The Company leases space for its Home Office in historic Boston's Back Bay, the Company plans on continuing to utilize this space as its corporate headquarters. In addition, we lease office space throughout the United States as needed for our operations, including for our sales force. We believe that our current facilities are adequate for our current and expected needs.
Management's discussion and analysis of financial condition and results of operations is presented in a condensed disclosure format pursuant to General Instruction (I) of Form 10-K. Management's narrative that follows reviews our consolidated financial condition as of December 31, 2004 and 2003, the consolidated results of operations for the years ended December 31, 2004, 2003 and 2002 and, where appropriate, factors that may affect future financial performance. This management narrative for the Company should be read in conjunction with the consolidated financial statements and related notes, included elsewhere in this Form 10-K. 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 Financial.
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 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) as a holding company, we depend on dividends from our subsidiaries; Massachusetts insurance law may restrict the ability of John Hancock Life Insurance Company (the Life Company) to pay dividends within the consolidated group; (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) a decline or increased volatility in the securities markets, and other economic factors, may adversely affect our business, particularly our variable life insurance, mutual fund, variable annuity and investment business; (6) 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 third party distribution relationships; (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 directors of our variable series trusts and of our mutual funds could reduce the compensation paid to us or could terminate our contracts to manage the funds; (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 overfunding of the closed block will benefit only the holders of policies included in the closed block, not our 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 we projected; (14) we face investment and credit losses relating to our investment portfolio including without limitation, the risks associated with the evaluation and determination by our investment professionals of the fair value 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) our United States insurance companies 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 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.
Readers are also directed to other risks and uncertainties discussed, as well as to further discussion of the risks described above, in other documents filed by the Company with the United States Securities and Exchange Commission. 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.
Effective April 28, 2004, Manulife Financial Corporation ("Manulife") acquired all of the outstanding common shares of John Hancock Financial Services, Inc. (JHFS or the Company) that were not already beneficially owned by Manulife as general fund assets and JHFS became a wholly owned subsidiary of Manulife. 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. In order to more efficiently manage its corporate structure, on October 7, 2004 Manulife transferred all of its shares in JHFS to John Hancock Holdings (Delaware) LLC - a wholly-owned subsidiary of Manulife.
In accordance with SFAS No. 141, "Business Combinations" the merger transaction was accounted for as a purchase of John Hancock by Manulife. In accordance with "push down accounting," John Hancock, the acquired company, adjusted the cost and reporting basis of its assets and liabilities to their fair values on the acquisition date (the purchase adjustments).
The Company discloses summary financial data and its maximum exposure to losses for the CDOs, Properties and other entities in Note 4 - Relationships with Variable Interest Entities in the notes to the Company's consolidated financial statements.
Amortization of Deferred Acquisition Costs (DAC) and Value of Business Acquired (VOBA) Assets
Our reported effective tax rate on net income was 27.9%, 27.4% and 17.0% for the years ended December 31, 2004, 2003 and 2002, 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 Combination" and FASB Statement of Financial Accounting Standards 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.
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.
This transfer was recorded by the Company as a disposal of a business by other than sale, i.e. as a transfer of a business between entities under common control. No gain or loss was recognized in the Company's Consolidated Statements of Income on this transfer. The excess of the proceeds received over the net carrying value of assets and liabilities transferred was accounted for as a capital transfer to the Company by an affiliate.
Summarized financial data for these discontinued operations are presented in the tables below:
Recent Acquisition/Disposal Activity. The acquisition described under the table below were recorded under the purchase method of accounting and, accordingly, the operating results have been included in the Company's consolidated results of operations from each date of acquisition. Each purchased price was allocated to the assets acquired and the liabilities assumed based on estimated fair values, with the excess, if any, of the applicable purchase price over the estimated fair values of the acquired assets and liabilities recorded as goodwill. These acquisitions were made by the Company in execution of its plan to acquire businesses and products that have strategic value, meet its earnings requirements and advance the growth of its current business.
On September 30, 2004, the Company's Singapore subsidiary, the John Hancock Life Assurance Limited in Singapore (JHLAC) was transferred from the Company to Manulife (Singapore) Private Limited, a wholly owned subsidiary of Manulife, as part of Manulife's rationalization of its worldwide operations along geographic lines. No gain or loss was recorded on this transfer of a business between entities under common control.
On March 8, 2005 the Company borrowed $320.0 million from Manufacturer's Hungarian Holdings Limited (MHHL) for capital planning purposes. The note payable to MHHL bears interest at a rate of LIBOR plus 25 basis points, is payable quarterly commencing March 28, 2005 and is due March 8, 2006. The Company will include the note payable to MHHL in debt on its Consolidated Balance Sheets.
The tables below present the consolidated results of operations for the periods presented:
Premium revenues decreased 7.4%, or $222.8 million, from the prior year. The decrease was primarily due to a $235.4 million decrease in premiums in the G&SFP Segment, driven by a decrease in the single premium annuity business. We continue to look for opportunistic sales in the single premium annuity market where our pricing standards are met. In addition, premiums in the Wealth Management Segment decreased $25.3 million driven by lower sales of single premium immediate annuities in the fixed annuity business, while premiums decreased $52.8 million in the traditional life insurance business and $38.1 million due to the sale of the group life insurance business in the prior year. Partially offsetting these decreases in premiums was by an increase in premiums of $128.5 million in the long-term care insurance business.
Net investment income decreased 9.8%, or $376.1 million, from the prior year. The yield, net of investment expenses, on the general account portfolio decreased to 5.12% from 5.95% in the prior year. Yield for the period subsequent to the merger with Manulife, April 29, 2004 through December 31, 2004, was 4.78%. The decrease in yield was driven by the following factors:
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. In 2004 this dilutive effect was 8 basis points, compared to 8 basis points in the prior year. However, adjusting for taxes, these investments increased the Company's net income by $2.0 million in 2004 compared to the prior year.
Partially offsetting the effects of these decreases to yields on investments was an increase in invested assets and a reduction in investment expenses. In 2004, weighted-average invested assets grew $3,139.5 million, or 4.8%, from the prior year. In addition, investment expenses were reduced $32.2 million compared to the prior year.
Other revenue decreased 3.0%, or $8.2 million, from the prior year. The decrease in other revenue is due to Signature Fruit, a subsidiary of the Company since April 2, 2001, which acquired certain assets and assumed certain liabilities out of bankruptcy proceedings of Tri Valley Growers, Inc., a co-operative association on that date. The revenues and expenses of Signature Fruit are included in the Company's income statement in other revenue and other operating costs and expenses, respectively, in the Corporate and Other Segment. Signature Fruit generated revenue of $242.6 million in 2004, a decrease of $11.9 million from the prior year. Also included in other revenue is the fee revenue generated in the Federal long-term care insurance business, its primary operating revenue. The Federal long-term care insurance business is a fee business where the Company administers and supports employee long-term care insurance benefits offered by the Federal Government to its employees. Federal long-term care insurance fee revenue increased $1.2 million from the prior year.
Other operating costs and expenses increased $250.6 million from the prior year driven by a charge for unrecoverable reinsurance of $142.1 million, an increase of $47.9 million in merger transaction expenses, an increase of $29.5 million in the integration costs and $3.6 million in amortization of other
intangible assets created in the merger with Manulife. There was a $5.5 million increase in operating expenses at the Hancock Natural Resource Group, which included $4.4 million of expenses associated with the expansion of its property management division. Partially offsetting these increases was a decrease in operating expenses of $11.9 million at Signature Fruit. Signature Fruit other operating costs and expenses were $245.9 million in 2004 and $257.8 million in the prior year. Operating expenses at the institutional advisory businesses, Declaration Management & Research and Independence Investments LLC, decreased $6.9 million to $40.9 million primarily due to lower compensation expenses.
Amortization of deferred policy acquisition costs and value of business acquired decreased 9.7%, or $33.2 million, from the prior year. The decrease in amortization of deferred policy acquisition costs and value of business acquired was comprised of a $42.8 million decrease in the non-traditional life insurance business and a decrease of $24.4 million in the traditional life insurance business. The decrease in amortization of deferred policy acquisition costs and value of business acquired was driven by the impact of purchase accounting in the merger with Manulife during the year. Partially offsetting these decreases was an increase in amortization of deferred policy acquisition costs and value of business acquired of $36.4 million in the G&SFP Segment driven by the VOBA asset established in this business due to purchase accounting resulting from the merger with Manulife.
Cumulative effect of accounting change, net of tax, was a charge of $4.3 million and $166.2 million for the years ended December 31, 2004 and 2003, respectively. During the 2004, 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. In 2003 the cumulative effect of accounting change related to the adoption of DIG B36 as of October 1, 2003, refer to Note 2 - Summary of Significant Accounting Policies in the notes to the Company's Consolidated Financial Statements.
Consolidated income before income taxes, discontinued operations and cumulative effect of accounting changes increased 117.3%, or $623.7 million, from the prior year. The increase was driven by growth in income before taxes, discontinued operations and cumulative effect of accounting change of $266.6 million in the Corporate and Other Segment, $145.5 million in the Guaranteed and Structured Financial Products, $114.3 million in the Protection Segment, and $97.3 million in the Wealth Management Segment. After consolidated income from continuing operations before income taxes, discontinued operations, and cumulative effect of accounting changes the Company recorded income from discontinued operations of $133.5 million and $58.4 million for the years ended December 31, 2003 and 2002, respectively. In addition, the Company recorded a decrease to net income of $166.2 million (net of tax of $89.5 million) resulting from the adoption of a new accounting pronouncement, the Financial Accounting Standards Board's Derivative Implementation Group (DIG) release of Statement of Financial Accounting Standard No. 133 Implementation Issue No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments" (DIG B36), see Note 2 - Summary of Significant Accounting Policy for additional discussion.
