* Selected financial data under generally accepted accounting principles is not available for the 1993 fiscal year. See Management's Discussion and Analysis and Notes to the Consolidated Financial Statements for additional information.
** Statutory accounting principles differ in certain respects from generally accepted accounting principles. The significant differences relate to consolidation accounting, investments, deferred acquisition costs, deferred income taxes, non-admitted asset balances, surplus notes and reserve calculation assumptions.
The following analysis of the consolidated results of operations and financial condition of The Manufacturers Life Insurance Company of America (the "Company" or ManAmerica") should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements.
The Company is a direct wholly-owned U.S. subsidiary of The Manufacturers Life Insurance Company (U.S.A.) ("ManUSA"), which in turn is a direct wholly-owned subsidiary of the Manulife Reinsurance Corporation (U.S.A.) ("MRC"). MRC is an indirectly wholly-owned subsidiary of The Manufacturers Life Insurance Company ("Manulife Financial"), a Canadian mutual insurance company. Manulife Financial, with consolidated assets under management of $79.7 billion ($Can), actively operates in thirteen countries worldwide. Manulife Financial has been doing business in the United States since 1903.
Manulife Financial and its subsidiaries have consistently received excellent ratings from Standard & Poor's Insurance Rating Service, A. M. Best Company, Moody's Investors Service Inc. and Duff & Phelps Credit Rating Co.
b) Internationally, the sale of participating insurance products through Branch Operations in Taiwan
Variable annuity deposits during 1997 were 32% of 1996 deposit levels. The Company de-emphasized the sale of variable annuities and concentrated on the sale of estate planning variable life products which is more consistent with its client and producer base.
The Company entered Taiwan in 1992 as a start-up venture to sell traditional insurance products through its Taiwan branch. During 1995 the Company commenced full operations that resulted in significant expenditures on agent recruitment and training. In 1996 Taiwan's operating losses increased as a result of costs associated with recruitment and training. Although management expected losses, the magnitude was not acceptable. In late 1996, a new General Manager was appointed and
In addition to the above businesses, the Company assumes reinsurance from its Parent Company, ManUSA. The Company reinsures an inforce individual participating life insurance block of business which does not include any new business.
On January 20, 1998, the Board of Directors of Manulife asked the management of Manulife to prepare a plan for conversion of Manulife from a mutual life insurance company to an investor-owned, publicly-traded stock company. Any demutualization plan for Manulife is subject to the approval of the Manulife Board of Directors and policyholders as well as regulatory approval.
Certain information included herein is forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning anticipated operating results, financial resources, growth in existing markets and the impact of the year 2000. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein. These risks and uncertainties include changes in general economic conditions, the effect of regulatory, tax and competitive changes in the environment in which the Company operates, fluctuations in interest rates, performance of financial markets and the Company's ability to achieve anticipated levels of earnings.
The Company reported a consolidated net loss in 1997 of $3.6 million, compared to the 1996 net loss of $8.4 million ($6.8 million net loss in 1995). The main contributors to these losses were as follows:
The net loss from Taiwan operations decreased to $2.8 million in 1997 from $17.5 million in 1996 (a $9.3 million net loss in 1995). The increased net loss in 1996 was a result of significant start-up costs incurred in Taiwan, particularly associated with producer recruitment. In 1997, as discussed earlier, improvements were made in the Taiwan branch operations to rationalize the operations, slow the sales growth and related production costs, and to instead focus on strategic growth. Lower sales significantly reduced the level of commissions and expenses incurred.
Premium revenue for 1997 was $5.3 million compared to $12.9 million in 1996 ($15.3 million in 1995). Of the total, premiums related to sales of traditional life insurance contracts in Taiwan in 1997, 1996 and 1995 were $4.8 million, $12.2 million and $9.3 million respectively. The decrease in premiums reported in Taiwan in 1997 are a result of the more focused strategic growth discussed previously whereas the increase in 1996 over 1995 reflected the initially growing operation. Premiums
related to U.S. operations decreased to $0.5 million in 1997 from $0.7 million in 1996 and $6.0 million in 1995. The U.S. premiums relate solely to a block of Corporate-owned life insurance business assumed from ManUSA for which the initial premium assumed of $25.4 million was received in 1994, with very little renewal premium received thereafter.
Net investment income was $8.3 million in 1997 compared to $19.7 million in 1996 ($18.7 million in 1995). The decrease in 1997 is due to the maturity of a $171.7 million guaranteed annuity contract in March 1997 on which interest of approximately $13.2 million was reported in 1996. The increase in 1996 compared to 1995 is due to the strengthening of the stock market in 1996.
Policyholder benefits decreased to $6.7 million in 1997, compared to $14.5 million in 1996 ($16.9 million in 1995). The decrease in 1997 is a direct result of the reduction in activity and death claims experience in Taiwan. Death claims experience in 1996 was favorable compared to expected levels and to prior years.
