322.1 million increase in premiums. During 2000, we sold two significant single premium annuity contracts during the period. Investment-type product charges were $64.7 million for 2000, a decrease of $14.6 million, or 18.4%, primarily due to lower general account expense recoveries and slower separate account GIC sales in the current year. Investment-type product charges were 0.56% and 0.65% of average fee-based policy reserves in 2000 and 1999, respectively. The decrease primarily reflects lower expense charges on participating contracts and the impact of slower sales in the current year. Net investment income increased $60.6 million, or 3.6%, to $1,741.9 million in 2000 compared to $1,681.3 million in 1999, primarily as a result of a higher yield on average invested assets backing spread-based products. Average invested assets backing spread-based products decreased $196.5 million, or 1.2%, to $16,879.8 million in 2000 from $17,076.3 million in 1999 reflecting the termination of the short-term funding agreements in 1999, largely offset by asset growth in 2000. The average investment yield on these invested assets increased to 8.64% in 2000 compared to 8.10% in 1999, reflecting the reinvestment of proceeds from lower-yielding assets into relatively higher-yielding securities. Realized investment losses associated with the termination of the short-term funding agreement business in 1999 were not repeated in 2000. Total benefits and expenses increased $360.3 million, or 20.8%, to $2,089.3 million in 2000 from $1,729.0 million in 1999. The increase was primarily due to a $358.0 million increase in benefits to policyholders as a result of increased sales of single premium annuity contracts. Benefits to policyholders also includes interest credited on account balances for spread-based products, which was $1,163.8 million in 2000, an increase of $45.5 million, or 4.2%, from $1,118.3 million in 1999. Excluding interest credited in 1999 on short-term funding agreements that were terminated in that year, the interest credited for spread-based products increased $101.6 million, or 9.6%. The increase was primarily due to an increase in average account balances for spread-based products of $810.8 million, excluding short-term funding agreement balances from 1999, to $16,185.2 million in 2000 from $15,374.4 million in 1999 and an increase in the average interest credited rate on account balances for spread-based products, which was 7.18% in 2000 compared to 6.81% in 1999. The increase in the average interest credited rate on account balances for spread-based products was primarily due to the sale of GICs and funding agreements with higher average interest credited rates. Other operating costs and expenses were $70.8 million in 2000, a decrease of $14.8 million, or 17.3%, from $85.6 million in 1999. The decrease was primarily due to lower deficiency interest charges. Dividends of $43.5 million in 2000, increased $17.6 million, or 68.0%, from $25.9 million in 1999, reflecting higher earnings on participating contractholders' accounts. The segment's effective tax rate was 33.9% in 2000, as compared to 31.1% in 1999. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Segment after-tax operating income was $201.7 million in 1999, an increase of $56.0 million, or 38.4%, from $145.7 million in 1998. Spread-based products segment after-tax operating income increased $46.9 million, or 39.9%, 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 interest on a defaulted fixed maturity investment. Fee-based products' segment after-tax operating income increased $9.5 million to $37.7 million in 1999 from $28.2 million in 1998 primarily due to an increase in separate account GIC fees and lower operating expenses. Total revenues increased $290.6 million, or 16.8%, to $2,021.8 million in 1999 from $1,731.2 million in 1998, primarily due to a $176.8 million increase in premiums. During the second quarter of 1999, we sold a significant single premium annuity contract which drove the increase in premiums. Investment-type product charges were $79.3 million for 1999, an increase of $7.9 million, or 11.0%, primarily due to higher sales of single premium annuity contracts and higher product charges from separate account GICs due to higher average account balances resulting from sales. Investment-type product charges were .65% and .59% of average fee-based policy reserves in 1999 and 1998, respectively. The increase primarily reflects higher expense charges on participating contracts and the recognition of fee income upon the sale of single premium annuity contracts and separate account GICs. Net investment income increased $105.0 million, or 6.7%, in 1999 compared to 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 $1,924.5 million, or 12.7%, to $17,076.3 million in 1999 from $15,151.8 million in 1998. The average investment yield on these invested assets declined to 8.10% in 1999 compared to 8.18% in 1998, reflecting the reinvestment of proceeds from higher-yielding fixed maturities