The increase in income before income taxes, discontinued operations and the cumulative effect of an accounting change in the Corporate and Other Segment was driven by growth in net realized investment and other gains due to a gain of $233.8 million (and a deferred profit of $247.7 million) on the sale of the Company's Home Office properties during the first quarter of 2003. See Note 9 - Sale/Leaseback Transaction and other Lease Obligations in the notes to the consolidated financial statements. The increase in the G&SFP Segment was primarily due to a $97.5 million improvement in net realized investment and other losses. The increase in the Protection Segment was driven by a $106.6 million increase in net investment income, a $38.7 million increase in net realized investment and other losses, and a $35.3 million increase in universal life product fees. The increase in the Wealth Management Segment was driven by growth in net investment income, partially offset by an increase in benefits to policyholders and operating expenses. In addition, within the Corporate and Other Segment, income before income taxes, discontinued operations and cumulative effect of accounting changes increased due to the institutional investment advisory business where net realized investment and other gains increased $9.0 million and management advisory fees increased $7.0 million.
Premium revenues increased 11.7%, or $314.8 million, from the prior year. Premiums in the G&SFP Segment improved $170.4 million driven by the single premium annuity business and the structured settlements business. We continue to look for opportunistic sales in the single premium annuity market where our pricing standards are met. Premiums also increased in the Protection Segment by $21.8 million driven primarily by long-term care insurance premiums, which increased 22.8%, or $179.4 million, partially offset by a decline in the group life insurance business of $115.0 million and in traditional life insurance premiums of 4.0%, or $42.0 million. The Company sold the group life insurance business effective May 1, 2003.
o Partially offsetting the effects of these decreases to yields on investments was an increase in invested assets and a reduction in investment expenses. In 2003, weighted-average invested assets grew $7,008.9 million, or 12.1%, from the prior year. In addition, investment expenses were reduced $36.6 million in 2003 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.
Other revenue increased 12.3%, or $29.8 million, from the prior year. The increase in other revenue is due to Signature Fruit, a subsidiary of the Company since April 2, 2001, which acquired certain assets and assumed certain liabilities out of bankruptcy proceedings of Tri Valley Growers, Inc., a co-operative association on that date. The revenues and expenses of Signature Fruit are included in the Company's income statement in other revenue and other operating costs and expenses, respectively, in the Corporate and Other Segment. Signature Fruit generated revenue of $254.5 million in 2003, an increase of $18.6 million from the prior year. Also included in other revenue is the fee revenue generated in the Federal long-term care insurance business, its primary operating revenue. The Federal long-term care insurance business is a fee business where the Company administers and supports employee long-term care insurance benefits offered by the Federal Government to its employees. Federal long-term care insurance fee revenue increased $7.2 million from the prior year, its start-up year.
Benefits to policyholders increased 7.0%, or $318.7 million, from the prior year. The increase in benefits to policyholders was driven by an increase in the Protection Segment of 3.6%, or $80.9 million, from the prior year. In the Protection Segment long-term care insurance benefits to policyholders increased 26.6%, or $189.1 million, primarily due to additions to reserves for premium growth and higher claim volume on growth of the business during the period. In addition, in the Protection Segment the non-traditional life insurance business experienced increased benefits to policyholders of 9.4%, or $27.4 million, primarily due to an increase in interest credited on higher current year account balances, partially offset by a $17.9 million decrease in reserves for lower reserves on term conversions and a decrease in death claims, net of reserves released. Partially offsetting these increases in benefits to policyholders was a decrease of $127.1 million in the group life insurance business partially offset by growth in the International Group Program of $111.9 million. In addition, benefits to policyholders in the G&SFP Segment increased 5.6%, or $84.7 million, on higher sales of single premium annuities, partially offset by lower interest credited on account balances. Interest credited decreased 6.1%, or $65.5 million, from the prior year. The decrease in interest credited was due to a decline in the average interest credited rate on account balances for spread-based products, due to the reset of approximately $11 billion of liabilities with floating rates and new business added at current market rates. The average crediting rate fell to 4.31% from 4.94% in the prior year.
Income taxes were $316.7 million in 2003, compared to $90.6 million for 2002. Our effective tax rate was 27.4% in 2003, compared to 17.0% in 2002. The higher effective tax rate was primarily due to increased pre-tax income driven by improved net realized investment and other gains/losses, partially offset by increased affordable housing tax credits.
Income from discontinued operations of $133.5 million and $58.4 million for the years ended December 31, 2003 and 2002, respectively, consist of the net income of the Canada Segment transferred to an affiliated entity for no gain or loss on December 29, 2004, see Note 2 - Summary of Significant Accounting Policy for further discussion. Canada Segment's net income consists primarily of the results of Maritime Life, formerly the Company's principal operating subsidiary in Canada.
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.
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.
Invested assets, excluding separate accounts totaled $67.7 billion and $76.2 billion as of December 31, 2004 and December 31, 2003, respectively. Prior year's invested assets included $8.1 billion of invested assets for Maritime Life. On December 29, 2004, the remaining operations, assets, and liabilities of the Maritime Life Assurance Company (Maritime Life), which was formerly reported as the Company's Canada Segment, were transferred to The Manufacturers Life Insurance Company (MLI), Manulife's primary Canadian insurance subsidiary (See Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements). 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. Also, 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 $0.9 billion as of December 31, 2004. The following table shows the composition of investments in the general account portfolio.
(1) In addition to bonds, the fixed maturity security portfolio contains redeemable preferred stock with a carrying value of $902.4 million and $606.3 million as of December 31, 2004 and December 31, 2003, respectively. The total fair value of the fixed maturity security portfolio was $48,491.0 million and $53,452.2 million, at December 31, 2004 and December 31, 2003 respectively. (2) The fair value for the mortgage loan portfolio was $11,896.7 million and $13,979.5 million as of December 31, 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.
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 December 31, 2004, fixed maturity securities represented 71.6% of general account invested assets with a carrying value of $48.5 billion, comprised of 53.7% public securities and 46.3% private securities. Each year, the Company directs the majority of net cash inflows into investment grade fixed maturity securities. Typically, less than 10% 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 8% of invested assets and the majority of that balance in the BB category. As of December 31, 2004, the below investment grade bonds were 7.0% of invested assets, and 10.0% of total rated fixed maturities. Rated fixed maturity securities exclude redeemable preferred stock. 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.
(2) Comparisons between SVO and S&P ratings are published by the National Association of Insurance Commissioners.
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 90.0% and 88.3% of rated fixed maturity investments invested in Category 1 and 2 securities as of December 31, 2004 and December 31, 2003, respectively. Below investment grade bonds were 10.0% and 11.7% of fixed maturity investments rated by the SVO and 7.0% and 8.1% of total invested assets at December 31, 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
As of December 31, 2004 and December 31, 2003, 54.0% and 48.5% 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 $227.1 million and $410.9 million as of December 31, 2004 and December 31, 2003, respectively. As of December 31, 2004 and December 31, 2003, $0.5 million and $4.1 million, of interest on bonds near default were included in accrued investment income, respectively. 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.
The following exhibits show a distribution of gross unrealized gains and losses 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. 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.
(1) Includes $1,905.2 million in debt securities held by our Canadian insurance subsidiary and issued and fully supported by the Canadian federal, provincial or municipal governments.
(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 20 securities with gross unrealized losses that are awaiting an SVO rating with a carrying value of $213.6 million and unrealized losses of $2.9 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 2.0% and 2.5% 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 Investment Grade Category and Age
The tables above show the Company's investment grade and below investment grade securities that were in a loss position at December 31, 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 December 31, 2004 and December 31, 2003, respectively, the fixed maturity securities had a total gross unrealized loss of $115.7 million and $331.0 million, excluding basis adjustments related to hedging relationships. As of December 31, 2004, the aging of securities reflects the mark to market on April 28, 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.
(1) As of December 31, 2004 and December 31, 2003 the Company held mortgage loans with a carrying value of $11.8 billion and $12.9 billion, respectively.
The valuation allowance is maintained at a level that management believes is adequate 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 $45.3 million, or 0.4% of the carrying value of the portfolio as of December 31, 2004. The decrease in the valuation allowance from December 31, 2003 was driven by the purchase accounting mark to market on April 28, 2004.
Twelve Months Ended December 31, 2004 Compared to Twelve Months Ended December 31, 2003
o As of December 31, 2004, the Company's asset portfolio had approximately $12 billion of floating-rate exposure (primarily LIBOR). This compares to a $13 billion level of exposure as of December 31, 2003. This exposure was created mostly through interest rate swaps designed to match our floating-rate liability portfolio. As of December 31, 2004, approximately 86% of this exposure, excluding cash and short-term investments, was directly offset by exposure to floating-rate liabilities. Most of the remaining 14% 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 a reduction of 43 basis points for 2004 compared to 56 basis points for 2003.
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 twelve month period ended December 31, 2004, this dilutive effect was 8 basis points, compared to 8 basis points in the prior year. However, adjusting for taxes, these investments increased the Company's net income by $2.0 million in 2004 compared to 2003.
o Investment expenses and taxes were reduced $32.2 million in the twelve month period ended December 31, 2004 compared to the prior year. Included are reductions in state income tax, real estate expenses, and miscellaneous expenses.
