-----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, OrZfCt77AFV8PJk0G36xXbWHAU1R/0V0RdsrJBbIPpUd/kHBCRasRysDE7NWvSsX 6LgoOq7q7Cj3QK7wjDItRA== 0001171520-04-000275.txt : 20040809 0001171520-04-000275.hdr.sgml : 20040809 20040809172437 ACCESSION NUMBER: 0001171520-04-000275 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040809 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31445 FILM NUMBER: 04962380 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-Q 1 eps1513.txt JOHN HANCOCK LIFE INSURANCE COMPANY UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 Commission File Number: 333-45862 JOHN HANCOCK LIFE INSURANCE COMPANY Exact name of registrant as specified in charter MASSACHUSETTS 04-1414660 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) John Hancock Place Post Office Box 111 Boston, Massachusetts 02117 (Address of principal executive offices) (617) 572-6000 (Registrant's telephone number, including area code) 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 |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| As of August 6, 2004 there were outstanding 1,000 shares of common stock, $10,000 par value of the registrant, all of which were owned by John Hancock Financial Services, Inc. Reduced Disclosure Format Registrant meets the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and is therefore filing this Form with the Reduced Disclosure Format. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JOHN HANCOCK LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS
June 30, 2004 December 31, (unaudited) 2003 --------------------------- (in millions) Assets Investments Fixed maturities: Held-to-maturity--at amortized cost (fair value: December 31--$1,512.8 million) ......................... -- $ 1,488.7 Available-for-sale--at fair value (cost: June 30--$47,751.0 million; December 31--$43,907.7 million) .. $47,456.7 46,482.1 Equity securities: Available-for-sale--at fair value (cost: June 30--$233.4 million; December 31--$249.9 million) ........ 235.5 333.1 Trading securities--at fair value (cost: June 30--$0.3 million; December 31--$0.3 million) ............ 0.3 0.6 Mortgage loans on real estate ............................................ 11,765.1 10,871.1 Real estate .............................................................. 136.7 123.8 Policy loans ............................................................. 2,020.6 2,019.2 Short-term investments ................................................... 50.2 31.5 Other invested assets .................................................... 3,275.8 2,912.2 --------- --------- Total Investments ............................................... 64,940.9 64,262.3 Cash and cash equivalents ................................................ 1,244.5 2,626.9 Accrued investment income ................................................ 891.0 700.5 Premiums and accounts receivable ......................................... 105.1 104.1 Goodwill ................................................................. 3,031.7 108.6 Value of business acquired ............................................... 2,858.1 168.5 Deferred policy acquisition costs ........................................ 58.4 3,420.7 Intangible assets ........................................................ 1,351.1 6.3 Reinsurance recoverable .................................................. 3,237.2 2,677.3 Deferred tax asset ....................................................... 401.9 -- Other assets ............................................................. 2,206.0 2,886.2 Separate account assets .................................................. 18,493.0 19,369.6 --------- --------- Total Assets .................................................... $98,818.9 $96,331.1 ========= =========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 JOHN HANCOCK LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS - (CONTINUED)
June 30, 2004 December 31, (unaudited) 2003 --------------------------- (in millions) Liabilities and Shareholder's Equity Liabilities Future policy benefits ................................ $42,181.1 $38,451.0 Policyholders' funds .................................. 21,322.3 21,693.5 Consumer notes ........................................ 2,101.0 1,550.4 Unearned revenue ...................................... 9.7 406.9 Unpaid claims and claim expense reserves .............. 175.5 166.5 Dividends payable to policyholders .................... 434.9 440.0 Short-term debt ....................................... 51.5 104.0 Long-term debt ........................................ 558.7 609.4 Deferred tax liability ................................ -- 1,534.1 Other liabilities ..................................... 3,963.5 4,417.7 Separate account liabilities .......................... 18,493.0 19,369.6 --------- --------- Total liabilities ............................ 89,291.2 88,743.1 Minority interest ..................................... 5.1 5.1 Commitments and contingencies - Note 5 Shareholder's Equity Common stock, at June 30, 2004, $10,000 par value; 1,000 shares authorized, issued and outstanding ..... 10.0 10.0 Additional paid in capital ............................ 9,467.0 4,763.2 Retained earnings ..................................... 169.1 1,332.1 Accumulated other comprehensive income ................ (123.5) 1,477.6 --------- --------- Total Shareholder's Equity ................... 9,522.6 7,582.9 --------- --------- Total Liabilities and Shareholder's Equity ... $98,818.9 $96,331.1 ========= =========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 JOHN HANCOCK LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Period From Period From April 29, 2004 April 1, 2004 Three Months through through Ended June 30, 2004 April 28, 2004 June 30, 2003 ------------- -------------- ------------- (in millions) Revenues Premiums ............................................................ $ 324.9 $ 157.3 $ 484.4 Universal life and investment-type product fees ..................... 104.6 53.9 153.1 Net investment income ............................................... 581.8 301.2 942.3 Net realized investment and other gains (losses), net of related amortization of deferred policy acquisitions costs and value of businees acquired credited to participating pension contract holders and the policyholder dividend obligation ($(16.3), $29.1 and $49.3 respectively) .......................................... 48.9 198.7 78.3 Investment management revenues, commissions and other fees .......... 84.6 48.3 122.4 Other revenue ....................................................... 37.6 17.0 55.3 -------- -------- -------- Total revenues ......................................................... 1,182.4 776.4 1,835.8 Benefits and expenses Benefits to policyholders, excluding amounts related to net realized investment and other gains (losses) credited to participating pension contract holders and the policyholder dividend obligation ($(10.8), $22.0, and $28.4 (respectively) Benefits to policyholders ........................................... 556.4 341.7 919.7 Other operating costs and expenses .................................. 223.5 112.5 348.7 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses) ($(5.5), $7.1 and $20.9, respectively) ......................................... 37.8 15.0 63.6 Dividends to policyholders .......................................... 77.8 40.5 137.5 -------- -------- -------- Total benefits and expenses ......................................... 895.5 509.7 1,469.5 -------- -------- -------- Income before income taxes ............................................. 286.9 266.7 366.3 Income taxes ........................................................... 117.8 91.7 108.6 -------- -------- -------- Net income ............................................................. $ 169.1 $ 175.0 $ 257.7 ======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 JOHN HANCOCK LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF INCOME - (CONTINUED)
Period From Period From April 29, 2004 January 1, 2004 Six Months through through Ended June 30, 2004 April 28, 2004 June 30, 2003 ------------- -------------- ------------- (in millions) Revenues Premiums .................................................................. $ 324.9 $ 628.0 $ 956.7 Universal life and investment-type product fees ........................... 104.6 230.7 308.1 Net investment income ..................................................... 581.8 1,284.7 1,875.4 Net realized investment and other gains (losses), net of related amortization of deferred policy acquisitions costs and value of business acquired credited to participating pension contract holders and the policyholder dividend obligation ($(16.3), $28.3 and $(0.5) respectively) ......................................... 48.9 101.0 183.7 Investment management revenues, commissions and other fees ................ 84.6 180.7 241.6 Other revenue ............................................................. 37.6 88.3 127.4 -------- -------- -------- Total revenues ............................................................... 1,182.4 2,513.4 3,692.9 Benefits and expenses Benefits to policyholders, excluding amounts related to net realized investment and other gains (losses) credited to participating pension contract holders and the policyholder dividend obligation ($(10.8), $39.2, $(12.9), respectively) Benefits to policyholders ................................................. 556.4 1,277.1 1,869.0 Other operating costs and expenses ........................................ 223.5 483.2 665.4 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses)($(5.5), $(10.9) and $12.4, respectively) ..................................... 37.8 121.8 135.4 Dividends to policyholders ................................................ 77.8 157.1 270.0 -------- -------- -------- Total benefits and expenses ............................................... 895.5 2,039.2 2,939.8 -------- -------- -------- Income before income taxes and cumulative effect of accounting changes ........................................................ 286.9 474.2 753.1 Income taxes ................................................................. 117.8 141.6 224.4 -------- -------- -------- Net income before cumulative effect of accounting change ..................... 169.1 332.6 528.7 Cumulative effect of accounting changes, net of income tax - Note 1 .......... -- (3.3) -- Net income ................................................................... $ 169.1 $ 329.3 $ 528.7 ======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 JOHN HANCOCK LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
Accumulated Additional Other Total Outstanding Common Paid in Retained Comprehensive Shareholder's Common Stock Capital Earnings Income (Loss) Equity Shares ------------------------------------------------------------------------------ (in millions, except for outstanding share amounts) Balance at April 1, 2003 ......................... $ 10.0 $4,763.2 $1,227.1 $ 757.1 $6,757.4 1,000 Comprehensive income: Net income .................................. 257.7 257.7 Other comprehensive income, net of tax: Net unrealized gains (losses) ............. 637.3 637.3 Net accumulated gains (losses) on cash flow hedges ............................. 106.5 106.5 Foreign currency translation adjustment .............................. 0.1 0.1 Minimum pension liability ................... 1.7 1.7 -------- Comprehensive income ............................. 1,003.3 Dividend paid to parent company .................. (100.0) (100.0) ------------------------------------------------------------------------------ Balance at June 30, 2003 ......................... $ 10.0 $4,763.2 $1,384.8 $1,502.7 $7,660.7 1,000 ==============================================================================
6 JOHN HANCOCK LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
Accumulated Additional Other Total Outstanding Common Paid in Retained Comprehensive Shareholder's Common Stock Capital Earnings Income (Loss) Equity Shares ------------------------------------------------------------------------------ (in millions, except for outstanding share amounts) Balance at April 1, 2004 ......................... $ 10.0 $ 4,763.2 $ 1,486.4 $ 1,942.7 $ 8,202.3 1,000 Comprehensive income: Net income .................................. 175.0 175.0 Other comprehensive income, net of tax: Net unrealized gains (losses) ............. (379.3) (379.3) Net accumulated gains (losses) on cash flow hedges ............................. (151.0) (151.0) Foreign currency translation adjustment .............................. (0.4) (0.4) Minimum pension liability ................... -- -- --------- Comprehensive income ........................ (355.7) ======================================================================= Balance at April 28, 2004 ........................ $ 10.0 $ 4,763.2 $ 1,661.4 $ 1,412.0 $ 7,846.6 1,000 ----------------------------------------------------------------------- Acquisition by Manulife Financial Corporation: Sale of shareholder's equity ................. $ (10.0) $(4,763.2) $(1,661.4) $(1,412.0) $(7,846.6) (1,000) Manulife Financial Corporation purchase price ............................. 10.0 9,467.0 -- -- 9,477.0 1,000 ======================================================================= Balance at April 29, 2004 ........................ $ 10.0 $ 9,467.0 -- -- $ 9,477.0 1,000 Comprehensive income: Net income .................................. 169.1 169.1 Other comprehensive income, net of tax: Net unrealized gains (losses) ............. (118.7) (118.7) Net accumulated gains (losses) on cash flow hedges ............................. (4.6) (4.6) Foreign currency translation adjustment .............................. (0.2) (0.2) Minimum pension liability ................... -- -- --------- Comprehensive income ............................. 45.6 ----------------------------------------------------------------------- Balance at June 30, 2004 ......................... $ 10.0 $ 9,467.0 $ 169.1 $ (123.5) $ 9,522.6 1,000 =======================================================================
7 JOHN HANCOCK LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME- (CONTINUED)
Accumulated Additional Other Total Outstanding Common Paid in Retained Comprehensive Shareholder's Common Stock Capital Earnings Income (Loss) Equity Shares ------------------------------------------------------------------------------ (in millions, except for outstanding share amounts) Balance at January 1, 2003 .................... $ 10.0 $4,763.2 $ 956.1 $ 442.2 $6,171.5 1,000 Comprehensive income: Net income ............................... 528.7 528.7 Other comprehensive income, net of tax: Net unrealized gains (losses) .......... 944.8 944.8 Net accumulated gains (losses) on cash flow hedges ..................... 112.3 112.3 Foreign currency translation adjustment ........................... -- -- Minimum pension liability ................ 3.4 3.4 -------- Comprehensive income .......................... 1,589.2 Dividend paid to parent company ............... (100.0) (100.0) ------------------------------------------------------------------------ Balance at June 30, 2003 ...................... $ 10.0 $4,763.2 $1,384.8 $1,502.7 $7,660.7 1,000 ========================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 8 JOHN HANCOCK LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME- (CONTINUED)
Additional Accumulated Other Total Outstanding Common Paid In Retained Comprehensive Shareholder's Common Stock Capital Earnings Income (Loss) Equity Shares -------------------------------------------------------------------------- Balance at January 1, 2004 ......................... $ 10.0 $4,763.2 $1,332.1 $1,477.6 $7,582.9 1,000 Comprehensive income: Net income ...................................... 329.3 329.3 Other comprehensive income, net of tax: Net unrealized gains (losses) ................... (28.6) (28.6) Net accumulated gains (losses) on cash flow hedges ........................... (37.3) (37.3) Foreign currency translation adjustment .................................... (0.3) (0.3) Minimum pension liability ....................... 0.6 0.6 -------- Comprehensive income ............................... 263.7 -------------------------------------------------------------------------- Balance at April 28, 2004 .......................... $ 10.0 $4,763.2 $1,661.4 $1,412.0 $7,846.6 1,000 -------------------------------------------------------------------------- Acquisition by Manulife Financial Corporation: Sale of shareholder's equity .................... (10.0) (4,763.2) (1,661.4) (1,412.0) (7,846.6) -- Manulife Financial Corporation purchase price ................................ $ 10.0 $9,467.0 -- -- $9,477.0 -- -------------------------------------------------------------------------- Balance at April 29, 2004 .......................... $ 10.0 $9,467.0 -- -- $9,477.0 1,000 Comprehensive income Net income ...................................... 169.1 169.1 Other comprehensive income, net of tax: Net unrealized gains (losses) ................... $ (118.7) (118.7) Net accumulated gains (losses) on cash flow hedges ........................... (4.6) (4.6) Foreign currency translation adjustment .................................... (0.2) (0.2) -------- Minimum pension liability Comprehensive income ............................... 45.6 -------------------------------------------------------------------------- Balance at June 30, 2004 ........................... $ 10.0 $9,467.0 $ 169.1 $ (123.5) $9,522.6 1,000 ==========================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 9 JOHN HANCOCK LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the For the period period from For the six April 29, 2004 January 1, 2004 month period through through April ended June June 30, 2004 28, 2004 30, 2003 -------------------------------------------- (in millions) Cash flows from operating activities: Net income ....................................................................... $ 169.1 $ 329.3 $ 528.7 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premium (discount) - fixed maturities .......................... 117.9 17.1 (1.8) Net realized investment and other losses ....................................... (48.9) (101.0) (183.7) Change in accounting principle ................................................. -- 3.3 -- Change in deferred policy acquisition costs .................................... (58.3) (15.9) (143.6) Depreciation and amortization .................................................. 42.8 15.0 21.4 Net cash flows from trading securities ......................................... -- 0.3 0.3 Increase in accrued investment income .......................................... (133.3) (57.2) (117.0) (Increase) decrease in premiums and accounts receivable ........................ (16.9) 15.9 12.8 Increase in other assets and other liabilities, net ............................ (74.9) 62.6 (178.4) Increase in policy liabilities and accruals, net ............................... 238.6 480.5 1,182.8 Increase in income taxes ....................................................... 95.9 86.0 175.4 --------------------------------------- Net cash provided by operating activities ............................... 332.0 835.9 1,296.9 Cash flows from investing activities: Sales of: Fixed maturities available-for-sale .......................................... 572.0 2,731.2 6,484.2 Equity securities available-for-sale ......................................... 1.3 154.9 87.3 Real estate .................................................................. 1.4 97.7 63.6 Home Office properties ....................................................... -- -- 887.6 Short-term investments and other invested assets ............................. 104.8 130.7 103.2 Maturities, prepayments and scheduled redemptions of: Fixed maturities held-to-maturity ............................................ -- 40.3 136.0 Fixed maturities available-for-sale .......................................... 763.2 1,497.6 1,779.8 Short-term investments and other invested assets ............................. 2.6 32.4 80.2 Mortgage loans on real estate ................................................ 234.1 615.0 530.6 Purchases of: Fixed maturities held-to-maturity ............................................ -- -- (2.2) Fixed maturities available-for-sale .......................................... (1,003.1) (5,983.2) (11,245.8) Equity securities available-for-sale ......................................... (33.5) (39.6) (87.3) Real estate .................................................................. (1.5) (6.9) (6.7) Short-term investments and other invested assets ............................. (85.6) (627.8) (514.2) Mortgage loans on real estate issued ........................................... (524.8) (507.9) (808.8) Net cash received related to acquisition of business .......................... -- -- 93.7 Other, net ..................................................................... (11.5) (70.2) (180.5) --------------------------------------- Net cash provided by (used in) in investing activities ..................... $ 19.4 $(1,935.8) $(2,599.3)
The accompanying notes are an integral part of these unaudited consolidated financial statements. 10 JOHN HANCOCK LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
For the For the period period from For the April 29, January 1, 2004 six month 2004 through period through June April 28, ended June 30, 2004 2004 30, 2003 ----------------------------------------- (in millions) Cash flows from financing activities: Dividends paid to parent .................................................. -- $ (100.0) $ (100.0) Universal life and investment-type contract deposits ...................... $ 688.8 2,307.3 4,562.5 Universal life and investment-type contract maturities and withdrawals .... (1,587.9) (2,379.5) (3,386.9) Issuance of consumer notes ................................................ 129.5 372.2 389.9 Issuance of short-term debt ............................................... -- -- 70.8 Repayment of short-term debt .............................................. (20.5) (41.8) (114.5) Issuance of long-term debt ................................................ 0.2 0.3 -- Repayment of long-term debt ............................................... (1.3) (1.2) (4.1) ----------------------------------------- Net cash provided by (used in) provided by financing activities ....... (791.2) 157.3 1,417.7 ----------------------------------------- Net (decrease) increase in cash and cash equivalents .................. (439.8) (942.6) 115.3 Cash and cash equivalents at beginning of period ...................... 1,684.3 2,626.9 897.0 ----------------------------------------- Cash and cash equivalents at end of period ............................ $ 1,244.5 $ 1,684.3 $1,012.3 =========================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 11 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1 -- Change of Control Effective April 28, 2004, Manulife Financial Corporation ("Manulife") completed a merger with JHFS, the Company's parent, under which Manulife became the beneficial owner of all the outstanding common shares of John Hancock Financial Services, Inc. (JHFS) that were not already beneficially owned by Manulife as general fund assets and became a wholly owned subsidiary of Manulife. John Hancock Life Insurance Company remains a wholly owned subsidiary of JHFS. As a result of the acquisition, the combined company is the largest life insurance company in Canada and the second largest in North America. The combined entity has a more diversified product line and distribution capabilities and expects to have improved operating efficiencies and a leading position across all its core business lines. Pursuant to the terms of the acquisition, the holders of JHFS common shares received 1.1853 shares of Manulife stock for each JHFS common share. Approximately 342 million Manulife common shares were issued at an ascribed price of CDN $39.61 per share based on the volume weighted average closing stock price of the common shares for the period from September 25, 2003 to September 30, 2003. In addition all of the JHFS unvested stock options as of the date of announcement of the acquisition on September 28, 2003, vested immediately prior to the closing date and were exchanged for options exercisable for approximately 23 million Manulife common shares. The acquisition was accounted for using the purchase method under Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". Under the purchase method of accounting, the assets acquired and liabilities assumed were recorded at estimated fair value at the date of acquisition. The Company is in the process of completing the valuations of a portion of the assets acquired and liabilities assumed; thus, the allocation of the purchase price is subject to refinement. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of April 28, 2004 (in millions): Assets: Fair Value ---------- Fixed maturity securities ........................ $48,658.9 Equity securities ................................ 230.3 Mortgage loans ................................... 11,563.5 Policy loans ..................................... 2,027.6 Other invested assets ............................ 3,423.8 Goodwill ......................................... 3,031.7 Value of business acquired ....................... 2,864.6 Intangible assets ................................ 1,352.0 Cash and cash equivalents ........................ 1,684.7 Reinsurance recoverable, net ..................... 3,162.0 Deferred tax asset ............................... 436.4 Other assets acquired ............................ 3,067.2 Separate account assets .......................... 18,331.9 --------- Total assets acquired ............. 99,834.6 Liabilities: Policy liabilities ............................... $66,277.5 Other liabilities ................................ 5,748.2 Separate accounts ................................ 18,331.9 --------- Total liabilities assumed .......... 90,357.6 Net assets acquired .............................. $ 9,477.0 --------- Goodwill of $3,031.7 million has been allocated to the business and geographic segments refer to Note 9 -- Goodwill and Other Intangible Assets for additional discussion of the Company's goodwill balances. Of the $3,031.7 million in Goodwill, no material amount is expected to be deductible for tax purposes. 12 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Change of Control - (Continued) Intangible assets of $1,352.0 million resulting from the acquisition consist of brand name, distribution network, licensing agreements and contractual rights. Refer to Note 9-- Goodwill and Other Intangible Assets for a more complete discussion of these intangible assets. Note 2 -- Summary of Significant Accounting Policies Business John Hancock Life Insurance Company, (the Company), is a diversified financial services organization that provides a broad range of insurance and investment products and investment management and advisory services. The Company is a wholly owned subsidiary of John Hancock Financial Services (JHFS). On April 28, 2004, JHFS completed its merger agreement with Manulife Financial Corporation (Manulife) and as of the close of business JHFS common stock stopped trading on the New York Stock Exchange. In accordance with the agreement, each share of JHFS common stock was converted into 1.1853 shares of Manulife stock. Commencing on April 28, 2004, the Company operates as a subsidiary of Manulife and the John Hancock name is Manulife's primary U.S. brand. Basis of Presentation The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these unaudited consolidated financial statements contain all adjustments, consisting of purchase accounting adjustments resulting from Manulife's acquisition of the Company, see Note 1- Change of Control, as well as normal and recurring adjustments necessary for a fair presentation of the Company's financial position and results of operations. Operating results for the period from April 29, 2004 through June 30, 2004 (post-merger) and the periods from April 1, 2004 through April 28, 2004 and January 1, 2004 through April 28, 2004 (pre-merger) are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These unaudited consolidated financial statements should be read in conjunction with the Company's annual audited financial statements as of December 31, 2003 included in the Company's Form 10-K for the year ended December 31, 2003 filed with the United States Securities and Exchange Commission (hereafter referred to as the Company's 2003 Form 10-K). The Company's news releases and other information are available on the internet at www.jhancock.com, and its financial statements are available at www.manulife.com, under the link labeled "Securities Filings" on the "Investor Relations" page. In addition, all of the Company's United States Securities and Exchange Commission filings are available on the internet at www.sec.gov, under the name Hancock John Life. 13 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Summary of Significant Accounting Policies - (Continued) The balance sheet at December 31, 2003, presented herein, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain prior period amounts have been reclassified to conform to the current period presentation. Transactions Affecting Comparability of Results of Operations In addition to the acquisition of the Company by Manulife, the disposal described under the table below was conducted in order to execute the Company's strategy to focus resources on businesses in which it can have a leadership position. The table below presents actual and proforma data, for comparative purposes, of revenue and net income for the periods indicated, to demonstrate the proforma effect of the disposal as if it occurred on January 1, 2003.
Period from April 29 Period from April 1 Three Months Ended through June 30, through April 28, June 30, 2004 2004 2003 Proforma 2004 Proforma 2004 Proforma 2003 ----------------------------------------------------------------- (in millions) Revenue .......... $1,182.4 $1,182.4 $ 776.4 $ 776.4 $1,822.1 $1,835.8 Net income ....... $ 169.1 $ 169.1 $ 175.0 $ 175.0 $ 255.8 $ 257.7
Period from April 29 Period from January 1 Six Months Ended through June 30, through April 28, June 30, 2004 2004 2003 Proforma 2004 Proforma 2004 Proforma 2003 ----------------------------------------------------------------- (in millions) Revenue .......... $1,182.4 $1,182.4 $2,513.4 $2,513.4 $3,648.1 $3,692.9 Net income ....... $ 169.1 $ 169.1 $ 329.3 $ 329.3 $ 525.9 $ 528.7
Disposal: On June 19, 2003, the Company agreed to sell its group life insurance business through a reinsurance agreement with Metropolitan Life Insurance Company, Inc (MetLife). The Company is ceding all activity after May 1, 2003 to MetLife. The transaction was recorded as of May 1, 2003 and closed November 4, 2003. There was no material impact on the Company's results of operations from the disposed operations during the first six months of 2003. Stock-Based Compensation For stock option grants made to employees prior to January 1, 2003, the Company applied the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," which resulted in no compensation expense recognized for these stock option grants to employees. Prior to January 1, 2003 the Company recognized compensation expense at the time of the grant or over the vesting period for grants of non-vested stock to employees and non-employee board members and grants of stock options to non-employee general agents and has continued this practice. All options granted under those plans had an exercise price equal to the market value of the Company's common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the effect of which is to record compensation expense for grants made subsequent to this date. The following table illustrates the pro forma effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123 to all stock-based employee compensation. 14 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Summary of Significant Accounting Policies - (Continued)
Period from Period from April 29 April 1 through through Three Months June 30, April 28, Ended June 30, 2004 2004 2003 ---------------------------------------------- (in millions) Net income, as reported ....................................... $169.1 $175.0 $257.7 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects ............ 1.1 1.4 4.0 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects ........................................ 1.1 2.1 9.2 ---------------------------------------------- Proforma net income ........................................... $169.1 $174.3 $252.5 ============================================== Period from Period from April 29 January 1 Six Months through through Ended June 30, April 28, June 30, 2004 2004 2003 ----------------------------------------------- (in millions) Net income, as reported ..................................... $169.1 $329.3 $528.7 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects .......... 1.1 4.8 12.1 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects ............................... 1.1 7.2 25.9 ----------------------------------------------- Proforma net income ......................................... $169.1 $326.9 $514.9 ===============================================
Recent Accounting Pronouncements In May, 2004, the FASB issued FASB Staff Position 106-2 - Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2). In accordance with FSP 106-2, the Company recorded a $40.9 million reduction in the accumulated plan benefit obligation as of the purchase accounting remeasurement date (April 28, 2004) and a $2.5 million decrease in net periodic postretirement benefit costs for the period April 29 through June 30, 2004. On December 8, 2003, President Bush signed into law the bill referenced above, which expands Medicare, primarily by adding a prescription drug benefit for Medicare-eligible retirees starting in 2006. The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) provides for special tax-free subsidies to employers that offer plans with qualifying drug coverages beginning in 2006. There are two broad groups of retirees receiving employer-subsidized prescription drug benefits at the Company. The first group, those who retired prior to January 1, 1992, receives a subsidy of between 90% and 100% of total cost. Since this subsidy level will clearly meet the criteria for qualifying drug coverage, the Company anticipates that the benefits it pays after 2005 for pre-1992 retirees will be lower as a result of the new Medicare provisions and has reflected that reduction in the other postretirement benefit plan liability. With respect to the second group, those who retired on or after January 1, 1992, the employer subsidy on prescription drug benefits is capped and currently provides as low as 25% of total cost. Since final authoritative accounting guidance has not yet been issued on determining whether a benefit meets the actuarial criteria for qualifying drug coverage, the Company has deferred recognition as permitted by FSP 106-2 for this group. The final accounting guidance could require changes to previously reported information. FASB Interpretation No. 46 (revised December 2003) - Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 In December, 2003, the FASB re-issued Interpretation 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," (FIN 46R) which clarifies the consolidation accounting guidance of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," (ARB No. 51) to certain entities for which controlling financial interests are not measurable by reference to ownership of the equity of the entity. Such entities are known as variable interest entities (VIEs). Controlling financial interests of a VIE are defined as exposure of a party to the VIE to a majority of either the expected variable losses or expected variable returns of the VIE, or both. Such party is the primary beneficiary of the VIE and FIN 46R requires that the primary beneficiary of a VIE consolidate the VIE. FIN 46R also requires certain disclosures for significant relationships with VIEs, whether or not consolidation accounting is either used or anticipated. The consolidation requirements of FIN 46R were applied at December 31, 2003 for entities considered to be special purpose entities (SPEs), and applied at March 31, 2004 for non-SPE entities. The Company categorized its FIN 46R consolidation candidates into three categories- 1) collateral debt obligation funds it manages (CDO funds or CDOs), which are SPEs, 2) low-income housing properties (the Properties) which are not SPEs, and 3) assorted other entities (Other Entities) which are not SPEs. The Company has determined that it should not consolidate any of the CDO funds, Properties or Other Entities, therefore the adoption of FIN 46R has no impact on the Company's consolidated financial position, results of operations or cash flows. 15 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Summary of Significant Accounting Policies - (Continued) Additional liabilities recognized as a result of consolidating any VIEs with which the Company is involved would not represent additional claims on the general assets of the Company; rather, they would represent claims against additional assets recognized by the Company as a result of consolidating the VIEs. Conversely, additional assets recognized as a result of consolidating VIEs would not represent additional assets which the Company could use to satisfy claims against its general assets, rather they would be used only to settle additional liabilities recognized as a result of consolidating the VIEs. Refer to Note 4--Relationships with Variable Interest Entities for a more complete discussion of the Company's significant relationships with VIEs, their assets and liabilities, and the Company's maximum exposure to loss as a result of its involvement with them. Statement of Position 03-1 - Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long Duration Contracts and for Separate Accounts On July 7, 2003, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long Duration Contracts and for Separate Accounts" (SOP 03-1). SOP 03-1 provides guidance on a number of topics unique to insurance enterprises, including separate account presentation, interest in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation, returns based on a contractually referenced pool of assets or index, accounting for contracts that contain death or other insurance benefit features, accounting for reinsurance and other similar contracts, accounting for annuitization benefits, and sales inducements to contractholders. The Company adopted SOP 03-1 on January 1, 2004, which resulted in a decrease in shareholders' equity of $1.5 million (net of tax of $0.8 million). The Company recorded a reduction in net income of $3.3 million (net of tax of $1.8 million) partially offset by an increase in other comprehensive income of $1.8 million (net of tax of $1.0 million) which were recorded as the cumulative effects of an accounting change, on January 1, 2004. In addition, in conjunction with the adoption of SOP 03-1 the Company reclassified $933.8 million in separate account assets and liabilities to the general account balance sheet accounts. Note 3 -- Segment Information As a result of Manulife's acquisition of the Company, see Note 1- Change of Control, the Company renamed and reorganized certain businesses within its operating segments to better align the Company with its new parent, Manulife. The Company renamed the Asset Gathering Segment as the Wealth Management Segment. In addition, the Institutional Investment Management Segment was moved to the Corporate and Other Segment. Other realignments include moving Signator Investors, Inc. our agent sales organization, from Wealth Management to Protection, and Group Life, Retail Discontinued operations, discontinued health insurance operations and Creditor from Corporate and Other to Protection. International Group Plans (IGP) remain in international operations in our Corporate and Other Segment while IGP will be reported in Reinsurance in Manulife's segment results. The financial results for all periods have been reclassified to conform to the current period presentation. The Company operates in the following four business segments: two segments primarily serve retail customers, one segment serves institutional customers, and our fourth segment is the Corporate and Other Segment, which includes our institutional advisory business, the remaining international operations, and the corporate account. Our retail segments are the Protection Segment and the Wealth Management Segment, previously called Asset Gathering. Our institutional segment is the Guaranteed and Structured Financial Products Segment (G&SFP). Prior to the merger, the Company operated in five business segments: two segments primarily served retail customers, two segments served domestic institutional customers, and our fifth segment was the Corporate and Other Segment, which included our remaining international operations, the corporate account and several discontinued business lines. For additional information about the Company's pre-acquisition business segments please refer to the Company's 2003 Form 10-K. Subsequent to the merger, the Company changed its methodology for determining how much capital is needed to support its operating segments and redeployed capital according to the new methodology. As part of this process the Company moved certain tax preferenced investments from the operating segments to the Corporate and Other Segment. These steps were taken as part of the alignment of the Company's investment and capital allocation processes with those of its parent, and they could have a material impact on each operating segment's investment income and net income in future periods. 16 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Segment Information - (Continued) The following table summarizes selected financial information by segment for the periods and dates indicated. Included in the Protection Segment for all periods presented are the assets, liabilities, revenues and expenses of the closed block. For additional information on the closed block, see Note 6 - Closed Block in the notes to the unaudited consolidated financial statements and the related footnote in the Company's 2003 Form 10-K.