into relatively lower-yielding securities. Realized investment losses associated with our short-term funding agreements, which were terminated in 1999, improved $6.5 million in 1999 primarily due to a narrowing of interest rate spreads on mortgage-backed securities and corporate bonds relative to U.S. Treasury securities, resulting in higher prices upon the sale of the securities in 1999 as compared to 1998. Total benefits and expenses increased $200.4 million, or 13.1%, to $1,729.0 million in 1999 from $1,528.6 million in 1998. The increase was primarily due to a $202.9 million increase in benefits to policyholders as a result of increased sales of single premium annuity contracts. Benefits to policyholders also includes interest credited on account balances for spread-based products, which was $1,118.3 million in 1999, an increase of $69.2 million, or 6.6%, from $1,049.1 million in 1998. The increase was primarily due to an increase in average account balances for spread-based products of $1,356.7 million to $16,429.1 million in 1999 from $15,072.4 million in 1998 partially offset by a decline in the average interest credited rate on account balances for spread-based products, which was 6.81% in 1999 compared to 7.21% in 1998. The decline in the average interest credited rate on account balances for spread-based products was primarily due to sales of GICs and funding agreements with lower average interest credited rates. Other operating costs and expenses were $85.6 million in 1999, a decrease of $7.0 million, or 7.6%, from $92.6 million in 1998. The decrease was primarily due to lower guaranty fund assessments. Dividends of $25.9 million in 1999, increased $5.1 million, or 24.5%, from $20.8 million for 1998, reflecting higher earnings on participating contractholders' accounts. The segment's effective tax rate was 31.1% in 1999, as compared to 28.1% in 1998. Institutional-Investment Management Segment The following table presents certain summary financial data relating to the Investment Management Segment for the periods indicated.
For the Year Ended December 31, ---------------------------------------- 2000 1999 1998 --------- --------- --------- (in millions) Operating Results: Revenues Net investment income ........................... $ 22.7 $ 45.9 $ 24.1 Realized investment gains (losses), net (1) ..... 3.2 3.5 (4.4) Investment management revenues, commissions, and other fees .................. 186.1 140.2 123.8 Other revenue ................................... -- 0.3 0.4 --------- --------- --------- Total revenues ............................... 212.0 189.9 143.9
For the Year Ended December 31, ---------------------------------------- 2000 1999 1998 --------- --------- --------- (in millions) Benefits and expenses Other operating costs and expenses .............. 132.7 127.2 117.8 --------- --------- --------- Total benefits and expenses ..................... 132.7 127.2 117.8 Segment pre-tax operating income (1) .............. 79.3 62.7 26.1 Income taxes ...................................... 32.5 25.4 10.7 --------- --------- --------- Segment after-tax operating income (1) ............ 46.8 37.3 15.4 After-tax adjustments: (1) Realized investment gains, net ................. 4.4 2.0 0.1 --------- --------- --------- GAAP Reported: Income before cumulative effect of accounting change ........................................ 51.2 39.3 15.5 Cumulative effect of accounting change ......... -- (0.1) -- --------- --------- --------- Net income ........................................ $ 51.2 $ 39.2 $ 15.5 ========= ========= ========= Amortization of goodwill, net of tax .............. 0.8 0.7 0.7 --------- --------- --------- Net Income before amortization of goodwill ........ $ 52.0 $ 39.9 $ 16.2 ========= ========= ========= Other Data: Assets under management, end of year (2) .......... $32,651.6 $40,211.7 $39,637.7 ========= ========= =========
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. (2) Includes general account cash and invested assets of $106.9 million, $164.5 million, and $88.1 million as of December 31, 2000, 1999, and 1998, respectively. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income was $46.8 million in 2000, an increase of $9.5 million, or 25.5%, from $37.3 million in 1999. The increase was primarily due to higher investment advisory fees. Total revenues increased $22.1 million, or 11.6%, to $212.0 million in 2000 from $189.9 million in 1999. Net investment income was $22.7 million in 2000, a decrease of $23.2 million from $45.9 million for 1999. The decrease in net investment income was partially due to the purchased equity interest in collateralized bond obligations by other business segments of $31.7 million. Offsetting this decrease was a $7.8 million increase in interest income on mortgage loans held for sale. Investment management revenues, commissions, and other fees increased $45.9 million, or 32.7% in 2000, due primarily to an increase investment advisory fees, which increased $47.0 million to $180.6 million