Twelve Months Ended December 31, 2003 Compared to Twelve Months Ended December 31, 2002
Net investment income increased $221.0 million from the prior year. The increase was primarily the result of asset growth and lower investment expenses. Overall, the 2003 yield, net of investment expenses, on the general account portfolio decreased to 5.95% from 6.29% in the prior year. The lower portfolio yield was driven primarily by the drop in short-term interest rates during the year, which impacts floating rate investments, and lower yields on investment acquisitions. In summary, the change in yields was driven by the following factors:
o The inflow of new cash for the twelve-month period ending December 31, 2003 was invested at rates that were below the portfolio rate. In addition, maturing assets rolling over into new investments at rates less favorable than those available in 2002. In 2003, weighted-average invested assets grew $7,008.9 million, or 12.1%, from the prior year. These two factors account for the majority of the remaining decline in portfolio rate.
o Investment expenses were reduced $36.6 million in the twelve month period ended December 31, 2003 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.
(1) Fixed maturities gain on disposals includes $90.8 million of gains from previously impaired securities. (2) Fixed maturities loss on disposals includes $28.8 million of credit related losses.
For the year ended December 31, 2004 the Company realized net realized investment and other gains and losses of $87.7 million compared to a gain of $23.8 million for the year ended December 31, 2003. For the year ended December 31, 2004 gross losses on impairments and on disposal of investments - including bonds, equities, real estate, mortgages and other invested assets was $426.5 million, excluding hedging adjustments, compared to $761.3 million in prior year. The Company recorded total impairments of $210.2 million for the period subsequent to the merger with Manulife, April 29, 2004 through December 31, 2004, and $119.2 million for the period prior to the merger with Manulife, from January 1, 2004 through April 28, 2004, compared to $574.9 million for the prior year.
For the year ended December 31, 2004, realized gains on disposal of fixed maturities, excluding hedging adjustments, were $298.0 million. These gains resulted from managing the portfolios for tax optimization and ongoing portfolio positioning, as well as $104.8 million of prepayments. There were $42.5 million of recoveries on sales of previously impaired securities for the year ended December 31, 2004.
For the year ended December 31, 2004, the Company realized losses on the disposal of fixed maturities, excluding hedging adjustments, of $64.7 million. The Company generally intends to hold securities in unrealized loss positions until they mature or recover. However, fixed maturities are sold under certain circumstances such as when new information causes a change in the 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 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.
Realized Gains, Losses and Impairments on Disposals - Year Ended December 31, 2004
Of the $64.7 million of realized losses on sales of fixed maturity securities for the year ended December 31, 2004, there was a total of $7.0 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 period.
The Company also recognized losses on other than temporary impairments of common stock of $6.1 million for the year ended December 31, 2004 as the result of market values falling below cost for more than six months.
The Company recorded a net loss of $63.7 million on mortgage loans for the year ended December 31, 2004 (of which $17.6 million was losses on hedging adjustments). Included in this loss is $65.7 million in impairments. These impairments primarily relate to mortgages on a company that operates flour milling facilities ($20.2 million), a refrigeration warehouse company ($21.5 million), and a commercial office property ($10.0 million).
There were also gains of $107.4 million on the sale of equity securities as part of our overall investment strategy of using equity gains to offset credit losses in the long term, gains of $50.3 million from the sale of other invested assets, and gains of $83.1 million resulting from the sale of real estate for the year ended December 31, 2004. Net derivative activity resulted in a gain of $40.6 million for the year ended December 31, 2004 resulting from a slightly larger impact from interest rate changes on the Company's fair value of hedged items in comparison to the changes in fair value of its derivatives hedging those items and the change in the fair value of derivatives that do not qualify for hedge accounting.
The Company recorded losses due to other than temporary impairments of other invested assets of $29.8 million for year ended December 31, 2003. These impairments primarily related to an investment in a royalty stream ($11.5 million), a fund investment ($3.8 million) and a power holding company ($3.1 million). There were also $4.6 million in impairments on CBO and CDO equity for the period. Equity in these CBOs and CDOs take the first loss risk in a pool of high yield debt. These impairments are recognized using the guidance of EITF 99-20. At December 31, 2003 the Company had a total remaining carrying value of $60.0 million of CBO and CDO equity, which was supported by expected cash flows.
There were also gains of $102.8 million on the sale of equity securities as part of our overall investment strategy of using equity gains to offset credit losses in the long term, gains of $22.7 million from the sale of other invested assets, and gains of $251.8 million resulting from the sale of real estate for the year ended December 31, 2003. Net derivative activity resulted in a gain of $118.2 million for the year ended December 31, 2003 resulting from a slightly larger impact from interest rate changes on the Company's fair value of hedged items in comparison to the changes in fair value of its derivatives hedging those items and the change in the fair value of derivatives that do not qualify for hedge accounting.
The Company's primary insurance operations are those of the Life Company, and formerly, of Maritime Life. State insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval. The Life Company's dividend paying limit is the greater of 10% of its statutory surplus or its prior calendar year's statutory net gain from operations. The ability of the Life Company, JHFS' primary operating subsidiary, to pay shareholder dividends is and will continue to be subject to restrictions set forth in the insurance laws and regulations of Massachusetts, its domiciliary state. The Massachusetts insurance law limits how and when the Life Company can pay shareholder dividends. The Life 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. JHFS currently does not expect such regulatory requirements to impair its ability to meet its liquidity and capital needs. However, JHFS can give no assurance it will declare or pay dividends on a regular basis.
In January and December of 2003, the Commissioner of Insurance for the Commonwealth of Massachusetts (the "Commissioner") approved dividends from the Life Company to JHFS in the amount of $214.5 million. The Life Company paid $100.0 million in cash in 2003, transferred property worth $14.5 million in August 2003 and paid the final $100.0 million in cash in January 2004. Funds from the dividends, together with the net proceeds from operations of the Company were principally used to pay $101.3 million in dividends to JHFS common shareholders. JHFS paid a dividend on its common stock of $0.35 per share on December 11, 2003 to shareholders of record as of November 18, 2003. In 2004, the Commissioner approved dividends from the Life Company to JHFS in the amount of $200.0 million which were paid in 2004. JHFS paid no dividends to its shareholders in 2004 prior to the merger with Manulife, or to Manulife after the merger. None of the dividends paid were classified as extraordinary by state regulators.
guidelines for each portfolio based upon the return objectives, risk tolerance, liquidity, and tax and regulatory requirements of the underlying products and business segments.
The Company's primary operating subsidiary is John Hancock Life Insurance Company. The risk-based capital standards for life insurance companies, as prescribed by the National Association of Insurance Commissioners, establish a risk-based capital ratio comparing adjusted surplus to required surplus for each of our United States domiciled insurance subsidiaries. If the risk-based capital ratio falls outside of acceptable ranges, regulatory action may be taken ranging from increased information requirements to mandatory control by the domiciliary insurance department. The risk-based capital ratios of all our insurance subsidiaries as of December 31, 2004, were above the ranges that would require regulatory action.
Net cash used in investing activities was $2,834.2 million, $3,649.6 million and $6,714.1 million for the years ended December 31, 2004, 2003 and 2002, 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 cash generated by operating and financing activities. Cash flows from investing activities include those from the purchase or sales of product lines and asset management such as the sale of the Home Office properties in 2003. In addition to a comprehensive asset-liability management program that seeks to align the financial and risk attributes of the Company's investment portfolio (including cash and short term investments) with those of its liability contracts, we also maintain a minimum cash balance and monitors available liquidity against estimated liquidity needs. All of this leads to a liquidity policy we think is prudent and is expected to amply support liquidity needs.
The $815.4 million decrease in cash used in 2004 as compared to 2003 resulted from a $978.7 million reduction in net acquisitions of fixed maturities and a $418.9 million reduction in net issuances of mortgage loans on real estate and a $305.2 million decrease of net acquisitions in other investment categories for the year ended December 31, 2004 as compared to the prior year, and a non-recurring $887.6 million cash inflow from the sale of Home Office properties in the first quarter of 2003. The decrease in net cash used in 2003 as compared to 2002 resulted primarily from the $887.6 million cash inflow from the sale of Home Office properties in the first quarter of 2003 and a $2,204.9 million reduction in net acquisitions of fixed maturities during the year ended December 31, 2003 as compared to prior year.
At December 31, 2004 the Company had two separate committed lines of credit totaling $1.5 billion: the first 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 "external line of credit"); the second of $1.0 billion with the Company's parent, Manulife (the "Manulife line of credit"). The external line of credit agreement provides for a multi-year facility for $500 million (renewable in 2005). The external line of credit is available for general corporate purposes. The external line of credit agreement has no material adverse change clause, and includes, among others, the following covenants: minimum requirements for JHFS shareholder's equity, maximum limit on
As of December 31, 2004, we had $2,183.2 million of principal and interest amounts of debt outstanding consisting of $528.2 million of medium-term bonds, $516.7 million of surplus notes, $354.7 million of Canadian debt, $32.5 million of other notes payable (excluding $144.1 million in non-recourse debt for Signature Fruit and an Australian farm management subsidiary), a $295.3 million note payable to MLI Resources, Inc., a related party, and $289.8 million in commercial paper. Also not included in these amounts is the $22.1 million SFAS No. 133 fair value adjustment to interest rate swaps held for the Surplus Notes. During the year ended December 31, 2004, the Company issued in aggregate $3,007.5 million in commercial paper, of which $289.8 million was outstanding at December 31, 2004. In addition, the Company has outstanding $2,379.1 million of consumer notes which are redeemable upon the death of the holder, subject to an annual overall program redemption limitation of 1% of the aggregate securities outstanding, or an individual redemption limitation of $200,000 of aggregate principal, and mature at a various dates in the future. Covenants in this program include, among others, limitations on liens. Coincident with the acquisition of the Company's shares by Manulife, the Company merged with Jupiter Merger Corporation (Jupiter), a subsidiary of Manulife, which was organized solely for the purpose of effecting the merger with the Company. Prior to the merger, Jupiter had a note payable to MLI Resources, Inc., an affiliated Manulife entity, in the amount of $260.7 and held previously purchased shares of the Company, which were cancelled upon the merger. The carrying value of this note payable (now on JHFS' balance sheet) will fluctuate with changes in the USD to CDN exchange rates and was $295.3 million at December 31, 2004. The Company paid $5.2 million to Manulife under the terms of the promissory note during the year ended December 31, 2004. These payments represent the May 2004, August 2004 and November 2004 payments due.