Wealth Corporate Protection Management G&SFP and Other Consolidated --------------------------------------------------------------- (in millions) For the period from April 29, 2004 through June 30, 2004 Revenues: Revenues from external customers ... $ 354.6 $ 64.0 $ 8.7 $ 124.4 $ 551.7 Net investment income .............. 221.9 104.5 200.9 54.5 581.8 Net realized investment and other gains (losses), net ........ 13.2 (9.2) 48.9 (4.0) 48.9 Inter-segment revenues ............. -- 0.2 0.1 (0.3) -- ------------------------------------------------------------------- Revenues ........................... $ 589.7 $ 159.5 $ 258.6 $ 174.6 $ 1,182.4 =================================================================== Net Income: Net income ......................... $ 89.2 $ 31.3 $ 55.6 $ (7.0) $ 169.1 =================================================================== Supplemental Information: Equity in net income of investees accounted for by the equity method $ 5.3 $ 1.5 $ 4.9 $ (3.0) $ 8.7 Carrying value of investments accounted for by the equity method ........................... 431.6 221.6 568.9 644.9 1,867.0 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses) ......................... 12.4 15.8 9.6 -- 37.8 Segment assets ..................... 40,816.5 19,478.9 35,012.0 3,511.5 98,818.9
17 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Segment Information - (Continued)
Wealth Corporate Protection Management G&SFP and Other Consolidated ------------------------------------------------------------- (in millions) For the period from April 1, 2004 through April 28, 2004 Revenues: Revenues from external customers ........ $190.2 $ 24.4 $ 11.3 $ 50.6 $276.5 Net investment income ................... 122.6 59.8 128.6 (9.8) 301.2 Net realized investment and other gains (losses), net ................... (8.0) 5.5 125.4 75.8 198.7 Inter-segment revenues .................. -- 0.1 0.1 (0.2) -- ---------------------------------------------------------- Revenues ................................ $304.8 $ 89.8 $265.4 $116.4 $776.4 Net Income: Net income .............................. $ 25.3 $ 18.2 $ 88.9 $ 42.6 $175.0 Supplemental Information: Equity in net income of investees accounted for by the equity method .... $ 2.8 $ 0.1 $ 1.6 $ 2.1 $ 6.6 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses) ... 6.0 8.9 0.1 -- 15.0
18 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Segment Information - (Continued)
Wealth Corporate Protection Management G&SFP and Other Consolidated ----------------------------------------------------------- (in millions) As of or for the three months ended June 30, 2003 Revenues: Revenues from external customers ....... $ 520.0 $ 107.4 $ 15.5 $ 172.3 $815..2 Net investment income .................. 357.9 176.7 412.3 (4.6) 942.3 Net realized investment and other gains (losses), net .................. 27.5 20.2 11.8 18.8 78.3 Inter-segment revenues ................. -- 0.3 -- (0.3) -- ---------------------------------------------------------- Revenues ............................... $ 905.4 $ 304.6 $ 439.6 $ 186.2 $ 1,835.8 Net Income: Net income ............................. $ 109.0 $ 63.7 $ 75.6 $ 9.4 $ 257.7 ========================================================== Supplemental Information: Equity in net income of investees accounted for by the equity method ... $ 5.8 $ 3.1 $ 11.8 $ 5.2 $ 25.9 Carrying value of investments accounted for by the equity method ... 308.9 201.9 505.8 703.2 1,719.8 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses) .. 44.1 19.1 0.6 (0.2) 63.6 Segment assets ......................... 35,956.7 18,189.2 36,927.2 4,754.5 95,827.6
19 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Segment Information - (Continued)
Wealth Corporate Protection Management G&SFP and Other Consolidated ---------------------------------------------------------------- (in millions) For the period from April 29 through June 30, 2004 Revenues: Revenues from external customers ....... $ 354.6 $ 64.0 $ 8.7 $ 124.4 $ 551.7 Net investment income .................. 221.9 104.5 200.9 54.5 581.8 Net realized investment and other gains (losses), net .................. 13.2 (9.2) 48.9 (4.0) 48.9 Inter-segment revenues ................. -- 0.2 0.1 (0.3) -- ---------------------------------------------------------------- Revenues ............................... 589.7 159.5 258.6 174.6 1,182.4 ================================================================ Net Income: Net income ............................. $ 89.2 $ 31.3 $ 55.6 $ (7.0) $ 169.1 ================================================================ Supplemental Information: Equity in net income of investees accounted for by the equity method ............................... $ 5.3 $ 1.5 $ 4.9 $ (3.0) $ 8.7 Carrying amount of investments accounted for using the equity method ............................... 431.6 221.6 568.9 644.9 1,867.0 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses) .. 12.4 15.8 9.6 -- 37.8 Segment assets ......................... 40,816.5 19,478.9 35,012.0 3,511.5 98,818.9
20 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Segment Information - (Continued)
Wealth Corporate Protection Management G&SFP and Other Consolidated ------------------------------------------------------------------- (in millions) For the period from January 1, 2004 through April 28, 2004 Revenues: Revenues from external customers ....... $ 751.6 $ 116.6 $ 26.9 $ 232.6 $1,127.7 Net investment income .................. 492.7 237.5 530.4 24.1 1,284.7 Net realized investment and other gains (losses), net .................. (9.0) (1.5) 8.8 102.7 101.0 Inter-segment revenues ................. -- 0.4 0.2 (0.6) -- ------------------------------------------------------------------- Revenues ............................... 1,235.3 353.0 566.3 358.8 2,513.4 =================================================================== Net Income: Net income ............................. $ 110.9 $ 49.5 $ 83.2 $ 85.7 $ 329.3 =================================================================== Supplemental Information: Equity in net income of investees accounted for by the equity method ............................... 11.4 3.1 11.5 43.3 69.3 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses) .. 71.4 50.0 0.6 (0.2) 121.8
21 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Segment Information - (Continued)
Wealth Corporate Protection Management G&SFP and Other Consolidated ------------------------------------------------------------- (in millions) As of or for the six months ended June 30, 2003 Revenues: Revenues from external customers ........ $ 1,064.8 $ 208.5 $ 33.6 $ 326.9 $ 1,633.8 Net investment income ................... 708.2 342.5 839.6 (14.9) 1,875.4 Net realized investment and other gains (losses), net ................... (5.0) (17.5) (123.5) 329.7 183.7 Inter-segment revenues .................. -- 0.6 -- (0.6) -- ------------------------------------------------------------- Revenues ................................ $ 1,768.0 534.1 $ 749.7 $ 641.1 $ 3,692.9 ============================================================= Net Income: Net income .............................. $ 174.1 $ 79.0 $ 67.1 $ 208.5 $ 528.7 ============================================================= Supplemental Information: Equity in net income of investees accounted for by the equity method ................................ $ 11.0 $ 5.2 $ 19.7 $ 5.2 $ 41.1 Carrying amount of investments accounted for using the equity method ................................ 308.9 201.9 505.8 703.2 1,719.8 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses) .............. 81.4 53.0 1.1 (0.1) 135.4 Segment assets .......................... 35,956.7 18,189.2 36,927.2 4,754.5 95,827.6
22 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 4 -- Relationships with Variable Interest Entities The Company has relationships with various types of special purpose entities (SPEs) and other entities, some of which are variable interest entities (VIEs), in accordance with FIN 46R, as discussed in Note 2--Summary of Significant Accounting Policies above. Presented below are discussions of the Company's significant relationships with them, the Company's conclusions about whether the Company should consolidate them, and certain summarized financial information for them. As explained in Note 2--Summary of Significant Accounting Policies above, additional liabilities recognized as a result of consolidating any VIEs with which the Company is involved would not represent additional claims on the general assets of the Company; rather, they would represent claims against additional assets recognized by the Company as a result of consolidating the VIEs. These additional liabilities would be non-recourse to the general assets of the Company. Conversely, additional assets recognized as a result of consolidating these VIEs would not represent additional assets which the Company could use to satisfy claims against its general assets, rather they would be used only to settle additional liabilities recognized as a result of consolidating the VIEs. Collateralized Debt Obligation Funds (CDOs). Since 1996, the Company has acted as investment manager to certain asset backed investment vehicles, commonly known as collateralized debt obligation funds (CDOs). The Company also invests in the debt and/or equity of these CDOs, and in the debt and/or equity of CDOs managed by others. CDOs raise capital by issuing debt and equity securities, and use their capital to invest in portfolios of interest bearing securities. The returns from a CDO's portfolio of investments are used by the CDO to finance its operations including paying interest on its debt and paying advisory fees and other expenses. Any net income or net loss is shared by the CDO's equity owners and, in certain circumstances where the Company manages the CDO, positive investment experience is shared by the Company through variable performance management fees. Any net losses in excess of the CDO equity are borne by the debt owners in ascending order of subordination. Owners of securities issued by CDOs that are managed by the Company have no recourse to the Company's assets in the event of default by the CDO. The Company's risk of loss from any CDO it manages, or in which it invests, is limited to its investment in the CDO. In accordance with previous consolidation accounting principles (now superceded by FIN 46R), the Company formerly consolidated a CDO only if the Company owned a majority of the CDO's equity. The Company is now required to consolidate a CDO when, in accordance with FIN 46R, the CDO is deemed to be a VIE, but only if the Company is deemed to be the primary beneficiary of the CDO. For those CDOs which are not deemed to be VIEs, the Company determines its consolidation status by considering the control relationships among the equity owners of the CDOs. The Company has determined whether each CDO should be considered a VIE, and while most are VIEs, some are not. The Company has determined that it is not the primary beneficiary of any CDO which is a VIE, and for those that are not VIEs, the Company also does not have controlling financial interests. Therefore, the Company does not use consolidation accounting for any of the CDOs which it manages. The Company believes that its relationships with its managed CDOs are collectively significant, and accordingly provides, in the tables below, summary financial data for all these CDOs and data relating to the Company's maximum exposure to loss as a result of its relationships with them. The Company has determined that it is not the primary beneficiary of any CDO in which it invests and does not manage and thus will not be required to consolidate any of them, and considers that its relationships with them are not collectively significant, therefore the Company does not disclose data for them. Credit ratings are provided by nationally recognized credit rating agencies, and relate to the debt issued by the CDOs in which the Company has invested. June 30, December 31, 2004 2003 -------------------------- (in millions) Total size of Company-Managed CDOs (1) Total assets .................................... $3,396.4 $4,922.2 ======== ======== Total debt ...................................... $3,404.2 $4,158.2 Total other liabilities ......................... 5.4 712.0 -------- -------- Total liabilities ............................... 3,409.6 4,870.2 Total equity .................................... (13.2) 52.0 -------- -------- Total liabilities and equity .................... $3,396.4 $4,922.2 ======== ======== (1) The reduction in size of the Company-Managed CDOs is primarily due to the liquidation, at maturity, of Declaration Funding 1 LTD, in May 2004 23 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 4 -- Relationships with Variable Interest Entities - (Continued)
Maximum exposure of the Company to losses From Company-Managed CDOs June 30, 2004 December 31, 2003 -------------------------------------------- (in millions, except percents) Investment in tranches of Company managed CDOs, by credit rating (Moody's/Standard & Poors): Aaa/AAA ............................................ $184.2 59.3% $201.0 35.6% Aa1/AA+ ............................................ 73.8 23.8 75.7 13.4 Baa2/BBB ........................................... -- -- 218.0 38.8 B2 ................................................. -- -- 8.0 1.4 B3/B- .............................................. 7.7 2.5 -- -- Caa1/CCC+ .......................................... 10.4 3.3 13.2 2.3 Not rated (equity) ................................. 34.6 11.1 48.1 8.5 ------ ------ ------ ------ Total Company exposure ............................. $310.7 100.0% $564.0 100.0% ====== ====== ====== ======
Low-Income Housing Properties. Since 1995, the Company has generated income tax benefits by investing in apartment properties (the Properties) that qualify for low income housing and/or historic tax credits. The Company initially invested in the Properties directly, but now primarily invests indirectly via limited partnership real estate investment funds (the Funds), which are consolidated into the Company's financial statements. The Properties are organized as limited partnerships or limited liability companies each having a managing general partner or a managing member. The Company is usually the sole limited partner or investor member in each Property; it is not the general partner or managing member in any Property. The Properties typically raise additional capital by qualifying for long-term debt, which at times is guaranteed or otherwise subsidized by Federal or state agencies, or by Fannie Mae. In certain cases, the Company invests in the mortgages of the Properties. The Company's maximum loss in relation to the Properties is limited to its equity investment in the Properties, future equity commitments made, and where the Company is the mortgagor, the outstanding balance of the mortgages originated for the Properties, and outstanding mortgage commitments the Company has made to the Properties. The Company receives Federal income tax credits in recognition of its investment in each of the Properties for a period of ten years. In some cases, the Company receives distributions from the Properties which are based on a portion of the Property cash flows. The Company has determined that it is not the primary beneficiary of any Property, so the Company does not use consolidation accounting for any of them. The Company believes that its relationships with the Properties are significant, and accordingly, the disclosures in the tables below are provided. The tables below present summary financial data for the Properties, and data relating to the Company's maximum exposure to loss as a result of its relationships with them. June 30, 2004 December 31, 2003 --------------------------------- (in millions) Total size of the Properties (1) Total assets .............................. $1,072.6 $ 982.7 ======== ======== Total debt ................................ $ 627.0 $ 576.3 Total other liabilities ................... 125.6 116.6 -------- -------- Total liabilities ......................... 752.6 692.9 Total equity .............................. 320.0 289.8 -------- -------- Total liabilities and equity .............. $1,072.6 $ 982.7 ======== ======== (1) Property level data reported above is reported with six and three month delays, respectively due to the delayed availability of financial statements of the Funds. 24 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 4 -- Relationships with Variable Interest Entities - (Continued)
June 30, 2004 December 31, 2003 --------------------------------- (in millions) Maximum exposure of the Company to losses from the Properties Equity investment in the Properties (1) .................... $304.0 $291.0 Outstanding equity capital commitments to the Properties ... 101.4 108.2 Carrying value of mortgages for the Properties ............. 67.5 62.8 Outstanding mortgage commitments to the Properties ......... 0.9 5.1 ------ ------ Total Company exposure ..................................... $473.8 $467.1 ====== ======
(1) Equity investment in the Properties above is reported with six and three month delays, respectively, due to the delayed availability of financial statements of the Funds. Other Entities. The Company has investment relationships with a disparate group of entities (Other Entities), which result from the Company's direct investment in their debt and/or equity. This category includes energy investment partnerships, investment funds organized as limited partnerships, and businesses which have undergone debt restructurings and reorganizations and various other relationships. The Company has determined that for each of these Other Entities which are VIEs, the Company is not the primary beneficiary, and should not use consolidation accounting for them. The Company believes that its relationships with the Other Entities are not significant, and is accordingly not providing summary financial data for them, or data relating to the Company's maximum exposure to loss as a result of its relationships with them. These potential losses are generally limited to amounts invested, which are included on the Company's consolidated balance sheets in the appropriate investment categories. Note 5 -- Commitments and Contingencies Reinsurance Recoverable On February 28, 1997, the Company sold a major portion of its group insurance business to UNICARE Life & Health Insurance Company (UNICARE), a wholly owned subsidiary of WellPoint Health Networks, Inc. The business sold included the Company's group accident and health business and related group life business and Cost Care, Inc., Hancock Association Services Group and Tri-State, Inc., all of which were indirect wholly-owned subsidiaries of the Company. The Company retained its group long-term care operations. The insurance business sold was transferred to UNICARE through a 100% coinsurance agreement. The Company remains liable to its policyholders to the extent that UNICARE does not meet its contractual obligations under the coinsurance agreement. Through the Company's group health insurance operations, the Company 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, the Company both assumed risks as a reinsurer, and 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. The disputes concern the placement of the business with reinsurers and recovery of the reinsurance. The Company is engaged in certain disputes, including a number of related legal proceedings, in respect of this business. The risk to the Company is that other companies that reinsured the business from the Company may seek to avoid their reinsurance obligations. However, the Company believes that it has a reasonable legal position in this matter. During the fourth quarter of 1999 and early 2000, the Company received additional information about its 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, during the fourth quarter of 1999 the Company recognized a charge for uncollectible reinsurance of $133.7 million, after tax, as its best estimate of its remaining loss exposure. The Company believes that any exposure to loss from this issue, in addition to amounts already provided for as of June 30, 2004, would not be material to the Company's financial position, results of operations or liquidity. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under the reinsurance agreements. Failure of the reinsurers to honor their obligations could result in losses to the Company; consequently, estimates are established for amounts deemed or estimated to be uncollectible. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers 25 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 5 -- Commitments and Contingencies - (Continued) and monitors concentration of credit risk arising from similar characteristics of the reinsurers. Other Matters In the normal course of its business operations, the Company is involved with litigation from time to time with claimants, beneficiaries and others, and a number of litigation matters were pending as of June 30, 2004. It is the opinion of management, after consultation with counsel, that the ultimate liability with respect to these claims, if any, will not materially affect the financial position, results of operations or liquidity of the Company. 26 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 6 -- Closed Block In connection with the Company's plan of reorganization for its demutualization and initial public offering, the Company created a closed block for the benefit of policies included therein. Additional information regarding the creation of the closed block and relevant accounting issues is contained in the notes to consolidated financial statements of the Company's 2003 Form 10-K. The following tables set forth certain summarized financial information relating to the closed block as of the dates indicated.
June 30, 2004 December 31, 2003 -------------------------------- (in millions) Liabilities Future policy benefits ............................................... $10,680.5 $10,690.6 Policyholder dividend obligation ..................................... 437.1 400.0 Policyholders' funds ................................................. 1,506.6 1,511.9 Policyholder dividends payable ....................................... 415.7 413.1 Other closed block liabilities ....................................... 59.5 37.4 -------------------------------- Total closed block liabilities .................................... $13,099.4 $13,053.0 -------------------------------- Assets Investments: Fixed maturities: Held-to-maturity--at amortized cost (fair value: December 31--$69.6) ................................ -- $ 66.0 Available-for-sale--at fair value (cost: June 30--$6,402.9; December 31--$5,847.6) ................ $ 6,354.6 6,271.1 Equity securities: Available-for-sale--at fair value (cost: June 30--$7.0 December 31--$9.1) ......................... 6.9 9.1 Mortgage loans on real estate ........................................ 1,716.5 1,577.9 Policy loans ......................................................... 1,543.3 1,554.0 Short-term investments ............................................... -- 1.2 Other invested assets ................................................ 294.0 230.6 -------------------------------- Total investments ................................................. 9,915.3 9,709.9 Cash and cash equivalents ............................................ 98.6 248.3 Accrued investment income ............................................ 146.4 145.1 Other closed block assets ............................................ 319.7 308.6 -------------------------------- Total closed block assets ......................................... $10,480.0 $10,411.9 -------------------------------- Excess of reported closed block liabilities over assets designated to the closed block .................................... $ 2,619.4 $ 2,641.1 -------------------------------- Portion of above representing other comprehensive income: Unrealized (depreciation) appreciation , net of tax of ($15.9) million and ($148.0) million at June 30 and December 31, respectively .................................................... (28.4) 275.3 Allocated to the policyholder dividend obligation, net of tax of $(15.9) million and $148.1 million at June 30 and December 31, respectively .................................................... 29.5 (275.1) -------------------------------- Total ......................................................... 1.1 0.2 -------------------------------- Maximum future earnings to be recognized from closed block assets and liabilities ............................................ $ 2,620.5 $ 2,641.3 ================================
27 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 6 -- Closed Block - (Continued)
Period from Period from Twelve April 29, January 1, Months ended through June 30, through April 28, December 31, 2004 2004 2003 ----------------------------------------------------- (in millions) Changes in the policyholder dividend obligation: Balance at beginning of period ..................... $308.8 $400.0 $288.9 Impact on net income before income taxes ......... (34.9) 23.4 (57.9) Unrealized investment gains (losses) ............. (45.2) (114.6) 169.0 Purchase equation fair value adjustment .......... 208.4 -- -- -------------------------------------------------- Balance at end of period ........................... $437.1 $308.8 $400.0 ==================================================
The following table sets forth certain summarized financial information relating to the closed block for the periods indicated:
Period from Period from April 29, April 1, Three Months through through Ended June 30, April 28, June 30, 2004 2004 2003 ------------------------------------------ (in millions) Revenues Premiums ................................................................ $131.9 $ 68.7 $218.8 Net investment income ................................................... 89.2 50.5 161.7 Net realized investment and other gains (losses), net of amounts credited to the policyholder dividend obligation of $(10.7) million and $18.8 million for the periods April 29 through June 30, and April 1 through April 28, 2004, respectively, and $23.8 million for the three months ended June 30, 2003 ............ 0.7 (34.6) (1.1) Other closed block revenues ............................................. (0.1) 0.1 0.1 ------------------------------------------ Total closed block revenues ........................................... 221.7 84.7 379.5 Benefits and Expenses Benefits to policyholders ............................................... 154.2 78.9 230.3 Change in the policyholder dividend obligation .......................... (24.7) (6.6) (3.2) Other closed block operating costs and expenses ......................... (0.4) (0.5) (1.9) Dividends to policyholders .............................................. 69.9 36.3 120.9 ------------------------------------------ Total benefits and expenses ........................................... 199.0 108.1 346.1 ------------------------------------------ Closed block revenues, net of closed block benefits and expenses, before income taxes ................................................... 22.7 (23.4) 33.4 Income taxes, net of amounts credited to the policyholder dividend obligation of $0.7 million and $0.0 million for the periods April 29 through June 30, and April 1 through April 28, 2004, respectively, and $0.6 million for the three months ended June 30, 2003 ...................................... 7.6 (8.9) 11.9 ------------------------------------------ Closed block revenues, net of closed block benefits and expenses, and income taxes .................................................... $ 15.1 ($14.5) $ 21.5 ==========================================
28 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 6 -- Closed Block - (Continued)
Period from Period from April 29, January 1, Six Months through through Ended June 30, April 28, June 30, 2004 2004 2003 ------------------------------------ (in millions) Revenues Premiums ............................................................. $131.9 $278.0 $443.2 Net investment income ................................................ 89.2 208.4 326.3 Net realized investment and other gains (losses), net of amounts credited to the policyholder dividend obligation of $(10.7) million and $33.7 million for the periods from April 29 through June 30, 2004 and January 1 through April 28, 2004, respectively, and $(11.2) million for the six months ended June 30, 2003 ...................................................... 0.7 (35.7) (2.3) Other closed block revenues .......................................... (0.1) (0.2) 0.1 ------------------------------------ Total closed block revenues ........................................ 221.7 450.5 767.3 Benefits and Expenses Benefits to policyholders ............................................ 154.2 310.9 475.9 Change in the policyholder dividend obligation ....................... (24.7) (11.2) (8.7) Other closed block operating costs and expenses ...................... (0.4) 0.9 (4.4) Dividends to policyholders ........................................... 69.9 141.1 237.9 ------------------------------------ Total benefits and expenses ........................................ 199.0 441.7 700.7 ------------------------------------ Closed block revenues, net of closed block benefits and expenses, before income taxes ................................................ 22.7 8.8 66.6 Income taxes, net of amounts credited to the policyholder dividend obligation of $0.7 million and $0.6 million for the periods from April 29 through June 30 and January 1 through April 28, 2004, respectively, and $1.1 million for the six months ended June 30, 2003 ................................................ 7.6 2.3 23.3 ------------------------------------ Closed block revenues, net of closed block benefits and expenses, and income taxes ................................................. $ 15.1 $ 6.5 $ 43.3 ====================================
29 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 7 -- Restructuring Costs Following the acquisition of JHFS by Manulife on April 28, 2004, see Note 1 - Change of Control, Manulife developed a plan to integrate the operations of JHFS with Manulife's consolidated subsidiaries. Manulife expects the restructuring to be substantially completed by the end of 2005. Restructuring costs of $85.1 million were recognized by the Company as part of the purchase transaction and consist primarily of exit and consolidation activities involving operations, certain compensation costs, and facilities. The accruals for the restructuring costs are included in other liabilities on the consolidated balance sheets and in other operating costs and expenses in the income statements. The following details the amounts and status of restructuring costs (in millions):
Pre-acquisition Amount Ending Accrual Accruals Utilized Accrued at Amount Utilized Balance Type of Cost 1/1/04 1/1/04-4/28/04 1/1/04-4/28/04 acquisition 4/29/04-6/30/04 6/30/04 - -------------------------------------------------------------------------------------------------------------------- Personnel ............ $12.0 $(0.8) $ 2.5 $41.5 $ 2.0 $48.2 Facilities ........... -- -- -- 43.6 1.0 42.6 - -------------------------------------------------------------------------------------------------------------------- Total ........... $12.0 $(0.8) $ 2.5 $85.1 $ 3.0 $90.8 ================================================================================================================
Note 8 -- Related Party Transactions The Company provides JHFS, its parent, with personnel, property, and facilities in carrying out certain of its corporate functions. The Company annually determines a fee (the parent company service fee) for these services and facilities based on a number of criteria, which are periodically revised to reflect continuing changes in the Company's operations. The parent company service fee is included in other operating costs and expenses within the Company's income statements. The Company charged JHFS service fees of $3.5 million and $4.8 million for the three month periods ended June 30, 2004 and 2003, respectively, and $8.7 million and $11.1 million for the six month periods ended June 30, 2004 and 2003, respectively. As of June 30, 2004, JHFS was current in its payments to the Company related to these services. The Company provides certain administrative and asset management services to its employee benefit plans (the Plans). Fees paid to the Company by the Plans for these services were $1.5 million and $1.2 million for the three month periods ended June 30, 2004 and 2003, respectively, and $3.2 million and $2.6 million for the six month periods ended June 30, 2004 and 2003, respectively. During the six month periods ended June 30, 2004 and 2003, the Company paid $69.0 million and $24.8 million in premiums to an affiliate, John Hancock Insurance Company of Vermont (JHIC of Vermont) for certain insurance services. All of these were in Trust Owned Health Insurance (TOHI) premiums, a funding vehicle for postretirement medical benefit plans, which offers customers an insured medical benefit-funding program in conjunction with a broad range of investment options. The Company has reinsured certain portions of its long term care insurance, non-traditional life insurance and group pension businesses with John Hancock Reassurance Company, Ltd. of Bermuda (JHReCo), an affiliate and a wholly owned subsidiary of JHFS. The Company entered into these reinsurance contracts in order to facilitate its capital management process. These reinsurance contracts are primarily written on a funds withheld basis where the related financial assets remain invested at the Company. As a result, the Company recorded a liability for coinsurance amounts withheld from JHReCo of $1.309.0 million at June 30, 2004 and $994.5 million at December 31, 2003, which are included with other liabilities in the consolidated balance sheets and recorded reinsurance recoverable from JHReCo of $1,962.0 million at June 30, 2004 and $1,421.1 million at December 31, 2003, respectively, which are included with other reinsurance recoverables on the consolidated balance sheets. Premiums ceded to JHReCo were $183.7 million and $166.0 for the three month periods ended June 30, 2004 and 2003, respectively, and $379.1 million and $283.3 million of the six month periods ended June 30, 2004 and 2003, respectively. During the year ended 2002, the Company began reinsuring certain portions of its group pension businesses with JHIC of Vermont. The Company entered into these reinsurance contracts in order to facilitate its capital management process. These reinsurance contracts are primarily written on a funds withheld basis where the related financial assets remain invested at the Company. As a result, the Company recorded a liability for coinsurance amounts withheld from JHIC of Vermont of $229.2 million at June 30, 2004 and $157.2 million at December 31, 2003, which is included with other liabilities in the consolidated balance sheets. At June 30, 2004 and December 31, 2003, the Company had not recorded any reinsurance recoverable from JHIC of Vermont. Reinsurance recoverable is typically recorded with other reinsurance recoverables on the consolidated balance sheet. Premiums ceded by the Company to JHIC of Vermont were $0.5 million and $0.2 million for the three month periods 30 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 8 -- Related Party Transactions - (Continued) ended June 30, 2004 and 2003, respectively, and $0.8 million and $0.4 million for the six month periods ended June 30, 2004 and 2003, respectively. Prior to its acquisition by Manulife effective April 28, 2004, the Company reinsured certain portions of its closed block with Manulife. The Company entered into these reinsurance contracts in order to facilitate its statutory capital management process. These reinsurance contracts are primarily written on a modified coinsurance basis where the related financial assets remain invested at the Company. The closed block reinsurance agreement is a financial reinsurance agreement and does not meet the risk transfer definition for U.S. GAAP reporting purposes. The agreement is accounted for under deposit accounting with only the reinsurance risk fee being reported on the U.S. GAAP income statement. The U.S. GAAP financial statement does not report reinsurance ceded premiums or reinsurance recoverable. The impact on our U.S. GAAP financial statement represents the fee recorded as payable to Manulife, which appears in Other Operating Costs and Expenses in the income statements and was $0.8 million for the period the Company operated as a subsidiary of Manulife, April 29, 2004 through June 30, 2004. Note 9 -- Goodwill and Other Intangible Assets The Company recognized several intangible assets which resulted from business combinations including Manulife's acquisition of the Company (see Note 1 - Change of Control above). Non-amortizable assets include; goodwill, which is the excess of the cost over the fair value of identifiable assets acquired in business combinations, brand name which is the value in the purchase price of the Company assigned to the Company's trademark and trade name, and mutual fund investment management contracts acquired (investment management contracts) which are values assigned to the investment management relationships between the Company and each of the mutual funds managed by the Company. Amortizable assets include; value of business acquired (VOBA) which is the present value of estimated future profits of insurance policies in force related to businesses acquired, and which has weighted average lives ranging from 6 to 17 years for the various insurance products, distribution networks which are the value assigned to the Company's network of sales agents and producers responsible for procuring business and which have a weighted average life of 22 years, and other investment management contracts which are the values assigned to the Company's institutional investment contracts and which have a weighted average life of 10 years. Three of these assets were initially recognized at the time of the acquisition of the Company by MFC (brand name, distribution networks, and other investment management contracts) while the others were expanded in scope and size as a result of the merger. The following tables contain summarized financial information for each of these intangible assets as of the dates and periods indicated.
