The following selected historical consolidated financial data should be read in conjunction with other information including our Consolidated Financial Statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations", included elsewhere in this form 10-K.
We evaluate segment performance and base management's incentives on segment after-tax operating income, which excludes the effect of net realized investment gains and losses and unusual or non-recurring events and transactions. Segment after-tax operating income is determined by adjusting GAAP net income for net realized investment gains and losses, extraordinary items, and certain other items which we believe are not indicative of overall operating trends. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of segment after-tax operating income enhances the understanding of our results of operations by highlighting net income attributable to the normal, recurring operations of the business. However, segment after-tax operating income and total segment income are not a substitute for net income determined in accordance with GAAP.
(1) Prior to 1996, we prepared our financial statements in conformity with accounting practices prescribed or permitted by the Massachusetts Division of Insurance which accounting practices were considered to be GAAP for mutual life insurance companies. As of January 1, 1996, we adopted Financial Accounting Standards Board "FASB" Interpretation No. 40, Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises and Statement of Financial Accounting Standards ("SFAS") No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long Duration Participating Policies. Interpretation No. 40 and SFAS No. 120 require mutual life insurance companies to adopt all applicable authoritative GAAP pronouncements in their general purpose financial statements. Accordingly, the financial information presented in the Selected Financial Data for periods prior to 1996 has been derived from our financial information which has been retroactively restated to reflect the adoption of all applicable authoritative GAAP pronouncements. All such applicable pronouncements were adopted as of the effective date originally specified in each such pronouncement. The following sets forth the significant accounting pronouncements with effective dates subsequent to the earliest financial information presented herein, the effective dates of their adoption by us and, if applicable, a description of the accounting followed by us for periods presented herein prior to the effective date of such pronouncements.
. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, was adopted for the year ended December 31, 1997, retroactive to December 31, 1994. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in financial statements. The segment data presented herein reflects the adoption of SFAS No. 131.
(2) We have completed a number of transactions which have affected the comparability of our results of operations.
On March 31, 1999, we completed the sale of Unigard Security Insurance Company ("USIC") and John Hancock Insurance Co. of Bermuda Ltd. ("John Hancock Bermuda"). The sale of USIC was completed by entering into a 100% quota share reinsurance agreement with a third party reinsurer and then through a stock sale. We also sold 100% of the stock of John Hancock Bermuda, which offered reinsurance products and services. Assets and liabilities transferred in connection with both sales amounted to $381.0 million and $161.8 million, respectively. The sale of USIC resulted in an after-tax loss of $21.4 million. John Hancock Bermuda was sold for its net book value which resulted in the recognition of no gain or loss.
On February 28, 1997, we sold a major portion of our group insurance business to UNICARE Life & Health Insurance Company ("UNICARE"), a wholly- owned subsidiary of WellPoint Health Networks, Inc. The business sold included our group accident and health business and related group life insurance business and Cost Care, Inc., Hancock Association Services Group and Tri-State Inc., all of which were indirectly wholly-owned subsidiaries of the company. The company retained its group long-term care operations. Assets equal to liabilities of $686.7 million at February 28, 1997 were transferred to UNICARE in connection with the sale. Income from operations in 1997 was not significant. The insurance business sold was transferred to UNICARE through a 100% coinsurance agreement.
The disposed businesses' results of operations for each of the three years in the three-year period ended December 31, 1999 are presented below:
(6) In accordance with accounting practices prescribed or permitted by the Massachusetts Division of Insurance, statutory capital and surplus includes $450.0 million in total principal amount of our surplus notes outstanding.
(7) Our GAAP reported net income was significantly affected by net realized investment gains and losses and unusual or non-recurring events and transactions presented above as after-tax adjustments. A description of these adjustments follows.
In all periods, net realized investment gains and losses, except for gains and losses from mortgage securitizations and investments backing our short- term funding agreements, have been excluded from segment after-tax operating income due to their volatility between periods and because such data are often excluded by analysts and investors when evaluating the overall financial performance of insurers. The volatility between periods can be impacted by fluctuations in the market, as well as by changes in the volume of activity which can be influenced by us and our investment decisions. Realized investment gains and losses from mortgage securitizations and investments backing our short-term funding agreements were not excluded from segment after-tax operating income because we view the related gains and losses as in integral part of the core business of those operations. See Note 8 for related amounts.
During 1997, we entered into a court approved settlement relating to a class action lawsuit involving individual life insurance policies sold from 1979 through 1996, as specified in the Legal Proceedings section of this form 10-K. In entering into the settlement, we specifically denied any wrongdoing. The reserve held in connection with the settlement to provide for relief to class members and for legal and administrative costs associated with the settlement amounted to $496.6 million, $436.6 million and $308.8 million at December 31, 1999, 1998 and 1997, respectively. Given the uncertainties associated with estimating the reserve, it is reasonably possible that the final cost of the settlement could differ materially from the amount previously reported.