Operating costs and expenses, net of deferrable acquisition expenses, increased to $41.7 million in 1997 compared to $34.6 million in 1996 ($30.7 million in 1995). The increase in 1997 and 1996 is due to non-deferrable expenses incurred in connection with the development of two new products, a COLI variable universal life contract in 1997 and a survivorship variable life contract in 1996 as discussed previously.
The Company had total consolidated assets of $1,167 million at December 31, 1997, an increase of $104 million or 9.8% from 1996. This change is principally a result of separate account asset growth of $229 million due to strong investment performance of the underlying investment funds, continued consumer preference for participation in the stock market through separate accounts, and the additional product offerings and investment options introduced in 1997, offset by a reduction in general account assets due to the maturity and repayment of MLMSC's mortgage-backed bonds.
General account investments increased by $22.9 million or 22.6% from 1996. This change is due to an increase in fixed maturities of $16.2 million and cash and short-term investments of $4.5 million. In the fourth quarter of 1997, ManAmerica borrowed $33 million from its parent, ManUSA, to provide additional liquidity and to meet the costs of new business strain resulting from significant COLI sales.
As at December 31, 1997, 97.5% of the bond portfolio was rated "A" or higher, and 100% was rated investment grade, "BBB" or higher. The corresponding percentages at the end of 1996 were 85.9% and 97.5%.
Policy loans represented 12% of investments at December 31, 1997, compared to 10% in 1996. Most individual life insurance policies provide the individual policyholder with the right to obtain a policy loan from the Company. Such loans are made in accordance with the terms of the respective policies, are carried at the unpaid balance, and are fully secured by the cash surrender value of the policies on which the respective loans are made.
Separate account liabilities are $897 million, an increase of 34% over 1996. This reflects the growing popularity of variable products in the marketplace and the increase in existing fund values due to the increase in the stock market in 1997 and sales of the new COLI product.
The Company maintains a prudent amount invested in cash and short term investments. At the end of 1997, this amounted to $22 million or 17.7% of total investments compared to $17.5 million in 1996 or 17.3%. In addition, the Company's liquidity is managed by maintaining an easily marketable portfolio of fixed maturities. Because of the excess of expense over income, which arises from the cost of new policy issues, the continued success in generating sales will not only result in losses in the results from operations, but will create a cash flow strain as well. The Company's consolidated statements of cash flows indicates this in that operating activities used cash of $24.7 million and $20.5 million in 1997 and 1996 respectively compared to $29.6 million in 1995. As a result, the Company looks to its parent, ManUSA, for the necessary capital to support its operations. In 1995 a surplus note for $8.5 million was issued to the Company from ManUSA. In 1996, a $15 million contribution of capital was made to the Company by its Parent to provide further liquidity. In December 1997, the Company borrowed $33 million from ManUSA pursuant to a promissory note maturing on February 1, 2007. Manulife Financial provides a claims paying guarantee to the Company's U.S. policyholders.
In order to enhance the regulation of insurer solvency, the NAIC enforces minimum Risk Based Capital (RBC) requirements. The requirements are designed to monitor capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The RBC model law required that life insurance companies report on a formula-based RBC standard which is calculated by applying factors to various assets, premium and reserve items. The formula takes into account risk characteristics of the life insurer, including asset risk, insurance risk, interest risk and business risk. If an insurer's ratio falls below certain thresholds, regulators will be authorized, and in some circumstance required, to take regulatory action. The Company's policy is to maintain capital and surplus balances well in excess of the minimums required under government regulations in all jurisdictions in which the Company does business.
terms of ability to commit the Company to credit instruments. Credit and commitment exposures are monitored using a rigorous reporting process and are subject to a formal quarterly review.
The management of ongoing claims risk for an insurer includes establishing appropriate criteria to determine the insurability of applicants as well as managing the exposure to large dollar claims. Underwriting standards have been established to manage the insurability of applicants. Management performs periodic reviews to ensure compliance with standards.
Exposure to large claims is managed by establishing policy retention limits. Policies in excess of the limits are reinsured with MRC. Underwriting standards and policy retention limits are reviewed on a periodic basis.
Business risk comprises operating risk as well as other risks. Operating risk is the exposure to inadequate internal controls, including inadequate control of risk management. Other risks include legal, political, competitive and environmental risks. Business risks expose the Company to potential loss of earnings.
Preparing computer systems to deal with the Year 2000 risk has become a major issue for businesses throughout the world. Within the Manulife Financial group, a group-wide program has been underway since 1996 to make all critical systems compliant by the end of 1998 and other systems compliant by the end of 1999. Included in this program are all systems applicable to and shared by the Company with Manulife Financial. Based on a detailed assessment, Manulife Financial determined that a portion of its software needs to be modified or replaced so that its computer systems will function properly into the Year 2000 and beyond. Like most companies, the Year 2000 issue represents a significant challenge for Manulife
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 WITH REPORT OF INDEPENDENT AUDITORS
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Manufacturers Life Insurance Company of America at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS)
The accompanying consolidated financial statements of The Manufacturers Life Insurance Company of America and its wholly-owned subsidiaries have been prepared in accordance with generally accepted accounting principles ("GAAP").