compared to $133.6 million reported in 1999. The increase in investment advisory fees was primarily due to the $45.3 million in incentive fee receipts in connection with the restructuring of timber management contracts and $15.3 million in performance fees earned by the mezzanine fund manager. Investment advisory fees were .50% and .34% of average advisory assets under management in 2000 and 1999, respectively. Mortgage origination and servicing fees were $5.4 million compared to $6.6 million in 1999. Realized investment gains decreased $0.3 million due to lower securitization activity in 2000. Other operating costs and expenses were $132.7 million in 2000, an increase of $5.5 million, or 4.3%, from $127.2 million in 1999. The increase was primarily due to $15.7 million in incentive compensation payments related to the receipt of incentive fees on timber management contracts and $9.1 million in performance fees paid for the management of the mezzanine fund. Offsetting these increases was a $19.8 million transfer of expenses on equity interest in collateralized bond obligations to the other business segments owning these assets. The segment's effective tax rate on operating income was 41.0% in 2000 and 1999. The effective tax rate for the Investment Management Segment is higher than our other business segments due to the state tax on certain subsidiaries. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Segment after-tax operating income was $37.3 million in 1999, an increase of $21.9 million, or 142.2%, from $15.4 million in 1998. The increase was primarily due to higher investment advisory fees resulting from an increase in average assets under management and higher realized investment gains on sales of mortgage loans. Total revenues increased $46.0 million, or 32.0%, to $189.9 million in 1999 from $143.9 million in 1998. Net investment income was $45.9 million in 1999, an increase of $21.8 million from $24.1 million for 1998. The increase in net investment income was due to a higher level of average invested assets due to the formation of a collateralized bond obligation in the fourth quarter of 1998. Investment management revenues, commissions, and other fees increased $16.4 million, or 13.2%, in 1999, primarily due to an increase in investment advisory fees, which increased $18.3 million to $133.6 million in 1999 compared to $115.3 million in 1998. The increase in investment advisory fees was primarily due to a higher level of average assets under management, which increased $4,824.5 million, or 13.5%, to $40,554.7 million in 1999 from $35,730.2 million in 1998. Investment advisory fees were .33% and .32% of average advisory assets under management in 1999 and 1998, respectively. This increase primarily reflects the receipt of a fee in connection with the termination of a timber management contract. Mortgage origination and servicing fees were $6.6 million in 1999 compared to $8.5 million in 1998. Realized investment gains increased $7.9 million in 1999 primarily due to a narrowing of interest rate spreads in 1999, as compared to 1998, on mortgage loans held for sale. Other operating costs and expenses were $127.2 million in 1999, an increase of $9.4 million, or 8.0%, from $117.8 million in 1998. The increase was primarily due to a $8.5 million increase in interest expense in connection with our collateralized bond obligation. Other operating costs and expenses were 0.22% and 0.24% of average advisory assets under management in 1999 and 1998, respectively. The segment's effective tax rate was 41.0% in 1999 and 1998. 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 Year Ended December 31, -------------------------------- 2000 1999 1998 ------- ------- ------- (in millions) Operating Results: Segment after-tax operating income (loss): (1) International insurance operations ................. $ 27.1 $ 26.0 $ 25.3 Corporate operations ............................... 69.3 31.2 8.7 Non-core businesses ................................ 7.6 10.6 22.3 ------- ------- ------- Total ............................................ 104.0 67.8 56.3 After-tax adjustments (1): Realized investment gains (losses), net ............ 93.5 (42.1) 15.4 Class action lawsuit ............................... -- (91.1) (150.0) Restructuring charges .............................. (1.3) (0.5) -- Demutualization expenses ........................... 0.1 (3.2) (0.5) Other demutualization related costs ................ (0.2) (0.2) -- Workers' compensation reinsurance reserve .......... -- (133.7) -- Surplus tax ........................................ 18.1 (2.2) 1.5 ------- ------- ------- Total after-tax adjustments ..................... 110.2 (273.0) (133.6) ------- ------- ------- GAAP Reported: Net income (loss) .................................... $ 214.2 $(205.2) $ (77.3) ======= ======= ======= Amortization of goodwill, net of tax ................. 8.6 1.2 0.9 ------- ------- ------- Net income (loss) before amortization of goodwill .......................................... $ 222.8 $(204.0) $ (76.4) ======= ======= =======