Through our group health insurance operations, which we sold in 1997, we entered into a number of reinsurance arrangements in respect of personal accident insurance and the occupational accident component of workers compensation insurance, a portion of which was originated through a pool managed by Unicover Managers, Inc. Under these arrangements, we both assumed risks as a reinsurer, and also passed 95% of these risks on to other companies. This business had originally been reinsured by a number of different companies, and has become the subject of widespread disputes. Late in the fourth quarter of 1999 and early 2000, we received additional information about our exposure to losses under the various reinsurance programs. As a result of this additional information and in connection with global settlement discussions initiated in late 1999 with other parties involved in the reinsurance programs, our present best estimate of our remaining loss exposure to this issue is $133.7 million, after tax, which we recognized in 1999.
During 1999, we recorded a $6.8 million after-tax charge for demutualization related expenses to improve our financial analysis and financial reporting abilities. These charges primarily included consulting fees and planning and expense management costs.
During 1997, a participating pension reinsurance contractholder requested the distribution of a portion of contract funds. At the time of the request, the contract stated that these funds were to be paid out over a specified number of years. However, we distributed a portion of the contractholder's funds in exchange for
The statements, analyses, and other information contained herein relating to trends in the company's operations and financial results, the markets for the company's products, the future development of the company's business, and the contingencies and uncertainties to which the company may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their effects on the company and may not be those anticipated by management. John Hancock's actual results may differ materially from the results anticipated in these forward-looking statements.
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 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.
We are a leading financial services company providing a broad range of products and services in two major
. net investment income and realized investment gains on general account assets.
Our expenses consist principally of insurance benefits provided to policyholders, interest credited on policyholders' general account balances, dividends to policyholders, other operating costs and expenses, which include commissions and general business expenses, net of expenses deferred, amortization of deferred policy acquisition costs, and premium and income taxes.
Recent economic and industry trends also have affected the sales and financial results of our institutional business. Due to declining demand for general account GICs in the 401(k) plan market, deposits on our general account GICs have remained relatively level over the past three years and were $2,442.2 million in 1999.
continued without adjustment. Conversely, to the extent that such cash flows and other experience are, in the aggregate, less favorable than we assumed in setting up the closed block, total policy dividends paid to closed block policyholders in future years will be less than the total dividends that would have been paid to such policyholders if the policy dividend scales payable in 1999 had been continued without adjustment, unless we choose, for competitive reasons, to use our general account assets to support the dividends. As a result of continuing efforts to contact policyholders in connection with our demutualization, we anticipate that additional death claims will be reported to us. We have agreed to reimburse the closed block for the financial effect of the excess claims incurred prior to January 1, 1999, which are reported through December 31, 2000, over the reserve for such claims as of December 31, 1998. We presently estimate that this amount will approximate $61.7 million, as a result of additional claim data received by us in 1999 and have recognized a reserve in that amount. The 1999 charge lowered estimated gross profits for purposes of amortizing deferred policy acquisition costs and reduced amortization expense by approximately $32.4 million in 1999.
In addition, if the assets allocated to the closed block, the cash flows therefrom and the revenues from the closed block business prove to be insufficient to pay the benefits guaranteed under the policies included in the closed block, John Hancock Life Insurance Company will be required to make payments from its general funds in an amount equal to the shortfall. We funded the closed block to provide for payment of guaranteed benefits on such policies and for continuation of dividends paid under 1999 policy dividends scales, assuming the experience underlying such dividend scales continues. Therefore, we do not believe it will be necessary to use general funds to pay guaranteed benefits on closed block business unless the closed block business experiences substantial adverse deviations in investment, mortality, persistency or other experience factors.
We estimate that costs relating to the demutualization, excluding costs relating to the offering, will be approximately $156.4 million net of income taxes, of which $112.1 million was recognized through December 31, 1999. Demutualization expenses include printing and mailing costs and our aggregate cost of engaging independent accounting, actuarial, financial, investment banking, legal and other consultants to advise us. In addition, our costs include the costs of the staff and advisors of the Massachusetts Division of Insurance and the New York Insurance Department as to the demutualization process and related matters.
Group Participating Contracts. Certain group products have participating features, under which crediting rates and dividends are affected directly by portfolio earnings. Certain participating contractholders participate in contract experience related to net investment income and realized capital gains and losses in the general account. These participating contractholders were compensated for transferred assets based on the fair value of the assets transferred, which amounted to $771.7 million. These participating contractholders were credited with their portion of the difference between the fair value and carrying value of the assets transferred through the crediting rates and dividends on their contracts. The after-tax amount of the transfer was $205.8 million.
We accounted for the transfer of the corporate purpose assets between the business segments and the corporate account at historical cost.
The transfer during the fourth quarter of 1999 resulted in a charge to operations of $205.8 million, net of tax.
On February 28, 1997, we sold a major portion of our group insurance business to UNICARE Life & Health Insurance Company ("UNICARE"), a wholly owned subsidiary of WellPoint Health Networks, Inc. The business
In order to enhance comparability, the following discussion of our results of operations is supplemented, where appropriate, by financial information of the disposed businesses in each period presented. The financial information of the disposed businesses is presented for informational purposes only.
The table below presents the results of operations of our ongoing businesses, disposed businesses, and consolidated financial information for the years ended 1999, 1998 and 1997.