Accumulated Gross Amortization Net Carrying And Other Carrying Amount Changes Amount ------------------------------------ (in millions) June 30, 2004 Unamortizable intangible assets: Goodwill ............................................. $3,031.7 -- $3,031.7 Brand name ........................................... 600.0 -- 600.0 Investment management contracts ...................... 292.9 -- 292.9 Amortizable intangible assets: Distribution networks ................................ $ 397.2 $ (0.2) $ 397.0 Other investment management contracts ................ 61.7 -- 61.2 VOBA ................................................. 2,864.6 (6.5) 2,858.1 December 31, 2003 Unamortizable intangible assets: Goodwill ............................................. $ 166.7 $(58.1) $ 108.6 Mutual fund investment management contracts .......... 13.3 (7.0) 6.3 Amortizable intangible assets: VOBA ................................................. 205.9 (37.4) 168.5
31 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Period from Period from April 29, April 1, 2004 2004 Three through through Months June 30, April 28, Ended June 2004 2004 30, 2003 ----------------------------------------- (in millions) Amortization expense: Distribution networks, net of tax of $0.1 million, $ - million, and $ - million, respectively .................... $ 0.1 -- -- Other investment management contracts, net of tax of $0.1 million, $ - million, and $- million, respectively .... 0.3 -- -- VOBA, net of tax of $11.2 million, $0.5 million and $0.7 million, respectively ......................................... 20.8 $ 0.8 $ 1.4 ----------------------------------------- Total amortization expense, net of tax of $11.4 million, $0.5 million and $0.7 million, respectively ................... $21.2 $ 0.8 $ 1.4 ========================================= Period from Period from April 29, January 1, 2004 2004 through through Six Months June 30, April 28, Ended June 2004 2004 30, 2003 ------------------------------------------ (in millions) Amortization expense: Distribution networks, net of tax of $0.1 million, $ - million and $- million, respectively ...................... $ 0.1 -- -- Other investment management contracts, net of tax of $0.1 million, $ - million and $- million, respectively ..... 0.3 -- -- VOBA, net of tax of $11.2 million, $ 1.8 million and $1.4 million, respectively ................................ 20.8 $ 3.3 $ 2.7 ------------------------------------------- Total amortization expense, net of tax of $11.4 million, $1.8 million and $1.4 million, respectively ................... $21.2 $ 3.3 $ 2.7 ===========================================
Net Tax Effect Expense ---------- ------- (in millions) Estimated future aggregate amortization expense for the years ended December 31, 2004....................................................................... $ 42.1 $ 78.3 2005....................................................................... 54.5 101.2 2006....................................................................... 51.5 95.7 2007....................................................................... 47.7 88.5 2008....................................................................... 42.9 79.6
32 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Goodwill and Other Intangible Assets - (Continued) The following tables present the continuity of each of the Company's unamortizable and amortizable intangible assets for the periods presented. Unamortizable intangible assets:
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ Goodwill: (in millions) - --------- Balance at January 1, 2004 .................... $ 66.1 $ 42.1 -- $ 0.4 $ 108.6 Goodwill derecognized (1) ..................... (66.1) (42.1) -- (0.4) (108.6) Goodwill recognized (2) ....................... 1,842.3 1,040.0 149.4 3,031.7 ------------------------------------------------------------------- Balance at June 30, 2004 ...................... $1,842.3 $1,040.0 -- $ 149.4 $3,031.7 ===================================================================
(1) Goodwill derecognized in the purchase transaction with Manulife. (2) Goodwill recognized in the purchase transaction with Manulife.
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ Goodwill: (in millions) - --------- Balance at January 1, 2003........................ $ 66.1 $ 42.1 -- $ 0.4 $ 108.6 -------------------------------------------------------------------- Balance at December 31, 2003...................... $ 66.1 $ 42.1 -- $ 0.4 $ 108.6 ====================================================================
33 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ Brand name: (in millions) - ----------- Balance at January 1, 2004 .................... -- -- -- -- -- Brand name recognized (1) ..................... $364.4 $209.0 -- $ 26.6 $600.0 Foreign currency translation adjustment .................................. -- -- -- -- -- Other adjustments ............................. -- -- -- -- -- ---------------------------------------------------------------- Balance at June 30, 2004 ...................... $364.4 $209.0 -- $ 26.6 $600.0 ================================================================
(1) Brand name recognized in the purchase transaction with Manulife.
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ Investment management contracts: (in millions) - -------------------------------- Balance at January 1, 2004 ........................ -- $ 6.3 -- -- $ 6.3 Investment management contracts derecognized (1) .. -- (6.3) -- -- (6.3) Investment management contracts recognized (2) .... -- 292.9 -- -- 292.9 Acquisitions ...................................... -- -- -- -- -- Other adjustments ................................. -- -- -- -- -- --------------------------------------------------------------------- Balance at June 30, 2004 .......................... -- $292.9 -- -- $292.9 =====================================================================
(1) Investment management contracts derecognized in purchase transaction with Manulife. (2) Investment management contracts recognized in the purchase transaction with Manulife. 34 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Corporate Wealth and Protection Management G&SFP Canada Other Consolidated ---------- ---------- ----- ------ ----- ------------ Investment management contracts: (in millions) - -------------------------------- Balance at January 1, 2003 ................... -- $5.2 -- -- -- $5.2 Acquisitions(1) .............................. -- 1.1 -- -- -- 1.1 Other adjustments ............................ -- -- -- -- -- -- ------------------------------------------------------------------------------ Balance at December 31, 2003 ................. -- $6.3 -- -- -- $6.3 ==============================================================================
(1) This increase results from JH Fund's purchases of the mutual fund investment management contracts for the US Global Leaders Fund, Classic Value Fund, and Large Cap Select Fund in 2003. Amortizable intangible assets:
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ Distribution networks: (in millions) - ---------------------- Balance at January 1, 2004 .................... -- -- -- -- -- Distribution networks recognized (1) .......... $308.6 $ 88.6 -- -- $397.2 Amortization .................................. (0.2) -- -- -- (0.2) Other adjustments ............................. -- -- -- -- -- --------------------------------------------------------------------- Balance at June 30, 2004 ...................... $308.4 $ 88.6 -- -- $397.0 =====================================================================
(1) Distribution networks recognized in the purchase transaction with Manulife.
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ Other investment management contracts: (in millions) - -------------------------------------- Balance at January 1, 2004 .............................. -- -- -- -- -- Other investment management contracts recognized (1) .... -- $20.3 -- $41.4 $61.7 Amortization ............................................ -- -- -- (0.5) (0.5) Other adjustments ....................................... -- -- -- -- -- -------------------------------------------------------------------- Balance at June 30, 2004 ................................ -- $20.3 -- $40.9 $61.2 ====================================================================
(1) Other investment management contracts recognized in the purchase transaction with Manulife. 35 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ VOBA: (in millions) - ----- Balance at January 1, 2004 .................... $168.5 -- -- -- $168.5 Amortization .................................. (5.1) -- -- -- (5.1) Acquisitions .................................. -- -- -- -- -- Adjustment to unrealized gains on securities available for sale ............... 5.5 -- -- -- 5.5 Other adjustments (1) ......................... (1.4) -- -- -- (1.4) ------------------------------------------------------------------ Balance at April 28, 2004 ..................... $167.5 -- -- -- $167.5 ==================================================================
(1) VOBA related to the acquisition of the fixed universal life insurance business of Allmerica was adjusted to reflect adjustments to the purchase price equation.
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ VOBA: (in millions) - ----- Balance at April 29, 2004 .................... $ 167.5 -- -- -- $ 167.5 VOBA derecognized (1) ........................ (167.5) -- -- -- (167.5) VOBA recognized (2) .......................... 2,141.8 474.9 247.9 2,864.6 Amortization ................................. (12.6) (9.8) (9.6) (32.0) Adjustment to unrealized gains on securities available for sale .............. 10.2 15.3 -- -- 25.5 ------------------------------------------------------------------- Balance at June 30, 2004 ..................... $2,139.4 $ 480.4 $ 238.3 -- $2,858.1 ===================================================================
(1) VOBA derecognized in the purchase transaction with Manulife. (2) VOBA recognized in the purchase transaction with Manulife. 36 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Corporate Wealth and Protection Management G&SFP Other Consolidated ---------- ---------- ----- ----- ------------ VOBA: (in millions) - ----- Balance at January 1, 2003 .................. $177.2 -- -- -- $177.2 Amortization ................................ (10.1) -- -- -- (10.1) Acquisitions ................................ -- -- -- -- -- Adjustment to unrealized gains on securities available for sale ............. (2.8) -- -- -- (2.8) Other adjustments(1) ........................ 4.2 -- -- -- 4.2 ------------------------------------------------------------------ Balance at December 31, 2003 ................ $168.5 -- -- -- $168.5 ==================================================================
(1) An adjustment of $4.2 million was made to previously recorded VOBA relating to acquisition of the fixed universal life insurance business Allmerica, to reflect refinements in methods and assumptions implemented upon finalization of transition. 37 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 10 -- Pension and Other Postretirement Benefit Plans The Company maintains a number of pension and benefit plans for its eligible employees and agents. The following table demonstrates the components of the Company's net periodic benefit cost for the periods indicated. Through June 30, 2004, there is no significant difference to the pre-merger and post-merger net periodic benefit cost values so the following information is presented without such distinction:
Three Months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003 2004 2003 2004 2003 Other Other Postretirement Postretirement Pension Benefits Benefits Pension Benefits Benefits ---------------- -------------- ---------------- -------------- (in millions) Service cost ....................... $ 5.6 $ 6.7 $ 0.3 $ 0.4 $11.2 $13.4 $ 0.7 $ 0.8 Interest cost ...................... 32.0 32.7 9.1 8.8 64.5 65.4 17.9 17.7 Expected return on plan assets ..... (43.5) (39.0) (5.2) (4.3) (87.6) (77.9) (10.4) (8.7) Amortization of transition asset ... -- -- -- -- -- -- -- -- Amortization of prior service cost ............................. 0.6 1.9 (0.6) (1.6) 2.2 3.8 (2.5) (3.3) Recognized actuarial gain .......... 2.1 7.5 1.1 1.6 8.3 15.0 4.2 3.4 Other .............................. -- -- -- -- -- -- -- -- -------------- -------------- ---------------- ---------------- Net periodic benefit cost ... $(3.2) $ 9.8 $ 4.7 $ 4.9 $(1.4) $19.7 $ 9.9 $ 9.9 ============== ============== ================ ================
Employer Contributions The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute approximately $2 million to its qualified pension plan in 2004 and approximately $25 million to its non-qualified pension plans in 2004. As of June 30, 2004, no contributions have been made to the qualified plans, and the Company still anticipates contributing approximately $2 million for the year ended December 31, 2004. As of June 30, 2004, $14.0 million of the contributions have been made to the non-qualified plans, and the Company anticipates contributing another $11.0 million to reach a total of $25.0 million for the year ended December 31, 2004. The Company's policy is to fund its other post retirement benefits in amounts at or below the annual tax qualified limits. As of June 30, 2004, $25.6 million was contributed to its other post retirement benefit plans. The Company expects to contribute approximately $50 million to its other post retirement benefit plans in 2004. On December 8, 2003, President Bush signed into law a bill that expands Medicare, primarily by adding a prescription drug benefit for Medicare-eligible retirees starting in 2006. The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) provides for special tax-free subsidies to employers that offer plans with qualifying drug coverages beginning in 2006. There are two broad groups of retirees receiving employer-subsidized prescription drug benefits at the Company. The first group, those who retired prior to January 1, 1992, receives a subsidy of between 90% and 100% of total cost. Since this subsidy level will clearly meet the criteria for a qualifying drug coverage, the Company anticipates that the benefits it pays after 2005 for pre-1992 retirees will be lower as a result of the new Medicare provisions. In accordance with Financial Accounting Standards Board Staff Position FAS 106-2 (FSP FAS 106-2), the Company reflected a reduction in the accumulated plan benefit obligation for this group of $40.9 million as of the purchase accounting remeasurement (April 28, 2004) and reduced net periodic postretirement benefit costs by $2.5 million for the period April 29 through June 30,2004. With respect to the second group, those who retired on or after January 1, 1992, the employer subsidy on prescription drug benefits is capped and currently provides as low as 25% of total cost. Since final authoritative accounting guidance has not yet been issued on determining whether a benefit meets the actuarial criteria for qualifying drug coverage, the Company has deferred recognition as permitted by FSP FAS 106-2 for this group. The final accounting guidance could require changes to previously reported information. 38 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 11 -- Certain Separate Accounts The Company issues variable annuity contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities). The Company also issues variable life insurance and variable annuity contracts which contain certain guarantees (variable contracts with guarantees) which are discussed more fully below. During 2004 and 2003, there were no gains or losses on transfers of assets from the general account to the separate account. The assets supporting the variable portion of both traditional variable annuities and variable contracts with guarantees are carried at fair value and reported as summary total separate account assets with an equivalent summary total reported for liabilities. Amounts assessed against the contractholders for mortality, administrative, and other services are included in revenue and changes in liabilities for minimum guarantees are included in policyholder benefits in the Company's Statement of Operations. Separate account net investment income, net investment gains and losses, and the related liability changes are offset within the same line item in the Company's Statement of Operations. The deposits related to the variable life insurance contracts are invested in separate accounts and the company guarantees a specified death benefit if certain specified premiums are paid by the policyholder, regardless of separate account performance. At June 30, 2004 and December 31, 2003, the Company had the following variable life contracts with guarantees. For guarantees of amounts in the event of death, the net amount at risk is defined as the excess of the initial sum insured over the current sum insured for fixed premium variable life contracts, and, for other variable life contracts, is equal to the sum insured when the account value is zero and the policy is still in force. June 30, December 31, 2004 2003 ----------------------------- (in millions, except for age) Life contracts with guaranteed benefits In the event of death Account values............................... $6,475.5 $6,249.4 Net amount at risk related to deposits....... $102.1 $106.2 Average attained age of contractholders ..... 44 46 The variable annuity contracts are issued through separate accounts and the company contractually guarantees to the contract holder either (a) return of no less than total deposits made to the contract less any partial withdrawals, (b) total deposits made to the contract less any partial withdrawals plus a minimum return, (c) the highest contract value on a specified anniversary date minus any withdrawals following the contract anniversary or (d) a combination benefit of (b) and (c) above. Most business issued after May 2003 has a proportional partial withdrawal benefit instead of a dollar-for-dollar relationship. These variable annuity contract guarantees include benefits that are payable in the event of death or annuitization, or at specified dates during the accumulation period. At June 30, 2004 and December 31, 2003, the Company had the following variable contracts with guarantees. (Note that the company's variable annuity contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive.) For guarantees of amounts in the event of death, the net amount at risk is defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. For guarantees of amounts at annuitization, the net amount at risk is defined as the present value of the minimum guaranteed annuity payments available to the contract holder determined in accordance with the terms of the contract in excess of the current account balance. For guarantees of accumulation balances, the net amount at risk is defined as the guaranteed minimum accumulation balance minus the current account balance. 39 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 11 -- Certain Separate Accounts - (Continued)
June 30, 2004 December 31,2003 -------------------------------- (in millions, except for age and percents) Return of net deposits In the event of death Account value .................................................................. $3,303.9 $3,406.4 Net amount at risk ............................................................. $ 136.6 $ 153.8 Average attained age of contractholders ........................................ 62 61 Return of net deposits plus a minimum return In the event of death Account value .................................................................. $ 994.3 $1,051.7 Net amount at risk ............................................................. $ 231.5 $ 230.7 Average attained age of contractholders ........................................ 64 63 Guaranteed minimum return rate ................................................. 5% 5% At annuitization Account value .................................................................. $ 203.9 $ 169.4 Net amount at risk ............................................................. -- -- Average attained age of contractholders ........................................ 57 57 Range of guaranteed minimum return rates ....................................... 4-5% 4-5% Highest specified anniversary account value minus withdrawals post anniversary In the event of death Account value .................................................................. $1,196.9 $1,224.7 Net amount at risk ............................................................. $ 190.1 $ 214.0 Average attained age of contractholders ........................................ 59 58
Account balances of variable contracts with guarantees were invested in variable separate accounts in various separate mutual funds at June 30, 2004 which included foreign and domestic equities and bonds as shown below: June 30, December 31, 2004 2003 --------------------------- Type of Fund (in millions, except for number of funds) Domestic Equity - Growth Funds ............... $ 2,863.8 $ 2,813.4 Domestic Bond Funds .......................... 2,334.3 2,423.5 Domestic Equity - Growth & Income Funds ...... 2,359.6 2,341.2 Balanced Investment Funds .................... 2,165.2 2,167.4 Domestic Equity - Value Funds ................ 958.3 865.0 International Equity Funds ................... 648.3 621.1 International Bond Funds ..................... 107.3 107.3 Hedge Funds .................................. 26.4 22.7 --------- --------- Total ....................................... $11,463.2 $11,361.6 ========= ========= 40 JOHN HANCOCK LIFE INSURANCE COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 11 -- Certain Separate Accounts - (Continued) The following summarizes the liabilities for guarantees on variable contracts reflected in the general account:
Guaranteed Guaranteed Minimum Death Minimum Income Benefit (GMDB) Benefit (GMIB) Totals -------------------------------------------- (in millions) Balance at January 1, 2004 $32.9 $ 1.0 $33.9 Incurred guarantee benefits 7.6 0.3 7.9 Fair value adjustment at Manulife acquisition (0.1) 0.0 (0.1) Paid guarantee benefits (4.8) 0.0 (4.8) -------------------------------------------- Balance at June 30, 2004 $35.6 $ 1.3 $36.9 ============================================
The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The following assumptions and methodology were used to determine the GMDB liability at June 30, 2004. o Data used included 1000 and 200 (for life and annuity contracts, respectively) stochastically generated investment performance scenarios. o Volatility assumptions depended on mix of investments by contract type and were 19% for annuity and 13.8% for life products. o Life products used purchase GAAP mortality, lapse, mean investment performance, and discount rate assumptions included in the related deferred acquisition cost (DAC) and value of business acquired (VOBA) models which varied by product o Mean investment performance assumptions for annuity contracts was 8.67%. o Annuity mortality was assumed to be 100 percent of the Annuity 2000 table. o Annuity lapse rates vary by contract type and duration and range from 1 percent to 20 percent. o Annuity discount rate was 6.5%. The guaranteed minimum income benefit (GMIB) liability represents the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization, recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. 41 JOHN HANCOCK LIFE INSURANCE COMPANY ITEM 2. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS Management's discussion and analysis of financial condition and results of operations is presented in a condensed disclosure format pursuant to General Instruction H(1)(a) and (b) of Form 10-Q. The management narrative for the Company that follows should be read in conjunction with the unaudited interim financial statements and related footnotes to the unaudited interim financial statements included elsewhere herein, and with the Management's Discussion and Analysis of Financial Condition and Results of Operations section included in the Company's 2003 Annual Report on Form 10-K. The Company's news releases and other information are available on the internet at www.jhancock.com, and its financial statements are available at www.manulife.com, under the link labeled "Securities Filings" on the "Investor Relations" Page. In addition, all of the Company's United States Securities and Exchange Commission filings are available on the internet at www.sec.gov, under the name Hancock John Life. Statements, analyses, and other information contained in this report 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," "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 potential effects on the Company. Future events and their effects on the Company may not be these anticipated by management. The Company's actual results may differ materially from the results anticipated in these forward-looking statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements" included herein for a discussion of factors that could cause or contribute to such material differences. Merger with Manulife Financial Corporation On April 28, 2004, JHFS, the parent of the Company, completed its merger agreement with Manulife Financial Corporation (Manulife) and as of the close of business JHFS common stock stopped trading on the New York Stock Exchange. In accordance with the agreement, each share of JHFS common stock was converted into 1.1853 shares of Manulife stock. Commencing on April 28, 2004, the Company operates as a subsidiary of Manulife and the John Hancock name is Manulife's primary U.S. brand. Critical Accounting Policies General We have identified the accounting policies below as critical to our business operations and understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 1--Summary of Significant Accounting Policies in the notes to consolidated financial statements in the Company's 2003 Form 10-K. Note that the application of these accounting policies in the preparation of this report requires management to use judgments involving assumptions and estimates concerning future results or other developments including the likelihood, timing or amount of one or more future transactions or events. There can be no assurance that actual results will not differ from those estimates. These judgments are reviewed frequently by senior management, and an understanding of them may enhance the reader's understanding of the Company's financial statements. We have discussed the identification, selection and disclosure of critical accounting estimates and policies with the Audit Committee of the Board of Directors. Purchase Accounting (PGAAP) In accordance with SFAS No. 141, "Business Combinations" the merger transaction was accounted for as a purchase of John Hancock by Manulife. The purchase method requires that John Hancock, the Company, adjust the cost and reporting basis of its assets and liabilities to their fair values on the acquisition date (the purchase adjustments). 42 JOHN HANCOCK LIFE INSURANCE COMPANY The determination of the purchase adjustments relating to investments included utilization of independent price quotes where available, and management's own estimates and assumptions where price quotes were unavailable. Other purchase adjustments also required significant management estimates and assumptions. Management must exercise significant judgement in assessing fair values related to intangible assets, including goodwill, value of business acquired (VOBA), brand name and others, and to liabilities, including policyholder reserves and others. The Company is in the process of completing the valuations of a portion of the assets acquired and liabilities assumed; thus, allocation of the purchase price is subject to refinement. The Company's purchase adjustments resulted in a revalued balance sheet which may result in future earnings trends which differ significantly from historical trends. The Company does not anticipate any impact on its liquidity, or ability to pay claims of policyholders, arising out of the purchase accounting process related to the merger. Consolidation Accounting In December 2003, the Financial Accounting Standards Board re-issued Interpretation 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," (FIN 46R) which clarifies the consolidation accounting guidance of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," (ARB No. 51) to certain entities for which controlling interests are not measurable by reference to ownership in the equity of the entity. Such entities are known as variable interest entities (VIEs). The Company has finalized its FIN 46R analysis for all of the entities described below. The Company is not the primary beneficiary of any of them. For many of these, the application of FIN 46R required estimation by the Company of the future periodic cash flows and changes in fair values for each candidate, starting as of the Company's original commitment to invest in and/or manage each candidate, and extending out to the end of the full expected life of each. These cash flows and fair values were then analyzed for variability, and this expected variability was quantified and compared to total historical amounts invested in each candidate's equity to help determine if each candidate is a VIE. The Company also evaluated quantitative and non-quantitative aspects of control relationships among the owners and decision makers of each candidate to help determine if they are VIEs. For each candidate determined to be a VIE, the expected variable losses and returns were then theoretically allocated out to the various investors and other participants in each candidate, in order to determine if any party had exposure to the majority of the expected variable losses or returns, in which case that party is the primary beneficiary of the VIE. The Company used significant levels of judgment while performing these quantitative and qualitative assessments. The Company manages invested assets for its customers under various fee-based arrangements using a variety of entities to hold these assets under management, and since 1996, this has included investment vehicles commonly known as collateralized debt obligations funds (CDOs). Various business units of the Company sometimes invest in the debt or equity securities issued by these and other CDOs to support their insurance liabilities. Since 1995, the Company generates income tax benefits by investing in apartment properties (the Properties) that qualify for low income housing and/or historic tax credits. The Company invests in the Properties directly, but primarily invests indirectly via limited partnership real estate investment funds (The Funds). The Funds are consolidated into the Company's financial statements. The Properties are organized as limited partnerships or limited liability companies each having a managing general partner or a managing member. The Company is usually the sole limited partner or investor member in each Property; it is not the general partner or managing member in any Property. The Properties typically raise additional capital by qualifying for long-term debt, which at times is guaranteed or otherwise subsidized by Federal or state agencies or Fannie Mae. In certain cases, the Company invests in the mortgages of the Properties. The Company has a number of relationships with a disparate group of entities (Other Entities), which result from the Company's direct investment in their equity and/or debt. This group includes energy investment partnerships, investment funds organized as limited partnerships, and manufacturing companies in whose debt the Company invests, and which subsequently underwent corporate reorganizations. Additional liabilities recognized as a result of consolidating any of these entities would not represent additional claims on the general assets of the Company; rather, they would represent claims against additional assets recognized by the Company as a result of these consolidations. Conversely, 43 JOHN HANCOCK LIFE INSURANCE COMPANY additional assets recognized as a result of these consolidations would not represent additional assets which the Company could use to satisfy claims against its general assets, rather they would be used only to settle additional liabilities recognized as a result of these consolidations. The Company's maximum exposure to loss in relation to these entities is limited to its investments in them, future debt and equity commitments made to them, and where the Company is the mortgagor to the Properties, the outstanding balance of the mortgages originated for them, and outstanding mortgage commitments made to them. Therefore, the Company believes that the application of FIN 46R has no potential impact on the Company's liquidity and capital resources beyond what is already presented in the consolidated financial statements and notes thereto. The Company discloses summary financial data and its maximum exposure to losses for the CDOs and Properties in Note 4 - Relationships with Variable Interest Entities in the notes to unaudited consolidated financial statements, but does not do so for the Other Entities because the Company does not believe these relationships are collectively significant. Amortization of Deferred Acquisition Costs (DAC) and Value of Business Acquired (VOBA) Assets Costs that vary with, and are related primarily to the production of new business are deferred to the extent that they are deemed recoverable. Such costs include commissions, certain costs of policy issue and underwriting, and certain agency expenses. Similarly, any amounts assessed as initiation fees or front-end loads are recorded as unearned revenue. The Company has also recorded intangible assets representing the present value of estimated future profits of insurance policies inforce related to business acquired. The Company tests the recoverability of its DAC and VOBA assets quarterly with a model that uses data such as market performance, lapse rates and expense levels. We amortize DAC and VOBA on term life and long-term care insurance ratably with premiums. We amortize DAC and VOBA on our annuity products and retail life insurance, other than term life insurance policies, based on a percentage of the estimated gross profits over the life of the policies, which are generally twenty years for annuities and thirty years for life policies. Our estimated gross profits are computed based on assumptions related to the underlying policies including mortality, lapse, expenses, and asset growth rates. We amortize DAC, VOBA and unearned revenue on these policies such that the percentage of gross profits realized compared to the amount of DAC, VOBA and unearned revenue amortized is constant over the life of the policies. Estimated gross profits, including net realized investment and other gains (losses), are adjusted periodically to take into consideration the actual experience to date and assumed changes in the remaining gross profits. When estimated gross profits are adjusted, we also adjust the amortization of DAC and VOBA to maintain a constant amortization percentage over the life of the policies. Our current estimated gross profits include certain judgments by our actuaries concerning mortality, lapse and asset growth that are based on a combination of actual Company experience and historical market experience of equity and fixed income returns. Short-term variances of actual results from the judgments made by management can impact quarter to quarter earnings. Our history has shown us that the actual results over time for mortality, lapse and the combination of investment returns and crediting rates (referred in the industry as interest spread) for the life insurance and annuity products have reasonably followed the long-term historical trends. As actual results for market experience, or asset growth fluctuate significantly from historical trends and the long-term assumptions made in calculating expected gross profits, management changes these assumptions periodically as necessary. Benefits to Policyholders The liability for future policy benefits is the largest liability included in our consolidated balance sheets, equal to $42,181.1 million, 47.2% of total liabilities as of June 30, 2004. Changes in this liability are generally reflected in the benefits to policyholders in our consolidated statements of income. This liability is primarily comprised of the present value of estimated future payments to holders of life insurance and annuity products based on certain management judgments. Reserves for future policy benefits of certain insurance products are calculated using management's judgments of mortality, morbidity, lapse, investment performance and expense levels that are based primarily on the Company's past experience and are therefore reflective of the Company's proven underwriting and investing abilities. Once these assumptions are made for a given policy or group of policies, they will not be changed over the life of the policy unless the Company recognizes a loss on the entire line of business or the Company is acquired. The Company periodically reviews its policies for loss recognition and, based on management's judgment, the Company from time to time may recognize a loss on certain