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income from international insurance operations was $27.1 million for 2000, an increase of $1.1 million from $26.0 million for 1999. On October 1, 1999, The Maritime Life Assurance Company (Maritime), our Canadian subsidiary, purchased Aetna Holdings Canada Limited (Aetna). Accordingly, Aetna's results of operations are included with Maritime's from the date of the acquisition. The increase in segment after-tax operating income primarily resulted from the inclusion of Aetna's operations for a full year in 2000 compared to one quarter in 1999. Segment after-tax operating income from corporate operations was $69.3 million in 2000, an increase of $38.1 million from $31.2 million in 1999. During the fourth quarter of 1999, a corporate account was formed and all corporate type assets, including certain tax advantaged assets, were moved from the other segments to the Corporate and Other Segment. Tax credits, associated with the tax advantaged assets, were $15.9 million in 2000 and $0.5 million in 1999. In addition, as part of this move, the group pension participating contractholders were reimbursed at fair market value for these contracts. Because of this transaction, in 2000 there was no longer a need to credit participating policyholders with a share of the change in these assets which amounted to a charge to this segment of $13.7 million for the first nine months of 1999. Segment after-tax operating income from non-core businesses was $7.6 million in 2000, a decrease of $3.0 million from $10.6 million in 1999. The decrease was due primarily to lower net investment income resulting from the previously described disposals. Amortization of goodwill increased $7.4 million in 2000, as compared to 1999, due to the acquisition of Aetna in the fourth quarter of 1999. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Segment after-tax operating income from international insurance operations was $26.0 million for 1999, an increase of $0.7 million from $25.3 million for 1998. On October 1, 1999, The Maritime Life Assurance Company (Maritime), our Canadian subsidiary, purchased Aetna Holdings Canada Limited (Aetna). Accordingly, Aetna's results of operations are included with Maritime's from the date of the acquisition. The increase in segment after-tax operating income primarily resulted from the inclusion of Aetna's after-tax operating income of $5.2 million partially offset by a decrease in Maritime's after-tax operating income due to unfavorable group claims experience. Segment after-tax operating income from corporate operations was $31.2 million in 1999, an increase of $22.5 million from $8.7 million in 1998. The increase was primarily due to a $13.7 million decrease in unallocated corporate overhead and expenses associated with the disposed businesses and higher net investment income due to a higher level of corporate purpose assets. During the fourth quarter of 1999, a corporate account was formed and all corporate type assets were removed from the business units to the Corporate and Other Segment. As part of this move, the group pension participating contractholders were reimbursed at fair market value for these contracts. Because of this transaction, there was no longer a need to calculate the participating policyholders share of the change in these assets. As a result, 1999's segment after-tax operating income includes a charge for this item for nine months versus a full year in 1998, an improvement of $9.4 million. Segment after-tax operating income from non-core businesses was $10.6 million in 1999, a decrease of $11.7 million from $22.3 million in 1998. The decrease was due primarily to lower net investment income resulting from the previously described disposals. Amortization of goodwill increased $0.3 million in 1999, as compared to 1998, due to the acquisition of Aetna in 1999 partially offset by completing the amortization period for Investors Guarantee Life in 1998. General Account Investments On the effective date of the Plan of Reorganization, the Company's invested assets were allocated between the closed block and operations outside the closed block. In view of the similar asset quality characteristics of the major asset categories in the two portfolios, the invested assets in the closed block have been combined with the Company's invested assets outside the closed block for purposes of the following discussion and analysis. Overall Composition of the General Account Invested assets, excluding separate accounts, totaled $52.0 billion and $48.6 billion as of December 31, 2000 and December 31, 1999, respectively. The most significant difference between the portfolio composition as of December 31, 2000 compared to December 31, 1999 is the growth of cash and cash equivalents. This is primarily the result of the sale of non-participating pension contracts in December 2000, which had yet to be placed in permanent investments as of the end of the year.