- --------------- (1) Net of related amortization of deferred policy acquisition costs and amounts credited to participating pension contractholders of $85.8 million, $120.3 million, and $60.5 million for the years ended 1999, 1998, and 1997, respectively. (2) Excluding amounts related to net realized investment gains credited to participating pension contractholders of $35.3 million, $79.1 million, and $29.3 million for the years ended 1999, 1998, and 1997, respectively. (3) Excluding amounts related to net realized investment gains of $50.5 million, $41.2 million, and $31.2 million for the years ended 1999, 1998, and 1997, respectively.
Consolidated income before income taxes, extraordinary item and cumulative effect of accounting change of $358.4 million for the year ended December 31, 1999 decreased by $285.7 million, or 44.4%, as compared to consolidated income before income taxes, extraordinary item and cumulative effect of accounting change of $644.1 million for the year ended December 31, 1998. The decrease was primarily attributable to decreases in income before income taxes, extraordinary item and cumulative effect of accounting change of $194.3 million in the Guaranteed and Structured Financial Products Segment, $191.0 million in the Corporate and Other Segment, and $34.0 million in the Asset Gathering Segment. These decreases were offset by increases of $94.1 million in the Protection Segment and $39.5 million in the Investment Management Segment. The decrease in the Guaranteed and Structured Financial Products Segment was primarily due to recognizing a $345.5 million pre-tax charge for compensation of group participating contractholders for assets transferred in conjunction with the formation of the corporate account. The decrease in the Corporate & Other Segment was primarily due to a $208.6 million pre-tax charge for our exposure to losses under our Workers' Compensation reinsurance programs, including Unicover Managers, Inc., that was associated with the group business we sold in 1997 partially offset by lower pre-tax charges in connection with the class action settlement of $140.2 million in 1999 compared to $230.8 million in 1998. The decrease in the Asset Gathering Segment was primarily due to lower investment advisory fees earned from our mutual fund operations. The increase in the Protection Segment was primarily due to higher realized investment gains on real estate, higher fee income on variable life insurance products, and favorable claims experience on long-term care insurance products. The increase in the Investment Management Segment was due primarily to higher investment advisory fees resulting from growth in assets under management and higher realized investment gains on sales of mortgage loans.
Universal life and investment-type product charges from ongoing businesses were $703.5 million for 1999, an increase of $106.5 million, or 17.8%, from $597.0 million in 1998. These product charges consist primarily of cost of insurance fees on our variable life insurance and universal life insurance products and mortality and expense fees on our variable annuity products. The increase was primarily due to higher cost of insurance fees resulting from growth in the average amount of variable life insurance in force and higher average variable annuity separate account liabilities. Investment-type product charges in the Guaranteed and Structured Financial Products Segment also increased as a result of higher sales of single premium annuity contracts and separate account GICs.
Other operating costs and expenses from ongoing businesses were $1,412.3 million for 1999, an increase of $29.3 million, or 2.1%, from $1,383.0 million for 1998. The increase was primarily due to $26.3 million in restructuring charges during 1999 and increased interest and related expenses of $9.0 million in the Investment Management Segment primarily resulting from the formation of a collateralized bond obligation during the second quarter of 1998. These increases were partially offset by a $20.9 million decrease in interest expense on prior year taxes.
Income taxes from ongoing businesses were $215.7 million in 1999, compared to $176.4 million for 1998. Our effective tax rate from ongoing businesses before the surplus tax and demutualization expenses was 31.3% in 1999, as compared to 31.7% in 1998. We have been subject to the surplus tax (add-on tax) imposed on mutual life insurance companies which disallows a portion of mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, we are no longer subject to the surplus tax.
Extraordinary expenses from ongoing businesses, net of tax, were $93.6 million in 1999 compared to $11.7 million in 1998. These expenses were comprised of direct non-recurring costs specifically related to our reorganization. These costs primarily consist of printing and mailing fees, fees of the regulators' advisors and our financial, legal, actuarial, and accounting advisors.
Consolidated income before income taxes, extraordinary item and cumulative effect of accounting change of $644.1 million for the year ended December 31, 1998 increased by $54.4 million, or 9.2%, as compared to consolidated income before income taxes, extraordinary item and cumulative effect of accounting change of $589.7 million for the year ended December 31, 1997. The increase was primarily attributable to increases in consolidated income before income taxes, extraordinary item and cumulative effect of accounting change of $43.6 million in the Asset Gathering Segment, $20.2 million in the Guaranteed and Structured Financial Products Segment, and $3.1 million in the Protection Segment. These increases were offset by decreases of $8.5 million in the Corporate and Other Segment and $4.0 million in the Investment Management Segment. The increase in the Asset Gathering Segment was primarily attributable to growth in investment management revenues, commissions, and other fees, investment-type product charges, and net investment income, all due to growth in assets under management, primarily due to net sales. The increase in the Guaranteed and Structured Financial Products Segment was primarily due to improved interest margins on spread-based products and growth in general account assets. The increase in the Protection Segment was primarily due to higher fee income from cost of insurance and separate account charges on variable life insurance products and lower amortization of deferred policy acquisition costs, partially offset by higher operating expenses. Corporate and Other Segment income declined due to the disposal of businesses previously described. The decrease in the Investment Management Segment was due primarily to reduced advisory fees on timber assets and higher operating expenses due to growth in operations.
