The following analysis of the consolidated results of operations and financial condition of the Manufacturers Life Insurance Company of America, (hereafter referred to as the Company) should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements.
The Company is a U.S. direct wholly-owned subsidiary of The Manufacturers Life Insurance Company (U.S.A.), which in turn is a direct wholly-owned subsidiary of the Manulife Reinsurance Corporation (U.S.A.) ("MRC"). MRC is an indirectly wholly-owned subsidiary of The Manufacturers Life Insurance Company ("Manufacturers Life"), a Canadian mutual insurance company. Manufacturers Life, with consolidated assets of $68.6 billion ($Can), actively operates in fourteen countries worldwide. Manufacturers Life has been doing business in the United States since 1903.
In 1996, the ownership of the Company was transferred from MRC, to The Manufacturers Life Insurance Company (U.S.A.) ("ManUSA"). This was part of a more general corporate reorganization of Manufacturers Life's U.S. operations. This transfer of ownership had no material effect on the operations or consolidated financial statements of the Company.
TAIWAN: In 1993 the Company entered the Taiwan market as a startup venture to sell traditional insurance products. The Company anticipates a large potential for this market. The Company operates in Taiwan using a branch of the Company. During 1995 the Company commenced full operations which have resulted in significant recruitment and training expenditures. These expenditures are expected to positively impact future operations as market share increases. The business written in Taiwan consists of traditional individual life insurance, such as whole life and endowment contracts, and is marketed by the Company's own agency force.
In addition, the Company has assumed reinsurance from its parent company, ManUSA. The Company reinsures an in force individual participating life insurance block of business which does not include any new business.
The Company reported a consolidated net loss in 1996 of $8.4 million, compared to the 1995 net loss of $6.8 million ($6.7 million net loss in 1994). The main contributors to these losses were as follows:
Fee income for 1996 was $40.4 million, compared to $25 million in 1995 ($18.3 million in 1994). Strong investment performance in 1996 and a growing maturing block of in-force business resulted in higher separate account values and, therefore, higher fee income, which is earned on a percentage of the net value of invested assets in the separate account portfolios. The variable universal life and annuity business accounted for 85% of the fee income earned by the Company in 1996 compared to 94% in 1995 and 89.6% in 1994. Fee income from investment advisory subsidiaries increased at a somewhat greater rate than that from the variable universal life and annuity business.
Net investment income was $19.7 million in 1996 compared to $18.7 million in 1995 ($17.7 million in 1994). The Company's performance in 1996 reflects similar investment income results compared to 1995. The increase in 1995 compared to 1994 is due to the strengthening of the stock market in 1995.
General account investments decreased by $21.3 million or 17% from 1995. This change is due to a decrease in fixed maturities of $15.3 million in order to pay operating costs relating to the Taiwan operation and to meet costs of new business strain, as well as a decrease in mortgage loans of $6.7 million due to principal repayments.
The Company's fixed maturity bond portfolio of $51.7 million represents 51% of investments at the end of 1996, compared to 55% at the end of 1995.
The Company's equity portfolio of $21.6 million represents 21% of investments at the end of 1996, compared to 19% at the end of 1995. The equities consist entirely of investments in mutual funds sponsored by an affiliate.
The Company had no provisions for impairments as at December 31, 1996 and 1995.
As the mortgages in MLMSC have matured, the funds have been invested in a Guaranteed Annuity Contract with the Company's parent, ManUSA. An interest rate of 8% is credited to the GAC asset. This GAC asset will mature on March 1, 1997, the same date that the mortgage backed security issued by MLMSC matures.
The following table shows the distribution of Policyholder Liabilities and Separate Account Liabilities by line of business at December 31:
Taiwan reserves, although still small, have shown a rapid increase in 1996. This reflects the start-up operation in Taiwan. Taiwan reserves are expected to continue to rise rapidly in the near future.
The General account liabilities consist of traditional insurance whose liquidity requirements do not fluctuate significantly from one year to the next. The majority of the Company's cash flows arise from policyholder transactions related to the Separate account, and, as such, the assets and liabilities of these products are exactly matched.