$50 million in letters of credit for JH Reassurance Company, guaranteed by the Company, are subject to rating triggers that require the posting of deposits (within three business days) as additional collateral if the ratings of JHFS or the Life Company fall below designated rating levels. Currently, JHFS and the Life Company's ratings are several levels away from a triggering event for the guaranteed letters of credit. Failure to make such deposit under one or more of the guaranteed letters of credit could trigger the cross-acceleration provisions in other financing agreements, including the line of credit referenced above. Certain of these guaranteed letters of credit incorporate the financial covenants from the line of credit as well as contain cross-default and cross-acceleration provisions.
The Company has the following additional guarantees outstanding with affiliates, related to market value annuity products in the Life Company and it subsidiary John Hancock Variable Life Insurance Company (see Note 20-Information Provided in Connection with Market Value Annuity of John Hancock Variable Life Insurance Company) covering contracts with account values of $376.4 million, and $354.7 million in senior unsecured notes payable issued by John Hancock Canadian Corporation, guaranteed by the Company.
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 some 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.
These relationships 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. These agreements are described in detail in Note 14 - Commitments, Guarantees and Contingencies to our consolidated financial statements.
The following table summarizes the Company's information about contractual obligations by due date and expiration date as of December 31, 2004. Contractual obligations of the Company are those obligations fixed by agreement as to dollar amount and date of payment. These obligations are inputs into the Company's asset liability management system described elsewhere in this document.
Consolidated Statements of Income for the periods April 29, 2004 through December 31, 2004 (Company) and January 1, 2004 through April 28, 2004 and the years ended December 31, 2003 and 2002 (Predecessor Company)......... 77
Consolidated Statements of Changes in Shareholder's Equity and Comprehensive Income for the periods April 29 2004 through December 31, 2004 (Company) and January 1, 2004 through April 28, 2004 and the years ended December 31, 2003 and 2002 (Predecessor Company) ........ 78
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of John Hancock Financial Services, Inc. at December 31, 2004, and the consolidated results of their operations and their cash flows for the period April 29, 2004 through December 31, 2004, and the consolidated financial position of the predecessor company at December 31, 2003 and the consolidated results of its operations and its cash flows for the period January 1, 2004 through April 28, 2004 and for the years ended December 31, 2003 and 2002, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Pursuant to the terms of the merger, 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 merger 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 merger 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 merger and these values were "pushed down" to the Company's financial statements in accordance with push down accounting rules. 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 and liabilities recorded as of April 28, 2004 (in millions):
Goodwill of $4,417.2 million has been allocated to the Company's business and geographic segments. (See Note 18-Goodwill and Other Intangible Assets). Of the $4,417.2 million in goodwill, no material amount is expected to be deductible for tax purposes. Value of business acquired is the present value of estimated future profits of insurance policies in force related to businesses acquired by Manulife, and has been allocated to the Company's business and geographic segments. (See Note 18 - Goodwill and Other Intangible Assets).
Aside from goodwill and value of business acquired, intangible assets of $1,488.9 million resulting from the acquisition consists of the JHFS brand name, distribution network, investment management contracts in the mutual funds business and other investments management contracts in the institutional investment advisory business. Refer to Note 18-- Goodwill and Other Intangible Assets for a more complete discussion of these intangible assets.
Basis of Presentation. The accompanying financial statements as of December 31, 2004 and for the period from April 29, 2004 to December 31, 2004 reflect the results of adjustments required under the purchase method of accounting. The accompanying predecessor financial statements for periods prior to the date of the merger are presented under the predecessor Company's historical basis of accounting and do not reflect any adjustments that would be required as a result of the merger with Manulife. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The Company's news releases and other information are available on the internet at www.jhancock.com. 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 Financial.
This transfer was recorded by the Company as a disposal of a business by other than sale, i.e. as a transfer of a business between entities under common control. No gain or loss was recognized in the Company's Consolidated Statements of Income on this transfer. The excess of the proceeds over the net carrying value of assts and liabilities transferred was accounted for as a capital transfer to the Company from affiliates.
Proceeds to the Company of the transfer consisted primarily of $2,185.1 of redeemable preferred stock of a subsidiary of Old Manufacturers Life, a wholly owned subsidiary of Manulife. The subsidiary of Old Manufacturers Life then redeemed its preferred shares by assigning a $2,081.3 million demand note payable bearing interest at 2.97% payable annually, maturing December 29, 2005, and a $103.9 million non-interest bearing demand note receivable, both from MLI. On December 31, 2004, the Company drew down $85.6 million on the 2.97% demand note. MFC then partially repaid the 2.97% demand note by issuing a $1,703.2 million demand note bearing interest at 3.01%, reducing the balance of the 2.97% note to $293.7 million. These three notes receivable are included in other assets on the Company's Consolidated Balance Sheets.
Net assets transferred December 29, December 31, 2004 2003 -------------------------- (in millions) Net assets.......................................... $1,994.3 $1,002.6
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.
For the mortgage-backed bond portion of the fixed maturity investment portfolio, the Company recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date plus anticipated future payments, and any resulting adjustment is included in net investment income.
Investment real estate, which the Company has the intent to hold for the production of income, is carried at depreciated cost, using the straight-line method of depreciation, less adjustments for impairments in value. In those cases where it is determined that the carrying amount of investment real estate is not recoverable, an impairment loss is recognized based on the difference between the depreciated cost and fair value of the asset. The Company reports impairment losses as part of net realized investment and other gains (losses).
Real estate to be disposed of is carried at the lower of cost or fair value less costs to sell. Any change to the valuation allowance for real estate to be disposed of is reported as a component of net realized investment and other gains (losses). The Company does not depreciate real estate to be disposed. The carrying value of real estate to be disposed of was $27.0 and $28.5 million at December 31, 2004 and 2003, respectively and is reported in real estate in the investment section of the Company's Consolidated Balance Sheet. On March 14, 2003, the Company sold three of its Home Office properties to Beacon Capital Partners for $910.0 million. See Note 9 - Sale/Leaseback Transaction and Other Lease Obligations.
Derivative Financial Instruments. The Company uses various derivative instruments to hedge and manage its exposure to changes in interest rate levels, foreign exchange rates and equity market prices, and also to manage the duration of assets and liabilities. All derivative instruments are carried on the Company's Consolidated Balance Sheet at fair value.
Deferred Policy Acquisition Costs. Deferred policy acquisition costs (DAC) are costs that vary with, and are related primarily to, the production of new insurance business and have been deferred to the extent that they are deemed recoverable. Such costs include sales commissions, certain costs of policy issuance and underwriting, and certain agency expenses. The Company tests the recoverability of its DAC quarterly with a model that uses data such as market performance, lapse rates and expense levels. As of December 31, 2004, the Company's DAC asset was deemed recoverable. Similarly, any amounts assessed as initiation fees, or front-end loads, are recorded as unearned revenue. For non-participating term life and long-term care insurance products, such costs are amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For participating traditional life insurance policies, such costs are amortized over the life of the policies at a constant rate based on the present value of the estimated gross margin amounts expected to be realized over the lives of the policies. Estimated gross margin amounts include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. For universal life insurance policies and investment-type products, such costs and unearned revenues are being amortized generally in proportion to the change in present value of expected gross profits arising principally from surrender charges, investment results and mortality and expense margins.
In the development of expected gross profits, the Company is required to estimate the growth in the policyholder account balances upon which certain asset based fees are charged. In doing so, the Company assumes that, over the long term, account balances will grow from investment performance. The rate of growth takes into account the current fixed income/equity mix of account balances as well as historical fixed income and equity investment returns. The Company also assumes that historical variances from the long-term rate of investment return will reverse over the next fifteen year period. The resulting rates for the next fifteen years are reviewed for reasonableness, and they are raised or lowered if they produce an annual growth rate that the Company believes to be unreasonable.
As of September 30, 2002, the Company changed future assumptions with respect to the expected gross profits in its variable life and variable annuity businesses. First, the long-term growth rate assumption was lowered from 9%, to 8%, gross
of fees. Second, the average growth rates were lowered for the next five years from the mid-teens to 13%. Finally, the Company increased certain fee rates on these policies (the variable series trust (VST) fees were increased). Total amortization of DAC, including the acceleration of amortization of DAC from the assumption changes mentioned above, was $170.1 million and $139.8 million for the periods from April 29, 2004 through December 31, 2004 and from January 1, 2004 through April 28, 2004, respectively, and was $334.9 million and $ 334.0 million for the years ended December 31, 2003, and 2002, respectively.