Universal life and investment-type product charges from ongoing businesses were $597.0 million for 1998, an increase of $85.0 million, or 16.6%, from $512.0 million in 1997. The increase was primarily the result of growth in account values of variable life insurance products due to additional deposits and market appreciation. The average amount of variable life insurance in force increased 12.7% to $49,364.1 million in 1998 from $43,791.7 million in 1997. Average variable annuity separate account liabilities increased 28.9% to $5,736.0 million in 1998 compared to $4,450.0 million in 1997.
assets related to ongoing businesses due to continued sales among all segments. Average invested assets related to ongoing businesses increased $1,688.4 million, or 4.1%, to $43,310.3 million for 1998, as compared to $41,621.9 million in 1997. The net yield on average invested assets increased to 7.62% in 1998 from 7.58% in 1997. The increase was primarily due to increased investments in leveraged leases and lower depreciation expense on real estate, which resulted from suspending depreciation on real estate properties held for sale during 1998.
Other revenue from ongoing businesses was $11.0 million in 1998, a decrease of $11.2 million, or 50.5%, from $22.2 million reported in 1997. Of the decrease, $4.4 million was due to lower conversion fee income resulting from the termination of our participation in the FEGLI Program. Conversion fee income is earned when an insured in the FEGLI Program purchases insurance directly from us.
Benefits to policyholders from ongoing businesses were $4,140.8 million for 1998, a decrease of $29.6 million, or 0.7%, from $4,170.4 million in 1997. This decrease primarily resulted from a $107.0 million decline in benefits related to the termination of the FEGLI Program and a $83.6 million decline in benefits primarily resulting from lower sales of single premium annuity contracts. These decreases were partially offset by a $77.3 million increase in benefits related to the settlement of a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996 and higher benefits on non- traditional life insurance and individual long-term care insurance products due to increased sales.
Other operating costs and expenses from ongoing businesses were $1,383.0 million for 1998, an increase of $141.4 million, or 11.4%, from $1,241.6 million for 1997. The increase was primarily due to higher compensation and related costs and administrative expenses of approximately $60.6 million related to mutual fund and institutional investment management operations as a result of continued growth in those businesses and additional expenses of $47.2 million related to the operation, management, and enhancement of our information systems. Commissions increased from 1997 as a result of higher sales of mutual fund and non-traditional life insurance products. These increases were partially offset by lower expenses of $19.6 million in 1998, as compared to 1997, related to the settlement of a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996.
Extraordinary expenses of $11.7 million, net of tax, for 1998 were comprised of direct non-recurring costs specifically related to our reorganization. These costs primarily consist of fees of our financial, legal, actuarial, and accounting advisors.
Disposed Businesses. Revenues from disposed businesses decreased $169.2 million and benefits and expenses from disposed businesses decreased $165.9 million from 1997 to 1998 due to the previously described disposals.
We evaluate segment performance and base management's incentives on segment after-tax operating income, which excludes the effect of net realized investment gains and losses and unusual or non-recurring events and transactions. Segment after-tax operating income is determined by adjusting GAAP net income for net realized investment gains and losses, extraordinary items, and certain other items which we believe are not indicative of overall operating trends. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of segment after-tax operating income enhances the understanding of our results of operations by highlighting net income attributable to the normal, recurring operations of the business. However, segment after-tax operating income is not a substitute for net income determined in accordance with GAAP.
Net realized investment gains have been reduced by: (1) amortization of deferred policy acquisition costs to the extent that such amortization results from realized gains and losses and (2) the portion of realized gains and losses credited to certain participating contractholder accounts. We believe presenting realized investment gains and losses in this format provides information useful in evaluating our operating performance. This presentation may not be comparable to presentations made by other insurers. Summarized below is a reconciliation of (a) net realized investment gains per the consolidated financial statements and (b) the adjustment made for net realized investment gains to calculate segment after-tax operating income for the years ended December 31, 1999, 1998 and 1997.
During 1999, we recorded $17.0 million in after-tax restructuring charges to reduce costs and increase future operating efficiency by consolidating portions of our operations. For additional information see "Note 1 - Summary of Significant Accounting Policies - Severance" of our Consolidated Financial Statements.
During 1997, a participating pension reinsurance contractholder requested the distribution of a portion of contract funds. At the time of the request, the contract stated that these funds were to be paid out over a specified number of years. However, we distributed a portion of the contractholder's funds in exchange for the right to retain the tax credits that resulted from the distribution. The contractual amendment resulted in the recognition of a $7.7 million after-tax gain.
We have been subject to the surplus tax imposed on mutual life insurance companies which disallows a portion of mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, we are no longer subject to surplus tax and have excluded the surplus tax from segment after-tax operating income in all periods.
For the Year Ended December 31, ---------------------------------- 1999 1998 1997 ---------- -------- ---------- (in millions) Amortization of Goodwill: Protection Segment.................. $ - $ - $ - Asset Gathering Segment............. 6.8 6.5 6.5 ------ ------ ------ Total Retail...................... 6.8 6.5 6.5 Guaranteed and Structured Financial Products Segment........ - - -
________________ (1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis.
(2) Statutory data have been derived from the annual statements of John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, Investors Partner Life (formerly John Hancock Life Insurance Company of America), and John Hancock Reassurance Company Ltd. as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices.