lines of business. Short-term variances of actual results from the judgments made by management are reflected in current period earnings and can impact quarter to quarter earnings. Investment in Debt and Equity Securities 44 JOHN HANCOCK LIFE INSURANCE COMPANY Impairments on our investment portfolio are recorded as a charge to income in the period when the impairment is judged by management to occur. See the General Account Investments section of this document for a more detailed discussion of the investment officers' professional judgments involved in determining impairments and fair values. Certain of our fixed income securities classified as available-for-sale are not publicly traded, and quoted market prices are not available from brokers or investment bankers on these securities. The changes in the fair values of the available-for-sale securities are recorded in other comprehensive income as unrealized gains or losses. We calculate the fair value of these securities ourselves through the use of pricing models and discounted cash flows calling for a substantial level of professional investment management judgment. Our approach is based on currently available information, including information obtained by reviewing similarly traded securities in the market, and we believe it to be appropriate and fundamentally sound. However, different pricing models or assumptions or changes in relevant current information could produce different valuation results. The Company's pricing model takes into account a number of factors based on current market conditions and trading levels of similar securities. These include current market based factors related to credit quality, country of issue, market sector and average investment life. The resulting prices are then reviewed by the pricing analysts and members of the Security Operations Department. Our pricing analysts take appropriate action to reduce the valuation of securities where an event occurs that negatively impacts the securities' value. Certain events that could impact the valuation of securities include issuer credit ratings, business climate, management changes at the investee level, litigation, fraud and government actions, among others. As part of the valuation process we attempt to identify securities which may have experienced an other than temporary decline in value, and thus require the recognition of an impairment. To assist in identifying impairments, at the end of each quarter our Investment Review Committee reviews all securities where market value is less than ninety percent of amortized cost for three months or more to determine whether impairments need to be taken. This committee includes the head of workouts, the head of each industry team, the head of portfolio management, and the Chief Credit Officer of Manulife. The analysis focuses on each investee company's or project's ability to service its debts in a timely fashion and the length of time the security has been trading below amortized cost. The results of this analysis are reviewed quarterly by the Credit Committee at Manulife. This committee includes Manulife's Chief Financial Officer, Chief Investment Officer, Chief Risk Officer, and the Chief Credit Officer. See "Management's Discussion and Analysis of Financial Condition and Analysis of Financial Condition and Results of Operations--General Account Investments" section of this document for a more detailed discussion of this process and the judgments used therein. Benefit Plans The Company reviewed its pension and other post-employment benefit plan assumptions for the discount rate, the long-term rate of return on plan assets, and the compensation increase rate for incorporation in the measurements made as of April 28, 2004 ( the date of the Manulife acquisition of the Company) and for net periodic costs for the calendar year. These assumptions are normally incorporated in measurements made annually as of each December 31 and for the subsequent calendar year resulting thereon. All assumptions are reviewed and approved by the Chief Financial Officer and reviewed with the Audit Committee of the Board of Directors. The assumed discount rate is set based on the published December 31st Moody's Investor Services long-term corporate bond yield for rating category Aa. The discount rate used in the April 28, 2004 mark to market of 2004's net periodic pension cost was 6.0%. The discount rate originally in effect for 2004 was 6.25%. A 0.25% increase in the discount rate would decrease pension benefits Projected Benefit Obligation (PBO) and 2004 Net Periodic Pension Cost (NPPC) by approximately $57.6 million and $1.2 million respectively. A 0.25% increase in the discount rate would decrease other post- employment benefits Accumulated Postretirement Benefit Obligation (APBO) and 2004 Net Periodic Benefit Cost (NPBC) by approximately $15.9 million and $1.2 million, respectively. The assumed long-term rate of return on plan assets is generally set at the long-term rate expected to be earned (based on the Capital Asset Pricing Model and similar tools) based on the long-term investment policy of the plans and the various classes of the invested funds. For 2004, Net Periodic Pension (and benefit) Cost, an 8.75% long term rate of return assumption is being used. A 0.25% increase in the long-term rate of return would decrease 2004 NPPC by approximately $5.3 million and 2004 NPBC by approximately $0.6 million. The expected return on plan assets prior to the acquisition by Manulife is based on the fair market value of the plan assets as of December 31, 2003. Post merger, the expected return on plan assets is based on the fair value of plan assets as of April 28, 2004. The compensation rate increase assumption is generally set at a rate consistent with current and expected long-term compensation and salary policy including inflation. A change in the compensation rate increase assumption can be expected to move in the same direction as a change in the discount rate. A 4.0% compensation rate increase assumption is being used. A 0.25% increase in 45 JOHN HANCOCK LIFE INSURANCE COMPANY the salary scale would increase 2004 pension benefits PBO and NPPC by approximately $5.8 million and $0.6 million, respectively. Post employment benefits are independent of compensation. The Company uses a 10% corridor for the amortization of actuarial gains/losses. At the date of acquisition, actuarial gains and losses were set to zero. On December 8, 2003, President Bush signed into law a bill that expands Medicare, primarily by adding a prescription drug benefit for Medicare-eligible retirees starting in 2006. The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) provides for special tax-free subsidies to employers that offer plans with qualifying drug coverages beginning in 2006. There are two broad groups of retirees receiving employer-subsidized prescription drug benefits at the Company. The first group, those who retired prior to January 1, 1992, receives a subsidy of between 90% and 100% of total cost. Since this subsidy level will clearly meet the criteria for a qualifying drug coverage, the Company anticipates that the benefits it pays after 2005 for pre-1992 retirees will be lower as a result of the new Medicare provisions. In accordance with Financial Accounting Standards Board Staff Position FAS 106-2 (FSP FAS 106-2), the Company reflected a reduction in the accumulated plan benefit obligation for this group of $40.9 million as of the purchase accounting remeasurement (April 28, 2004) and reduced net periodic postretirement benefit costs by $2.5 million for the period April 29 through June 30, 2004. With respect to the second group, those who retired on or after January 1, 1992, the employer subsidy on prescription drug benefits is capped and currently provides as low as 25% of total cost. Since final authoritative accounting guidance has not yet been issued on determining whether a benefit meets the actuarial criteria for qualifying drug coverage, the Company has deferred recognition as permitted by FSP FAS 106-2 for this group. The final accounting guidance could require changes to previously reported information. Income Taxes Our reported effective tax rate on net income was 37.8% and 30.0% for the three month periods ended June 30, 2004 and 2003 and 34.1% and 29.8% for the six month periods ended June 30, 2004 and 2003, respectively. The increase in the effective tax rate during the period is due to changes in the recognition of tax expense as a result of the purchase accounting for leveraged leases as required by FASB Interpretation No. 21, "Accounting for Leases in a Business Combinatoin" and FASB Statement of Financial Accounting Standares No. 13, "Accounting for Leases". Our effective tax rate is based on expected income, statutory tax rates and tax planning opportunities available to us. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may not succeed. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our effective tax rate includes the impact of reserve provisions ,changes to reserves that we consider appropriate, and related interest. This rate is then applied to our year-to-date operating results. Tax regulations require certain items to be included in the tax return at different times than those items are reflected in the financial statements. As a result, our effective tax rate reflected in our financial statements is different than that reported in our tax return. Some of these differences are permanent, such as affordable housing tax credits, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our income statement. Our policy is to establish valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred or expense for which we have already taken a deduction on our tax return, but have not yet recognized as expense in our financial statements. A number of years may elapse before a particular matter, for which we have established an accrued liability, is audited and finally resolved. The Internal Revenue Service is currently examining our tax returns for 1999 through 2001. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. Our tax reserves are presented in the balance sheet within other liabilities. Reinsurance We reinsure portions of the risks we assume for our protection insurance products. The maximum amount of individual ordinary life insurance retained by us on any life is $10 million under an individual policy and $20 million under a second-to-die policy. As of January 1, 2001, we established additional 46 JOHN HANCOCK LIFE INSURANCE COMPANY reinsurance programs, which limit our exposure to fluctuations in life insurance claims for individuals for whom the net amount at risk is $3 million or more. As of January 1, 2001, the Company also entered into an agreements with two reinsurers covering 50% of its closed block business. One of these reinsurers is Manulife. Effective April 28, 2004 the Company operates as a subsidiary of Manulife. Effective December 31, 2003, the Company entered into an agreement with a third reinsurer covering another 5% of its closed block business. The reinsurance agreements 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 Life Company's demutualization to protect the reasonable dividend expectations of certain participating life insurance policyholders. In addition, the Company has entered into reinsurance agreements to specifically address insurance exposure to multiple life insurance claims as a result of a catastrophic event. The Company has put into place, effective July 1, 2002, catastrophic reinsurance covering individual life insurance policies written by all of its U.S. life insurance subsidiaries. Effective July 1, 2003, the deductible for individual life insurance coverages was reduced from $25 million to $17.5 million per occurrence and the limit of coverage is $40 million per occurrence. Both the deductible and the limit apply to the combined U.S. insurance subsidiaries. Should catastrophic reinsurance become unavailable to the Company in the future, the absence of, or further limitations on, reinsurance coverage, could adversely affect the Company's future net income and financial position. By entering into reinsurance agreements with a diverse group of highly rated reinsurers, we seek to control our exposure to losses. Our reinsurance, however, does not discharge our legal obligations to pay policy claims on the policies reinsured. As a result, we enter into reinsurance agreements only with highly rated reinsurers. Nevertheless, there can be no assurance that all our reinsurers will pay the claims we make against them. Failure of a reinsurer to pay a claim could adversely affect our business, financial condition or results of operations. 47 JOHN HANCOCK LIFE INSURANCE COMPANY Transactions Affecting Comparability of Results of Operations The disposal described under the table below was conducted in order to execute the Company's strategy to focus resources on businesses in which it can have a leadership position. The table below presents actual and proforma data, for comparative purposes, of revenue and net income for the periods indicated, to demonstrate the proforma effect of the disposal as if occurred on January 1, 2003.
Period from April 29 Period from April 1 Three Months Ended through June 30, through April 28, June 30, 2004 2004 2003 Proforma 2004 Proforma 2004 Proforma 2003 --------------------------------------------------------------------------- (in millions) Revenue ........... $1,182.4 $1,182.4 $ 776.4 $ 776.4 $1,822.1 $1,835.8 Net income ........ $ 169.1 $ 169.1 $ 175.0 $ 175.0 $ 255.8 $ 257.7
Period from April 29 Period from January 1 Six Months Ended through June 30, through April 28, June 30, 2004 2004 2003 Proforma 2004 Proforma 2004 Proforma 2003 ------------------------------------------------------------------------ (in millions) Revenue ........... $1,182.4 $1,182.4 $2,513.4 $2,513.4 $3,648.1 $3,692.9 Net income ........ $ 169.1 $ 169.1 $ 329.3 $ 329.3 $ 525.9 $ 528.7
Disposal: On June 19, 2003, the Company agreed to sell its group life insurance business through a reinsurance agreement with Metropolitan Life Insurance Company, Inc (MetLife). The Company is ceding all activity after May 1, 2003 to MetLife. The transaction was recorded as of May 1, 2003 and closed November 4, 2003. There was no material impact on the Company's results of operations from the disposed operations during the first six months of 2003. 48 JOHN HANCOCK LIFE INSURANCE COMPANY Results of Operations To assist in the comparability of our financial results and to make it easier to discuss and understand our results of operations, the following discussion combines the predecessor period (April 1 through April 28, 2004) with the successor period (April 29 through June 30, 2004) to present combined results for the three months ended June 30, 2004 and combines the predecessor period (January 1 through April 28, 2004) with the successor period (April 29 through June 30, 2004) to present combined results for the six months ended June 30, 2004. The tables below present the consolidated results of operations for the periods presented:
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 -------------------------------------------------- (in millions) Revenues Premiums ................................................................... $ 482.2 $ 484.4 $ 952.9 $ 956.7 Universal life and investment-type product fees ............................ 158.5 153.1 335.3 308.1 Net investment income ...................................................... 883.0 942.3 1,866.5 1,875.4 Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, and value of business acquired amounts credited to participating pensions contractholders and the policyholder dividend obligation (1) ............................... 247.6 78.3 149.9 183.7 Investment management revenues, commissions, and other fees ................ 132.9 122.4 265.3 241.6 Other revenue .............................................................. 54.6 55.3 125.9 127.4 -------------------------------------------------- Total revenues ........................................... 1,958.8 1,835.8 3,695.8 3,692.9 Benefits and expenses Benefits to policyholders, excluding amounts related to net realized investment and other gains (losses) credited to participating pension contractholders and the policyholder dividend obligation (2) .............................. 898.1 919.7 1,833.5 1,869.0 Other operating costs and expenses ......................................... 336.0 348.7 706.7 665.4 Amortization of deferred policy acquisition costs and value of business acquired, excluding amounts related to net realized investment and other gains (losses) (3) .................. 52.8 63.6 159.6 135.4 Dividends to policyholders ................................................. 118.3 137.5 234.9 270.0 -------------------------------------------------- Total benefits and expenses ............................... 1,405.2 1,469.5 2,934.7 2,939.8 Income before taxes and cumulative effect of accounting change ............. 553.6 366.3 761.1 753.1 Income taxes ............................................................... 209.5 108.6 259.4 224.4 -------------------------------------------------- Income before cumulative effect of accounting change ....................... 344.1 257.7 501.7 528.7 Cumulative effect of accounting change ..................................... -- -- 3.3 -- -------------------------------------------------- Net income ................................................. $ 344.1 $ 257.7 $ 498.4 $ 528.7 ==================================================
(1) Net of related amortization of deferred policy acquisition costs and value of business acquired, amounts credited to participating pension contractholders and the policyholder dividend obligation of $12.8 million and $(49.3) million for the three months ended June 30, 2004 and 2003, respectively and $12.0 million and $(0.5) million for the six months ended June 30, 2004 and 2003, respectively. (2) Excluding amounts related to net realized investment and other gains (losses) credited to participating pension contractholders and the policyholder dividend obligation of $11.2 million and $28.4 million for the three months ended June 30, 2004 and 2003, respectively and $28.4 and $(12.9) million for the six months ended June 30, 2004 and 2003, respectively. (3) Excluding amounts related to net realized investment and other gains (losses) of $1.6 million and $20.9 million for the three months ended June 30, 2004 and 2003, respectively and $(16.4) million and $12.4 million for the six months ended June 30, 2004 and 2003, respectively. Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 As a result of Manulife's acquisition of the Company, see Note 1- Change of Control, the Company renamed and reorganized certain businesses within its operating segments to better align the Company with its new parent, Manulife. The Company renamed the Asset Gathering Segment as the Wealth Management Segment. In addition, the Institutional Investment Management Segment was moved 49 JOHN HANCOCK LIFE INSURANCE COMPANY to the Corporate and Other Segment. Other realignments include moving Signator Investors, Inc. our agent sales organization, from Wealth Management to Protection, and Group Life, Retail Discontinued operations, discontinued health insurance operations and Creditor from Corporate and Other to Protection. International Group Plans (IGP) remain in international operations in our Corporate and Other Segment while IGP will be reported in Reinsurance in Manulife's segment results. The financial results for all periods have been reclassified to conform to the current period presentation. The Company operates in the following four business segments: two segments primarily serve retail customers, one segment serves institutional customers, and our fourth segment is the Corporate and Other Segment, which includes our institutional advisory business, the remaining international operations, and the corporate account. Our retail segments are the Protection Segment and the Wealth Management Segment. Our institutional segment is the Guaranteed and Structured Financial Products Segment (G&SFP). Consolidated income before income taxes increased 51.1%, or $187.3 million, for the three month period ended June 30, 2004 from the prior year. The increase was driven by higher net realized investment and other gains, which increased 216.2%, or $169.3 million, from the prior year. The change in net realized investment and other gains (losses) is the result of $226.7 million in derivative hedging adjustments, $74.3 million in gains on the sale of real estate and $19.6 million in gains on the sale of equity securities. For additional analysis regarding net realized investment and other gains (losses), see below and General Account Investments in the MD&A. Premiums decreased 0.5%, or $2.2 million, from the prior year. The increase in premiums was due largely to growth in the long-term care insurance business of $18.1 million, or 14.0%, primarily due to strong renewal premiums. In addition, Premiums in the G&SFP Segment increased $6.2 million. These increase were partially offset by a decrease of $11.6 million in premiums in the Wealth Management Segment on lower sales of single premium immediate annuities. Universal life and investment-type product fees increased 3.5%, or $5.4 million, from the prior year. Increased product fees was driven by universal life insurance product fees which increased 31.4%, or $9.6 million, due primarily to a $6.8 million increase in cost of insurance fees. Partially offsetting these increases in product fees was a decrease of $2.3 million, or 7.7%, in fees in the retail annuities business. Net investment income decreased 6.3%, or $59.3 million, from the prior year. The decrease was driven by lower average yield on invested assets, partially offset by an increase in invested assets. Investment yields decreased to 5.20 driven by floating-rate investments and the amortization of the purchase accounting mark-to-market adjustments on assets due to the Manulife acquisition. In addition, net investment income varies with market interest rates because the return on approximately $13 billion of the asset portfolio at June 30, 2004, floats with market rates. Matching the interest rate exposure on our asset portfolio to the exposure on our liabilities is a central feature of our asset/liability management process. Partially offsetting these decreases in yield was an increase in invested assets. In the three month period ended June 30, 2004, weighted-average invested assets grew $2,382.6 million, or 3.6%, from the prior year. For additional analysis of net investment income and yields see the General Account Investments section of this MD&A. Net realized investment and other gains (losses) increased 216.2%, or $169.3 million. See detail of current period net realized investment and other gains (losses) in table below. The change in net realized investment and other gains (losses) is the result of $226.8 million in derivative hedging adjustments, $74.3 million in gains on the sale of real estate and $19.6 million in gains on the sale of equity securities. Partially offsetting these gains were losses of $4.6 million compared to gains of $78.1 million in the prior year on fixed maturity securities. The prior year's gains included $259.3 million in gross gains on disposal of fixed maturity securities while the Company generated only $75.3 million in the current period. In addition, the Company incurred losses of $26.0 million on mortgage loans, primarily on disposals, and another $26.0 million on other invested assets, primarily from impairments. The largest impairments of fixed maturity securities were $9.6 million on a major U.S. airline, $6.2 million on an asset backed pool of gas station/convenience store franchise loans, and $5.3 million relating to an airline equipment trust. For additional analysis of net realized investment and other gains (losses) see the General Account Investments section of this MD&A. 50 JOHN HANCOCK LIFE INSURANCE COMPANY
Gross Gain Gross Loss Hedging Net Realized Investment For the Three Months Ended June 30, 2004 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss) ----------------------------------------------------------------------------- (in millions) Fixed maturity securities (1) ......... (29.8) 75.3 (25.1) (25.0) (4.6) Equity securities ..................... (1.5) 19.6 -- -- 18.1 Mortgage loans on real estate ......... (23.2) 16.4 (13.9) (5.3) (26.0) Real estate ........................... -- 74.3 (2.2) -- 72.1 Other invested assets ................. (29.7) 6.2 (2.5) -- (26.0) Derivatives ........................... -- -- -- 226.8 226.8 ----------------------------------------------------------------------------- Subtotal ............... (84.2) 191.8 (43.7) 196.5 260.4 ----------------------------------------------------------------------------- Amortization adjustment for deferred policy acquisition costs and value of business acquired............................................................... (1.6) Amounts credited to participating pension contractholders.......................... (3.1) Amounts credited to the policyholder dividend obligation........................... (8.1) ------------------- Total......................................................................... 247.6 ===================
(1) Fixed maturities gain on disposals includes $37.2 million of gains from previously impaired securities and prepayment gains of $23.7 million. The hedging adjustments in the fixed maturities and mortgage loans asset classes are non-cash adjustments representing the amortization or reversal of prior fair value adjustments on assets in those classes that were or are designated as hedged items in a fair value hedge. When an asset or liability is so designated, its cost basis is adjusted in response to movement in interest rates. These adjustments are non-cash and reverse with the passage of time as the asset or liability and derivative mature. The hedging adjustments on the derivatives represent non-cash adjustments on derivative instruments and on assets and liabilities designated as hedged items reflecting the change in fair value of those items. Investment management revenues, commissions and other fees (advisory fees) increased 8.6%, or $10.5 million, from the prior year. The increase in advisory fees was driven by the mutual fund business where fees grew by 8.5%, or $5.9 million, over the prior year due to higher assets under management on higher sales and market appreciation. In addition, advisory fees in our institutional asset management business increased 16.7% driven by higher advisory fees resulting from changes in the asset mix. Other revenue decreased 1.3%, or $0.7 million, from the prior year. Other revenue consists principally of the revenues generated by Signature Fruit, a subsidiary of the Company since April 2, 2001, which acquired certain assets and assumed liabilities out of Tri Valley Growers, Inc., a cooperative association on that date. Signature Fruit revenue decreased $1.3 million, to $51.5 million for the three months ended June 30, 2004 due to lower product sales. Other revenue includes Federal long-term care business fee revenue of $1.9 million for the three months ended June 30, 2004. Benefits to policyholders decreased 2.3%, or $21.6 million, from the prior year. The decrease in benefits to policyholders was driven by a $31.2 million decrease in the Wealth Management Segment due to lower sales of single premiums immediate annuities. In addition, benefits to policyholders decreased $14.4 million in the G&SFP Segment due to lower interest credited on account balances. Partially offsetting these decreases in benefits to policyholders was an increase in the variable life insurance business of $19.8 million on higher interest credited and lower surrenders. In addition, benefits to policyholders increased in the long-term care insurance business by $9.7 million, driven by growth in the business. Operating costs and expenses decreased 3.6%, or $12.7 million. Total operating costs and expenses was driven by decreases of $8.0 million in the G&SFP Segment and $5.7 million in the Corporate and Other Segment due to lower compensation expenses. In addition, operating costs and expenses decreased at Signature Fruit of $1.4 million to $52.4 million from the prior year and $1.5 million for the sale of the group life business effective May 1 2003. Partially offsetting these decreases, operating costs and expenses increased 7.2%, or $6.5 million, in the Wealth Management Segment Amortization of deferred policy acquisition costs and value of business acquired decreased 16.9%, or $10.8 million, from the prior year. The decrease in amortization of deferred policy acquisition costs and value of business acquired was driven by prior year amortization of deferred policy acquisition costs in the non-traditional life insurance business and the fixed annuity business. The non-traditional life insurance business increased amortization of deferred policy acquisition costs in the second quarter of 2003 for experience true-ups and growth. The fixed annuity business increased amortization of deferred policy acquisition costs in the second quarter of 2003 for account growth and interest 51 JOHN HANCOCK LIFE INSURANCE COMPANY spreads. Partially offsetting the decline in amortization of deferred policy acquisition costs was increased amortization of value of business acquired. Purchase accounting adjusted the historical deferred policy acquisition asset to zero and created a new value of business acquired asset at an established return on equity for the transaction. The impact on amortization was to decrease deferred policy acquisition costs due to the reduced asset and increase amortization of value of business acquired. Dividends to policyholders decreased 14.0%, or $19.2 million from the prior year. The decrease in dividends to policyholders was driven by traditional life insurance products which decreased 12.1%, or $14.7 million, due to a reduction in the dividend scale and a $2.9 million decrease in dividends due to the sale of the group life business. Group life was sold effective May 1, 2003 and thus generated policyholder dividends in the second quarter of 2003 and none after the sale of the business. The increase in the effective tax rate during the period is due to changes in the recognition of tax expense as a result of the purchase accounting for leveraged leases as required by FASB Interpretation No. 21 "Accounting for Leases in a Business Combination" and FASB Statement of Financial Accounting Standards No 13, "Accounting for Leases". Income taxes were $209.5 million in the second quarter of 2004, compared to $108.6 million for the second quarter of 2003. Our effective tax rate was 37.8% in the second quarter of 2004, compared to 29.6% in the second quarter of 2003. The increase in the effective tax rate during the period is due to changes in the recognition of tax expense as a result of the purchase accounting for leveraged leases as required by FASB Interpretation No. 21, "Accounting for Leases in a Business Combinatoin" and FASB Statement of Financial Accounting Standares No. 13, "Accounting for Leases". Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 As a result of Manulife's acquisition of the Company, see Note 1- Change of Control, the Company renamed and reorganized certain businesses within its operating segments to better align the Company with its new parent, Manulife. The Company renamed the Asset Gathering Segment as the Wealth Management Segment. In addition, the Institutional Investment Management Segment was moved to the Corporate and Other Segment. Other realignments include moving Signator Investors, Inc. our agent sales organization, from Wealth Management to Protection, and Group Life, Retail Discontinued operations, discontinued health insurance operations and Creditor from Corporate and Other to Protection. International Group Plans (IGP) remains in international operations in our Corporate and Other Segment while it will be reported in Other in Manulife's segment results. The financial results for all periods have been reclassified to conform to the current period presentation. The Company operates in the following four business segments: two segments primarily serve retail customers, one segment serves institutional customers, and our fourth segment is the Corporate and Other Segment, which includes our institutional advisory business, the remaining international operations, and the corporate account. Our retail segments are the Protection Segment and the Wealth Management Segment. Our institutional segment is the Guaranteed and Structured Financial Products Segment (G&SFP). Consolidated income before income taxes and cumulative effect of accounting pronouncement increased 1.1%, or $8.0 million, for the six month period ended June 30, 2004 from the prior year. The increase was driven by higher product fees and advisory fees. The increase in product fees was driven by a 12.7% increase in average account balance on universal life insurance products. The increase in advisory fees is driven by 13.9% growth in average assets under management in the mutual funds business compared to the prior year. These increase revenues were partially offset by a decrease in net realized investment and other gains from the sale of Home Office properties in the prior year. Through June 30, 2003, the Company recognized a gain of $271.4 million (and a deferred profit of $209.4 million) on the sale of the Company's Home Office properties in the first quarter of 2003. In addition, operating expenses increased 6.2%, or $41.3 million. The Company recorded an decrease to net income of $3.3 million (net of tax) resulting from the adoption of a new accounting pronouncement, Statement of Position 03-1 - Accounting and Reporting by Insurance Enterprises for Certain Untraditional Long Duration Contracts for Separate Accounts (SOP 03-1). Premiums decreased 0.4%, or $3.8 million, from the prior year. Premiums were driven by a decrease in the group life business of $29.8 million due to the sale of the group life insurance business effective May 1, 2003, a decrease in the sales of single premium annuities of $25.7 million, or 87.4% and a $22.8 million decrease in premiums in the traditional life insurance business. Partially offsetting these decreases were increased premiums in the long-term care insurance business, up by $40.9 million, or 16.0%, primarily due to business growth resulting from strong renewal premiums. In addition, premiums increased 16.9%, or $24.5 million, in the IGP business. Universal life and investment-type product fees increased 8.8%, or $27.2 million, over the prior year. In addition, product fees on universal life products increased 34.4%, or $20.6 million, due primarily to a $12.6 million increase in cost of insurance fees. Investment-type product fees increased 10.2%, or $16.7 million, in the variable life business due primarily to the higher amortization of unearned revenue of $10.7 million driven by unlocking for higher future death claims in the first quarter of 2004. Partially offsetting these increases in product fees was a decrease in fees in the retail annuities business. 52 JOHN HANCOCK LIFE INSURANCE COMPANY Net investment income decreased 0.5%, or $8.9 million, from the prior year. The decrease in net investment income was driven by lower yields, partially offset by asset growth and lower investment expenses. Average assets grew $2,788.7 million, or 4.4%, compared to the prior year. In addition, investment expenses decreased $12.6 million from the prior year, driven by the reduction in depreciation expense from the sale of the home office properties. The average yield on invested assets decreased to 5.61%, driven by the impact of floating-rate investments and purchase accounting mark-to-market adjustments on invested assets. Net investment income also varies with market interest rates as the return on approximately $13 billion of the asset portfolio at June 30, 2004, floats with market rates. Matching the interest rate exposure on our asset portfolio to the exposure on our liabilities is a central feature of our asset/liability management process. For additional analysis of net investment income and yields see the General Account Investments section of this MD&A. Net realized investment and other gains (losses) decreased 18.4%, or $33.8 million, due to the sale of the Home Office properties in the first quarter of 2003. Through June 30, 2003, the Company recognized a realized gain of $271.4 million (and a deferred profit of $209.4 million) on the sale of the Company's Home Office properties in the first quarter of 2003. See detail of current period net realized investment and other gains (losses) in table below. Offsetting the impact of the non-recurring gain from the sale of the Home Office properties was lower realized losses on fixed maturity securities of $142.9 million driven by lower levels of impairments and hedging adjustments. In addition, the Company generated $81.9 million in gains on equity securities and $75.7 million of gains on real estate. For additional analysis of net realized investment and other gains (losses) see the General Account Investments section of this MD&A.