Net realized investment and other gains (losses) related to certain products have a direct impact on the amortization of DAC as such gains and losses affect the amount and timing of profit emergence. Accordingly, to the extent that such amortization results from net realized investment and other gains (losses), management believes that presenting realized investment gains and losses net of related amortization of DAC provides information useful in evaluating the operating performance of the Company. This presentation may not be comparable to presentations made by other insurers.
Assets and liabilities related to reinsurance ceded contracts are reported on a gross basis. The accompanying statements of income reflect premiums, benefits and settlement expenses net of reinsurance ceded. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. The Company remains liable to its policyholders to the extent that counterparties to reinsurance ceded contracts do not meet their contractual obligations. Refer to Note 12-Reinsurance for additional disclosures regarding this topic.
Goodwill and Other Intangible Assets. In the merger with Manulife, the Company de-recognized its intangible assets including goodwill, value of business acquired (VOBA) and management contracts. Also, in the merger, the Company recognized new non-amortizable intangible assets including goodwill, brand name and investment management contracts, and recognized new amortizable intangible assets including VOBA, distribution networks and other investment management contracts. The Company accounts for all of these intangible assets in accordance with Statement of Financial Standards No. 142 -- Goodwill and Other Intangible Assets, including initial valuation, amortization or non-amortization, and impairment testing for these intangible assets. Refer to Note 18 -- Goodwill and Other Intangible Assets for a detailed discussion and presentation of each of these new intangible assets.
Future Policy Benefits and Policyholders' Funds. Future policy benefits for participating traditional life insurance policies are based on the net level premium method. This net level premium reserve is calculated using the guaranteed mortality and dividend fund interest rates, which range from 2.5% to 5.5%. The liability for annual dividends represents the accrual of annual dividends earned. Settlement dividends are accrued in proportion to gross margins over the life of the policies.
Policyholders' funds for universal life and investment-type products, including guaranteed investment contracts and funding agreements, are equal to the total of the policyholder account values before surrender charges, additional reserves established to adjust for lower market interest rates as of the merger date, and additional reserves established on certain guarantees offered in certain variable annuity products. Policyholder account values include deposits plus credited interest or change in investment value less expense and mortality fees, as applicable, and withdrawals. Policy benefits that are charged to expense and include benefit claims incurred in the period in excess of related policy account balances and interest credited to policyholders' account balances. Interest crediting rates range from 3.0% to 8.0% for universal life insurance products and from 1.7% to 11.3% for investment type products. Policy benefits charged to expense also include the change in the additional reserve for fair value adjustments as of the merger date and certain guarantees offered in certain investment type products.
These global funding agreements and annuities are investment products that pay a stated rate of interest on the principal amount and repay the principal at maturity. The global funding agreements may not be terminated or surrendered prior to maturity. Claims for principal and interest under the global funding agreements (which are issued by the Life Company) are afforded equal priority to claims of life insurance and annuity policyholders under the insolvency provisions of the Massachusetts Insurance Laws. Claims under the institutional annuities (which were issued by Maritime Life) are afforded equal priority to the claims of policyholders under the provisions of Canada's Winding-Up and Restructuring Act. If a medium-term note sold world-wide under the first two programs is denominated in a currency different from the currency of the related global funding agreement or annuity, the Company's U.S. insurance subsidiary also enters into a currency swap with the SPE, and a third party, to match currencies. Similarly, the Company's U.S. insurance subsidiary may enter into an interest rate swap with the SPE to match the interest rate characteristics of the global funding agreement to those of the related medium-term note. All medium-term notes issued under third program in Canada were denominated in Canadian dollars, as were the institutional annuities. Maritime entered into currency swaps with third parties to hedge currency risk of the annuity payments.
Under the second program, established in June 2000, for $5.0 billion, expanded in stages to $12.5 billion by June 2003, an SPE issued medium-term notes in Europe, Asia, and to institutional investors in the United States. As of December 31, 2004 and 2003, there was $8.5 billion and $8.7 billion, respectively, outstanding under this program. This SPE is not consolidated in the Company's Consolidated Financial Statements.
Under the third program, established in December 2001, for $1.0 billion (Cdn $1.5 billion), an SPE issued medium-term notes to investors in Canada. As of December 31, 2003, there was $0.4 billion (Cdn $0.5 billion) outstanding under this program. This SPE was not consolidated in the Company's Consolidated Financial Statements before its transfer to MLI.
At December 31, 2004, the annual contractual maturities of global funding agreements backing medium term notes issued under these programs were as follows: 2005--$2,547.0 million; 2006--$2,884.5 million; 2007--$861.6 million; 2008-- $1,488.2 million, 2009 -- $1,753.9 and thereafter--$1,741.0 million.
The determination of the amount of policyholders' dividends is complex and varies by policy type. In general, the aggregate amount of policyholders' dividends is related to actual interest, mortality, morbidity, persistency and expense experience for the year, and is based on management's judgment as to the appropriate level of statutory surplus to be retained by the Life Company. For policies included in the closed block, expense experience is not included in determining policyholders' dividends.
Investment advisory, transfer agent, distribution and service fees are recognized as revenues when services are performed. Commissions related to security transactions and related expenses are recognized as income on the trade date. Contingent deferred selling charge commissions are recognized as income in the year received. Selling commissions paid to the selling broker/dealer for sales of mutual funds that do not have a front-end sales charge are deferred and amortized on a straight-line basis over periods not exceeding six years. This is the approximate period of time expected to be benefited and during which fees earned pursuant to Rule 12b-1 distribution plans are received from the funds and contingent deferred sales charges are received from shareholders of the funds.
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 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to all stock-based employee compensation.
Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because the Company adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS No 123 will be recognized under Statement No. 123(R). However, had we adopted SFAS No.123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described above in the disclosure of pro forma net income and earnings per share in Note 2 - Significant Accounting Policies to our consolidated financial statements.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend upon, among other things, when employees exercise stock options), the amount of operating cash flows recognized for such excess tax deductions were $- million, $4.3 million, and $5.0 million in 2004, 2003 and 2002, respectively.
FASB Staff Position 106-2 - Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
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 re-measurement date (April 28, 2004) and a $1.6 million decrease in net periodic postretirement benefit costs for the period April 29, 2004 through December 31, 2004.
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) collateralized 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 had no impact on the Company's consolidated financial position, results of operations or cash flows.
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.
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. It requires that certain financial instruments be classified as liabilities on issuer balance sheets, including those instruments that are issued in shares and are mandatorily redeemable, those instruments that are not issued in shares but give the issuer an obligation to repurchase previously issued equity shares, and certain financial instruments that give the issuer the option of settling an obligation by issuing more equity shares. The adoption of SFAS No. 150 had no impact on the Company's consolidated financial position, results of operations or cash flows.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45--"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" and amends certain other existing pronouncements. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 had no impact on the Company's consolidated financial position, results of operations or cash flows.
On October 1, 2003, the Company adopted DIG B36 and determined that certain of its reinsurance contracts and participating pension contracts contain embedded derivatives. In accordance with DIG B36, the Company bifurcated each of the contracts into its debt host and embedded derivative (total return swap) and recorded the embedded derivative at fair value on the balance sheet with changes in fair value recorded in income. In the case of the Company, DIG B36 results in the establishment of derivative liabilities based on the fair value of all the underlying assets of the respective contracts, including both the assets recorded at amortized cost and the assets recorded at fair value on the balance sheet. With respect to the underlying assets held at amortized cost, current guidance does not permit adjustments to record the fair value of all of these assets. However, the Company's implementation of DIG B36 required embedded derivatives based on the fair value of those assets to be recorded in income. The Company recorded derivative liabilities aggregating $255.7 million based on the fair value of the assets underlying these contracts. Of this total liability, $95.1 million related to assets held at amortized cost without any adjustment recorded to recognize the change in the fair value of the asset. Prior to the adoption of DIG B36, the Company had established, through other comprehensive income, a reserve for its participating pension contracts to recognize the impact on contractholder liabilities of the realization of unrealized gains on assets backing those contracts. With the adoption of DIG B36, this reserve is no longer required and is replaced by the recognition of the fair value of the embedded derivative in income. The adoption of DIG B36 resulted in a decrease in shareholder's equity of $66.3 million (net of tax of $35.7 million). The Company recorded a reduction in net income of $166.2 million (net of tax of $89.5 million) partially offset by an increase in other comprehensive income of $99.9 million (net of tax of $53.8 million) which were recorded as the cumulative effects of an accounting change.
FASB Interpretation No. 45--Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires recognition of a liability for exit or disposal costs, including restructuring costs, when the liability is incurred rather than at the date of an entity's commitment to a formal plan of action. SFAS No. 146 applies to one-time termination benefits provided to current employees that are involuntarily terminated under the terms of a one-time benefit arrangement. An ongoing benefit arrangement is presumed to exist if a company has a past practice of providing similar benefits. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 had no impact on the Company's consolidated financial position, results of operations or cash flows.
The following information summarizes the components of net investment income and net realized investment and other gains (losses) (in millions):
Amortized Cost Fair Value ------------------------------- (in millions) Available-for-Sale: Due in one year or less.......................... $ 2,395.7 $ 2,402.4 Due after one year through five years............ 10,968.7 11,084.1 Due after five years through ten years........... 14,191.4 14,512.0 Due after ten years.............................. 10,128.6 10,433.3 Mortgage-backed securities....................... 9,977.6 10,059.2 ------------------------------- Total...................................... $ 47,662.0 $ 48,491.0 ===============================
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 amortized cost. The results of this analysis are reviewed by the Credit Committee at Manulife. This committee includes Manulife's Chief Financial Officer, Chief Investment Officer, Chief Risk Officer, Chief Credit Officer and other senior management. This quarterly process includes a fresh assessment of the credit quality of each investment in the entire fixed maturities portfolio.