Segment after-tax operating income was $172.3 million in 1998, an increase of $14.2 million, or 9.0% from $158.1 million in 1997. Non-traditional life insurance segment after-tax operating income increased $36.0 million, or 93.3%, to $74.6 million in 1998 from $38.6 million in 1997. This increase was primarily due to higher product charges on variable life insurance resulting from increased sales and market appreciation. This increase also was due to lower amortization expense of deferred policy acquisition costs in 1998 compared to 1997 that resulted from revised projections of estimated gross profits. Traditional life insurance segment after-tax operating income declined by $24.9 million, or 25.4%, primarily due to higher operating expenses incurred for the operation, management and enhancement of our information systems. Individual long-term care insurance segment after-tax operating income increased $0.5 million, or 3.1%, to $16.4 million in 1998 from $15.9 million in 1997, primarily due to favorable claims experience partially offset by unfavorable persistency. Group long-term care insurance segment after-tax operating income declined by $0.6 million, or 7.1%, primarily due to unfavorable persistency.
Total benefits and expenses were $2,512.9 million in 1998, an increase of $117.5 million, or 4.9%, from $2,395.4 million in 1997. This increase was primarily due to a $85.6 million increase in benefits to policyholders on non- traditional life insurance and individual long-term care insurance products. Benefits on non-traditional life insurance products increased $51.8 million, or 32.3%, primarily due to interest credited on the average total account balance on universal life insurance, which increased 19.8% to $1,699.2 million for 1998 from $1,418.4 million for 1997, due to sales of new contracts. Benefits on individual long-term care insurance products increased $33.8 million, or 28.4%, due to sales of new contracts and higher than expected persistency of insurance in force. These
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. (2) Statutory data have been derived from the annual statements of John Hancock Mutual Life Insurance Company and John Hancock Variable Life Insurance Company, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices.
Total benefits and expenses increased $34.0 million, or 4.0%, to $882.1 million in 1999 from $848.1 million in 1998. Benefits to policyholders increased $3.0 million, or 1.0%, primarily due to an increase in interest credited on fixed annuity account balances. Interest credited on fixed annuity account balances increased primarily due to higher average fixed annuity account balance of $4,862.2 million in 1999, as compared to $4,673.2 million in 1998. The increase in interest credited on average fixed annuity account balances was partially offset by a decline in the average interest credited rate on fixed annuity account balances to 5.59% in 1999 from 5.96% in 1998. The average interest credited rate pattern is dependent upon the general trend of market interest rates, frequency of credited rate resets and business mix. Deferred fixed annuities' interest credited rates generally are reset annually on the policy anniversary. Other operating costs and expenses increased $24.4 million, or 4.8%, to $529.3 million in 1999 from $504.9 million in 1998. The increase was primarily due to our acquisition of the Essex Corporation and higher amortization of mutual fund deferred selling commissions, resulting from higher redemptions in 1999. These increases were partially offset by a decrease in operating expenses related to our mutual fund operations and annuities operations. Amortization of deferred policy acquisition costs increased $6.6 million, or 14.1%, to $53.4 million in 1999 from $46.8 million in 1998, primarily due to higher profits. The segment's effective tax rate was 34.3% and 33.6% in 1999 and 1998, respectively.
Total revenues increased $110.4 million, or 12.2%, to $1,015.3 million in 1998 from $904.9 million in 1997. Premiums decreased $35.2 million, or 64.0%, due to decreased sales of immediate fixed annuities with life contingencies. Premiums in 1997 include $44.8 million of sales of immediate fixed annuities with life contingencies. Investment-type product charges were $99.9 million, an increase of $17.2 million, or 20.8%, as compared to $82.7 million in 1997. The increase was due to growth in average variable annuity separate account liabilities, which were $5,736.0 million in 1998 compared to $4,450.0 million in 1997, an increase of 28.9%. Variable annuity deposits grew 18.3% to $882.7 million in 1998 from $745.9 million in 1997. Mortality and expense fees as a percentage of average account balances were 1.37% and 1.38% in 1998 and 1997, respectively. Net investment income increased by $24.7 million, or 7.0%, in 1998 compared to 1997 as a result of a higher level of invested assets backing fixed annuity products partially offset by a decrease in the average investment yield on invested assets backing fixed annuity products. The average investment yield on invested assets backing fixed annuity products was 7.91% in 1998, compared to 7.98% in 1997. This decrease reflects lower market interest rates on new investments.