The Company maintains a prudent amount invested in cash and short term investments. At the end of 1996, this amounted to $17.5 million or 17.3% of total investments compared to $17.9 million in 1995 or 14.6%. In addition, the Company's liquidity is managed by maintaining an easily marketable portfolio of fixed maturities. Because of the excess of expense over income, which arises from the costs of new policy issues, the continued success in generating sales will not only result in losses in the results from operations, but will create a cash flow strain as well. The Company's consolidated statements of cash flows indicate this in that operating activities used cash of $20.5 million and $29.6 million in 1996 and 1995 respectively compared to providing cash of $10 million in 1994. As a result, the Company looks to its parent, ManUSA, for the necessary capital to support its operations. In 1995 a surplus note for $8.5 million was issued to the Company from ManUSA. In 1996, a $15 million contribution of capital was made to the Company by its Parent to provide further liquidity. Manufacturers Life has entered into a claims paying guarantee with the Company.
The Company's policy is to maintain capital and surplus balances well in excess of the minimums required under government regulations in all jurisdictions in which the Company does business.
Risk management is a fundamental element of the Company's financial strength and profitability, and is essential to its continuing success. The Company is committed to comprehensive risk management policies and procedures which measure and control risk in all of its business activities and allow for periodic by internal and external auditors and regulators.
The management of ongoing claims risk for an insurer includes establishing appropriate criteria to determine the insurability of applicants as well as managing the exposure to large dollar claims. Underwriting standards have been established to manage the insurability of applicants. Renewal underwriting standards are also in place for business that renews on a periodic basis (primarily group life and health insurance). Management performs periodic reviews to ensure compliance with standards.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 WITH REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of The Manufacturers Life Insurance Company of America as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in capital and surplus and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
As discussed in Note 2 to the financial statements, in 1996 the Company adopted certain accounting changes to conform with generally accepted accounting principles for mutual life insurance enterprises, and retroactively restated the 1995 and 1994 financial statements for the change.
On December 20, 1995, Manulife Reinsurance Corporation (U.S.A) ("MRC") transferred to the Company all of the common and preferred shares of Manufacturers Advisor Corporation ("MAC"), an investment fund management company.
Mortgage loans are reported at amortized cost, net of a provision for losses. The provision for losses is established for mortgage loans which are considered to be impaired when the Company has determined that it is probable that all amounts due under contractual terms will not be collected. Impaired loans are reported at the lower of unpaid principal or fair value of the underlying collateral.
Short-term investments include investments with maturities of less than one year at the date of acquisition.
Separate account assets and liabilities represent funds that are separately administered, principally for variable annuity and variable life contracts, and for which the contract holder, rather than the Company, bears the investment risk. Separate account contract holders have no claim against the assets of the general account of the Company. Separate account assets are recorded at market value. Operations of the separate accounts are not included in the accompanying financial statements.
Expenses for variable annuity and variable life insurance policies include interest credited to policy account balances and benefit claims incurred during the period in excess of policy account balances.
Income taxes have been provided for in accordance with Statement of Financial Accounting Standards 109 ("FAS 109") "Accounting for Income Taxes." The Company joins ManUSA, MRC and Manulife Reinsurance Limited ("MRL") in filing a U.S. consolidated income tax return as a life insurance group under provisions of the Internal Revenue Code. In accordance with an income tax sharing agreement, the Company's income tax provision (or benefit) is computed as if the Company filed a separate income tax return. Tax benefits from operating losses are provided at the U.S. statutory rate plus any tax credits attributable to the Company, provided the consolidated group utilizes such benefits currently. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes. Income taxes recoverable represents amounts due from ManUSA in connection with the consolidated return.
Proceeds from sales of fixed maturity securities during 1996 were $120,234 (1995 $67,507; 1994 $43,176). Gross gains of $1,858 and gross losses of $1,837 were realized on those sales (1995 $2,630 and $218; 1994 $168 and $1,007 respectively).
Net unrealized gains (losses) on fixed maturity and equity securities included in capital and surplus were as follows:
SURPLUS NOTE: Fair value was estimated using current interest rates that were based on U.S. Treasuries for similar maturity ranges.
Reinsurance recoveries on ceded reinsurance contracts were $357, $170 and $57 during 1996, 1995 and 1994 respectively.
The Company markets traditional life insurance products in Taiwan through its Taiwanese Branch. The carrying amount of net assets located in Taiwan as at December 31, 1996 and 1995 was $15,080 and $1,125 respectively.
The income (loss) before taxes related to the Taiwan and U.S. business was as follows:
THE BOARD OF DIRECTORS THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION ($ THOUSANDS)