Gross Gain Gross Loss Hedging Net Realized Investment For the Six Months Ended June 30, 2004 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss) ---------------------------------------------------------------------------- (in millions) Fixed maturity securities (1) ......... (98.1) 150.1 (30.5) (77.0) (55.5) Equity securities (2) ................. (6.2) 88.8 (0.7) -- 81.9 Mortgage loans on real estate ......... (23.6) 27.9 (14.6) (19.4) (29.7) Real estate ........................... -- 78.0 (2.3) -- 75.7 Other invested assets ................. (37.2) 8.5 (8.5) -- (37.2) Derivatives ........................... -- -- -- 126.7 126.7 ---------------------------------------------------------------------------- Subtotal ............... (165.1) 353.3 (56.6) 30.3 161.9 ---------------------------------------------------------------------------- Amortization adjustment for deferred policy acquisition costs and VOBA............. 16.4 Amounts credited to participating pension contractholders.......................... (5.1) Amounts credited to the policyholder dividend obligation........................... (23.3) ------------------ Total......................................................................... 149.9 ==================
1.) Fixed maturities gain on disposals includes $42.5 million of gains from previously impaired securities and prepayment gains of $57.2 million. 2.) Equity securities gain on disposal includes $9.3 million of gains from equity securities received as settlement compensation from an investee whose securities had previously been impaired. The hedging adjustments in the fixed maturities and mortgage loans asset classes are non-cash adjustments representing the amortization or reversal of prior fair value adjustments on assets in those classes that were or are designated as hedged items in a fair value hedge. When an asset or liability is so designated, its cost basis is adjusted in response to movement in interest rates. These adjustments are non-cash and reverse with the passage of time as the asset or liability and derivative mature. The hedging adjustments on the derivatives represent non-cash adjustments on derivative instruments and on assets and liabilities designated as hedged items reflecting the change in fair value of those items. Investment management revenues, commissions and other fees (advisory fees) increased 9.8%, or $23.7 million, from the prior year. The increase in advisory fees was driven by growth in the mutual fund business of 12.7%, or $17.1 million over the prior year due to higher assets under management. Advisory fees in our institutional asset management business increased 11.2% on stable assets under management. The institutional asset management business generated a 11.0% increase in deposits during the six months ended June 30, 2004 compared to the prior year. Other revenue decreased 1.2%, or $1.5 million, from the prior year. Other revenue consists principally of the revenues generated by Signature Fruit, a subsidiary of the Company since April 2, 2001, which acquired certain assets and assumed liabilities out of Tri Valley Growers, Inc., a cooperative association on that date. Signature Fruit generated $114.4 million in revenue for the six months ended June 30, 2004. In addition, other revenue includes Federal 53 JOHN HANCOCK LIFE INSURANCE COMPANY long-term care business fee revenue of $3.7 million for the six months ended June 30, 2004. The sale of the group life business effective May 1, 2003 decreased other revenue by $1.0 million from the prior year. Benefits to policyholders decreased 1.9%, or $35.5 million, from the prior year. Benefits to policyholders was driven by a decrease of $38.9 million in the fixed annuity business on lower sales of single premium annuity contracts. Benefits to policyholders decreased $36.0 million in the G&SFP segment on lower interest credited on account balances. Lower benefits to policyholders in the traditional life insurance business was offset by growth in the variable life insurance and universal life insurance businesses. Partially offsetting these decreases was the long-term care insurance business which increased $31.4 million, driven by growth in the business. Other operating costs and expenses increased 6.2%, or $41.3 million. Of this increase, $24.2 million resulted from growth in the long-term care business and $16.3 million related to the Wealth Management Segment. Partially offsetting these increases was a decrease at Signature Fruit of $8.8 million to $115.3 million from the prior year and a decrease of $5.5 million for the sale of the group life business. Amortization of deferred policy acquisition costs and value of business acquired increased 17.9%, or $24.2 million, from the prior year. The increase in amortization of deferred policy acquisition costs and value of business acquired is driven by amortization of value of business acquired, driven by the acquisition of the Company by Manulife. Purchase accounting adjusted the historical deferred policy acquisition asset to zero and created a new value of business acquired asset at an established return on equity for the transaction. The impact on amortization was to decrease deferred policy acquisition costs due to the reduced asset and increase amortization of value of business acquired. Partially offsetting the increased amortization of value of business acquired is lower amortization of deferred policy acquisition costs due to prior year amortization in the traditional life insurance business. Amortization of policy acquisition costs and value of business acquired increased $12.8 million in the Wealth Management Segment, $2.6 million in the Protection Segment and $9.1 million in the G&SFP Segment driven by amortization of value of business acquired established in the Manulife acquisition. Dividends to policyholders decreased 13.0%, or $35.1 million from the prior year. The decrease in dividends to policyholders was driven by traditional life insurance products which decreased 10.5%, or $26.1 million, due to a reduction in the dividend scale and a $5.4 million decrease in dividends due to the sale of the group life business. Group life was sold effective May 1, 2003 and thus generated policyholder dividends through that date in 2003 and none after the sale of the business. Income taxes were $259.4 million in the first six months of 2004, compared to $224.4 million for the first six months of 2003. Our effective tax rate was 34.1% in the first six months of 2004, compared to 29.8% in the first six months of 2003. The increase in the effective tax rate during the period is due to changes in the recognition of tax expense as a result of the purchase accounting for leveraged leases as required by FASB Interpretation No. 21, "Accounting for Leases in a Business Combination" and FASB Statement of Financial Accounting Standards No. 13, "Accounting for Leases". Cumulative effect of accounting change, net of tax, was $3.3 million. During the quarter, the Company adopted SOP 03-1 which requires specialized accounting for insurance companies related to separate accounts, transfers of assets, liability valuations, returns based on a contractually referenced pool of assets or index, accounting for contracts that contain death or other insurance benefit features, accounting for reinsurance and other similar contracts, accounting for annuitization benefits and sales inducements to contractholders. 54 JOHN HANCOCK LIFE INSURANCE COMPANY General Account Investments We manage our general account assets in investment segments that support specific classes of product liabilities. These investment segments permit us to implement investment policies that both support the financial characteristics of the underlying liabilities, and also provide returns on our invested capital. The investment segments also enable us to gauge the performance and profitability of our various businesses. Asset/Liability Risk Management Our primary investment objective is to maximize after-tax returns within acceptable risk parameters. We are exposed to two primary types of investment risk: o Interest rate risk, meaning changes in the market value of fixed maturity securities as interest rates change over time, and o Credit risk, meaning uncertainties associated with the continued ability of an obligor to make timely payments of principal and interest. We use a variety of techniques to control interest rate risk in our portfolio of assets and liabilities. In general, our risk management philosophy is to limit the net impact of interest rate changes on our assets and liabilities. Assets are invested predominantly in fixed income securities, and the asset portfolio is matched with the liabilities so as to eliminate the Company's exposure to changes in the overall level of interest rates. Each investment segment holds bonds, mortgages, and other asset types that will satisfy the projected cash needs of its underlying liabilities. Another important aspect of our asset-liability management efforts is the use of interest rate derivatives. We selectively apply derivative instruments, such as interest rate swaps and futures, to reduce the interest rate risk inherent in combined portfolios of assets and liabilities. Management of credit risk is central to our business and we devote considerable resources to the credit analysis underlying each investment acquisition. Our corporate bond management group includes a staff of highly specialized, experienced, and well-trained credit analysts. We rely on these analysts' ability to analyze complex private financing transactions and to acquire the investments needed to profitably fund our liability requirements. In addition, when investing in private fixed maturity securities, we rely upon broad access to proprietary management information, negotiated protective covenants, call protection features and collateral protection. Our bond portfolio is reviewed on a continuous basis to assess the integrity of current quality ratings. As circumstances warrant, specific investments are "re-rated" with the adjusted quality ratings reflected in our investment system. All bonds are evaluated regularly against the following criteria: o material declines in the issuer's revenues or margins; o significant management or organizational changes; o significant uncertainty regarding the issuer's industry; o debt service coverage or cash flow ratios that fall below industry-specific thresholds; o violation of financial covenants; and o other business factors that relate to the issuer. Insurance product prices are impacted by investment results as well as other results (e.g. mortality, lapse). Accordingly, incorporated in insurance products prices are assumptions of expected default losses over the long-term. Actual losses therefore vary above and below this average, and the market value of the portfolio as a whole also changes as market credit spreads move up and down during an economic cycle. John Hancock is able to hold to this investment strategy over the long term, both because of its strong capital position, the fixed nature of its liabilities and the matching of those liabilities with assets and because of the experience gained through many decades of a consistent investment philosophy. We generally intend to hold all of our fixed maturity investments to maturity to meet liability payments, and to hold securities with any unrealized gains and losses over the long term. However, we do sell bonds under certain circumstances, such as when new information causes us to change our assessment of whether a bond will recover or perform according to its contractual terms, in response to external events (such as a merger or a downgrade) that result in investment guideline violations (such as single issuer or overall portfolio credit quality limits), in response to extreme catastrophic events (such as September 11, 2001) that result in industry or market wide disruption, or to take advantage of tender offers. 55 JOHN HANCOCK LIFE INSURANCE COMPANY Overall Composition of the General Account Invested assets, excluding separate accounts totaled $66.2 billion and $66.9 billion as of June 30, 2004 and December 31, 2003, respectively. On April 28, 2004, as a result of Manulife's acquisition of John Hancock, assets were marked to market, which became the new cost basis of those assets, in accordance with purchase accounting guidelines. The January 1, 2004 adoption of the new accounting pronouncement SOP 03-01, Accounting and Reporting by Insurance Enterprises for Certain Non Traditional Long Duration Contracts and for Separate Accounts, increased fixed maturity securities by $0.7 billion as of June 30, 2004. The following table shows the composition of investments in the general account portfolio.
As of June 30, As of December 31, 2004 2003 ----------------------------------------------------------- Carrying % of Carrying % of Value Total Value Total ----------------------------------------------------------- (in millions) Fixed maturity securities (1) ...... $ 47,456.7 71.7% $ 47,970.8 71.7% Mortgage loans (2) ................. 11,765.1 17.8 10,871.1 16.3 Real estate ........................ 136.7 0.2 123.8 0.2 Policy loans (3) ................... 2,020.6 3.0 2,019.2 3.0 Equity securities .................. 235.8 0.4 333.7 0.5 Other invested assets .............. 3,275.8 4.9 2,912.2 4.4 Short-term investments ............. 50.2 0.1 31.5 -- Cash and cash equivalents (4) ...... 1,244.5 1.9 2,626.9 3.9 ----------------------------------------------------------- Total invested assets .............. $ 66,185.4 100.0% $ 66,889.2 100.0% -----------------------------------------------------------
(1) In addition to bonds, the fixed maturity security portfolio contains redeemable preferred stock with a carrying value of $818.9 million and $600.3 million as of June 30, 2004 and December 31, 2003, respectively. The total fair value of the fixed maturity security portfolio was $47,456.7 million and $47,994.9 million, at June 30, 2004 and December 31, 2003, respectively. (2) The fair value for the mortgage loan portfolio was $11,559.8 million and $11,791.4 million as of June 30, 2004 and December 31, 2003, 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. Consistent with the nature of the Company's product liabilities, assets are heavily oriented toward fixed maturity securities. The Company determines the allocation of assets primarily on the basis of cash flow and return requirements of its products and by the level of investment risk. Fixed Maturity Securities. The 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). The fixed maturity securities portfolio also includes redeemable preferred stock. As of June 30, 2004, fixed maturity securities represented 71.7% of general account invested assets with a carrying value of $47.5 billion, comprised of 53.6% public securities and 46.4% private securities. Each year, the Company directs the majority of net cash inflows into investment grade fixed maturity securities. Typically, between 5% and 15% of funds allocated to fixed maturity securities are invested in below investment grade bonds while maintaining a policy to limit the overall level of these bonds to no more than 9% of invested assets and the majority of that balance in the BB category. As of June 30, 2004, the below investment grade bonds were 8.4% of invested assets, and 11.9% of total fixed maturities. Rated fixed maturity securities exclude redeemable preferred stock. The Company has established a long-term target of limiting investments in below investment grade bonds to 9% and 8% of invested assets by year end 2004 and 2005, respectively, for its U.S. life insurance companies on a statutory accounting basis. Allocations are based on an assessment of relative value and the likelihood of enhancing risk-adjusted portfolio returns. While the Company 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 the Company's total assets. 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 56 JOHN HANCOCK LIFE INSURANCE COMPANY (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 shows the composition by credit quality of the fixed maturity securities portfolio. Fixed Maturity Securities -- By Credit Quality
------------------------------------------------------------ As of June 30, As of December 31, 2004 2003 ------------------------------------------------------------ SVO S&P Equivalent Carrying % of Carrying % of Rating (1) Designation (2) Value (3)(4)(5) Total Value (3)(4)(5) Total - --------------------------------------------------------------------------------------------------------- (in millions) 1 AAA/AA/A....................... $19,873.9 42.6% $19,612.6 41.4% 2 BBB............................ 21,195.2 45.5 21,645.6 45.7 3 BB............................. 2,758.3 5.9 2,953.2 6.2 4 B.............................. 1,552.4 3.3 1,919.4 4.1 5 CCC and lower.................. 1,080.7 2.3 841.3 1.8 6 In or near default............. 177.3 0.4 398.4 0.8 ----------------------------------------------------------- Subtotal................ 46,637.8 100.0% 47,370.5 100.0% Redeemable preferred Stock..................... 818.9 600.3 ----------------------------------------------------------- Total fixed maturities....... $47,456.7 $47,970.8 ===========================================================
(1) For securities that are awaiting an SVO rating, the Company has assigned a rating based on an analysis that it believes 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) Includes 95 securities that are awaiting an SVO rating, with a carrying value of $1,690.3 million as of June 30, 2004 and 175 securities that are awaiting an SVO rating, with a carrying value of $4,032.7 million at December 31, 2003. Due to lags between the funding of an investment, the processing of final legal documents, the filing with the SVO, and the rating by the SVO, there will always be a number of unrated securities at each statement date. (4) Includes the effect of $150.0 million notional invested in the Company's credit-linked note program, $130.0 million notional of written credit default swaps on fixed maturity securities in the AAA/AA/A category and $20.0 million notional of written credit default swaps on fixed maturity securities in the BBB category. As of December 31, 2003 the Company had $130.0 million notional invested in the Company's credit linked note program, $110.0 million notional written credit default swaps on fixed maturity securities in the AAA/AA/A category and $20.0 million notional written credit default swaps on fixed maturity securities in the BBB category. (5) The Company entered into a credit enhancement agreement in the form of a guaranty from an AAA rated financial guarantor in 1996. To reflect the impact of this guaranty on the overall portfolio, the Company has presented securities covered in aggregate by the guaranty at rating levels provided by the SVO and Moody's that reflect the guaranty. As a result, $22.6 million of SVO Rating 2, $329.4 million of SVO Rating 3, $112.0 million of SVO Rating 4, and $9.2 million of SVO Rating 5 underlying securities are included as $276.0 million of SVO Rating 1, $147.9 million of SVO Rating 2 and $49.3 million of SVO Rating 3 as of June 30, 2004 and $421.0 million of SVO Rating 3, $185.2 million of SVO Rating 4, and $7.6 million of SVO Rating 5 underlying securities are included as $397.6 million of SVO Rating 1, $162.1 million of SVO Rating 2 and $54.1 million of SVO Rating 3 as of December 31, 2003. The guaranty also contains a provision that the guarantor can recover from the Company certain amounts paid over the history of the program in the event a payment is required under the guaranty. As of June 30, 2004 and December 31, 2003, the maximum amount that can be recovered under this provision was $123.2 million and $112.8 million, respectively. The table above sets forth the SVO ratings for the bond portfolio along with an equivalent S&P rating agency designation. The majority of the rated fixed maturity investments are investment grade, with 88.1% and 87.1% of fixed maturity investments invested in Category 1 and 2 securities as of June 30, 2004 and December 31, 2003, respectively. Below investment grade bonds were 11.9% and 12.9% of the rated fixed maturity investments as of June 30, 2004 and December 31, 2003, respectively, and 8.4% and 9.1% of total invested assets at June 30, 2004 and December 31, 2003, respectively. This allocation reflects the Company strategy of avoiding the unpredictability of interest rate risk in favor of relying on the Company's bond analysts' ability to better predict credit or default risk. The 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. 57 JOHN HANCOCK LIFE INSURANCE COMPANY Valuation techniques for the bond portfolio vary by security type and the availability of market data. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. External pricing services are used where available, broker dealer quotes are used for thinly traded securities, and a spread pricing matrix is used when price quotes are not available, which typically is the case for our private placement securities. The spread pricing matrix is based on credit quality, country of issue, market sector and average investment life and is created for these dimensions through brokers' estimates of public spreads derived from their respective publications. When utilizing the spread pricing matrix, securities are valued through a discounted cash flow method where each bond is assigned a spread that is added to the current U.S. Treasury rates to discount the cash flows of the security. The spread assigned to each security is changed from month to month based on changes in the market. Certain market events that could impact the valuation of securities include issuer credit ratings, business climate, management changes, litigation, and government actions among others. The resulting prices are then reviewed by the pricing analysts and members of the Security Operations Department. The Company's pricing analysts take appropriate actions to reduce valuations of securities where such an event occurs that negatively impacts the securities' value. Although the Company believes its estimates reasonably reflect the fair value of those securities, the key assumptions about risk premiums, performance of underlying collateral (if any) and other factors involve significant assumptions and may not reflect those of an active market. To the extent that bonds have longer maturity dates, management's estimate of fair value may involve greater subjectivity since they involve judgment about events well into the future. Then, every quarter, there is a comprehensive review of all impaired securities and problem loans by Manulife's Credit Committee a group consisting of the Manulife's Chief Investment Officer, Chief Financial Officer, Chief Risk Officer and Chief Credit Officer. The valuation of impaired bonds for which there is no quoted price is typically based on the present value of the future cash flows expected to be received. If the company is likely to continue operations, the estimate of future cash flows is typically based on the expected operating cash flows of the company that are available to make payments on the bonds. If the company is likely to liquidate, the estimate of future cash flows is based on an estimate of the liquidation value of its net assets. As of June 30, 2004 and December 31, 2003, 49.5% and 48.3% of our below investment grade bonds are in Category 3, the highest quality below investment grade. Category 6 bonds, those in or near default, represent securities that were originally acquired as long-term investments, but subsequently became distressed. The carrying value of bonds in or near default was $177.3 million and $398.4 million as of June 30, 2004 and December 31, 2003, respectively. As of June 30, 2004 and December 31, 2003, $0.2 million and $4.1 million, respectively, of interest on bonds near default were included in accrued investment income. Unless the Company reasonably expects to collect investment income on bonds in or near default, the accrual will be ceased and any accrued income reversed. Management judgment is used and the actual results could be materially different. In keeping with the investment philosophy of tightly managing interest rate risk, the Company's MBS & ABS holdings 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. By investing in MBS and ABS securities with relatively predictable repayments, the Company adds high quality, liquid assets to our portfolios without incurring the risk of cash flow variability. The Company believes the portion of its MBS/ABS portfolio subject to prepayment risk as of June 30, 2004 and December 31, 2003 was limited to approximately 20.8% and 22.3%, respectively ,of our total MBS/ABS portfolio and 4.1% and 3.4%, respectively, of our total fixed maturity securities holdings, at each period end. The following exhibits show a distribution of gross unrealized loss in the portfolio. As a result of Manulife's acquisition of the Company, the Company's portfolio was marked to market through purchase accounting on April 28, 2004. Market interest rates rose between April 28, 2004 and June 30, 2004. The increase in market interest rates since marking the portfolio to market has left a large percent of the portfolio in a gross unrealized loss position. The gross unrealized loss position of the portfolio is fairly evenly distributed across the portfolio. The following table shows the composition by our internal industry classification of the fixed maturity securities portfolio and the unrealized gains and losses contained therein. 58 JOHN HANCOCK LIFE INSURANCE COMPANY Fixed Maturity Securities -- By Industry Classification/Sector
Investment Grade as of June 30, 2004 --------------------------------------------------------------------------- Carrying Carrying Value of Value of Securities Securities with with Total Net Gross Gross Gross Gross Carrying Unrealized Unrealized Unrealized Unrealized Unrealized Value Gain (Loss) Gains Gains Losses Losses --------------------------------------------------------------------------- (in millions) Corporate securities: Banking and finance ............... $ 5,930.9 $ (51.0) $ 1,014.7 $ 5.4 $ 4,916.2 $ (56.4) Communications .................... 2,774.0 (20.6) 449.2 1.7 2,324.8 (22.3) Government ........................ 2,449.4 (16.6) 506.8 1.1 1,942.6 (17.7) Manufacturing ..................... 5,997.4 (40.2) 1,412.3 5.9 4,585.1 (46.1) Oil & gas ......................... 3,582.2 (21.6) 633.0 6.5 2,949.2 (28.1) Services/trade .................... 2,493.4 (16.2) 540.5 2.5 1,952.9 (18.7) Transportation .................... 2,121.5 (1.2) 480.2 11.9 1,641.3 (13.1) Utilities ......................... 6,677.5 (38.9) 961.5 6.5 5,716.0 (45.4) --------------------------------------------------------------------------- Total corporate securities .......... 32,026.3 (206.3) 5,998.2 41.5 26,028.1 (247.8) Asset-backed and mortgage-backed securities ......................... 8,896.9 (58.9) 1,965.4 17.9 6,931.5 (76.8) U.S. Treasury securities and obligations of U.S. government agencies ........................... 318.6 (1.4) 9.7 -- 308.9 (1.4) Debt securities issued by foreign Governments ........................ 165.1 (0.9) 3.3 -- 161.8 (0.9) Obligations of states and political Subdivisions ....................... 326.6 (4.2) 11.0 -- 315.6 (4.2) --------------------------------------------------------------------------- Total ............................. $41,733.5 $ (271.7) $ 7,987.6 $59.4 $33,745.9 $ (331.1) ===========================================================================
59 JOHN HANCOCK LIFE INSURANCE COMPANY Fixed Maturity Securities -- By Industry Classification/Sector
Below Investment Grade as of June 30, 2004 --------------------------------------------------------------------------- Carrying Carrying Value of Value of Securities Securities with with Total Net Gross Gross Gross Gross Carrying Unrealized Unrealized Unrealized Unrealized Unrealized Value Gain (Loss) Gains Gains Losses Losses --------------------------------------------------------------------------- (in millions) Corporate securities: Banking and finance ................ $ 12.0 $ 0.2 $ 5.5 $ 0.2 $ 6.5 $ (0.0) Communications ..................... 227.7 2.7 137.3 3.5 90.4 (0.8) Government ......................... 9.8 (0.2) 0.7 -- 9.1 (0.2) Manufacturing ...................... 1,229.9 (8.6) 350.0 7.9 879.9 (16.5) Oil & gas .......................... 768.7 16.9 336.8 23.4 431.9 (6.5) Services/trade ..................... 319.9 (9.1) 33.9 0.0 286.0 (9.1) Transportation ..................... 394.5 (16.0) 171.5 0.6 223.0 (16.6) Utilities .......................... 2,371.8 (21.8) 455.6 3.5 1,916.2 (25.3) --------------------------------------------------------------------------- Total corporate securities ........... 5,334.3 (35.9) 1,491.3 39.1 3,843.0 (75.0) Asset-backed and mortgage-backed securities .......................... 377.7 13.0 195.4 18.0 182.3 (5.0) Debt securities issued by foreign Governments ......................... 11.2 0.3 7.5 0.4 3.7 (0.1) --------------------------------------------------------------------------- Total .............................. $5,723.2 $ (22.6) $1,694.2 $ 57.5 $4,029.0 $ (80.1) ===========================================================================
60 JOHN HANCOCK LIFE INSURANCE COMPANY Fixed Maturity Securities -- By Industry Classification/Sector
Investment Grade as of December 31, 2003 --------------------------------------------------------------------------- Carrying Carrying Value of Value of Securities Securities with with Total Net Gross Gross Gross Gross Carrying Unrealized Unrealized Unrealized Unrealized Unrealized Value Gain (Loss) Gains Gains Losses Losses --------------------------------------------------------------------------- (in millions) Corporate securities: Banking and finance ............... $ 6,198.6 $ 359.1 $ 5,408.5 $ 370.3 $ 790.1 $ (11.2) Communications .................... 2,795.5 230.8 2,390.1 239.8 405.4 (9.0) Government ........................ 3,151.1 132.7 2,112.2 140.0 1,038.9 (7.3) Manufacturing ..................... 6,199.1 381.3 5,194.4 411.9 1,004.7 (30.6) Oil & gas ......................... 3,827.5 342.3 3,660.0 347.9 167.5 (5.6) Services/trade .................... 2,351.1 170.4 2,222.8 174.3 128.3 (3.9) Transportation .................... 2,252.9 104.8 1,713.1 138.9 539.8 (34.1) Utilities ......................... 6,943.5 503.7 6,182.4 528.2 761.1 (24.5) --------------------------------------------------------------------------- Total corporate securities .......... 33,719.3 2,225.1 28,883.5 2,351.3 4,835.8 (126.2) Asset-backed and mortgage-backed securities ......................... 6,956.3 223.0 5,155.1 303.3 1,801.2 (80.3) U.S. Treasury securities and obligations of U.S. government agencies ........................... 289.3 2.7 111.1 4.1 178.2 (1.4) Debt securities issued by foreign governments ........................ 244.9 20.2 147.0 21.4 97.9 (1.2) Obligations of states and political Subdivisions ....................... 429.0 16.0 337.1 17.2 91.9 (1.2) --------------------------------------------------------------------------- Total ............................. $41,638.8 $ 2,487.0 $34,633.8 $ 2,697.3 $ 7,005.0 $ (210.3) ===========================================================================