Total benefits and expenses increased $78.4 million, or 10.2%, to $848.1 million in 1998 from $769.7 million in 1997, reflecting the growth in annuity and mutual fund assets under management. Benefits to policyholders decreased $18.2 million in 1998, primarily resulting from a $35.2 million decrease in premiums of immediate fixed annuities with life contingencies. This decrease was partially offset by an increase in interest credited on fixed annuity account balances which was $278.7 million in 1998 compared to $263.7 million in 1997. The increase was due to an increase in the average interest credited rate on fixed annuity account balances which was 5.96% in 1998, compared to 5.90% in 1997, and higher average fixed annuity account balances during 1998 of $4,673.2 million, as compared to $4,468.9 million during 1997. Other operating costs and expenses were $504.9 million in 1998, an increase of $88.7 million, or 21.3%, from $416.2 million in 1997. The increase was primarily due to an increase in compensation and related costs and administrative expenses incurred to support sales and marketing of mutual fund products and higher amortization of deferred selling commissions on mutual fund products. The increase was partially offset by lower commissions on fixed annuity products due to a decline in sales. Amortization of deferred policy acquisition costs of $46.8 million for 1998 increased $7.9 million from $38.9 million in 1997 primarily due to higher profits. The segment's effective tax rate increased to 33.6% in 1998 from 31.0% in 1997, primarily due to a state tax benefit provided to Massachusetts domiciled investment management companies in 1997.
Total benefits and expenses decreased $92.0 million, or 5.7%, to $1,528.6 million in 1998 from $1,620.6 million in 1997. The decrease was due primarily to an $81.5 million decrease in benefits to policyholders primarily resulting from lower sales of single premium annuity contracts. Interest credited on account balances for spread-based products was $1,049.1 million in 1998, a decrease of $29.7 million, or 2.8%, from $1,078.8 million in 1997. The decrease was due largely to a decline in the average interest credited rate on account balances for spread-based products, which was 7.21% in 1998 compared to 7.50% in 1997. The decrease in the average interest credited rate was primarily due to the general decline of market interest rates, resulting in new GIC and funding agreement liabilities which have a lower average interest credited rate. Other operating costs and expenses were $92.6 million in 1998, an increase of $11.6 million, or 14.3%, from $81.0 million in 1997. The increase was primarily due to higher guaranty fund assessments and continuing investments in technology for administrative systems. Dividends of $20.8 million in 1998, decreased $20.6 million, or 49.8%, from $41.4 million for 1997. Dividends in 1997 included $25.9 million resulting from contract modifications and conversions. Excluding dividends on contract
modifications and conversions, dividends were $20.2 million for 1998 and $15.5 million in 1997. The increase in recurring dividends primarily resulted from appreciation of equity securities. The segment's effective tax rate was 28.1% in 1998, as compared to 27.8% in 1997.
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis (2) Includes general account cash and invested assets of $164.5 million, $88.1 million, and $66.0 million as of December 31, 1999, 1998, and 1997, respectively.
Total revenues increased $46.0 million, or 32.0%, to $189.9 million in 1999 from $143.9 million in 1998. Net investment income was $45.9 million in 1999, an increase of $21.8 million from $24.1 million for 1998. The increase in net investment income was due to a higher level of average invested assets due to the formation of a collateralized bond obligation in the fourth quarter of 1998. Investment management revenues, commissions, and other fees increased $16.4 million, or 13.2%, in 1999, primarily due to an increase in investment advisory fees, which increased $18.3 million to $133.6 million in 1999 compared to $115.3 million in 1998. The increase in investment advisory fees was primarily due to a higher level of average assets under management, which increased $4,824.5 million, or 13.5%, to $40,554.7 million in 1999 from $35,730.2 million in 1998. Investment advisory fees were .33% and .32% of average advisory assets under management in 1999 and 1998, respectively. This increase primarily reflects the receipt of a fee in connection with the termination of a timber management contract. Mortgage origination and servicing fees were $6.6 million in 1999 compared to $8.5 million in 1998. Realized investment gains increased $7.9 million in 1999 primarily due to a narrowing of interest rate spreads in 1999, as compared to 1998, on mortgage loans held for sale.
Segment after-tax operating income from corporate operations was $31.2 million in 1999, an increase of $22.5 million from $8.7 million in 1998. The increase was primarily due to a $13.7 million decrease in unallocated corporate overhead and expenses associated with the disposed businesses and higher net investment income due to a higher level of corporate purpose assets. During the fourth quarter of 1999, a corporate account was formed and all corporate type assets were removed from the business units to the Corporate and Other Segment. As part of this move, the group pension participating contractholders were reimbursed at fair market value for these contracts. Because of this transaction, there was no longer a need to calculate the participating policyholders share of the change in these assets. As a result, 1999's segment after-tax operating income includes a charge for this item for nine months versus a full year in 1998, an improvement of $9.4 million.
Segment after-tax operating income from non-core businesses was $10.6 million in 1999, a decrease of $11.7 million from $22.3 million in 1998. The decrease was due primarily to lower net investment income resulting from the previously described disposals.
Segment after-tax operating income from international insurance operations was $25.3 million for 1998, an increase of $17.0 million from $8.3 million for 1997. The increase in segment after-tax operating income primarily resulted from continued growth in our Canadian operations' segregated assets, which resulted in higher product charges, which increased $20.5 million, or 29.3%, from 1997. The increase was primarily due to growth in segregated assets under management which were $1,988.1 million in 1998, an increase of 30.4% from $1,524.9 million in 1997.
Segment after-tax operating income from corporate operations was $8.7 million in 1998, an increase of $40.7 million from an after-tax operating loss of $32.0 million in 1997. The increase primarily resulted from higher net investment income of $32.9 million on corporate assets. Unallocated corporate overhead and expenses associated with the disposed businesses declined $8.0 million during 1998.