As of December 31, ------------------ 2000 1999 ------------------------------------------------------- Carrying % of Carrying % of Value Total Value Total ------------------------------------------------------- (in millions) (in millions) Fixed maturity securities (1) $32,535.0 62.5% $30,749.4 63.3% Mortgage loans (2) 10,899.5 20.9 10,733.0 22.1 Real estate 519.0 1.0 548.5 1.1 Policy loans (3) 1,969.2 3.8 1,938.8 4.0 Equity securities 1,332.8 2.6 1,314.3 2.7 Other invested assets 1,393.7 2.7 1,311.1 2.7 Short-term investments 214.0 0.4 166.9 0.4 Cash and cash equivalents (4) 3,146.8 6.1 1,797.7 3.7 --------- --------- --------- --------- Total invested assets $52,010.0 100.0% $48,559.7 100.0% ========= ========= ========= =========
(1) In addition to bonds, the fixed maturity security portfolio contains redeemable preferred stock with a carrying value of $732.0 million and $630.6 million as of December 31, 2000 and December 31, 1999, 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 $32,355.1 and $30,397.9 million, at December 31, 2000 and December 31, 1999, respectively. (2) The fair value for our mortgage loan portfolio was $11,337.4 and $10,681.8 million as of December 31, 2000 and December 31, 1999, respectively. (3) Policy loans are secured by the cash value of the underlying life insurance policies and do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. (4) Cash and cash equivalents are included in total invested assets in the table above for the purposes of calculating yields on the income producing assets for the Company. Cash and cash equivalents are not considered part of Total Investments of the Company of $48,863.2 million and $46,762.0 million at December 31, 2000 and December 31, 1999, respectively. Closed block Total Investments of $8,203.2 million as of December 31, 2000 are presented in closed block assets on the Consolidated Balance Sheets but remain part of the Company's total invested assets. 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. 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). Our fixed maturity securities portfolio also includes redeemable preferred stock. As of December 31, 2000, fixed maturity securities represented 62.6% of general account investment assets with a carrying value of $32.5 billion, roughly comprised of 50% public securities and 50% private securities. Each year we direct the majority of our net cash inflows into investment grade fixed maturity securities. We typically invest between 5% and 15% of funds allocated to fixed maturity securities in below-investment-grade bonds while maintaining our policy to limit the overall level of these bonds to no more than 10% of invested assets. 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 total invested assets. The following table shows the composition by issuer of our fixed maturity securities portfolio. Fixed Maturity Securities -- By Issuer
As of December 31, ------------------ 2000 1999 ------------------------------------------------------- Carrying % of Carrying % of Value Total Value Total ------------------------------------------------------- (in millions) (in millions) Corporate securities .......................... $25,159.3 77.4% $23,498.9 76.4% MBS/ABS ....................................... 5,480.6 16.8 5,265.6 17.1 U.S. Treasury securities and obligations of U.S. government agencies ................... 205.8 0.6 297.2 1.0 Debt securities issued by foreign Governments ................................ 1,548.7 4.8 1,554.1 5.1 Obligations of states and political Subdivisions ............................... 140.6 0.4 133.6 0.4 --------- --------- --------- --------- Total .................................... $32,535.0 100.0% $30,749.4 100.0% ========= ========= ========= =========
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 pre-payable without penalty prior to maturity at the option of the issuer, rather than in residential MBS where the underlying loans typically 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, 2000 and December 31, 1999 was limited to 3.3% and 3.9% of our total MBS/ABS portfolio and 0.6% and 0.7% of our total fixed maturity securities holdings, respectively. 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 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 at least once a year. 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 86.3% invested in Category 1 and 2 securities as of December 31, 2000. As a percent of total invested assets, our below investment grade bonds, at 8.3% as of December 31, 2000, are higher than the American Council of Life Insurers (ACLI) industry average of 5.9%, last published as of December 31, 1999. 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, resulting in a well-diversified high yield portfolio. A majority (64.3%) of our below investment grade bonds are in category 3, the highest quality below investment grade. 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 $216.7 million and $167.4 million as of December 31, 2000 and 1999, respectively. For the years ended December 31, 2000, 1999 and 1998, $49.4 million, $25.5 million and $31.2 million of interest on Category 6 bonds has been recognized in income but was delinquent. Fixed Maturity Securities -- By Credit Quality
As of December 31, --------------------------------------------------------- 2000 1999 -------------------------- -------------------------- SVO S&P Equivalent Carrying % of Carrying % of Rating (1) Designation (2) Value (3) Total Value (3) Total - ---------- --------------- --------- ----- --------- ----- (in millions) (in millions) 1 AAA/AA/A ................. $14,609.4 45.9% $14,722.5 48.8% 2 BBB ...................... 12,850.9 40.4 11,014.2 36.6 3 BB ....................... 2,790.3 8.8 2,886.7 9.6 4 B ........................ 1,066.0 3.4 867.7 2.9 5 CCC and lower ............ 269.7 0.8 460.3 1.5 6 In or near default ....... 216.7 0.7 167.4 0.6 --------- --------- --------- --------- Total .................... $31,803.0 100.0% $30,118.8 100.0% ========= ========= ========= =========
(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 $732.0 million and $630.6 million as of December 31, 2000 and 1999, respectively. Mortgage Loans. As of December 31, 2000, we held mortgage loans with a carrying value of $10.9 billion, including $2.5 billion of agricultural loans and $1.2 billion of loans managed by our Canadian subsidiary, The Maritime Life Assurance Company, of which $0.6 billion are government-insured by the Canada Mortgage and Housing Corporation (CMHC). 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 December 31, ------------------------------------------------------- 2000 1999 ------------------------ ------------------------ Carrying % of Carrying % of Value Total Value Total --------- --------- --------- --------- (in millions) (in millions) Apartment ................ $ 2,393.1 22.0% $ 2,493.7 23.2% Office Buildings ......... 2,465.1 22.6 2,551.8 23.7 Retail ................... 1,623.7 14.9 1,844.8 17.2 Agricultural ............. 2,510.6 23.0 1,891.4 17.6 Industrial ............... 905.8 8.3 1,005.1 9.4 Hotels ................... 414.7 3.8 425.5 4.0 Multi-Family ............. 71.8 0.7 80.7 0.8 Mixed Use ................ 274.7 2.5 140.2 1.3 Other .................... 240.0 2.2 299.8 2.8 --------- --------- --------- --------- Total ............... $10,899.5 100.0% $10,733.0 100.0% ========= ========= ========= =========
The following table shows the distribution of our mortgage loan portfolio by geographical region. Mortgage Loans -- By ACLI Region
As of December 31, ------------------------------------------------------------------------ 2000 1999 ---------------------------------------- ---------------------------- Number Carrying % of Carrying % of of Loans Value Total Value Total --------- --------- --------- --------- --------- (in millions) (in millions) East North Central ... 153 $ 1,101.0 10.1% $ 1,106.7 10.3% East South Central ... 41 530.4 4.9% 299.0 2.8% Middle Atlantic ...... 115 1,481.3 13.6% 1,675.9 15.6% Mountain ............. 96 401.9 3.7% 355.5 3.3% New England .......... 129 838.6 7.7% 896.5 8.4% Pacific .............. 288 1,969.0 18.0% 2,117.8 19.7% South Atlantic ....... 206 2,048.6 18.8% 1,926.9 18.0% West North Central ... 70 368.2 3.4% 377.3 3.5% West South Central ... 151 817.2 7.5% 742.9 6.9% Canada ............... 883 1,343.3 12.3% 1,234.5 11.5% --------- --------- --------- --------- --------- Total ........... 2,132 $10,899.5 100.0% $10,733.0 100.0% ========= ========= ========= ========= =========
The allowance for losses on mortgage loans on real estate and 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 losses or that additional valuation allowances or asset write-downs will not be required in the future. The portion of the investment valuation allowance for our mortgage loan portfolio was $83.5 million, or 0.8% of carrying value before reserves and $110.4 million, or 1.0% of carrying value before reserves as of December 31, 2000 and 1999, respectively. The portion of the investment valuation allowance for our real estate to be disposed of was $43.5 million, or 7.7% of carrying value before reserves and $58.1 million, or 9.6% of carrying value before reserves as of December 31, 2000 and 1999, respectively. Investment Results The following table summarizes the Company's investment results for the periods indicated. Overall, the yield, net of investment expenses, on our general account portfolio increased from the year ended December 31, 1999. The improved yield was primarily generated by favorable interest rates achieved on our 2000 fixed maturity security acquisitions. In particular, 2000 bond acquisitions benefited from a combination of higher U.S. Treasury rates and relatively wide spreads in both the public and private sectors. While interest rates declined substantially during the fourth quarter of 2000, they were well above 1999 rates on a full calendar year basis. The average 10-year U.S. Treasury rate in 2000 was 34 basis points higher than the average 10-year U.S. Treasury rate in 1999.
For the Year Ended December 31, ------------------------------------------------------- 2000 1999 Yield Amount Yield Amount ------------------------------------------------------- (in millions) (in millions) General account assets-excluding policy loans Gross income 8.26% $ 3,991.5 8.43% $ 3,794.8 Ending assets-excluding policy Loans 50,040.8 46,620.9 Policy loans Gross income 6.07% 118.6 5.75% 109.8 Ending assets 1,969.2 1,938.8 Total gross income 8.18% 4,110.1 8.32% 3,904.6 Less: investment expenses (267.5) (336.1) --------- --------- Net investment income 7.65% $ 3,842.6 7.58% $ 3,568.5 ========= =========
(1) Total Company net investment income of $3,842.6 million is discussed in this Management's Discussion and Analysis, which includes net investment income of $3,251.0 million in the consolidated statements of income and $591.6 million in Note 6 -- Closed Block to the audited consolidated financial statements for the year ended December 31, 2000. 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. John Hancock Life Insurance Company is wholly-owned by, and the primary operating subsidiary of, John Hancock Financial Services, Inc. (JHFS). As an insurance holding company JHFS is reliant on dividends of the Company for its operating cash flows. State insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval. The Company's limit is the greater of 10% of the statutory surplus or the prior calendar year's statutory net gain from operations of the Company. The ability of the Company 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 the Company can pay shareholder dividends. The Company, in the future, could also be viewed as being commercially domiciled in New York. If so, dividend payments may also be subject to New York's holding company act as well as Massachusetts law. Currently, the Company does not expect such regulatory requirements to impair its ability to dividend sufficient cash flows to sustain JHFS' liquidity and capital needs. However, the Company can give no assurance it will declare or pay dividends on a regular basis. In September, October and December 2000, the Commissioner of Insurance for the Commonwealth of Massachusetts approved, and the Company paid, dividends to JHFS in the amount of $200.0 million, $200.0 million and $66.0 million, respectively. None of these dividends were classified as extraordinary by state regulators. During the fourth quarter of 2000, JHFS used funds from the aforementioned dividends and other of its own cash flows, to fund a $267.2 million capital contribution to the Company. As of October 1, 2000, JHFS purchased John Hancock Reinsurance Company and 45% of John Hancock Canadian Holdings from the Company. Sources of cash for the Company's insurance businesses are from 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 various life insurance, annuity, and structured investment products, and to the funding of investments in new products, processes, and technologies. 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. The Company periodically adjusts its investment policy to respond to changes in short-term and long-term cash requirements and provide adequate funds to pay benefits without forced sales of investments. The liquidity of our insurance operations is also related to the overall quality of our investments. As of December 31, 2000, $27,460.3 million, or 86.3% of the fixed maturity securities held by us and rated by Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc. (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 $4,342.7 million of fixed maturity investments were rated non-investment grade. For additional discussion of our investment portfolio see the General Account Investments section above in this Management's Discussion and Analysis of Financial Condition and Results of Segment Operations. 