Below Investment Grade as of December 31, 2003 --------------------------------------------------------------------------- Carrying Carrying Value of Value of Securities Securities with with Total Net Gross Gross Gross Gross Carrying Unrealized Unrealized Unrealized Unrealized Unrealized Value Gain (Loss) Gains Gains Losses Losses --------------------------------------------------------------------------- (in millions) Corporate securities: Banking and finance .............. $ 113.4 $ (3.7) $ 84.3 $ 2.6 $ 29.1 $ (6.3) Communications ................... 203.3 8.2 104.9 17.4 98.4 (9.2) Government ....................... 11.0 (0.4) 1.5 0.2 9.5 (0.6) Manufacturing .................... 1,414.6 61.8 992.5 93.0 422.1 (31.2) Oil & gas ........................ 673.0 (31.7) 413.9 21.4 259.1 (53.1) Services/trade ................... 431.4 45.7 324.8 51.1 106.6 (5.4) Transportation ................... 507.3 (14.4) 182.0 29.9 325.3 (44.3) Utilities ........................ 2,588.2 107.0 1,852.1 153.1 736.1 (46.1) --------------------------------------------------------------------------- Total corporate securities ......... 5,942.2 172.5 3,956.0 368.7 1,986.2 (196.2) Asset-backed and mortgage-backed securities ........................ 380.4 (61.3) 47.0 2.2 333.4 (63.5) Debt securities issued by foreign governments ....................... 9.4 0.3 5.7 0.4 3.7 (0.1) --------------------------------------------------------------------------- Total ............................ $6,332.0 $ 111.5 $4,008.7 $371.3 $2,323.3 $ (259.8) ===========================================================================
61 JOHN HANCOCK LIFE INSURANCE COMPANY As of June 30, 2004 and December 31, 2003, there were gross unrealized gains of $116.9 million and $3,068.6 million, and gross unrealized losses of $411.2 million and $470.1 million on the fixed maturities portfolio. As of June 30, 2004 gross unrealized losses of $411.2 million was fairly evenly distributed across the sectors as a percent of the exposure to the manufacturing sector. The tables above show gross unrealized losses before amounts that are allocated to the closed block policyholders or participating pension contractholders. Of the $411.2 million of gross unrealized losses in the portfolio at June 30, 2004, $62.1 million was in the closed block and $25.2 million has been allocated to participating pension contractholders, leaving $323.9 million of gross unrealized losses after such allocations. The 2003 gross unrealized losses of $470.1 million included $413.3 million, or 87.9%, of gross unrealized losses concentrated in the utilities, manufacturing, oil and gas, transportation, and asset-backed and mortgage-backed securities. The tables above show gross unrealized losses before amounts that were allocated to the closed block policyholders or participating pension contractholders. Of the $470.1 million of gross unrealized losses in the portfolio at December 31, 2003, $61.8 million was in the closed block and $20.2 million was allocated to participating pension contractholders, leaving $388.1 million of gross unrealized losses after such allocations. Unrealized losses can be created by rising interest rates or by rising credit concerns and hence widening credit spreads. Credit concerns are apt to play a larger role in the unrealized loss on below investment grade bonds and hence the gross unrealized loss on the portfolio has been split between investment grade and below investment grade bonds in the above tables. The gross unrealized loss on below investment grade fixed maturity securities declined from $259.8 million at December 31, 2003 to $80.1 million primarily due to the marking to market of the portfolio on April 28, 2004. The gross unrealized loss on June 30, 2004 was largely due to interest rate changes since April 28, 2004 and is fairly evenly distributed through the fixed maturity portfolio. We remain most concerned about the airline sector. We lend to this industry almost exclusively on a secured basis (all of our current holdings are secured). These secured airline financings are of two types: Equipment Trust Certificates (ETC's) and Enhanced Equipment Trust Certificates (EETC's). The ETC's initially have an 80% loan-to-value ratio and the EETC senior tranches initially have a 40-50% loan-to-value and include a provision for a third party to pay interest for eighteen months from a default. For us to lose money on an ETC, three things must happen: the airline must default, the airline must decide it does not want to fly our aircraft, and the aircraft must be worth less than our loan. When lending to this industry, we underwrite both the airline and the aircraft. We have been lending to this industry in this fashion for 25 years through several economic cycles and have seen values on our secured airline bonds fall and recover through these cycles. While the airline industry is making positive strides in reducing its cost structure, a significant recovery in this sector requires a growing economy and a pick up in business travel. In the most recent quarter ending June 30, 2004, U.S. carriers have reported mixed results as increased fuel prices have offset increases in traffic. We do expect the airline sector to improve barring any new terrorist events or a reversal of the course of the U.S. economy. We do still expect that the senior secured nature of our loans to this industry will protect our holdings through this difficult time. Again, the gross unrealized loss on June 30, 2004 is largely due to interest rate changes since April 28, 2004 and hence is fairly evenly distributed throughout the fixed maturity portfolio. The following table shows the composition by credit quality of the securities with gross unrealized losses in our fixed maturity securities portfolio. The gross unrealized loss on investment grade bonds (those rated in categories 1 and 2 by the SVO) increased by $124.5 million in the six months ending June 30, 2004 to $324.4 million. The gross unrealized loss on below investment grade bonds (those rated in categories 3, 4, 5, and 6 by the SVO) declined even more over this period, dropping by $181.0 million to a total of $78.2 million as of June 30, 2004. 62 JOHN HANCOCK LIFE INSURANCE COMPANY Unrealized Losses on Fixed Maturity Securities -- By Quality
As of June 30, 2004 --------------------------------------------------------------- Carrying Value of Securities with SVO S&P Equivalent Gross Unrealized % of Gross Unrealized Rating (1) Designation (2) Losses (3) Total Losses (3) % of Total - --------------------------------------------------------------------------------------------------------- (in millions) 1 AAA/AA/A................. $16,312.5 43.8% $(162.8) 40.4% 2 BBB...................... 17,010.9 45.7 (161.6) 40.1 3 BB....................... 2,167.3 5.8 (27.8) 6.9 4 B........................ 1,133.9 3.1 (24.0) 6.0 5 CCC and lower............ 521.8 1.4 (17.2) 4.3 6 In or near default....... 60.7 0.2 (9.2) 2.3 --------------------------------------------------------------- Subtotal........... 37,207.1 100.0% (402.6) 100.0% Redeemable preferred stock................. 567.8 (8.6) --------------------------------------------------------------- Total.................... $37,774.9 $(411.2) ===============================================================
(1) With respect to securities that are awaiting rating, the Company has assigned a rating based on an analysis that it believes 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) Includes 71 securities with gross unrealized losses that are awaiting an SVO rating with a carrying value of $1,464.9 million and unrealized losses of $16.0 million. Due to lags between the funding of an investment, the processing of final legal documents, the filing with the SVO, and the rating by the SVO, there will always be a number of unrated securities at each statement date. Unrated securities comprised 3.9% and 3.9% of the total carrying value and total gross unrealized losses of securities in a loss position, including redeemable preferred stock, respectively. Unrealized Losses on Fixed Maturity Securities -- By Quality
As of December 31, 2003 -------------------------------------------------------------- Carrying Value of Securities with SVO S&P Equivalent Gross Unrealized % of Gross Unrealized Rating (1) Designation (2) Losses (3) Total Losses (3) % of Total - ---------------------------------------------------------------------------------------------------------------- (in millions) 1 AAA/AA/A......................... $4,631.6 50.8% $ (93.4) 20.3% 2 BBB.............................. 2,168.2 23.8 (106.5) 23.2 3 BB............................... 664.4 7.3 (74.4) 16.2 4 B................................ 1,068.3 11.7 (90.5) 19.7 5 CCC and lower.................... 441.5 4.8 (83.5) 18.2 6 In or near default............... 146.7 1.6 (10.8) 2.4 -------------------------------------------------------------- Subtotal................... 9,120.7 100.0% (459.1) 100.0% Redeemable preferred stock....... 207.6 (11.0) -------------------------------------------------------------- Total............................ $9,328.3 $(470.1) ==============================================================
(1) With respect to securities that are awaiting rating, the Company has assigned a rating based on an analysis that it believes 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) Includes 58 securities with gross unrealized losses that are awaiting an SVO rating with a carrying value of $1,763.4 million and unrealized losses of $27.1 million. Due to lags between the funding of an investment, the processing of final legal documents, the filing with the SVO, and the rating by the SVO, there will always be a number of unrated securities at each statement date. Unrated securities comprised 18.9% and 5.8% of the total carrying value and total gross unrealized losses of securities in a loss position, including redeemable preferred stock, respectively. 63 JOHN HANCOCK LIFE INSURANCE COMPANY Unrealized Losses on Fixed Maturity Securities -- By Quality Unrealized Losses on Fixed Maturity Securities -- By Investment Grade Category and Age
As of June 30, 2004 --------------------------------------------------------------------------------------- Investment Grade Below Investment Grade ------------------------------------------- ------------------------------------------ Carrying Value of Carrying Value of Securities Securities with with Gross Unrealized Hedging Market Gross Unrealized Hedging Market Losses Adjustments Depreciation Losses Adjustments Depreciation ------------------------------------------- ------------------------------------------ (in millions) Three months or less ................... $33,323.3 $ (64.0) $ (260.4) $ 3,883.8 $ (11.0) $ (67.2) Greater than three months to six months ......................... -- -- -- -- -- -- Greater than six months to nine months ........................ -- -- -- -- -- -- Greater than nine months to twelve months ...................... -- -- -- -- -- -- Greater than twelve months ........... -- -- -- -- -- -- ------------------------------------------- ------------------------------------------ Subtotal .......................... 33,323.3 (64.0) (260.4) 3,883.8 (11.0) (67.2) ------------------------------------------- ------------------------------------------ Redeemable preferred stock ............. 422.6 (0.5) (6.2) 145.2 -- (1.9) ------------------------------------------- ------------------------------------------ Total ............................. $33,745.9 $ (64.5) $ (266.6) $ 4,029.0 $ (11.0) $ (69.1) =========================================== ==========================================
Unrealized Losses on Fixed Maturity Securities -- By Investment Grade Category and Age
As of December 31, 2003 --------------------------------------------------------------------------------------- Investment Grade Below Investment Grade ------------------------------------------ ------------------------------------------- Carrying Value of Carrying Value of Securities Securities with with Gross Unrealized Hedging Market Gross Unrealized Hedging Market Losses Adjustments Depreciation Losses Adjustments Depreciation ------------------------------------------ ------------------------------------------- (in millions) Three months or less ................ $1,793.1 $ (12.2) $ (15.6) $ 247.8 $ (3.8) $ (7.5) Greater than three months to six months ..................... 1,385.2 (5.6) (27.0) 122.9 (1.8) (1.1) Greater than six months to nine months .................... 925.2 (1.0) (32.6) 122.1 (2.5) (10.8) Greater than nine months to twelve months .................. 207.4 (14.0) (7.7) 191.6 (1.2) (2.8) Greater than twelve months ......... 2,488.9 (43.7) (40.5) 1,636.5 (60.1) (167.6) ------------------------------------------ ------------------------------------------- Total .......................... 6,799.8 (76.5) (123.4) 2,320.9 (69.4) (189.8) ------------------------------------------ ------------------------------------------- Redeemable preferred stock .......... 205.2 -- (10.4) 2.4 -- (0.6) ------------------------------------------ ------------------------------------------- Total .......................... $7,005.0 $ (76.5) $ (133.8) $2,323.3 $ (69.4) $ (190.4) ========================================== ===========================================
The tables above shows the Company's investment grade and below investment grade securities that were in a loss position at June 30, 2004 and December 31, 2003 by the amount of time the security has been in a loss position. Gross unrealized losses from hedging adjustments represent the amount of the unrealized loss that results from the security being designated as a hedged item in a fair value hedge. When a security is so designated, its cost basis is adjusted in response to movements in interest rates. These adjustments, which are non-cash and reverse with the passage of time as the asset and derivative mature, impact the amount of unrealized loss on a security. The remaining portion of the gross unrealized loss represents the impact of interest rates on the non-hedged portion of the portfolio and unrealized losses due to creditworthiness on the total fixed maturity portfolio. As of June 30, 2004 and December 31, 2003, respectively, the fixed maturity securities had a total gross unrealized loss of $335.7 million and $324.2 million, excluding basis adjustments related to hedging relationships. As of June 30, 2004 the aging of securities reflects the mark to market on April 28, 2004, thus the entire gross unrealized loss is less than three months at June 30, 2004. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in credit spreads since the securities were acquired. Credit rating agencies statistics indicate that investment grade securities have been found to be less likely to develop credit concerns. 64 JOHN HANCOCK LIFE INSURANCE COMPANY The scheduled maturity dates for securities in an unrealized loss position at June 30, 2004 and December 31, 2003 is shown below. Unrealized Losses on Fixed Maturity Securities -- By Maturity
June 30, 2004 December 31, 2003 ----------------------------- ---------------------------- Carrying Value Carrying Value of Securities Gross of Securities Gross with Gross Unrealized with Gross Unrealized Unrealized Loss Loss Unrealized Loss Loss ----------------------------- ---------------------------- (in millions) Due in one year or less ................. $ 1,914.4 $ (12.6) $ 385.1 $ (11.5) Due after one year through five years ... 8,634.6 (81.7) 1,487.0 (74.5) Due after five years through ten years .. 12,307.3 (148.8) 1,916.7 (101.8) Due after ten years ..................... 7,804.8 (86.3) 3,404.8 (138.5) ----------------------------- ---------------------------- 30,661.1 (329.4) 7,193.6 (326.3) Asset-backed and mortgage-backed securities ............................ 7,113.8 (81.8) 2,134.7 (143.8) ----------------------------- ---------------------------- Total ................................... $37,774.9 $ (411.2) $ 9,328.3 $ (470.1) ============================= ============================
As of June 30, 2004, there were no securities with unrealized losses of $10 million or more. As of December 31, 2003, there were 59 securities with an unrealized loss of $10 million or more with an amortized cost of $1,048.3 million and unrealized loss of $136.3 million. The area of most concern continues to be the airline sector as previously discussed. Mortgage Loans. As of June 30, 2004 and December 31, 2003, the Company held mortgage loans with a carrying value of $11.8 billion and $10.9 billion, including $3.1 billion and $3.0 billion, respectively, of agricultural loans at each period end and $8.7 billion and $7.9 billion, respectively, of commercial loans. Impaired loans comprised 0.4% and 1.1% of the mortgage portfolio as of June 30, 2004 and December 31, 2003, respectively. The following table shows the Company's agricultural mortgage loan portfolio by its three major sectors: agri-business, timber and production agriculture.
As of June 30, 2004 As of December 31, 2003 ------------------------------------------- ---------------------------------------- Amortized Carrying % of Total Amortized Carrying % of Total Cost Value Carrying Value Cost Value Carrying Value ------------------------------------------- ---------------------------------------- (in millions) Agri-business........... $1,844.7 1,831.3 58.8% $1,861.0 $1,860.6 61.5% Timber.................. 1,270.8 1,266.0 40.7 1,172.4 1,144.2 37.9 Production agriculture.. 17.0 16.9 0.5 18.9 18.9 0.6 ------------------------------------------ ---------------------------------------- Total............... $3,132.5 $3,114.2 100.0% $3,052.3 $3,023.7 100.0% ========================================== ========================================
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. 65 JOHN HANCOCK LIFE INSURANCE COMPANY Mortgage Loans - By Property Type
As of June 30, 2004 As of December 31, 2003 --------------------------------------------------------------- Carrying % of Carrying % of Value Total Value Total --------------------------------------------------------------- (in millions) Apartment.......................... $ 1,609.8 13.7% $ 1,452.9 13.4% Office Buildings................... 2,557.9 21.7 2,448.4 22.5 Retail............................. 2,452.3 20.8 2,083.6 19.2 Agricultural....................... 3,114.2 26.5 3,023.7 27.8 Industrial......................... 975.1 8.3 938.4 8.6 Hotels............................. 459.6 3.9 435.9 4.0 Multi-Family....................... 0.8 0.0 0.9 -- Mixed Use.......................... 327.2 2.8 284.3 2.6 Other.............................. 268.2 2.3 203.0 1.9 --------------------------------------------------------------- Total......................... $11,765.1 100.0% $10,871.1 100.0% ===============================================================
The following table shows the distribution of our mortgage loan portfolio by geographical region, as defined by the American Council of Life Insurers (ACLI). Mortgage Loans -- By ACLI Region
--------------------------------------------------------------------------- As of June 30, 2004 As of December 31, 2003 --------------------------------------------------------------------------- Number Carrying % of Carrying % of Of Loans Value Total Value Total --------------------------------------------------------------------------- (in millions) East North Central....... 140 $ 1,233.9 10.5% $ 1,117.8 10.3% East South Central....... 39 448.1 3.8 411.9 3.8 Middle Atlantic.......... 118 1,596.2 13.6 1,449.5 13.3 Mountain................. 97 724.6 6.2 507.6 4.7 New England.............. 95 934.4 7.9 869.1 8.0 Pacific.................. 274 2,547.1 21.6 2,371.2 21.8 South Atlantic........... 201 2,506.6 21.3 2,375.6 21.8 West North Central....... 68 453.7 3.9 434.5 4.0 West South Central....... 112 1,040.5 8.8 1,022.2 9.4 Canada................... 10 280.0 2.4 311.7 2.9 --------------------------------------------------------------------------- Total............... 1,154 $11,765.1 100.0% $10,871.1 100.0% ===========================================================================
The following table shows the carrying values of our mortgage loan portfolio that are delinquent but not in foreclosure, delinquent and in foreclosure, restructured and foreclosed. The table also shows the respective ratios of these items to the total carrying value of our mortgage loan portfolio. Mortgage loans are classified as delinquent when they are 60 days or more past due as to the payment of interest or principal. Mortgage loans are classified as restructured when they are in good standing, but the basic terms, such as interest rate or maturity date, have been modified as a result of a prior actual delinquency or an imminent delinquency. All foreclosure decisions are based on a thorough assessment of the property's quality and location and market conditions. The decision may also reflect a plan to invest additional capital in a property to make tenant improvements or renovations to secure a higher resale value at a later date. Following foreclosure, we rely on our real estate investment group's ability to manage foreclosed real estate for eventual return to investment real estate status or outright sale. 66 JOHN HANCOCK LIFE INSURANCE COMPANY Mortgage Loan Comparisons
As of June 30, As of December 31, 2004 2003 ------------------------------- ---------------------------------- Carrying % of Total Carrying % of Total Value Mortgage Loans (1) Value Mortgage Loans (1) ------------------------------- ---------------------------------- (in millions) Delinquent, not in foreclosure .. $ 2.2 -- $ 0.2 -- Delinquent, in foreclosure ...... 64.0 0.5% 92.7 0.8% Restructured .................... 68.7 0.6 87.8 0.8 Loans foreclosed during period .. -- -- 23.9 0.2 Other loans with valuation allowance (2) ............... 45.3 0.4 5.5 0.1 ------------------------------------------------------------------- Total ........................ $180.2 1.5% $210.1 1.9% ------------------------------------------------------------------- Valuation allowance ............. $ 5.6 $ 65.9 ===================================================================
(1) As of June 30, 2004 and December 31, 2003 the Company held mortgage loans with a carrying value of $11.8 billion and $10.9 billion, respectively. The valuation allowance is maintained at a level that is adequate enough to absorb estimated probable credit losses. Management's 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 valuation allowance for the mortgage loan portfolio was $5.6 million, or no appreciable percent of the carrying value of the portfolio as of June 30, 2004. Investment Results Net Investment Income. The following table summarizes the Company's investment results for the periods indicated:
Three Months Ended Six Months Ended As of As of As of As of June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ------------------------------------------------------------------------------------------- Yield Amount Yield Amount Yield Amount Yield Amount ------------------------------------------------------------------------------------------- (in millions) (in millions) (in millions) (in millions) General account assets-excluding Policy loans Gross income 5.42% $ 892.8 5.99% $ 950.7 5.85% $ 1,885.9 6.17% $ 1,905.1 Ending assets-excluding policy Loans 64,164.8 64,919.7 64,164.8 64,919.7 Policy loans Gross income 5.77% 29.1 5.94% 29.9 5.80% 58.5 6.04% 60.9 Ending assets 2,020.6 2,014.5 2,020.6 2,014.5 Total gross income 5.43% 921.9 5.99% 980.6 5.84% 1,944.4 6.17% 1,965.9 Less: investment expenses (38.9) (38.3) (77.9) (90.5) --------- --------- --------- --------- Net investment income 5.20% $ 883.0 5.75% $ 942.3 5.61% $ 1,866.5 5.88% $ 1,875.4 ========= ========= ========= =========
(1) Cash and cash equivalents are included in invested assets in the table above for the purposes of calculating yields on income producing assets for the Company. Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 Net investment income decreased $59.3 million from comparable prior year period. The decrease was primarily the result of amortization of the mark to market adjustment on assets as a result of the purchase accounting treatment of the Manulife acquisition of John Hancock. Overall, the yield for the three months ended June 30, 2004, net of investment expenses, on the general account 67 JOHN HANCOCK LIFE INSURANCE COMPANY portfolio decreased to 5.20% from 5.75% for the three months ended June 30, 2003. In summary, the change in yields was driven by the following factors: o On April 28, 2004, as a result of Manulife's acquisition of John Hancock, assets were marked to market in accordance with purchase accounting rules. The impact of the asset adjustment and related amortization was a reduction in yield of approximately 44 basis points for the second quarter of 2004 compared to the second quarter of 2003. o As of June 30, 2004, the Company's asset portfolio had approximately $13 billion of floating-rate exposure (primarily LIBOR). This compares to the same $13 billion level of exposure as of June 30, 2003. This exposure was created mostly through interest rate swaps designed to match our floating-rate liability portfolio. As of June 30, 2004, approximately 88% of this exposure, excluding cash and short-term investments, was directly offset by exposure to floating-rate liabilities. Most of the remaining 12% of exposure is in floating rate assets acquired for their relative value and is accounted for in the portfolio's interest rate risk management plan. The impact was approximately 46 basis points this quarter compared to 53 basis points a year ago. o Certain of our tax-preferenced investments (affordable housing limited partnerships and lease residual management) dilute the Company's net portfolio yield on a pre-tax basis. For the three month period ended June 30, 2004, this dilutive effect was 10 basis points, compared to 10 basis points in the comparable prior year period. However, adjusting for taxes, these investments increased the Company's net income by $0.8 million in the second quarter of 2004 compared to the second quarter of 2003. o The inflow of new cash for the three month period ending June 30, 2004 was invested at rates that were below the portfolio rate. In addition, maturing assets rolling over into new investments at rates below the portfolio rate. Partially offsetting the effects of these events to yields on investments was an increase in invested assets. In the three month period ended June 30, 2004, weighted-average invested assets grew $2,382.6 million, or 3.6%, from the prior year. The mark to market of assets, as a result of the Manulife acquisition of John Hancock, increased the weighted average invested assets by $1,084.0 million. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Net investment income decreased $8.9 million from comparable prior year period. Overall, the yield for the six months ended June 30, 2004, net of investment expenses, on the general account portfolio decreased to 5.61% from 5.88% for the six months ended June 30, 2003. In summary, the change in yields was driven by the following factors: o On April 28, 2004, as a result of Manulife's acquisition of John Hancock, assets were marked to market in accordance with purchase accounting rules. The impact of the asset adjustment and related amortization was a reduction in yield of approximately 27 basis points for the six months ended June 30, 2004 compared to the same period last year. o As of June 30, 2004, the Company's asset portfolio had approximately $13 billion of floating-rate exposure (primarily LIBOR). This compares to the same $13 billion level of exposure as of June 30, 2003. This exposure was created mostly through interest rate swaps designed to match our floating-rate liability portfolio. As of June 30, 2004, approximately 88% of this exposure, excluding cash and short-term investments, was directly offset by exposure to floating-rate liabilities. Most of the remaining 12% of exposure is in floating rate assets acquired for their relative value and is accounted for in the portfolio's interest rate risk management plan. The impact was approximately 48 basis points this quarter compared to 54 basis points a year ago. o Certain of our tax-preferenced investments (affordable housing limited partnerships and lease residual management) dilute the Company's net portfolio yield on a pre-tax basis. For the three month period ended March 31, 2004, this dilutive effect was 9 basis points, compared to 10 basis points in the comparable prior year period. However, adjusting for taxes, these investments increased the Company's net income by $2.2 million for the six months ended June 20, 2004 compared to the same period last year. 68 JOHN HANCOCK LIFE INSURANCE COMPANY o The inflow of new cash for the six month period ending June 30, 2004 was invested at rates that were below the portfolio rate. In addition, maturing assets rolling over into new investments at rates below the portfolio rate. Partially offsetting the effects of these decreases to yields on investments was an increase in invested assets and a reduction in investment expenses. In the six month period ended June 30, 2004, weighted-average invested assets grew $2,788.7 million, or 4.4%, from the prior year. The mark to market of assets, as a result of the Manulife acquisition of John Hancock, increased the weighted average invested assets by $1,084.0 million. In addition, investment expenses were reduced $12.6 million in the six month period ended June 30, 2004 compared to the prior year. Included are reductions in corporate complex expenses and in depreciation expenses associated with the sale of the Company's home office real estate in the first quarter of 2003. Net Realized Investment and Other Gain/(Loss) The following table shows the Company's net realized investment and other gains (losses) by asset class for the periods presented:
Gross Gain Gross Loss Hedging Net Realized Investment For the Three Months Ended June 30, 2004 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss) ---------------------------------------------------------------------------- (in millions) Fixed maturity securities (1) ......... $(29.8) $ 75.3 $(25.1) $(25.0) $ (4.6) Equity securities ..................... (1.5) 19.6 -- -- 18.1 Mortgage loans on real estate ......... (23.2) 16.4 (13.9) (5.3) (26.0) Real estate ........................... -- 74.3 (2.2) -- 72.1 Other invested assets ................. (29.7) 6.2 (2.5) -- (26.0) Derivatives ........................... -- -- -- 226.8 226.8 ---------------------------------------------------------------------------- Subtotal ............... $(84.2) $191.8 $(43.7) $196.5 260.4 ---------------------------------------------------------------------------- Amortization adjustment for deferred policy acquisition costs and value of business acquired........................................................................ (1.6) Amounts credited to participating pension contractholders.......................... (3.1) Amounts credited to the policyholder dividend obligation........................... (8.1) ---------------------- Total......................................................................... $247.6 ======================
(1) Fixed maturities gain on disposals includes $37.2 million of gains from previously impaired securities and prepayment gains of $23.7 million.