Our investments include assets held in our general account and assets held in numerous separate accounts. We manage our general account assets in investment segments that support specific classes of product liabilities. These investment segments permit us to implement investment policies that both support the financial characteristics of the underlying liabilities, and also provide returns on our invested capital. The investment segments also enable us to gauge the performance and profitability of our various businesses.
. Interest rate risk, meaning changes in the market value of fixed maturity securities as interest rates change over time.
Management of credit risk is central to our business and we devote considerable resources to the credit analysis underlying each investment acquisition. Our corporate bond management group employs a staff of highly specialized, experienced, and well-trained credit analysts. We rely on these analysts' ability to analyze complex private financing transactions and to acquire the investments needed to profitably fund our liability guarantees. In addition, when investing in private fixed maturity securities, we rely upon broad access to management information, negotiated protective covenants, call protection features and collateral protection.
Our records dating back to 1970 show that, on average, the default assumptions built into our investment and liability pricing models have been consistent with actual investment performance.
To assist in the risk management of our commercial mortgage portfolio, beginning in 1991 we undertook the development of an analytic database, the "Mortgage Investment Risk Analysis" system. This system is designed to screen our mortgage portfolio for likely default candidates.
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 our portfolios.
The investment assets in our general account as of December 31, 1999 were generally of high quality and broadly diversified across asset classes and individual credits. As shown in the following table, the major categories of investment assets are fixed maturity securities, including bonds, redeemable preferred stock, asset and mortgage-backed securities, and commercial and agricultural mortgage loans. The remainder of the general account is invested in cash and short-term investments, real estate, equity securities, and "other" invested assets. "Other" invested assets primarily include fixed income leases, private equity investments and independent power generation projects in joint venture and limited partnership form. In addition, policy loans are included in our general account.
In the following discussion, we include the investment portfolio of our Canadian subsidiary, The Maritime Life Assurance Company. As of December 31, 1999, 37.2% of The Maritime Life Assurance Company's invested assets consisted of government-insured mortgage loans and obligations of the Canadian federal government and provincial governments.
The following table provides gross investment yields by asset categories for the periods indicated. Overall, the yield, net of investment expenses, on our general account portfolio increased modestly from 1997 through 1999. Within the real estate and mortgage loan categories, there was a reduction in the yield reflecting our recent real estate sales program and lower yields attributable to relatively tight investment spreads in this market sector. Largely offsetting these lower yields were favorable interest rates achieved on our 1999 fixed maturity security acquisitions and higher money market rates. In particular, 1999 bond acquisitions benefited from a combination of higher U.S. Treasury rates and relatively wide spreads in both the public and private sectors. Indicative of the increase in U.S. Treasury rates, between December 31, 1998 and December 31, 1999, the 10-year U.S. Treasury rate rose 180 basis points to 6.44%.
Fixed Maturity Securities. Our fixed maturity securities portfolio is predominantly comprised of low risk, investment grade, publicly and privately traded corporate bonds and senior tranches of asset-backed securities ("ABS") and mortgage-backed securities ("MBS"), with the balance invested in government bonds. Our fixed maturity securities portfolio also includes redeemable preferred stock. As of December 31, 1999, fixed maturity securities represented 63.4% of general account investment assets with a carrying value of $30.9 billion, roughly comprised of 51% public securities and 49% private securities. Each year we direct the majority of our net cash inflows into investment grade fixed maturity securities. We typically invest between 10% and 15% of funds allocated to fixed maturity securities in below-investment-grade bonds, some of which include equity participations, such as warrants. Allocations are based on our assessment of relative value and the likelihood of enhancing risk-adjusted portfolio returns. While the general account has profited from the below-investment-grade asset class in the
The following table sets forth the credit quality of our public fixed maturity securities portfolio. As the public market has grown to include new asset classes such as securities issued in the Rule 144A market, which we classify as "public" securities, and MBS/ABS, our public fixed maturity securities portfolio has grown in both absolute and relative terms, from 48.6% of our fixed maturity securities portfolio, as of December 31, 1997, to 52.0%, as of December 31, 1999.
- ----------------- (1) With respect to securities that are awaiting an SVO rating, we have assigned a rating based on an analysis that we believe is equivalent to that used by the SVO. (2) Comparisons between SVO and S&P ratings are published by the National Association of Insurance Commissioners. (3) Does not include redeemable preferred stock with a carrying value of $500.7 million, $414.0 million and $384.5 million as of December 31, 1999, 1998 and 1997, respectively.
The following tables detail the different industry classes that were represented in our bond portfolio as of the dates indicated. Our bond portfolio's industry diversification reflects our preference for corporate issuers and for issuers that rely on the private placement and Rule 144A markets. Our diversification tends to be fairly stable. Relative to insurance industry averages, we invest significantly less in MBS due to our aversion to prepayment and extension risk.
Mortgage Loans. As of December 31, 1999, we held mortgage loans with a carrying value of $10.7 billion, including $1.9 billion of agricultural loans and $1.1 billion of commercial loans managed by our Canadian subsidiary, The Maritime Life Assurance Company.