The aging of unrealized losses above reflects the mark to market of the portfolio on April 28, 2004. Gross unrealized losses above include unrealized losses from hedging adjustments. 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 over 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.
At December 31, 2004 and 2003, the total recorded investment in mortgage loans that are considered to be impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," along with the related provision for losses were as follows:
Years Ended December 31, 2004 2003 2002 ----------------------- (in millions) Average recorded investment in impaired loans....... $145.5 $ 94.3 $83.2 Interest income recognized on impaired loans........ 7.3 3.4 5.0
At December 31, 2004, the mortgage portfolio was diversified by geographic region and specific collateral property type as displayed below:
Mortgage loans with outstanding principal balances of $127.0 million, and bonds with amortized cost of $164.0 million were non-income producing for the year ended December 31, 2004. There was no non-income producing real estate for the year ended December 31, 2004.
Investments in other assets, which include unconsolidated joint ventures, partnerships, and limited liability corporations, accounted for using the equity method of accounting totaled $2,488.6 million and $2,003.9 million at December 31, 2004 and 2003, respectively. Total combined assets of such investments were $15,539.3 million and $15,800.4 million (consisting primarily of investments), and total combined liabilities were $3,557.4 million and $2,146.6 million (including $1,386.8 million and $1,216.3 million of debt) at December 31, 2004 and 2003, respectively. Total combined revenues and expenses of these investments in 2004 were $1,416.7 million and $773.5 million, respectively, resulting in $643.2 million of total combined income from operations. Total combined revenues and expenses in 2003 were $1,305.1 million and $1,054.3 million, respectively, resulting in $250.8 million of total combined income from operations. Total combined revenues and expenses in 2002 were $1,002.9 million and $1,212.3 million, respectively, resulting in $209.3 million of total combined loss from operations. Depending on the timing of receipt of audited financial statements of these other assets, the above financial data may be up to one year in arrears. Net investment income on investments accounted for using the equity method of accounting totaled $124.1 million for the period from April 28, 2004 through December 31, 2004 and $74.3 million for the period from January 1, 2004 through April 28, 2004. Net investment income on investments accounted for using the equity method of accounting totaled $140.9 million and $66.8 million in 2003 and 2002, respectively.
As explained in Note 2--Summary of Significant Accounting Policies, 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.
(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.
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.
(1) Equity investment in the Properties above is reported with three month delays due to the delayed availability of financial statements of the Funds.
For the year ended December 31, 2004, none of the Company's cash flow hedges were discontinued because it was probable that the original forecasted transactions would not occur by the end of the originally specified time period documented at inception of the hedging relationship.
For the period January 1, 2004 through April 28, 2004, losses of $40.7 million (net of tax of $21.8 million) representing the effective portion of the change in fair value of derivative instruments designated as cash flow hedges were added to accumulated other comprehensive income, resulting in a balance of $182.6 million (net of tax of $99.6 million) respectively. For the period April 29, 2004 through December 31, 2004, gains of $225.1 million (net of tax of $100.6 million) representing the effective portion of the change in fair value of derivative instruments designated as cash flow hedges were added to accumulated other comprehensive income, resulting in a balance of $225.1 million (net of tax of $100.6 million) at December 31, 2004. For the year ended December 31, 2003 gains of $28.7 million, net of tax of $15.5 million, representing the effective portion of the change in fair value of derivative instruments designated as cash flow hedges were added to accumulated other comprehensive income, resulting in balances of $223.3 million, net of tax of $120.3 million.
The Company files a life/non-life insurance company consolidated Federal income tax return. The life insurance company sub-group includes three domestic life insurance companies (John Hancock Life Insurance Company, (the Life Company), John Hancock Variable Life Insurance Company and Manulife Insurance Company , (formerly Investors Partner Life Insurance Company) and a Bermuda life insurance company (John Hancock Reassurance Company, Ltd.) that is treated as a U.S. company for Federal income tax purposes. The non-life insurance company subgroup consists of John Hancock Financial Services, Inc., John Hancock Subsidiaries, LLC and John Hancock International Holdings, Inc.
April 29 January 1 through through December 31, April 28, 2004 2004 2003 2002 -------------------------------------------- (in millions) Tax at 35%....................... $180.8 $134.4 $404.4 $186.1 Add (deduct): Prior year taxes................. 16.1 2.3 4.7 (6.6) Tax credits...................... (37.9) (18.6) (50.2) (36.4) Foreign taxes.................... 1.3 -- 1.4 2.0 Tax exempt investment income..... (7.3) (4.2) (20.7) (35.6) Lease income..................... (24.5) (2.4) (9.7) (25.5) Other............................ 7.4 3.6 (13.2) 6.6 -------------------------------------------- Total income taxes......... $135.9 $115.1 $316.7 $90.6 ============================================
December 31, 2004 2003 ------------------------ (in millions) Deferred tax assets: Policy reserve adjustments .......................... $1,008.9 $ 562.9 Dividends payable to policyholders .................. 253.0 99.6 Interest ............................................ 56.6 40.2 Other employee benefits ............................. 176.9 174.9 GAAP basis in excess of tax basis of investments .... 519.2 217.7 Unearned premium .................................... 5.8 275.8 Deferred policy acquisition costs ................... 140.6 -- Pension plan expense ................................ 57.7 -- Other ............................................... 10.1 238.0 ------------------------ Total deferred tax assets ..................... 2,228.8 1,609.1 Deferred tax liabilities: Deferred policy acquisition costs ................... -- 1,237.2 Pension plan expense ................................ -- 49.1 Depreciation ........................................ 33.7 68.5 Basis in partnerships ............................... 108.9 72.6 Market discount on bonds ............................ 147.9 20.0 Lease income ........................................ 71.5 1,041.4 Value of business acquired .......................... 1,217.0 34.5 Unrealized gains .................................... 221.4 826.7 Merger expenses ..................................... 209.9 -- ------------------------ Total deferred tax liabilities ................ 2,010.3 3,350.0 ------------------------ Net deferred tax assets (liabilities) ......... $ 218.5 $(1,740.9) ========================
The principal cash flow items that affect the amount of closed block assets and liabilities are premiums, net investment income, purchases and sales of investments, policyholders' benefits, policyholder dividends, premium taxes, guaranty fund assessments, and income taxes. The principal income and expense items excluded from the closed block are management and maintenance expenses, commissions and net investment income and realized investment gains and losses of investment assets outside the closed block that support the closed block business, all of which enter into the determination of total gross margins of closed block policies for the purpose of the amortization of deferred acquisition costs. The amounts shown in the following tables for assets, liabilities, revenues and expenses of the closed block are those that enter into the determination of amounts that are to be paid to policyholders.
- -------------- (1) As part of its interest rate management, the Company uses interest rate swaps to convert the interest expense on the Surplus Notes from fixed to variable. Under SFAS No. 133, these swaps are designated as fair value hedges, which results in the carrying value of the notes being adjusted for changes in fair value.
The Company issues commercial paper primarily to meet working capital needs. The Company had commercial paper with a book value of $289.8 million and a face value of $290.0 million outstanding at December 31, 2004. The weighted-average interest rate for outstanding commercial paper at December 31, 2004 was 2.41%. The weighted-average life for outstanding commercial paper at December 31, 2004 was approximately 13 days. Commercial paper borrowing arrangements are supported by a syndicated line of credit. The Company had commercial paper with a book value of $381.3 million and a face value of $382.0 million outstanding at December 31, 2003. The weighted-average interest rate for outstanding commercial paper at December 31, 2003 was 1.18%. The weighted-average life for outstanding commercial paper at December 31, 2003 was approximately 33 days.
made pursuant to a $1.0 billion effective shelf registration statement, the remaining capacity of the shelf registration is $500.0 million at December 31, 2004. The notes payable consists of debt issued by various operating subsidiaries of the Company of which $327.4 million was outstanding at December 31, 2004 at John Hancock Canadian Corporation, a subsidiary of the Company, and is fully guaranteed by the Company. The note payable is a $260.7 million promissory note payable to a subsidiary of Manulife, which matures February 10, 2007, and bears interest at a rate of 0.25% over the 90-day Canadian Bankers Acceptance Rate, and is payable quarterly.
At December 31, 2004 the Company had two separate committed lines of credit: one 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 "external line of credit"); the second of $1.0 billion with the Company's parent, Manulife (the "Manulife line of credit"). The external line of credit agreement provides for a multi-year facility for $500 million (renewable in 2005). The external line of credit is available for general corporate purposes. The external line of credit agreement has no material adverse change clause, and includes, among others, the following covenants: minimum requirements for JHFS shareholder's equity, maximum limit on the capitalization ratio and a negative pledge clause (with exceptions) as well as limitations on subsidiary debt, none of which were triggered as of December 31, 2004. The external line of credit also contains cross-acceleration provisions, none of which were triggered as of December 31, 2004. The fee structure of the external line of credit is determined by the rating levels of JHFS or the Life Company. To date, the Company has not borrowed any amounts under the external lines of credit as of December 31, 2004.
Consumer Notes. The Life Company issues consumer notes through its SignatureNotes program. SignatureNotes is an investment product sold through a broker-dealer network to retail customers in the form of publicly traded fixed and/or floating rate securities. SignatureNotes are issued weekly with a variety of maturities, interest rates, and call provisions. SignatureNotes may be redeemed upon the death of the holder, subject to an annual overall program redemption limitation of 1% of the aggregate securities outstanding, or $1,000,000, or an individual redemption limitation of $200,000 of aggregate principal.
Aggregate maturities of consumer notes are as follows: 2005--$22.1 million; 2006--$80.5 million; 2007--$144.0 million; 2008--$106.3 million; 2009--$38.2 million; and thereafter--$1,977.5 million.
The future minimum lease payments payable by year and in the aggregate, under the capital lease and under non-cancelable operating leases are presented below:
To effect the efficiencies of the merger with Manulife, the Company has an arrangement with Manulife to share the cost of certain corporate services including, among others, personnel, property facilities, catastrophic reinsurance coverage, and directors' and officers insurance. In addition, synergies of sales agents are being found whereby the Company has an arrangement for the compensation of its sales agents for cross-selling products of Manulife affiliates. Operational efficiencies identified in the merger are subject to a service agreement between the Company's primary operating subsidiary, John Hancock Life Insurance Company (the Life Company), and its affiliate Manulife U.S.A., a U.S.-based life insurance subsidiary of Manulife, whereby the Company is obligated to provide certain services in support of Manulife U.S.A's business. Further, under the service agreement Manulife U.S.A. is obligated to provide compensation to the Company for services provided. Through December 31, 2004, there had not been a material level of business transacted under the service agreement and no material receivable is owed to the Company at period end.
There are two Service Agreements, both effective as of April 28, 2004, between the Life Company and The Manufacturers Life Insurance Company (U.S.A.) which on January 1, 2005 changed its name to John Hancock Life insurance Company (U.S.A.) ("John Hancock USA"). Under the one agreement the Life Company provides services to John Hancock USA, and under the other John Hancock USA provides services to the Life Company. In both cases the Provider of the services can also employ a "Provider Affiliate" to provide services. In the case of the service agreement where the Life Company provides services to John Hancock USA, a "Provider Affiliate" means JHFS and its direct and indirect subsidiaries, except for John Hancock USA. As of December 31, 2004, the Company has an accrued payable of $9.8 million for these service agreements. John Hancock USA paid $15.3 million and Manulife New York paid $0.9 million to Signator for Commissions on Manulife product sales.
Prior to its merger with Manulife, the Company reinsured certain portions of its closed block with Manulife. During the fourth quarter of 2004, the Life Company entered into an additional agreement covering closed block policies with a Manulife affiliate. The Company entered into these reinsurance contracts in order to facilitate its statutory capital management process. Both the original and the revised 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 consolidated statements of income. The Company's Consolidated Financial Statements do not report reinsurance ceded premiums or reinsurance recoverable. The Company's Consolidated Financial Statements report a risk fee that was paid to the Manulife reinsurance companies for year 2004. This appears in other operating costs and expenses in the Consolidated Statements of Income and was $1.5 million for the period the Company operated as a subsidiary of Manulife, April 29, 2004 through December 31, 2004.
Manulife has a liquidity pool in which a subsidiary of the Company has invested its excess cash. The resulting economies of scale allow Manulife to earn a spread over the amount it pays the subsidiary and allows the Company's subsidiary to earn improved returns on its excess cash. At December 31, 2004 the balance outstanding was $17.5 million and is included in other assets on the Company's Consolidated Balance Sheets. No such arrangement existed at December 31, 2003.
Pursuant to Manulife's rationalization of its worldwide business operations along geographic lines, the Company's non-USA operations were or will be transferred to Manulife's previously existing subsidiaries in each region of the world. The transfers below were recorded by the Company as disposals of businesses by other than sale, i.e. as disposals of business between entities under common control. No gains or losses were recorded on these transfers. The differences between the proceeds and the net carrying values of assets and liabilities transferred was accounted for as capital transfers between the Company and the respective Manulife subsidiary.
Subsequent to the merger with Manulife the Company transferred John Hancock International Holdings' (JHIH) operations in Singapore, the Philippines, Thailand and its Asian regional office to Manulife subsidiaries in corresponding nations and locations. Proceeds to the Company of these transfers were in the form of cash.
Net assets transferred................................. $ 2,090.4 Proceeds received...................................... 2,154.5 -------------- Capital transferred.................................... $ 64.1 ==============
On December 31, 2004, the Company had $2,100.8 million in notes receivable from affiliates. These notes were received pursuant to the transfer of Maritime Life to MLI. The first note receivable, payable by MFC, in the amount of $1,703.2 million bears interest at 3.01%. The second note receivable, payable by MLI, in the amount of $293.7 million bears interest at 2.97%. The notes receivable from MFC and MLI are due on December 29, 2005, but may be extended one year by the borrower. The third note receivable, payable by MLI, in the amount of $103.9 million is a non-interest bearing demand note. These notes receivable are included in other assets on the Company's Consolidated Balance Sheets.
Maritime Life's Series A Cumulative Redeemable Preferred Stock and Series 1, Non-Cumulative Redeemable Second Preferred Shares were redeemed in the transfer of the Company's Canada Segment to MLI and therefore were not part of the Company's minority interests at December 31, 2004. Maritime Life's Non-Cumulative Redeemable Second Preferred Shares, Series 3 (Series 3 Preferred Shares) was partially redeemed in the transfer of the Company's Canada Segment to MLI; seventy-five percent, or $46.4 million, of this issue remains in the Company's minority interests, or at December 31, 2004.
Maritime's Life's Series 3 Preferred Shares was issued on December 13, 2002 as non cumulative redeemable preferred shares at a price of Cdn. $25 per share. Dividends on the Series 3 Preferred Shares are payable quarterly, through December 31, 2007, at a rate of Cdn. $0.38125 per preferred share, or 6.1% per annum. The Series 3 Preferred Shares are nonvoting and redeemable at Maritime Life's sole option any time on or after December 31, 2007 at Cdn. $26 per preferred share, on or after December 31, 2008 at Cdn. $25.75 per preferred share, on or after December 31, 2009 at Cdn. $25.50 per preferred
The effect of reinsurance on life, health and annuity premiums written and earned was as follows:
In addition to the Company defined benefit pension plans, the Company has employee welfare plans for medical and life insurance covering most of its retired employees and general agency personnel. Substantially all employees may become eligible for these benefits if they reach certain age and service requirements while employed by the Company. The postretirement health care coverages are contributory based for post January 1, 1992 non-union retirees. A small portion of pre-January 1, 1992 non-union retirees also contribute. The applicable contributions are based on the number of years of service. Dental insurance is provided to eligible pre-January 1, 1992 retired employees.
The accumulated benefit obligations for all defined benefit pension plans was $2,126.2 million and $2,181.3 million at December 31, 2004 and 2003, respectively and is included in other liabilities on the Company's Consolidated Balance Sheets.
Years Ended December 31, ---------------------------- 2004 2003 ---------------------------- (in millions) Projected benefit obligation..................... $376.5 $391.2 Accumulated benefit obligation................... 355.3 367.5 Fair value of plan assets........................ 4.3 38.3
The Company generally determines the assumed long-term rate of return on plan assets based on the rate expected to be earned for plan assets. The asset mix based on the long-term investment policy and range of target allocation percentages of the plans, and the Capital Asset Pricing Model are used as part of that determination. Current conditions and published commentary/guidance from United States Securities and Exchange Commission staff suggestions are also considered.
Note 13 -- Pension Benefit Plans and Other Postretirement Benefit Plans - (continued)
Assumed health care cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
Pension Plan Assets at December 31, ---------------------------- 2004 2003 ---------------------------- Asset Category: Equity securities................................ 65% 69% Fixed maturity securities....................... 25 24 Real estate...................................... 2 2 Other............................................ 8 5 ------------- ------------ Total................................... 100% 100% ============= ============
The target allocations for assets of the Company's pension plans is summarized below for major asset categories. Asset Category:
Equity securities........................................... 50% - 80% Fixed maturity securities.................................. 25% - 35% Real estate................................................. 1% - 5% Other....................................................... -% - 15%
Other Postretirement Benefits Plan Assets at December 31, -------------------- 2004 2003 -------------------- Asset Category: Equity securities.................................... 61% 61% Fixed maturity securities............................ 39 38 Real estate.......................................... -- -- Other................................................ -- 1 -------------------- Total....................................... 100% 100% ====================
Contributions. The Company's funding policy for its qualified defined benefit plans is to contribute annually an amount at least equal to the minimum annual contribution required under the Employee Retirement Income Security Act (ERISA) and other applicable laws, and, generally, not greater than the maximum amount that can be deducted for Federal income tax purposes. In 2004, $2.3 million was contributed to these qualified plans and no contributions were made in 2003. The entire $2.3 million was contributed to only one plan to ensure that the plan's assets continued to exceed the plan's Accumulated Benefit Obligation. Funding policy for the Company's non-qualified defined benefit plans is to contribute the amount of the benefit payments made during the year. In 2004 and 2003, $51.6 million and $14.5 million, respectively, were contributed to three non-qualified plans. In 2005, the Company expects to contribute approximately $4.7 million to its qualified pension plans and approximately $64.3 million to its non-qualified pension plans.
Year Total Qualified Total Non-Qualified Total --------------------------------------------------------------------- (in millions) 2005 $ 146.8 $ 64.3 $ 211.1 2006 134.8 22.0 156.8 2007 135.8 23.1 158.9 2008 135.7 23.5 159.2 2009 136.6 22.4 159.0 2010-2014 707.9 108.7 816.6
The information that follows shows supplemental information for the Company's defined benefit pension plans. Certain key summary data is shown separately for qualified plans and non-qualified plans.