Gross Gain Gross Loss Hedging Net Realized Investment For the Six Months Ended June 30, 2004 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss) ---------------------------------------------------------------------------- (in millions) Fixed maturity securities (1) ......... $(98.1) $150.1 $(30.5) $(77.0) $(55.5) Equity securities (2) ................. (6.2) 88.8 (0.7) -- 81.9 Mortgage loans on real estate ......... (23.6) 27.9 (14.6) (19.4) (29.7) Real estate ........................... -- 78.0 (2.3) -- 75.7 Other invested assets ................. (37.2) 8.5 (8.5) -- (37.2) Derivatives ........................... -- -- -- 126.7 126.7 ---------------------------------------------------------------------------- Subtotal ............... $(165.1) $353.3 $(56.6) $ 30.3 $161.9 ---------------------------------------------------------------------------- Amortization adjustment for deferred policy acquisition costs and value of business acquired....................................................................... 16.4 Amounts credited to participating pension contractholders.......................... (5.1) Amounts credited to the policyholder dividend obligation........................... (23.3) ---------------------- Total......................................................................... $149.9 ======================
(1) Fixed maturities gain on disposals includes $42.5 million of gains from previously impaired securities and prepayment gains of $57.2 million. (2) Equity securities gain on disposal includes $9.3 million of gains from equity securities received as settlement compensation from an investee whose securities had previously been impaired. 69 JOHN HANCOCK LIFE INSURANCE COMPANY The hedging adjustments in the fixed maturities and mortgage loans asset classes are non-cash adjustments representing the amortization or reversal of prior fair value adjustments on assets in those classes that were or are designated as hedged items in fair value hedges. When an asset or liability is so designated, its cost basis is adjusted in response to movement in interest rates. These adjustments are non-cash and reverse with the passage of time as the asset or liability and derivative mature. The hedging adjustments on the derivatives represent non-cash adjustments on derivative instruments and on assets and liabilities designated as hedged items reflecting the change in fair value of those items. For the three and six month periods ended June 30, 2004 net realized investment and other gains/(losses) was a gain of $247.6 million and $149.9 million, respectively. For the same time period, gross losses on impairments and on disposal of investments - including bonds, equities, real estate, mortgages and other invested assets was $127.9 million and $221.7 million, respectively, excluding hedging adjustments. This compares to net realized investment and other gains of $78.3 million and $183.7 million and gross losses on impairments and disposals of investments of $122.7 million and $409.2 million, for the three and six month periods ended June 30, 2003, respectively. For the three and six month periods ended June 30, 2004, respectively, we realized $75.3 million and $150.1 million of gains on disposal of fixed maturities excluding hedging adjustments. These gains resulted from managing our portfolios for tax optimization and ongoing portfolio positioning, as well as $23.7 million and $57.2 million of prepayments and approximately $37.2 million and $42.5 million from recoveries on sales of previously impaired securities, for the three and six month periods ended June 30, 2004, respectively. For the three and six month period ended June 30, 2004, we realized $25.1 million and $30.5 million of losses upon disposal of fixed maturities excluding hedging adjustments. We generally intend to hold securities in unrealized loss positions until they mature or recover. However, we do sell fixed maturities under certain circumstances such as when new information causes us to change our assessment of whether a bond will recover or perform according to its contractual terms, in response to external events (such as a merger or a downgrade) that result in investment guideline violations (such as single issuer or overall portfolio credit quality limits), in response to extreme catastrophic events (such as September 11, 2001) that result in industry or market wide disruption, or to take advantage of tender offers. Sales generate both gains and losses. The Company has a process in place to identify securities that could potentially have an impairment that is other than temporary. This process involves monitoring market events that could impact issuers' credit ratings, business climate, management changes, litigation and government actions, and other similar factors. This process also involves monitoring late payments, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. At the end of each quarter, our Investment Review Committee reviews all securities where market value is less than ninety percent of amortized cost for three months or more to determine whether impairments need to be taken. This committee includes the head of workouts, the head of each industry team, the head of portfolio management, and the Chief Credit Officer of Manulife. The analysis focuses on each company's or project's ability to service its debts in a timely fashion and the length of time the security has been trading below cost. The results of this analysis are reviewed by the Credit Committee at Manulife. This committee includes Manulife's Chief Finacial Officer, Chief Investment Officer, Chief Risk Officer, and Chief Credit Officer. This quarterly process includes a fresh assessment of the credit quality of each investment in the entire fixed maturities portfolio. The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other than temporary. Relevant facts and circumstances considered include (1) the length of time the fair value has been below cost; (2) the financial position of the issuer, including the current and future impact of any specific events; and (3) the Company's ability and intent to hold the security to maturity or until it recovers in value. To the extent the Company determines that a security is deemed to be other than temporarily impaired, the difference between amortized cost and fair value would be charged to earnings. There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is other than temporary. These risks and uncertainties include (1) the risk that our assessment of an issuer's ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) fraudulent information could be provided to our investment professionals who determine the fair value estimates 70 JOHN HANCOCK LIFE INSURANCE COMPANY and other than temporary impairments, and (4) the risk that new information obtained by us or changes in other facts and circumstances lead us to change our intent to hold the security to maturity or until it recovers in value. Any of these situations could result in a charge to earnings in a future period. As disclosed in our discussion of the Results of Operations in this MD&A, the Company recorded losses due to other than temporary impairments of fixed maturity securities for three and six month period ended June 30, 2004 of $42.7 million and $112.5 million, respectively, (including impairment losses of $29.8 million and $98.1 million, and $12.9 million and $14.4 million of previously recognized gains where the bond was part of a hedging relationship, for three and six month period ended June 30, 2004, respectively). Impairments and Losses on Disposals - Three Months Ended June 30, 2004 Of the $25.1 million of realized losses on sales of fixed maturity securities for the three months ended June 30, 2004, there were no significant credit losses. Most of the sales were related to general portfolio management, largely due to redeploying high quality, liquid public bonds into more permanent investments and the losses resulted from increasing interest rates during the quarter. The Company recorded losses due to other than temporary impairments of lease investments and CDO equity of $29.7 million for the three month period ended June 30, 2004. The impairments on lease investments, primarily in the U.S. airline industry, of $28.9 million, drove the total impairments on other invested assets. Although our $0.8 million in impairments on CDO equity were a small portion of impairments of other invested assets for the period, our equity in CDOs take the first loss risk in a pool of high yield debt thus under perform in a high yield default environment. We have a total remaining carrying value of $48.6 million and $60.0 million of CDO equity as of June 30, 2004 and December 31, 2003, which is currently supported by expected cash flows. The Company also recognized losses on other than temporary impairments of common stock of $1.5 million for the three month period ended June 30, 2004 as the result of market values falling below cost for more than six months. The Company recorded a net loss of $26.0 million on mortgage loans for the three month period ended June 30, 2004 (of which $5.3 million was losses on hedging adjustments). Included is a $26.0 million increase to reserves for a refrigeration warehouse company and a milling company for the three months ended June 30, 2004. There were also gains of $19.6 million on the sale of equity securities as part of our overall investment strategy of using equity gains to minimize credit losses in the long term, gains of $6.2 million from the sale of other invested assets, and gains of $74.3 million resulting from the sale of real estate for the three month period ended June 30, 2004. Net derivative activity resulted in a gain of $226.8 million for the three months ended June 30, 2004 resulting from a slightly larger impact from interest rate changes on the Company's fair value of hedged and hedging thos items and the change in fair value of its derivatives with a hedging relationship. items in comparison to the changes in fair value of its derivatives. Impairments and Losses on Disposals - Six Months Ended June 30, 2004 Of the $30.5 million of realized losses on sales of fixed maturity securities for the six months ended June 30, 2004, there was a total of $0.6 million in credit losses. Most of the sales were related to general portfolio management, largely due to redeploying high quality, liquid public bonds into more permanent investments and the losses resulted from increasing interest rates during the quarter. The Company recorded losses due to other than temporary impairments of lease investments and CDO equity of $37.2 million for six month period ended June 30, 2004. The impairments on lease investments, primarily in the U.S. airline industry, of $33.4 million, drove the total impairments on other invested assets. Although our $3.8 million in impairments on CDO equity were a small portion of impairments of other invested assets for the period, our equity in CDOs take the first loss risk in a pool of high yield debt thus under perform in a high yield default environment. We have a total remaining carrying value of $48.6 million and $60.0 million of CDO equity as of June 30, 2004 and December 31, 2003, which is currently supported by expected cash flows. The Company also recognized losses on other than temporary impairments of common stock of $6.2 million for the six month period ended June 30, 2004 as the result of market values falling below cost for more than six months. 71 JOHN HANCOCK LIFE INSURANCE COMPANY The Company recorded a net loss of $29.7 million on mortgage loans for the six month period ended June 30, 2004 (of which $19.4 million was losses on hedging adjustments). Included is a $26 million increase to reserves for a refrigeration warehouse company and a milling company for the six months ended June 30, 2004. There were also gains of $88.8 million on the sale of equity securities as part of our overall investment strategy of using equity gains to minimize credit losses in the long term, gains of $8.5 million from the sale of other invested assets, and gains of $78.0 million resulting from the sale of real estate for the six month period ended June 30, 2004. Net derivative activity resulted in a gain of $126.7 million for the six months ended June 30, 2004 resulting from a slightly larger impact from interest rate changes on the Company's fair value of hedged and non-hedged items in comparison to the changes in fair value of its derivatives. Liquidity and Capital Resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the immediate capital needs to facilitate business operations. The assets of the Company consist of a diversified investment portfolio and investments in operating subsidiaries. The Company's cash flow consists primarily of premiums, deposits, investment income, results of its operating subsidiaries and proceeds from the Company's debt offerings offset by benefits paid to contractholders, operating expenses, policyholder dividends to its participating policyholders and shareholder dividends to it parent company. All of the outstanding common stock of John Hancock Life Insurance Company is owned by its Parent, an insurance holding company, John Hancock Financial Services, Inc. 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. 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 at prior year-end 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. The Company currently does not expect such regulatory requirements to impair its ability to meet its liquidity and capital needs. During the first quarter of 2004, the Company paid no dividends to its parent, JHFS. Sources of cash for the Company include 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. On April 28, 2004, JHFS, the parent of the Company, completed its merger agreement with Manulife Financial Corporation (Manulife) and as of the close of business JHFS stock stopped trading on the New York Stock Exchange. In accordance with the agreement, each share of JHFS common stock was converted into 1.1853 shares of Manulife stock. Commencing on April 28, 2004, the Company now operates as a subsidiary of Manulife and the John Hancock name is Manulife's primary U.S. brand. Following the completion of the merger, Standard and Poor's, Moody's, A.M. Best and Fitch affirmed all ratings. In addition, Standard & Poor's upgraded the long-term counterparty credit and senior debt ratings on John Hancock Financial Services, Inc. and the debt ratings John Hancock Canadian Corp. to A+ from A. Dominion Bond Rating Service upgraded John Hancock Financial Services' corporate rating to AA (low) from A (high). The liquidity of our insurance operations is also related to the overall quality of our investments. As of June 30, 2004, $41,069.1 million, or 88.1% of the fixed maturity securities held by us and rated by Standard & Poor's Ratings 72 JOHN HANCOCK LIFE INSURANCE COMPANY Services, (S&P) or the National Association of Insurance Commissioners were rated investment grade (BBB- or higher by S&P, Baa3 or higher for Moody's, or 1 or 2 by the National Association of Insurance Commissioners). The remaining $5,568.7 million, or 11.9%, of rated fixed maturity investments were rated non-investment grade. For additional discussion of our investment portfolio see the General Account Investments section of 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. Analysis of Consolidated Statement of Cash Flows Net cash provided by operating activities was $1,167.9 million and $1,296.9 million for the six month period ended June 30, 2004 and 2003, respectively. Cash flows from operating activities are affected by the timing of premiums received, fees received and investment income. The $129.0 million decrease in the first six months of 2004 as compared to the same period of 2003 resulted primarily from a $393.1 million increase in policy related costs, partially offset by a $49.4 million increase in fee and other income. Net cash used in investing activities was $1,916.4 million and $2,599.3 million for the six month periods ended June 30, 2004 and 2003, respectively. Changes in the cash provided by investing activities primarily relate to the management of the Company's investment portfolios and the investment of excess capital generated by operating and financing activities. The $682.9 million decrease in cash used in the first quarter of 2004 as compared to the same period in 2003 resulted primarily from an $887.6 million cash inflow from the sale of Home Office properties in the first quarter of 2003, offset partially by a $1,466.0 million reduction in net acquisitions of fixed maturities and a $94.6 million increase in net mortgage maturities, prepayments and scheduled redemptions. Net cash used in financing activities was $633.9 million for the six month period ended June 30, 2004 and the net cash provided by financing activities was $1,417.7 million for the six month periods ended June 30, 2003. Changes in cash provided by financing activities primarily relate to excess deposits or withdrawals under investment type contracts, the issuance of debt and borrowings or re-payments of the Company's debt. The $2,051.6 million decrease in net cash provided by financing activities for the first six months of 2004 as compared to the same period in 2003 was driven by a decrease in deposits and an increase in cash payments made on withdrawals of universal life insurance and investment-type contracts totaling $2,146.9 million. Withdrawals on such universal life insurance and investment-type contracts exceeded deposits by $971.3 million for the first six months of 2004, while during the same period in 2003, deposits exceeded withdrawals by $1,175.6 million. The Company's ability to generate customer deposits in excess of withdrawals is critical to our long-term growth. Lines of Credit, Debt and Guarantees Cash flow requirements are also supported by a committed line of credit of $500 million, through a syndication of banks including Fleet National Bank, JPMorgan Chase, Credit Suisse First Boston, The Bank of New York, Barclays, The Bank of Nova Scotia, Wachovia, Royal Bank of Canada, State Street Bank, Bank of America, Bank One, BNP Paribas, Deutsche Bank, PNC Bank, Sovereign Bank, Westdeutsche Landesbank, Comerica Bank and Northern Trust. The line of credit agreement provides for one facilities: for $500 million (renewable in 2005). The line of credit is available for general corporate purposes. The line of credit agreement contains various covenants, among these being that statutory total capital and surplus plus asset valuation reserve meet certain requirements. To date, we have not borrowed any amounts under the line of credit. As of June 30, 2004, we had $610.2 million of principal and interest amounts of debt outstanding, consisting of $518.1 million of surplus notes and $92.1 million of other notes payable, including current maturities and a fair value adjustment for interest rate swaps. A new commercial paper program has been established at JHFS that has replaced the commercial paper program that was in place at the Company's indirect subsidiary, John Hancock Capital Corporation, and there were no commercial paper borrowings outstanding at June 30, 2004. 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 73 JOHN HANCOCK LIFE INSURANCE COMPANY insurance department. The risk-based capital ratios are reported annually and monitored continuously. The Company's risk-based capital ratios for all of our insurance subsidiaries as of year end were significantly above the ranges that would require regulatory action. We maintain reinsurance programs designed to protect against large or unusual losses. Based on our periodic review of our reinsurers' financial statements, financial strength ratings and reputations in the reinsurance marketplace, we believe that our reinsurers are financially sound, and, therefore, that we have no significant exposure to uncollectible reinsurance in excess of uncollectible amounts recognized in our consolidated financial statements. Off Balance Sheet Arrangements The Company has relationships with a number of entities which are not consolidated into the Company's consolidated financial statements. These entities include qualified special purpose entities (QSPEs) and other special purpose entities. In the course of its business the Company transfers assets to, and in some cases, retains interests in QSPEs. The Company may also purchase interests in QSPEs on the open market. The Company's primary use of QSPEs occurs in its commercial mortgage banking subsidiary. The Company's commercial mortgage banking subsidiary originates commercial mortgages and sells them to QSPEs which then issues mortgage backed securities (MBS). The Company engages in this activity to earn fees during the origination process, and to generate gains during the securitization process. The Company maintains a portfolio of MBS securities, in order to generate net investment income for its general account, and some of theses MB securities were purchased from QSPEs to which we transferred mortgages. The majority of the Company's MBS portfolio were purchased from unrelated QSPEs. These QSPEs and other special purpose entities also include CDO funds we manage and may also invest in, which are considered variable interest entities and are discussed in detail in Note 4 - Relationships with Variable Interest Entities to our consolidated financial statements. The Company generates fee income from the CDO funds we manage, and generates net investment income from CDOs we invest in, whether we manage them or not. The Company receives Federal income tax benefits from certain investments made through variable interest entities. These off balance sheet arrangements also include credit and collateral support agreements with FNMA and FHMLC, through which the Company securitized some of its mortgage investments, which provided a potential source of liquidity to the Company. The Company's risk of loss from these entities is limited to its investment in them. Consolidation of unconsolidated accounts from these entities would inflate the Company's balance sheet but would not be reflective of additional risk in these entities. In each, there are no potential liabilities which might arise in the future as a result of these relationships that would not be completely satisfied by the assets of that entity. 74 JOHN HANCOCK LIFE INSURANCE COMPANY Forward-Looking Statements The statements, analyses, and other information contained in this Management's Discussion and Analysis (MD&A) and elsewhere in this Form 10-Q, in connection with the merger with John Hancock and Manulife Financial Corporation, relating to trends in the John Hancock Life Insurance Company's (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. Future events and their effects on the Company may not be those anticipated by management. The Company'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) new laws and regulations, including the recently enacted Sarbanes-Oxley Act of 2002, or changes to existing laws or regulations, (including, but not limited to, those relating to the Federal Estate Tax Laws and the proposed Bush Administration tax and savings initiatives), and the applications and interpretations given to these laws and regulations, may adversely affect the Company's sales of 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 businesses from mutual fund companies, banks and investment management firms as well as from other insurance companies; (5) declines 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) due to acts of terrorism or other hostilities, there could be business disruption, economic contraction, increased mortality, morbidity and liability risks, generally, or investment losses that could adversely affect our business; (7) our life insurance sales are highly dependent on a third party distribution relationship; (8) customers may not be responsive to new or existing products or distribution channels, (9) interest rate volatility may adversely affect our profitability; (10) 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; (11) the independent trustees 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; (12) 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. We may have to fund deficiencies in our closed block, and any over-funding of the closed block will benefit only the holders of policies included in the closed block, not our sole shareholder; (13) we will face losses if the claims on our insurance products, or reductions in rates of mortality on our annuity products, are greater than projected; (14) we face investment and credit losses relating to our investment portfolio, including, without limitation, the risk associated with the evaluation and determination by our investment professionals of the fair values of investments as well as whether or not any investments have been impaired on an other than temporary basis; (15) we may experience volatility in net income due to changes in standards for accounting for derivatives and other changes; (16) we are subject to risk-based capital requirements and possible guaranty fund assessments; (17) we may be unable to retain personnel who are key to our business; (18) we may incur losses from assumed reinsurance business in respect of personal accident insurance and the occupational accident component of workers compensation insurance; (19) litigation and regulatory proceedings may result in financial losses, harm our reputation and divert management resources; (20) we face unforeseen liabilities arising from our acquisitions and dispositions of businesses; (21) we may incur multiple life insurance claims as a result of a catastrophic event which, because of higher deductibles and lower limits under our reinsurance arrangements, could adversely affect the Company's future net income and financial position, and (22) in connection with the merger between JHFS and Manulife Financial Corporation: we may not achieve the revenue synergies, cost savings and other synergies contemplated by the merger; we may experience litigation related to the merger; John Hancock's and Manulife's distributors, customers and policyholders may react negatively to the transaction; we may encounter difficulties in promptly and effectively integrating the businesses of John Hancock and Manulife; we may not be able to retain the professional and management talent necessary to operate the business; the transaction may result in diversion of management time on integration-related issues; and we may experience increased exposure to exchange rate fluctuations and other unknown risks associated with the merger. 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. 75 JOHN HANCOCK LIFE INSURANCE COMPANY ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omitted pursuant to General Instruction H(1)(a) and (b) of Form 10-Q. ITEM 4. CONTROLS and PROCEDURES An evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. No change in the Company's internal control over financial reporting (as defined in Rule 14-15f) of the Securities Exchange Act of 1934, as amended) occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings We are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming us as a defendant ordinarily involves our activities as a provider of insurance protection products, as well as an investment adviser, employer and taxpayer. In addition, state regulatory bodies, the United States Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc. (NASD) and other government and regulatory bodies regularly make inquiries and, from time to time conduct examinations concerning our compliance with, among other things, insurance laws, securities laws, and laws governing the activities of broker/dealers. As with many other companies in our industry, the Company has received information requests from government and regulatory authorities, including the SEC and the NASD, with respect to market timing and late trading of mutual funds, and broker/dealer practices, including requests with respect to mutual funds underlying variable life and annuity products. It is believed that these inquiries are similar to those made to many financial service companies by various agencies into practices, policies and procedures relating to trading in mutual fund shares and broker/dealer practices. We have been and intend to continue to cooperate fully with government and regulatory authorities in connection with their respective inquiries. We do not believe at this time that the ultimate resolution of any of these legal or regulatory matters that are currently pending, either individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations. ITEM 6. EXHIBITS and REPORTS on FORM 8-K a) Exhibits Exhibit Number Description - ------ ----------- 3.2 Amended and Restated By-Laws of John Hancock Life Insurance Company (As adopted as of July 1, 2004) 31.1 Chief Executive Officer Certification Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 31.2 Chief Financial Officer Certification Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 32.1 Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 76 JOHN HANCOCK LIFE INSURANCE COMPANY b) Reports on Form 8-K During the Second Quarter of 2004 the Company filed the following Current Reports on Form 8-K: On April 6, 2004, the Company filed a Current Report on Form 8-K, dated April 5, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On April 13, 2004, the Company filed a Current Report on Form 8-K, dated April 12, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On April 20, 2004, the Company filed a Current Report on Form 8-K, dated April 19, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On April 26, 2004, the Company filed a Current Report on Form 8-K, dated April 26, 2004, reporting under Item 12 thereof John Hancock Financial Services (JHFS) operating and financial results for the first quarter of 2004. JHFS is the company's parent and sole shareholder. On April 27, 2004, the Company filed a Current Report on Form 8-K, dated April 26, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On April 28, 2004, the Company filed a Current Report on Form 8-K, dated April 28, 2004, reporting under Item 1 thereof the completion of the merger pursuant to which the Company became an indirect, wholly-owned subsidiary of Manulife Financial Corporation. On May 4, 2004, the Company filed a Current Report on Form 8-K, dated May 3, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On May 11, 2004, the Company filed a Current Report on Form 8-K, dated May 10, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On May 18, 2004, the Company filed a Current Report on Form 8-K, dated May 17, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On May 25, 2004, the Company filed a Current Report on Form 8-K, dated May 24, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On June 2, 2004, the Company filed a Current Report on Form 8-K, dated June 1, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On June 8, 2004, the Company filed a Current Report on Form 8-K, dated June 7, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On June 14, 2004, the Company filed a Current Report on Form 8-K, dated June 10, 2004, reporting under Item 5 thereof the resignation of its CEO and appointment of a new CEO, both effective November 30, 2004. On June 15, 2004, the Company filed a Current Report on Form 8-K, dated June 14, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. 77 JOHN HANCOCK LIFE INSURANCE COMPANY On June 22, 2004, the Company filed a Current Report on Form 8-K, dated June 21, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. On June 29, 2004, the Company filed a Current Report on Form 8-K, dated June 28, 2004, filing under Item 5 thereof certain exhibits in connection with a Registration Statement on Form S-3 covering the Company's SignatureNotes Medium Term Note Program. 78 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. JOHN HANCOCK LIFE INSURANCE COMPANY Date: August 9, 2004 By: /s/ THOMAS E. MOLONEY ---------------------- Thomas E. Moloney Senior Executive Vice President and Chief Financial Officer EX-3.2 2 ex3-2.txt Exhibit 3.2 ================================================================================ JOHN HANCOCK LIFE INSURANCE COMPANY AMENDED AND RESTATED BY-LAWS As Adopted on July 1, 2004 ================================================================================ ARTICLE I OFFICES.......................................................1 ARTICLE II STOCKHOLDERS..................................................1 Section 2.1. Place of Meetings..........................................1 Section 2.2. Annual Meeting.............................................1 Section 2.3. Special Meetings...........................................1 Section 2.4. Notice of Meeting..........................................2 Section 2.5. Quorum.....................................................2 Section 2.6. Adjournment of Meeting.....................................2 Section 2.7. Voting.....................................................2 Section 2.8. Action by Stockholders Without a Meeting...................2 ARTICLE III DIRECTORS.....................................................2 Section 3.1. Number and Qualifications..................................2 Section 3.2. Responsibilities...........................................3 Section 3.3. Election and Term of Office................................3 Section 3.4. Removal of directors.......................................3 Section 3.5. Filling of Vacancies.......................................3 Section 3.6. Regular Meetings...........................................3 Section 3.7. Special Meetings...........................................4 Section 3.8. Notice and Place of Meetings...............................4 Section 3.9. Business Transacted at Meetings............................4 Section 3.10. Quorum and Manner of Acting................................4 Section 3.11. Action Without a Meeting...................................4 Section 3.12. Participation by Telephone.................................4 Section 3.13. Compensation...............................................4 ARTICLE IV BOARD COMMITTEES..............................................5 Section 4.1. General....................................................5 Section 4.2. Notices of Times of Meetings of Committees and Presiding Officers.......................................5 Section 4.3. Powers.....................................................5 Section 4.4. Proceedings................................................5 Section 4.5. Quorum and Manner of Acting................................5 Section 4.6. Action by Telephonic Communications........................6 Section 4.7. Absent or Disqualified Members.............................6 Section 4.8. Resignations...............................................6 Section 4.9. Removal....................................................6 Section 4.10. Vacancies..................................................6 ARTICLE V OFFICERS......................................................6 Section 5.1. Officer Positions:.........................................6 Section 5.2. Additional Officers:.......................................7 Section 5.3. Surety Bonds:..............................................7 - i - ARTICLE VI EXECUTION OF INSTRUMENTS, BORROWING OF MONEY AND DEPOSIT OF CORPORATE FUNDS............................................7 Section 6.1. General Provisions.........................................7 Section 6.2. Execution of Instruments...................................7 Section 6.3. Corporate Indebtedness.....................................8 Section 6.4. Deposit....................................................8 Section 6.5. Checks, Drafts, etc........................................9 Section 6.6. Sale, Transfer, etc., of Securities........................9 Section 6.7. Voting Upon Stock..........................................9 ARTICLE VII CAPITAL STOCK.................................................9 Section 7.1. Certificates of Stock......................................9 Section 7.2. Transfer of Stock.........................................10 Section 7.3. Amount and Issuance.......................................10 ARTICLE VIII INDEMNIFICATION..............................................10 Section 8.1. Nature of Indemnity for Directors and Officers............10 Section 8.2. Nature of Indemnity for Employees and Agents..............11 Section 8.3. Limitation on Indemnities.................................11 Section 8.4. Expenses to be Reimbursed.................................11 Section 8.5. Determination that Indemnification is Proper..............12 Section 8.6. Advance Payment of Expenses...............................12 Section 8.7. Survival..................................................12 Section 8.8. Preservation of Other Rights..............................13 Section 8.9. Insurance.................................................13 Section 8.10. Severability..............................................13 Section 8.11. Procedure for Indemnification of Directors and Officers...13 ARTICLE IX AMENDMENTS...................................................14 Section 9.1. Amendments................................................14 ARTICLE X GENERAL PROVISIONS...........................................14 Section 10.1. Fiscal Year...............................................14 Section 10.2. Contributions.............................................14 Section 10.3. Waivers of Notice.........................................14 Section 10.4. Dividends.................................................14 - ii - AMENDED AND RESTATED BY-LAWS OF JOHN HANCOCK LIFE INSURANCE COMPANY Incorporated under the Laws of The Commonwealth of Massachusetts ARTICLE I OFFICES John Hancock Life Insurance Company (the "Corporation") shall maintain a registered office in The Commonwealth of Massachusetts. The Corporation may also have other offices at such places, either within or without The Commonwealth of Massachusetts, as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE II STOCKHOLDERS Section 2.1. Place of Meetings. All meetings of the stockholders shall be held at the principal office of the corporation in Massachusetts or, to the extent permitted by the Articles of Organization, at such other place within the United States as shall be fixed by the President or the directors. Any adjourned session of any meeting of the stockholders shall be held in the same city/or town as the initial session, or elsewhere within Massachusetts, in either case at the place designated in the vote of adjournment. Section 2.2. Annual Meeting. The annual meeting of stockholders for the election of directors and the transaction of any other