The following table shows the percentages of our commercial loan portfolio that are delinquent but not in foreclosure, delinquent and in foreclosure, restructured and foreclosed. Commercial mortgage loans are classified as delinquent when they are 60 days or more past due as to the payment of interest or principal. Commercial mortgage loans are classified as restructured when they are in good standing, but the basic terms, such as interest rate or maturity date, have been modified as a result of a prior actual delinquency or an imminent delinquency. Although we have recorded higher levels of delinquencies and foreclosures than ACLI averages in most of the periods shown, we believe our commercial mortgage portfolio has performed comparably to ACLI industry averages for delinquencies, restructurings and foreclosures in process. While our total delinquency rate as of September 30, 1999
Delinquent and restructured loans are reviewed on a quarterly basis after consultation with the controller's department. Loan officers present an analysis of the problem loans, including a 10 year discounted cash flow analysis, that establishes a value for the property. A reserve is established based on the difference between the book value of the property and the agreed-upon market value.
The following table shows our agricultural mortgage loan portfolio by its three major sectors: agribusiness, timber and production agriculture. Agribusiness is our largest agricultural sector and is a relatively stable segment of the food industry that includes suppliers, warehousers, processors, distributors, wholesalers, and retailers. Our expertise in this area provides us with a specialized niche in the largest sector of manufactured goods in the United States. Our largest concentrations of agricultural mortgage loans are located in California and Maine, with the two states comprising 44% of our agricultural mortgage loan portfolio's holdings as of December 31, 1999. We are one of the largest lenders in the timber market and, in addition to managing timber investments for third parties, we have a small amount of timber loans in our general account. In 1998, we sold 70% of our production agriculture portfolio and are not actively pursuing new investments in this market sector.
The following table shows investment valuation allowances for our mortgage loan and real estate portfolios for the periods indicated:
The allowance for losses on mortgage loans on real estate and foreclosed real estate is maintained at a level that we believe to be adequate to absorb estimated probable credit losses. Our periodic evaluation of the adequacy of the allowance for losses is based on past experience, known and inherent risks, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying security, the general composition of the portfolio, current economic conditions and other factors. This evaluation is inherently subjective and is susceptible to significant changes and no assurance can be given that the allowances taken will in fact be adequate to cover all future losses or that additional valuation allowances or asset write-downs will not be required in the future.
Equity Securities. As of December 31, 1999, we held $1,316.2 million of equity securities, including $947.8
Other Invested Assets. Other invested assets totaled $1,311.1 million as of December 31, 1999, compared to $1,254.6 million as of December 31, 1998. Total gross investment income from other invested assets totaled $165.3 million for the year ended December 31, 1999 and $181.3 million in 1998. Other invested assets primarily include leases, private equity, and independent power projects. Joint ventures and partnership interests are comprised of a variety of underlying investment pools or assets such as real estate leases. Joint venture and partnership interests are generally accounted for under the equity method. The equity method requires increasing the asset's carrying value to recognize undistributed earnings, or reducing the asset's carrying value to recognize distributed earnings and return of principal, in the underlying entities. The carrying value of this asset class, as well as the investment income it generates, is highly contingent upon the economic performance of the underlying entities or assets. Also included in this category are derivatives and other miscellaneous assets.
We maintain investment programs generally intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer lives, such as life insurance and certain pension products, are matched with assets having similar estimated lives such as mortgage loans, long-term bonds, and private placement bonds. Shorter-term liabilities are matched with investments such as short and medium-term fixed maturities. In addition, highly liquid, high quality short-term U.S. Treasury securities and other liquid investment grade fixed maturities are held to fund normal operating expenses, surrenders, withdrawals and development and maintenance expenses associated with new products and technologies.
Net cash used in investing activities was $1,996.9 million, $1,339.1 million and $1,295.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. The increase in cash used in 1999 as compared to 1998 resulted from net cash paid related to acquisitions and disposals of subsidiaries and a decrease in maturities, prepayments and scheduled redemptions of fixed maturities partially offset by an increase in sales of real estate. The increase in net cash used in 1998 as compared to 1997 resulted primarily from an increase in purchases of fixed maturities, partially offset by fixed maturity securities maturing or being sold.
Cash flow requirements also are supported by committed lines of credit totaling $1,000.0 million, $500.0 million of which expires on July 29, 2000 and $500.0 million of which expires June 30, 2001. The lines of credit are available for general liquidity needs, capital expansion, and acquisitions. The lines of credit contain covenants that, among other provisions, require maintenance of certain levels of policyholders' equity. To date, we have not borrowed any amounts under the lines of credit.
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, 1999, were above the ranges that would require regulatory action.
By late 1999, we completed our Year 2000 readiness plan to address issues that could result from computer programs being written using two digits to define the applicable year rather than four to define the applicable year and century. As a result, we were prepared for the transition to the Year 2000 and did not experience any significant Year 2000 problems with respect to our mission critical information technology ("IT") or non-IT systems, applications or infrastructure. During the date rollover to the year 2000, we implemented and monitored our millennium rollover plan and conducted business as usual on Monday, January 3, 2000.
See Index to Consolidated Financial Statements and Schedules on page herein.