Guarantees. In the course of business the Company enters into guarantees which vary in nature and purpose and which are accounted for and disclosed under accounting principles generally accepted in the U.S. specific to the insurance industry. The Company has no material guarantees outstanding outside the scope of insurance accounting at December 31, 2004.
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 and wealth management products, as well as an investment adviser, employer and taxpayer. In addition, state regulatory bodies, state attorneys general, the United States Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and other government and regulatory bodies regularly make inquiries and, from time to time, require the production of information or 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 the financial services industry, we have been requested or required by such government and regulatory authorities to provide information with respect to market timing and late trading of mutual funds and sales compensation and broker-dealer practices, including 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 sales compensation and broker-dealer practices. We intend to continue to cooperate fully with government and regulatory authorities in connection with their respective inquiries. We do not believe that the conclusion of any current legal or regulatory matters, either individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
Net unrealized investment gains (losses), included in the Company's Consolidated Balance Sheets as a component of shareholder's equity, are summarized as follows:
(C) Statutory Results. The Life Company and its domestic insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the state of domicile. For the Life Company, the Commonwealth of Massachusetts only recognizes statutory accounting practices prescribed or permitted by Massachusetts insurance regulations and laws. The National Association of Insurance Commissioners' "Accounting Practices and Procedures" manual (NAIC SAP) has been adopted as a component of prescribed or permitted practices by Massachusetts. The Commissioner of Insurance has the right to permit other specific practices that deviate from prescribed practices, otherwise known as permitted practices.
From time to time the Company has requested permission from the Commonwealth of Massachusetts Division of Insurance (the Division) for a permitted accounting practice. The Company currently has one permitted practices which relate to an admitted asset for an after-tax ceding commission in the acquisition of the fixed universal life insurance business of Allmerica Financial.
On December 31, 2002, the Company entered into indemnity coinsurance agreements, under which it assumed 100% of the liabilities for the fixed universal life insurance blocks of Allmerica Financial Life Insurance and Annuity Company and First Allmerica Financial Life Insurance Company. The Division provided the Company approval to record the after-tax ceding commission of $37.8 million, $51.1 million and $60.5 million on the purchase as goodwill at December 31, 2004, 2003 and 2002, respectively. This amount will be amortized over a ten year period. The impact on statutory net income was an amortization expense of $12.4 million and $9.3 million in 2004 and 2003, respectively. There was no amortization expense in 2002. As a result of this permitted practice, the Company's reported capital and surplus for the 2004, 2003 and 2002 reporting periods was increased by $37.8 million, $51.1 million and $60.5 million, respectively.
Statutory net income and surplus in the table below include the accounts of the John Hancock Life Insurance Company.
2004 2003 2002 -------------------------------- (in millions) Statutory net income......................... $ 481.9 $ 441.7 $ 210.4 Statutory capital and surplus................ 4,084.5 3,789.9 3,524.1
Prior to the merger, the Company operated in the following six business segments: two segments served primarily domestic retail customers, two segments served primarily domestic institutional customers, one segment served primarily Canadian retail and group customers and our sixth segment was the Corporate and Other Segment, which included our remaining international operations, the corporate account and run-off from several discontinued business lines. Our retail segments were the Protection Segment and the Asset Gathering Segment. Our institutional segments were the Guaranteed and Structured Financial Products (G&SFP) Segment and the Investment Management Segment. Our Canada Segment, previously the Maritime Life Segment, consisted primarily of the financial results of our former Canadian operating subsidiary, Maritime Life. For additional information about the Company's pre-acquisition business segments, please refer to the Company's 2003 Form 10-K.
Corporate and Other Segment. Primarily consists of the Company's remaining international insurance operations, certain corporate operations, the institutional investment management business and businesses that are either disposed or in run-off. Corporate operations primarily include certain financing activities, income on capital not specifically allocated to the reporting segments and certain non-recurring expenses not allocated to the segments. The disposed businesses primarily consist of group health insurance and related group life insurance, property and casualty insurance and selected broker/dealer operations.
The accounting policies of the segments are the same as those described in Note 2 - Summary of Significant Accounting Policies. Allocations of net investment income are based on the amount of assets allocated to each segment. Other costs and operating expenses are allocated to each segment based on a review of the nature of such costs, cost allocations utilizing time studies, and other relevant allocation methodologies.
The Company operates primarily in the United States, and until December 29 2004, in Canada and the Pacific Rim (including China, Indonesia, Malaysia, the Philippines, Singapore, and Thailand). The following table summarizes selected financial information by geographic location for the year ended or at December 31:
Methods and assumptions used by the Company to determine the fair values of financial instruments included the following:
For fixed maturity securities, (including redeemable preferred stocks) fair values are obtained from external pricing services 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. 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 Credit Chief 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 amortized cost. The results of this analysis are reviewed by the Credit Committee at Manulife. This committee includes Manulife's Chief Financial Officer, Chief Investment Officer, Chief Risk Officer, Chief Credit Officer and other senior management. This quarterly process includes a fresh assessment of the credit quality of each investment in the entire fixed maturities portfolio.
The fair value for mortgage loans on real estate is estimated using discounted cash flow analyses using interest rates adjusted to reflect the credit characteristics of the loans. Mortgage loans with similar characteristics and credit risks are aggregated into qualitative categories for purposes of the fair value calculations. Fair values for impaired mortgage loans are measured based either on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral for loans that are collateral dependent.
The Company's derivatives include futures contracts, interest rate swap, cap and floor agreements, swaptions, currency rate swap agreements and equity collar agreements. Fair values for these contracts are based on current settlement values. These values are based on quoted market prices for the financial futures contracts and brokerage quotes that utilize pricing models or formulas using current assumptions for all swaps and other agreements.
The following tables set forth certain summarized financial information relating to the Company's intangible assets as of the dates and periods indicated.
The following tables present the continuity of each of the Company's unamortizable and amortizable intangible assets for the periods presented.
(1) Goodwill derecognized in the purchase transaction with Manulife. (2) Goodwill recognized in the purchase transaction with Manulife. JHFS's Canada segment was transferred to MLI in 2004. (3) Also, certain Asian operations, included in Corporate and Other, were transferred to Manulife's Asian subsidiaries in 2004.
(1) JHFS's Canada segment was transferred to MLI in 2004. Other adjustments include $57.1 million goodwill recognized in Canada segment's acquisition of Liberty Health, and $33.3 foreign currency translation adjustment.
(1) Investment management contracts derecognized in the purchase transaction with Manulife. (2) Investment management contracts recognized in the purchase transaction with Manulife.
(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.
(1) Other investment management contracts recognized in the purchase transaction with Manulife. (2) JHFS's Canada segment was transferred to MLI in 2004. For these discontinued operations, the amortization expense for the period was $ (4.5) million, and the foreign currency translation adjustment was $ 10.4 million.
(1) VOBA derecognized in the purchase transaction with Manulife. (2) VOBA recognized in the purchase transaction with Manulife. (3) JHFS's Canada segment was transferred to MLI in the fourth quarter of 2004. For these discontinued operations, the amortization expense was $(23.3) million for the period, and the foreign currency translation adjustment was $104.0 million. (4) JHFS' Singapore insurance operations (JH Singapore), included in Corporate and Other, were transferred to Manulife Singapore in 2004. The amortization expense related with these discontinued operations was $(0.2) million for the period.
(1) An adjustment of $4.2 million was made to previously recorded VOBA relating to the acquisition of the fixed universal life insurance business of Allmerica, to reflect refinements in methods and assumptions implemented upon finalization of transition. (2) Other adjustments to the Canadian segment included $8.3 million amortization expense for the period, $25.4 million VOBA recognized in its acquisition of Liberty Health, $(9.3) million adjustment to unrealized gains on securities available for sale, and foreign currency translation adjustment of $55.7 million.
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 Statements of Income. Separate account net investment income, net investment gains and losses, and the related liability changes are offset within the same line items in the Company's Statements of Income.
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.
In 2004, the Company transferred its Canada segment to MLI. Therefore the Canada segment's separate account assets and various guarantees are not included in the Company's 2004 year end balances, but included in the Company's 2003 year end balances.
At December 31, 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 assumed to be zero and the policy is still in force.
o Data used included 200 and 1,000 (for annuity and life contracts, respectively) stochastically generated investment performance scenarios.
o Volatility assumptions depended on mix of investments by contract type and ranged between 13.8% (life products) and 19% (annuity products).
o Annuity lapse rates vary by contract type and duration and range from 1% to 20%.
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. The guaranteed minimum accumulation benefit (GMAB) liability is determined each period end by calculating the highest investment value occurring ten or more years prior to each contract's maturity, applying the guaranteed rates of 75% or 100% depending upon the type of contract and adjusting the results proportionately for any new deposits or withdrawals within the final ten years to maturity.
John Hancock Variable Life Insurance Company (the Variable Company) is a wholly-owned subsidiary of JHFS. The Variable Company sells deferred annuity contracts, which are registered products with the Commission and which feature a market value adjustment. As of December 31, 2004, JHFS provides a full and unconditional guarantee of the Variable Company's obligation to pay amounts due to contractholders on surrender, withdrawal or annuitization of the Variable Company's deferred annuity contracts' market value adjustment interest. In addition, JHFS guarantees all Variable Company's future issues of deferred annuity contracts with market value adjustments.
Note 20 -- Information Provided in Connection with Market Value Annuity of John Hancock Variable Life Insurance Company - (continued)