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. Net cash provided by operating activities was $1,564.7 million, $1,621.9 million, and $1,290.8 million for the years ended December 31, 2000, 1999 and 1998, respectively. The decrease in 2000 compared to 1999 resulted primarily from cash transferred to the closed block of $158.6 million, income attributed to the closed block of $124.1 million, and an increase in purchases of trading securities of $147.5 million, partially offset by an increase in net income of $689.4 million. The increase in 1999 as compared to 1998 resulted primarily from a decrease in benefits paid to policyholders, partially offset by an decrease in net income. Net cash used in investing activities was $1,318.5 million, $1,933.6 million and $1,303.1 million for the years ended December 31, 2000, 1999, and 1998, respectively. The decrease in cash used in 2000 as compared to 1999 resulted from fewer acquisitions of fixed maturities during the year ended December 31, 2000 than the comparable prior year period, prior year cash payments related to acquisitions and disposals of subsidiaries which resulted in cash receipts in 2000 and a decrease in the issuance of mortgage loans on real estate. The increase in net cash used in 1999 as compared to 1998 resulted primarily from net cash paid related to acquisitions and disposals of subsidiaries and a decrease in maturities, prepayments and scheduled redemptions of fixed maturities partially offset by an increase in sales of real estate. Net cash provided by financing activities was $797.3 million, $250.1 million and $850.0 million, for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in 2000 as compared to 1999 resulted from a reduction in cash payments made on withdrawals of universal life insurance and investment-type contracts. Deposits on such universal life insurance and investment-type contracts exceeded withdrawals by $989.5 million for the year ended December 31, 2000. The decrease in 1999 as compared to 1998 resulted primarily from cash payments made on withdrawals of universal life insurance and investment-type contracts which exceeded cash received from deposits on such contracts by $221.9 million. Cash flow requirements also are supported by a committed line of credit of $1.0 billion. The line of credit agreement provides for two facilities: one for $500 million pursuant to a 364-day commitment (subject to renewal) and a second for $500 million pursuant to a five-year facility. The line of credit is available for general corporate purposes. The line of credit agreement contains various covenants, among these being that shareholders' equity meet certain requirements. To date, we have not borrowed any amounts under the line of credit. As of December 31, 2000, we had $779.3 million of debt outstanding consisting of $222.3 million of commercial paper borrowings, $447.2 million of surplus notes, and $109.8 million of other notes payable. A new commercial paper program has been established at the Company that will ultimately replace the commercial paper program now in place at its indirect subsidiary, John Hancock Capital Corporation. A primary liquidity concern with respect to life insurance and annuity products is the risk of early policyholder and contractholder withdrawal. 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 December 31, ---------------------------------------------------------- 2000 1999 --------------------------- ---------------------------- Amount % Amount % ------------- ------- ------------- ------ (in millions) (in millions) Not subject to discretionary withdrawal provisions ...... $21,698.0 72.6% $19,335.2 70.4% Subject to discretionary withdrawal adjustment: With market value adjustment ......................... 824.2 2.8 1,126.3 4.1 At contract value .................................... 1,877.6 6.3 1,540.6 5.6 Subject to discretionary withdrawal at contract value less surrender charge ................................ 5,455.8 18.3 5,461.1 19.9 ---------------------------------------------------------- Total annuity reserves and deposit funds liability ...... $29,855.6 100.0% $27,463.2 100.0% ==========================================================
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 December 31, 2000, we had approximately $17.1 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, $1.5 billion of which are in the closed block at December 31, 2000. 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 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, 2000, 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 in excess of uncollectable amounts recognized in our audited consolidated financial statements. 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. Accounting Standards For a discussion of accounting standards, see Note 1 to our audited consolidated financial statements. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized. JOHN HANCOCK LIFE INSURANCE COMPANY By: /s/ THOMAS E. MOLONEY ----------------------------------- Thomas E. Moloney Chief Financial Officer Date: June 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----