business as may properly come before such meeting shall be held on such date, at such time and place within six months after the end of the Corporation's fiscal year as shall be fixed from time to time by the Board of Directors and set forth in the notice of such meeting. At the annual meeting any business may be transacted and any corporate action may be taken, whether stated in the notice of meeting or not, except as otherwise expressly provided by applicable law or the Articles of Organization. Section 2.3. Special Meetings. Special meetings of the stockholders for any purpose may be called at any time by the Board of Directors or the President and shall be called by the Clerk (or another officer if the Clerk fails to do so) at the request of the holders of the issued and outstanding capital stock of the Corporation representing at least ten percent of the votes entitled to be cast at a meeting of stockholders not less than five business days after receipt of such request. Special meetings shall be held at such place or places within or without The Commonwealth of Massachusetts as shall from time to time be designated by the Board of Directors and stated in the notice of such meeting. A meeting of stockholders may be held not at any place, but may instead be held solely by means of remote communication to the extent permitted by applicable law. At any special meeting any business may be transacted and any corporate action may be taken, whether stated in the notice of meeting or not, except as otherwise expressly provided by applicable law or the Articles of Organization. Section 2.4. Notice of Meeting. A written notice of each meeting of stockholders, stating the place, date and hour and the purposes of the meeting, shall be given at least seven days before the meeting to each stockholder entitled to vote at such meeting and to each stockholder who, by applicable law, by the Articles of Organization or by these By-laws, is entitled to notice, by leaving such notice with such stockholder or at such stockholder's residence or usual place of business, or by mailing it, postage prepaid, addressed to such stockholder at such stockholder's address as it appears in the records of the corporation. Such notice shall be given by the Clerk or an Assistant Clerk or by an officer designated by the directors. Section 2.5. Quorum. Any number of stockholders, who are entitled to vote, who hold shares of the issued and outstanding capital stock of the Corporation representing at least a majority of the votes entitled to be cast at a meeting of stockholders and who shall be present in person or represented by proxy at any meeting duly called shall constitute a quorum for all purposes except as may otherwise be provided by applicable law or the Articles of Organization. Section 2.6. Adjournment of Meeting. Whether or not a quorum is present, a meeting may be adjourned by the affirmative vote of the stockholders present in person or represented by proxy and entitled to vote thereat holding shares representing at least a majority of the votes so present or represented and entitled to be cast (a "Majority Vote"), without notice other than by announcement at the meeting, until a quorum shall attend. Any meeting at which a quorum is present may also be adjourned in like manner and for such time or upon such call as may be determined by a Majority Vote. At any adjourned meeting at which a quorum shall be present, any business may be transacted and any corporate action may be taken which might have been transacted at the meeting as originally called. When a quorum is once present, it is not broken by the subsequent withdrawal or departure of any stockholder. Section 2.7. Voting. Except as otherwise provided by applicable law, all matters submitted to a meeting of stockholders shall be decided by vote of the holders of record of a majority of the Corporation's issued and outstanding capital stock present in person or by proxy. Unless required by applicable law or the Articles of Organization, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall state the number of shares voted. Section 2.8. Action by Stockholders Without a Meeting. Whenever, under applicable law, stockholders are required or permitted to take any action by vote, such action may be taken without a meeting, without prior notice and without a vote, if a consent in writing shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. ARTICLE III DIRECTORS Section 3.1. Number and Qualifications. The Board of Directors shall not be less than one (1) and shall consist of such number as may be fixed from time to time by resolution of the Board of Directors or by the stockholders. Any decrease in the number of directors shall be effective at the time of the next succeeding annual meeting of the stockholders unless there shall be vacancies in -2- the Board of Directors, in which case, such decrease may become effective at any time prior to the next succeeding annual meeting to the extent of the number of vacancies. All directors shall be at least eighteen years of age. The directors need not be stockholders. Section 3.2. Responsibilities. The general management of the affairs of the Corporation shall be vested in the Board of Directors, which may delegate to officers, employees and to committees of two or more directors such powers and duties as it may from time to time see fit, subject to the limitations hereinafter set forth, and except as may otherwise be provided by applicable law. The Board of Directors may elect from its own membership a Chairman of the Board of Directors and a Vice Chairman. Section 3.3. Election and Term of Office. Except as otherwise provided by applicable law or the Articles of Organization, the directors shall be elected at each meeting of the stockholders for the election of directors at which a quorum is present by a plurality of the votes cast at such election. If the election of directors shall not be held on the day designated by the By-Laws, the directors shall cause the same to be held as soon thereafter as may be convenient. The directors chosen at any annual meeting shall hold office except as hereinafter provided, until the next annual election and until the election and qualification of their successors. Section 3.4. Removal of Directors. Any director may be removed at any time, either for or without cause, upon the affirmative vote of the holders of a majority of the outstanding shares of stock of the Corporation entitled to vote for the election of such director, given at a special meeting of such stockholders called for the purpose, consistent with applicable law. In addition, any director may be removed at any time, either for or without cause, upon the affirmative vote of the majority of the directors then in office. A director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing removal. Any vacancy in the Board of Directors caused by any removal may be filled by the stockholders entitled to vote for the election of the director so removed. Such vacancy may also be filled in the manner provided in Section 3.5 hereof. Section 3.5. Filling of Vacancies. Any vacancy among the directors, occurring from any cause whatsoever, may be filled by the unanimous vote of the remaining directors, though less than a quorum, or by the stockholders. In lieu of filling any vacancy the Board of Directors may reduce the number of Directors pursuant to Section 3.1. In case of any increase in the number of directors, the additional directors may be elected by the unanimous vote of the directors in office prior to such increase or by the stockholders. Any person elected to fill a vacancy shall hold office, subject to the right of removal as hereinbefore provided, until the next annual election and until the election and qualification of his or her successor. Any such vacancies or newly created directorships may also be filled by the stockholders. Section 3.6. Regular Meetings. The Board of Directors shall hold an annual meeting for the purpose of organization and the transaction of any business immediately after the annual meeting of the stockholders, provided a quorum is present. Other regular meetings may be held at such times as may be determined from time to time by the Chairman, the Chief Executive Officer (if a director) or the Board of Directors. -3- Section 3.7. Special Meetings. Special meetings of the Board of Directors may be called at any time by any director. Section 3.8. Notice and Place of Meetings. Meetings of the Board of Directors may be held at such time and place as shall be determined by the Chairman, the Chief Executive Officer (if a director) or the Board of Directors on not less than five business days prior written notice to all directors; provided that no notice of the annual meeting shall be required if held immediately after the annual meeting of the stockholders and if a quorum is present. Notice of meeting need not be given to any Director who submits a waiver of notice before or after the meeting, nor to any director who attends the meeting without protesting, at the beginning thereof, the lack of notice. Section 3.9. Business Transacted at Meetings. All business to be transacted at any regular or special meeting of the Board of Directors must be stated in the notice of such meeting, provided that any action approved by all directors then in office may be taken regardless of the absence of such notice of such action. Section 3.10. Quorum and Manner of Acting. A majority of the entire Board of Directors shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors, unless otherwise provided by applicable law, the Articles of Organization or these By-Laws. Whether or not a quorum is present at a meeting of the Board of Directors, upon request of any director, the Board of Directors shall adjourn the meeting to such time (but not less than two business days after such adjournment, unless otherwise agreed to by the directors requesting such adjournment) and place as a majority of the directors present at the meeting may determine without notice other than an announcement at the meeting. Section 3.11. Action Without a Meeting. Any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the full Board of Directors or committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the consents thereto in writing by the members of the Board of Directors or committee shall be filed with the minutes of the proceedings of the Board or committee. Section 3.12. Participation by Telephone. Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or other communications equipment allowing all persons participating in the meeting to hear each other. Participation by such means shall constitute the presence of the person at the meeting. Section 3.13. Compensation. The Board of Directors may establish by resolution adopted by unanimous vote of the full Board of Directors reasonable compensation for directors for services to the Corporation as a director, committee member or chairman of any committee and for attendance at each meeting of the Board of Directors or committee thereof. Nothing herein contained shall preclude any director from serving the Corporation in any other capacity, as an officer, agent or otherwise, and receiving compensation therefor. -4- ARTICLE IV BOARD COMMITTEES Section 4.1. General. The Board of Directors may designate a Committee of Finance and one or more other committees, each such committee to consist of such number of Directors, not less than two, as from time to time may be fixed by the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any such committee, who may replace any absent or disqualified member or members at any meeting of such committee. Thereafter, members (and alternate members, if any) of each such committee may be designated at the annual meeting of the Board of Directors or at any other time. Any such committee may be abolished or re-designated from time to time by the Board of Directors. Each member (and each alternate member) of any such committee (whether designated at an annual meeting of the Board of Directors or to fill a vacancy or otherwise) shall hold office until his or her successor shall have been designated or until he or she shall cease to be a Director, or until his or her earlier death, resignation or removal. Section 4.2. Notices of Times of Meetings of Committees and Presiding Officers. Meetings of a committee shall be held upon call of the Chief Executive Officer, or upon call of the chairman of such committee or two members of such committee. Meetings of each committee may also be held at such other times as it may determine. A meeting of a committee shall be held at such place and upon such notice as shall be determined by the person or persons who call such meeting. Any such chairman, if present, or such member or members of each committee as may be designated by the Chief Executive Officer shall preside at meetings thereof or, in the event of the absence or disability of any thereof or failing such designation, the committee shall select from among its members present a presiding officer. Meetings of any committee may be attended by Directors who are not members of such committee unless the chairman of such committee requests otherwise. Section 4.3. Powers. Each committee of the Board of Directors shall have and may exercise such powers of the Board as shall be specified by the Board. An action by any such committee shall, for purposes of these By-Laws, and otherwise, be deemed to be the same as an action by the Board of Directors; provided, however, that no committee shall have or exercise any powers which may not be delegated to a committee under applicable law. Any committee may be granted by the Board of Directors power to authorize the seal of the Corporation to be affixed to any or all papers which may require it. Section 4.4. Proceedings. Each such committee may fix its own rules of procedure and may meet at such place (within or without The Commonwealth of Massachusetts), at such time and upon such notice, if any, as it shall determine from time to time. Each such committee shall keep minutes of its proceedings and shall report such proceedings to the Board of Directors at the meeting of the Board of Directors next following any such proceedings. Section 4.5. Quorum and Manner of Acting. At all meetings of any committee, the presence of members (or alternate members) constituting a majority of the members then serving on such committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at any meeting at which a quorum is present shall be the act of such committee. Any action required or permitted to be taken at any meeting of any such -5- committee may be taken without a meeting, if all members of such committee shall consent to such action in writing and such writing or writings are filed with the minutes of the proceedings of the committee. Notwithstanding anything to the contrary set forth in this Section 4.5 or elsewhere in these By-Laws, committees of two Directors may operate otherwise as determined by the Board of Directors. Section 4.6. Action by Telephonic Communications. Members of any committee designated by the Board of Directors may participate in a meeting of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 4.7. Absent or Disqualified Members. In the absence or disqualification of a member of any committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 4.8. Resignations. Any member (and any alternate member) of any committee may resign at any time by delivering a written notice of resignation, signed by such member, to the Chairman or the Clerk. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any resignation from the Board of Directors shall automatically constitute a resignation from any committee on which such Director may serve. Section 4.9. Removal. Any member (and any alternate member) of any committee may be removed at any time, either for or without cause, by resolution adopted by the Board of Directors. Removal of a Director as such shall automatically constitute removal from any committees on which such Director may serve. Section 4.10. Vacancies. If any vacancy shall occur in any committee, by reason of disqualification, death, resignation, removal or otherwise, the remaining members (and any alternate members) shall continue to act, and any such vacancy may be filled by the Board of Directors. ARTICLE V OFFICERS Section 5.1. Officer Positions. The officers of the Corporation shall be a Chief Executive Officer, President, one or more Vice Presidents, (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents, Assistant Vice Presidents and Senior Managing Directors, or other positions of equivalent rank) as the Board of Directors may from time to time determine, a Chief Financial Officer, a General Counsel, a Clerk, a Treasurer and such other additional officers as provided in Section 5.2 below, all of whom shall be chosen by and shall serve at the pleasure of the Board of Directors. The Clerk (who may also be referred to as a Secretary) shall be a resident of Massachusetts unless the Corporation shall have a resident agent. Except as otherwise specified by the -6- Board of Directors, such officers shall have the usual powers and shall perform all the usual duties incident to their respective offices. All officers shall be subject to the supervision and direction of the Board of Directors. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause, provided that such an officer may be removed for cause only after reasonable notice and opportunity to be heard before the Board of Directors. Section 5.2. Additional Officers. The Board of Directors may appoint such other officers and agents as it may deem appropriate, and such other officers and agents shall hold their offices for such terms and shall exercise such powers and perform such duties as may be determined from time to time by the Board of Directors. The Chairman of the Board, the Chief Executive Officer or the President may appoint additional officers to hold office at the pleasure of the appointing officer. Such officers may include members of the Chairman's Staff or the President's Staff, Department Heads or members of the staff of a Sector or Department Head, who are not elected officers. Such an appointed officer shall have such powers and duties as may be assigned by the Chairman of the Board, the Chief Executive Officer or the President or by his or her Sector or Department Head. The Board of Directors from time to time may delegate to any other officer or agent the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Any such officer or agent may remove any such subordinate officer appointed by him or her, for or without cause. Section 5.3. Surety Bonds. In case the Board of Directors shall so require, any officer or agent of the Corporation shall execute to the Corporation a bond in such sum and with such surety or sureties as the Board of Directors may direct, conditioned upon the faithful performance of his or her duties to the Corporation, including responsibility for negligence and for the accounting for all property, moneys or securities of the Corporation which may come into his or her possession. ARTICLE VI EXECUTION OF INSTRUMENTS, BORROWING OF MONEY AND DEPOSIT OF CORPORATE FUNDS Section 6.1. General Provisions. The Chief Executive Officer, the President, any Vice President (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents, Assistant Vice Presidents and Senior Managing Directors or positions of equivalent rank), the Clerk, any Assistant Clerk, the Chief Financial Officer, the Treasurer or any Assistant Treasurer may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors, the Chief Executive Officer or the President may authorize any other officer, employee or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization may be general or limited to specific contracts or instruments. Section 6.2. (a) Execution of Instruments. Except as otherwise provided by the Board of Directors, and in addition to the provisions of the foregoing -7- Section 6.1, each of the following officers or employees of the Corporation (i) the Chairman of the Board, the President, the Vice Chairman of the Board, the Chief Financial Officer, the Chief Investment Officer, the Chief Administrative Officer, the General Counsel, any Senior Executive Vice President, any Executive Vice President, any Senior Vice President, any Vice President, any Second Vice President, any Assistant Vice Presidents, any Executive Managing Director, the Treasurer, any Assistant Treasurer, or any Treasury Officer, (ii) any Senior Managing Director, any Managing Director, any Director or any other employee of the Bond and Corporate Finance Group of the Investment Sector (or any successor thereto) holding a title of equivalent rank or (iii) any Senior Investment Officer, any Investment Officer or any other employee of the Real Estate Investment Group of the Investment Sector (or any successor thereto) holding a title of equivalent rank, or any one of them, is hereby authorized to execute and seal with the corporate seal, acknowledge and deliver any and all instruments required in connection with any investment, sale or loan authorized by or pursuant to authority granted by the Committee of Finance. In addition, the Chairman of the Board, the Chief Financial Officer or the Chief Investment Officer, may at their discretion designate and authorize any employee of the Corporation to execute and seal with the corporate seal, acknowledge and deliver any and all instruments required in connection with any investment, sale or loan authorized by or pursuant to authority granted by the Committee of Finance. (b) Except as otherwise provided by the Board of Directors, each of the Chairman of the Board, the President, the Vice Chairman of the Board, the Chief Financial Officer, the Chief Investment Officer, the Chief Administrative Officer, the General Counsel, the Senior Executive Vice Presidents, the Executive Vice Presidents, the Senior Vice Presidents, the Vice Presidents, the Second Vice Presidents, the Assistant Vice Presidents, the Executive Managing Directors, the Senior Managing Directors, the Clerk and the Assistant Clerks, or any one of them, is hereby authorized to waive, alter, modify or change any of the conditions or provisions of any policy or contract issued by the Corporation and to execute or modify any contract of reinsurance. Section 6.3. Corporate Indebtedness. No loans or advances shall be made by the Corporation to others, or contracted on behalf of the Corporation, and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors, or a committee thereof, or the Chief Executive Officer. Any such authorization may be general or confined to specific instances. Any officer of the Corporation thereunto so authorized may effect loans and advances by or to the Corporation, and may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the Corporation. Any officer of the Corporation thereunto so authorized may pledge, hypothecate or transfer as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation any and all stocks, bonds, other securities and other personal property at any time held by the Corporation, and to that end may endorse, assign and deliver the same and do every act and thing necessary or proper in connection therewith. Section 6.4. Deposits. Any funds of the Corporation may be deposited from time to time in such banks, trust companies or other depositaries as may be determined by the Board of Directors, or a committee thereof, or the Chief Executive Officer, or other officers or agents as may be authorized by the Board of Directors or a committee thereof. -8- Section 6.5. Checks, Drafts, etc. All notes, drafts, bills of exchange, acceptances, checks, endorsements and other evidences of indebtedness of the Corporation and its orders for the payment of money shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as the Board of Directors, or a committee thereof, from time to time may determine. Section 6.6. Sale, Transfer, etc., of Securities. Subject to the limitation contained in these By-Laws, and except as otherwise provided by the Board of Directors, the Chairman of the Board, the President, the Chief Financial Officer or any Vice President (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents, Assistant Vice Presidents, Executive Managing Directors and Senior Managing Directors or positions of equivalent rank), the Treasurer, the Clerk, an Assistant Treasurer or a Treasury Officer of the Corporation with the approval in writing of the Treasurer, the Controller, the Auditor, an Associate Auditor or an Assistant Auditor is hereby authorized to do any and all things necessary to assign or transfer any stock in any corporation or any bonds, debentures, notes or other evidences of indebtedness now or hereafter owned by or standing in the name of the Corporation, and may make, execute and deliver in the name of and as the act of the Corporation, under its corporate seal, any and all instruments in writing necessary or proper to carry such sales, transfers, endorsements and assignments into effect. Section 6.7. Voting Upon Stock. Unless otherwise ordered by the Board of Directors, the President, the Chief Financial Officer, Treasurer or any Vice President (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents, Assistant Vice Presidents, Executive Managing Directors and Senior Managing Directors or positions of equivalent rank) shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or in the name of the Corporation to execute proxies to vote, at any meeting of stockholders of any corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise, in person or by proxy, any and all rights, powers and privileges incident to the ownership of such stock. The Board of Directors may, from time to time, confer like powers upon any other person or persons. ARTICLE VII CAPITAL STOCK Section 7.1. Certificates of Stock. (a) Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman of the Board or Vice Chairman, if any, or the President or any Vice President and by the Treasurer or any Assistant Treasurer, certifying the number of shares owned by such stockholder in the Corporation. (b) Certificates representing shares of stock of the Corporation shall be in such form as shall be approved by the Board of Directors. -9- (c) There shall be entered upon the stock books of the Corporation at the time of issuance of each share the number of the certificate issued, the name of the person owning the shares represented thereby, the number and class of such shares, and the date of issuance thereof. Every certificate exchanged or returned to the Corporation shall be marked "Cancelled", with the date of cancellation. Section 7.2. Transfer of Stock. (a) Transfers of shares of the stock of the Corporation shall be made on the books of the Corporation by the holder of record thereof, in person or by the holder's attorney thereunto duly authorized by a power of attorney duly executed in writing and filed with the Clerk of the Corporation or with any of its transfer agents, upon surrender of the certificate or certificates properly endorsed or accompanied by proper instruments of transfer, representing such shares. (b) The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the absolute owner thereof for all purposes, and accordingly shall not be bound to recognize any legal, equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by applicable law. Section 7.3. Amount and Issuance. The total number of shares and the par value, if any, of each class of stock which the Corporation is authorized to issue shall be stated in the Corporation's Articles of Organization. The Board of Directors may at any time issue all or from time to time any part of the unissued capital stock of the Corporation from time to time authorized under the Articles of Organization, and may determine, subject to any requirements of law, the consideration for which stock is to be issued and the manner of allocating such consideration between capital and surplus. ARTICLE VIII INDEMNIFICATION Section 8.1. Nature of Indemnity for Directors and Officers. The Corporation shall indemnify any person who is or was or has agreed to become a director or officer of the Corporation and who was, is or may be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of (i) any action alleged to have been taken or omitted in such capacity, (ii) activities with a non-profit organization, or pro bono or volunteer services, which services have been requested or endorsed by the Corporation or (iii) service at the Corporation's request with respect to any employee benefit plan. In addition, the Corporation shall indemnify any person, whether or not such person is or was a director or officer of the Corporation, who is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise in which the Corporation has a financial interest, direct or indirect, and who was, is or may be made a party to any Proceeding by reason of any action alleged to have been taken or omitted in such capacity. Any indemnification of an individual pursuant to this Section 8.1 (unless ordered by a court) shall be made by the Corporation, unless a determination is made that the individual failed to act in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of the -10- Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful; provided that, to the extent that a present or former director or officer of the Corporation or of another entity covered under this Section 8.1 has been successful on the merits or otherwise in defense of any Proceeding, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Notwithstanding the foregoing, the Corporation shall not be obligated to indemnify a director or officer of the Corporation or of another entity covered under this Section 8.1 in respect of a Proceeding (or part thereof) instituted by such director or officer, unless such Proceeding (or part thereof) has been authorized by the Board of Directors. Section 8.2. Nature of Indemnity for Employees and Agents. The Corporation may indemnify any person who is or was or has agreed to become an employee or agent of the Corporation, or who is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise in which the Corporation has a financial interest, direct or indirect, and who was or is or may be made a party to a Proceeding by reason of (i) any action alleged to have been taken or omitted in such capacity, (ii) activities with a non-profit organization, or pro bono or volunteer services, which services have been requested or endorsed by the Corporation or (iii) service at the Corporation's request with respect to any employee benefit plan. Any indemnification of a present or former employee or agent under this Section 8.2 (unless ordered by a court) may be made by the Corporation, unless a determination is made that the present or former employee or agent failed to act in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Section 8.3. Limitation on Indemnities. In the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor against any person described in Sections 8.1 and 8.2 above, (i) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit and (ii) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. No indemnification shall be provided for a person with respect to any matter as to which he or she shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interest of the Corporation or, to the extent that such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. Section 8.4. Expenses to be Reimbursed. Without limitation, any indemnification provided by the Corporation pursuant to Section 8.1 shall cover, or with respect to an indemnification provided pursuant to Section 8.2, may -11- cover, judgments, fines, court costs, reasonable attorneys' fees and the cost of reasonable settlements, to the extent such expenses are actually and reasonably incurred in connection with the Proceeding. Section 8.5. Determination that Indemnification is Proper. Any indemnification of a present or former director or officer of the Corporation or of another entity under Section 8.1 hereof (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the present or former director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 8.1. Any indemnification of a present or former employee or agent of the Corporation or of another entity under Section 8.2 hereof (unless ordered by a court) may be made by the Corporation unless a determination is made that indemnification of the present or former employee or agent is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 8.2. Any such determination shall be made, with respect to a person who is a director or officer of the Corporation at the time of such determination, (1) by a majority vote of the directors of the Corporation who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that the person had reasonable cause to believe that his or her conduct was unlawful. Section 8.6. Advance Payment of Expenses. Expenses (including attorneys' fees) incurred by a director or officer described in Section 8.1 in defending any Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it should be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by employees or agents described in Section 8.2 in defending any Proceeding may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate. The Board of Directors may authorize the Corporation's counsel to represent any director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. Section 8.7. Survival. The foregoing indemnification provisions shall be deemed to be a contract between the Corporation and each director, officer, employee and agent who serves in any such covered capacity at any time while these provisions, as well as the relevant provisions of any applicable law, are in effect. Any repeal or modification of these provisions or applicable law shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any Proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Rights arising under this Article may not be modified retroactively without the consent of any affected director, officer, employee or agent or former director, officer, employee or agent. -12- Section 8.8. Preservation of Other Rights. The indemnification provided under this Article VIII shall not be deemed exclusive of any other rights to which any person may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 8.9. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director, officer, employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person or on such person's behalf in any capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article VIII. Section 8.10. Severability. If this Article VII or any portion hereof shall be invalidated on any ground by any court, then the Corporation shall nevertheless indemnify each director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article VIII that shall not have been invalidated and to the fullest extent permitted by applicable law. Section 8.11. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer pursuant to these By-Laws, or advance of costs, charges and expenses to a director or officer under Section 8.6 of these By-Laws, shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this Article VIII shall be enforceable by the director or officer in a court of law. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 8.6 of these By-Laws where the required undertaking of repayment, if any, has been received by the Corporation) that the claimant has not met the standard of conduct requiring indemnification by the Corporation, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 8.1 of these By-Laws, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met -13- such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. ARTICLE IX AMENDMENTS Section 9.1. Amendments. Except as otherwise provided in the Articles of Organization, the Board of Directors shall have the power to make, rescind, alter, amend and repeal these By-Laws by majority vote of the full Board of Directors. ARTICLE X GENERAL PROVISIONS Section 10.1. Fiscal Year: The fiscal year of the Corporation shall be the calendar year. Section 10.2. Contributions: The Directors may, subject to the limits and restrictions imposed by law and subject to such rules and regulations consistent with law that they may make, make contributions of such sums of money as they determine to be reasonable for public welfare or for charitable, scientific or educational purposes. Section 10.3. Waivers of Notice: Whenever any notice is required to be given by law, or under the provisions of the Articles of Organization or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. Section 10.4. Dividends: (a) Subject to any applicable provisions of law, dividends upon the shares of the Corporation may be declared by the Board of Directors at any regular or special meeting of the Board of Directors and any such dividend may be paid in cash, property, or shares of the Corporation's capital stock. (b) A member of the Board of Directors, and each member of any committee designated by the Board of Directors, shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the Director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid. -14- EX-31.1 3 ex31-1.txt Exhibit 31.1 CERTIFICATIONS I, David F. D'Alessandro, certify that: 1. I have reviewed this quarterly report on Form 10-Q of John Hancock Life Insurance Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 9, 2004 By: /S/ DAVID F. D'ALESSANDRO ------------------------- David F. D'Alessandro Chairman, President and Chief Executive Officer EX-31.2 4 ex31-2.txt Exhibit 31.2 CERTIFICATIONS I, Thomas E. Moloney, certify that: 1. I have reviewed this quarterly report on Form 10-Q of John Hancock Life Insurance Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 9, 2004 By: /S/ THOMAS E. MOLONEY ----------------------------------- Thomas E. Moloney Senior Executive Vice President and Chief Financial Officer EX-32.1 5 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of John Hancock Life Insurance Company (the "Company"), hereby certifies, to his knowledge, that: (1) the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2004, (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. Dated: August 9, 2004 /s/ DAVID F. D'ALESSANDRO -------------------------- Name: David F. D'Alessandro Title: Chairman, President and Chief Executive Officer EX-32.2 6 ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of John Hancock Life Insurance Company (the "Company"), hereby certifies, to his knowledge, that: (1) the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2004, (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. Dated: August 9, 2004 /s/ THOMAS E. MOLONEY --------------------- Name: Thomas E. Moloney Title: Senior Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----