Prior to 1996, the Company prepared its financial statements in conformity with statutory accounting practices prescribed or permitted by the Insurance Department of the State of Michigan which practices were considered GAAP for mutual life insurance companies and their wholly-owned direct and indirect subsidiaries. Financial Accounting Standard Board Interpretation 40, "Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises" ("FIN 40") as amended, which is effective for 1996 annual financial statements and thereafter, no longer permits statutory based financial statements to be described as being prepared in conformity with GAAP. Accordingly, the Company has adopted GAAP including Statement of Financial Accounting Standards 120 ("FAS 120"), "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long Duration Participating Contracts", which addresses the accounting for long-duration insurance and reinsurance contracts, including all participating business.
Pursuant to the requirements of FIN 40 and FAS 120, the effect of the changes in accounting have been applied retroactively and the previously issued 1995 financial statements have been restated for the change.
On December 31, 1996, ManUSA transferred to the Company all of the common and preferred shares of Manulife Holding Corporation ("Holdco"), an investment holding company. Holdco has primarily two wholly-owned
subsidiaries, ManEquity Inc., a registered broker/dealer, and the Manufacturers Life Mortgage Securities Corporation ("MLMSC"), an issuer of mortgage-backed US Dollar bonds. The Company then transferred all the common and preferred shares of MAC to Holdco for two shares of $1 common stock of Holdco.
Policy loans are reported at aggregate unpaid balances which approximate fair value.
Fee income from variable annuity and variable life insurance policies consists of policy charges for the cost of insurance, expenses and surrender charges that have been assessed against the policy account balances. Policy charges that are designed to compensate the company for future services are deferred and recognized in income over the period benefited, using the same assumptions used to amortize DAC. Premiums on long-duration life insurance contracts are recognized as revenue when due. Investment income is recorded when due.
Income taxes have been provided for in accordance with Statement of Financial Accounting Standards 109 ("FAS109") "Accounting for Income Taxes." The Company joins ManUSA, MRC, Capitol Bankers Life Insurance Company and Manulife Reinsurance Limited ("MRL") in filing a U.S. consolidated income tax return as a life insurance group under provisions of the Internal Revenue Code. In accordance with an income tax sharing agreement, the Company's income tax provision (or benefit) is computed as if the Company filed a separate income tax return. Tax benefits from operating losses are provided at the U.S. statutory rate plus any tax credits attributable to the Company, provided the consolidated group utilizes such benefits currently. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes. Income taxes recoverable represents amounts due from ManUSA in connection with the consolidated return.
At December 31, 1997, all fixed maturity and equity securities have been classified as available-for-sale and reported at fair value. The amortized cost and fair value is summarized as follows:
The contractual maturities of fixed maturity securities at December 31, 1997 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Corporate requirements and investment strategies may result in the sale of investments before maturity.
The Company's deferred income tax liability, which results from tax effecting the differences between financial statement values and tax values of assets and liabilities at each balance sheet date, relates to the following:
The aggregate statutory capital and surplus of the Company at December 31, 1997 was $56,598 (1996 $76,202). The aggregate statutory net loss of the Company for the year ended 1997 was $2,550 (1996 $15,961; 1995 $13,705). State regulatory authorities prescribe statutory accounting practices that differ in certain respects from generally accepted accounting principles followed by stock life insurance companies. The significant differences relate to investments, deferred acquisition costs, deferred income taxes, non-admitted asset balances and reserve calculation assumptions.
The Company has a formal service agreement with Manulife Financial which can be terminated by either party upon two months' notice. Under the Agreement, the Company will pay direct operating expenses incurred each year by Manulife Financial on its behalf. Services provided under the agreement include legal, actuarial, investment, data processing and certain other administrative services. Costs incurred under this agreement were $30,873, $26,982 and $23,210 in 1997, 1996 and 1995 respectively. In addition, there were $11,249, $6,934 and $5,052 of agents bonuses allocated to the Company during 1997, 1996 and 1995, respectively, which are included in commissions.
Reinsurance recoveries on ceded reinsurance contracts to affiliates were $3,972, $NIL and $NIL during 1997, 1996 and 1995 respectively.
The Company markets variable life insurance and variable annuity products through Separate Accounts which use Manufacturers Investment Trust (formerly NASL Series Trust) as its investment vehicle. The Manufacturers Investment Trust is an entity sponsored by an affiliated company, The Manufacturers Life Insurance of North America (formerly North American Security Life Insurance Company).
Reinsurance recoveries on ceded reinsurance contracts were $909, $357 and $170 during 1997, 1996 and 1995 respectively.
We have audited the financial statements of The Manufacturers Life Insurance Company of America as of December 31, 1997 and 1996 and 1995 and for each of the three years in the period ended December 31, 1997 and have issued our current year report thereon dated March 20, 1998 (included elsewhere in this Annual Report on Form 10-K). Our audits also included the financial statement schedules listed in this Annual Report on Form 10-K. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
SCHEDULE I -- SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES