-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RZbp+2nYAOJgckytPLBz+eA0iQfgU1A9g1vnfmsuhEj1zEoE+n8cbmQ6B949LXhH 3L2U0RFQNiJ0ELx9meoAxQ== 0001005477-02-001346.txt : 20020415 0001005477-02-001346.hdr.sgml : 20020415 ACCESSION NUMBER: 0001005477-02-001346 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000736260 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 043483032 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-15607 FILM NUMBER: 02586179 BUSINESS ADDRESS: STREET 1: LAW DIVISION STREET 2: PO BOX 111 CITY: BOSTON STATE: MA ZIP: 02117 MAIL ADDRESS: STREET 1: LAW DIVISION STREET 2: PO BOX 111 CITY: BOSTON STATE: MA ZIP: 02117 10-K405 1 d02-36490.txt JOHN HANCOCK FINANCIAL SERVICES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K {X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NO. 1-15607 JOHN HANCOCK FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-3483032 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) John Hancock Place Boston, Massachusetts 02117 (617) 572-6000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered Common Stock, $0.01 par value New York Stock Exchange, Inc. - ------------------------------------------------- --------------------------------------------- Series A Junior Preferred Stock purchase Rights New York Stock Exchange, Inc. - ------------------------------------------------- ---------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the December 31, 2001 JHFS Form 10-K or any amendment to the December 31, 2001 JHFS Form 10-K [X]. As of February 28, 2002, there were outstanding 297 ,340,240 shares of Common Stock, $0.01 par value per share of the registrant. The aggregate market value of the shares of the registrant's common equity held by non-affiliates of the registrant was $11,420,838,618 based on the closing price of $38.41 per share of Common Stock on the New York Stock Exchange on February 28, 2002.
Documents Incorporated by Reference ----------------------------------- Document Part of the Form 10-K into which incorporated - ---------------------------------------------------------------------------------------------------------------------- Portions of John Hancock's 2001 Annual Report Parts II and IV - ---------------------------------------------------------------------------------------------------------------------- Portions of John Hancock's definitive Proxy Part III Statement to be filed on or about April 1, 2002, for the Annual Meeting of Shareholders scheduled to be held May 13, 2002 - ----------------------------------------------------------------------------------------------------------------------
JOHN HANCOCK FINANCIAL SERVICES, INC.
CONTENTS FORWARD-LOOKING STATEMENTS.......................................................................... 3 PART I................................................................................................. 4 ITEM 1. BUSINESS OF JOHN HANCOCK FINANCIAL SERVICES, INC............................................ 4 ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT....................................................... 32 ITEM 2. PROPERTIES.................................................................................. 33 ITEM 3. LEGAL PROCEEDINGS........................................................................... 33 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 34 PART II................................................................................................ 35 ITEM 5. MARKET FOR JOHN HANCOCK FINANCIAL SERVICES, INC. COMMON STOCK AND RELATED SHAREHOLDER MATTERS......................................................................... 35 ITEM 6. SELECTED FINANCIAL DATA..................................................................... 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK................................. 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........ 38 PART III............................................................................................... 39 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF JOHN HANCOCK FINANCIAL SERVICES, INC................... 39 ITEM 11. EXECUTIVE COMPENSATION..................................................................... 39 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 39 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 39 PART IV................................................................................................ 40 ITEM 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.......................... 40
JOHN HANCOCK FINANCIAL SERVICES, INC. FORWARD-LOOKING STATEMENTS The statements, analyses, and other information contained herein relating to trends in John Hancock Financial Services, Inc.'s, (the Company's) operations and financial results, the markets for the Company's products, the future development of the Company's business, and the contingencies and uncertainties to which the Company may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their potential effects on the Company. Future events and their effects on the Company may not be those anticipated by management. The Company's actual results may differ materially from the results anticipated in these forward-looking statements. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the risks that (1) a significant downgrade in our ratings for claims-paying ability and financial strength may lead to policy and contract withdrawals and materially harm our ability to market our products; (2) changes to or elimination of Federal tax benefits for our products and other changes in laws and regulations (including those relating to the Federal Estate Tax Laws) which the Company expects would adversely affect sales of our insurance and investment advisory products; (3) as a holding company, we depend on dividends from our subsidiaries, Massachusetts insurance law, and similar Canadian laws, may restrict the ability of John Hancock Life Insurance Company and Maritime Life Assurance Company to pay dividends to us; (4) we face increasing competition in our retail businesses from mutual fund companies, banks and investment management firms as well as from other insurance companies; (5) 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 a third party distribution relationship; (8) customers may not be responsive to new or existing products or distribution channels, (9) interest rate volatility may adversely affect our profitability; (10) our net income and revenues will suffer if customers surrender annuities and variable and universal life insurance policies or redeem shares of our open-end mutual funds; (11) the independent 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 shareholders; (13) there are a number of provisions in our Plan of Reorganization, our Restated Certificate of Incorporation and by-laws, laws applicable to us, agreements that we have entered into with our senior management, and our shareholder rights plan, that will prevent or discourage takeovers and business combinations that our shareholders might otherwise consider to be in their best interests; (14) 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; (15) we face investment and credit losses relating to our investment portfolio (16) we may experience volatility in net income due to changes in standards for accounting for derivatives and other changes; (17) our United States insurance companies are subject to risk-based capital requirements and possible guaranty fund assessments; (18) the National Association of Insurance Commissioners' codification of statutory accounting practices will adversely affect the statutory surplus of John Hancock Life Insurance Company; (19) we may be unable to retain personnel who are key to our business; (20) we may incur losses from assumed reinsurance business in respect of personal accident insurance and the occupational accident component of workers compensation insurance; (21) litigation and regulatory proceedings may result in financial losses, harm our reputation and divert management resources, and (22) we face unforeseen liabilities arising from our acquisitions and dispositions of businesses. 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. 3 JOHN HANCOCK FINANCIAL SERVICES, INC. PART I ITEM 1. Business of John Hancock Financial Services, Inc. John Hancock Financial Services, Inc. (John Hancock, JHFS or the Company) is one of the nation's leading financial services companies, providing a broad array of insurance and investment products and services to retail and institutional customers, primarily in North America. Our principal executive offices are located at John Hancock Place, Boston, Massachusetts 02117. The Board of Directors of John Hancock Mutual Life Insurance Company, founded in 1862, unanimously adopted a Plan of Reorganization effective February 1, 2000 and John Hancock Mutual Life Insurance Company converted from a mutual life insurance company to a stock life insurance company, John Hancock Life Insurance Company (the Life Company), and became a wholly-owned subsidiary of John Hancock Financial Services, Inc., a holding company. Also on February 1, 2000, John Hancock Financial Services, Inc. completed an initial public offering of 102,000,000 shares of its common stock, par value $0.01 per share. We operate our business in five segments. Two segments primarily serve retail customers, and two segments serve primarily institutional customers. Our fifth segment is the Corporate and Other Segment. Our retail segments are the Protection Segment and the Asset Gathering Segment. The Protection Segment offers variable life, universal life, whole life, term life, and individual and group long-term care insurance products. The Asset Gathering Segment offers variable and fixed, deferred and immediate annuities, and mutual funds. Our retail business also includes our retail distribution and customer service operations. According to the latest publicly available data, with respect to the United States, the Company is the eighth largest writer of individual life insurance based on new and recurring individual life sales, the third largest writer of individual variable universal life insurance and the tenth largest writer of individual universal life insurance. We believe we are the second largest writer of individual long-term care insurance and the top provider of group long-term care insurance based on total premiums in force. As of September 30, 2001, we were the 23rd largest writer of individual annuity contracts, based on LIMRA sales data. Our mutual fund subsidiary ranked 17th among non-proprietary broker-sold U.S. asset managers in terms of total long-term, open-end assets under management as of December 31, 2001. Our institutional segments are the Guaranteed and Structured Financial Products Segment and the Investment Management Segment. The Guaranteed and Structured Financial Products Segment offers a wide variety of spread-based and fee-based investment products and services. The spread-based products provide the customer with some form of guaranteed return. The Investment Management Segment consists of investment management services and products marketed to institutions. This business is primarily fee-based and investment management products generally do not offer guarantees. As of December 31, 2001 and 2000, respectively, our total assets under management were $124.2 billion and $125.2 billion, which includes $29.3 billion and $31.7 billion of assets invested in the Company's retail mutual funds. Total shareholders' equity, excluding net unrealized capital gains on securities, was $5.5 billion and $5.6 billion as of December 31, 2001 and 2000, respectively. In addition, John Hancock generated $9.1 billion and $8.9 billion in revenues and $618.7 million and $818.7 million in net income in 2001 and 2000, respectively. The Company's return on shareholders' equity, excluding net unrealized capital gains on securities, was 11.2% and 14.7% at December 31, 2001 and 2000, respectively. 4 JOHN HANCOCK FINANCIAL SERVICES, INC. Protection Segment Overview Through our Protection Segment, we offer a variety of non-traditional and traditional life insurance products and individual and group long-term care insurance products. Our non-traditional life insurance products include variable life and universal life insurance. Our traditional life insurance products include whole life insurance and term life insurance. The Protection Segment has traditionally been our largest business segment, contributing 36.2%, 35.6% and 38.2% of consolidated operating revenues and 37.1%, 33.7% and 31.1% of consolidated segment after-tax operating income in the years ended December 31, 2001, 2000 and 1999, respectively. The Protection Segment generated revenues of $3,385.1 million, $3,148.2 million and $2,903.0 million and after-tax operating income of $298.7 million, $248.6 million and $190.6 million in 2001, 2000, and 1999, respectively. The Protection Segment has achieved the following financial results for the periods indicated:
As of or for the Years Ended December 31 2001 2000 1999 ------------------------------------------------------ (in millions) Sales (new premiums and deposits): Non-traditional life--excluding COLI and BOLI (1) Variable life........................................ $ 124.5 $ 152.5 $ 130.6 Universal life....................................... 30.4 18.4 16.4 Traditional life--excluding COLI (1)...................... Whole life........................................... 6.1 8.4 18.9 Term life............................................ 33.0 36.3 24.0 COLI and BOLI Variable life--COLI.................................. 90.5 38.6 23.6 Universal life--COLI................................. 22.1 14.8 3.3 Whole life--COLI..................................... -- -- -- Universal life--BOLI................................. 12.2 0.8 -- Individual long-term care (2)............................. 102.2 100.1 72.2 Group long-term care (3).................................. 16.8 11.5 13.7 ------------------------------------------------------ Total............................................ $ 437.8 $ 381.4 $ 302.7 ====================================================== Assets: Non-traditional life...................................... $11,163.2 $10,433.5 $10,195.5 Traditional life (4)...................................... 14,190.4 13,903.3 13,716.7 Individual long-term care................................. 2,519.0 1,923.7 1,008.5 Group long-term care...................................... 580.8 480.6 466.0 Other..................................................... 51.6 46.9 36.5 Intra-segment eliminations................................ -- -- (44.8) ------------------------------------------------------ Total............................................ $28,505.0 $26,788.0 $25,378.4 ======================================================
(1) Individual life insurance sales exclude (a) excess premiums, which are premiums that build cash value but do not purchase face amounts of insurance on variable life and universal life insurance products and (b) premiums on corporate owned life insurance (COLI) and bank owned life insurance (BOLI) policies covering more than 200 lives. Sales include 10% of single premium payments on universal and whole life insurance products. (2) Individual long-term care sales were revised for private label sales, including an additional $2.3 million and an additional $1.3 million in the years ended 2000 and 1999, respectively and Fortis Reinsurance premiums, including $23.9 million and $--, respectively, for the years ended 2000 and 1999. (3) Group long-term care sales were revised to include new enrollments and coverage additions of $5.4 million and $7.4 million in 2000 and 1999, respectively. (4) The 2000 balance was adjusted to reflect the adoption of the provisions of Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises for Demutualization and Formations of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts," as outlined in Note 1 to the consolidated financial statements. The result was $41.6 million additional assets for the traditional life product line as of December 31, 2000. 5 JOHN HANCOCK FINANCIAL SERVICES, INC. Products and Markets The trend in the individual life industry remains focused on the variable life insurance products and away from traditional whole life products. This is reflected in our life insurance sales growth, which has come principally from sales of variable, universal and term life insurance, while sales of traditional whole life insurance have declined. By diversifying from traditional whole life insurance products to term life insurance products and investment-oriented savings products demanded by today's consumer, we have generated strong business and earnings growth. The Company's sales of individual life insurance in 2001 consisted of 68% variable life, 20% universal life and 12% traditional life. The Company's sales of individual life insurance (excluding COLI and BOLI) in 2001 consisted of 64% variable life, 16% universal life and 20% traditional life. Term life sales represented 84% of traditional life product sales for the year ended December 31, 2001. Individual Life Insurance. The attractive demographics of an aging population is a key growth driver for our industry. The boomer generation is healthier, wealthier, and living longer. They need products to manage wealth, provide a stream of income, provide protection and manage longevity risk. They have a complex set of needs that plays right into our portfolio of products. o Variable Life Insurance. Our primary variable life insurance product is variable universal life insurance. This product provides life insurance coverage and an investment return linked to an underlying portfolio of investments chosen by the policyholder. Our variable life insurance product portfolio includes joint (second-to-die) and corporate owned life insurance products, as well as single life policies. Second-to-die products are typically used for estate planning purposes and insure two lives rather than one, with the policy proceeds paid after the death of both insured individuals. Corporate owned life insurance products are sold to corporations for a variety of reasons, including, to fund special deferred compensation plans and benefit programs for key employees. We were among the first insurance companies to offer variable life insurance products, beginning in 1980, and we believe the length of our experience in this market is a competitive strength. In 2001, we introduced an innovative product feature that combined a variable life insurance policy with a long-term care feature. o Universal Life Insurance. Our universal life insurance products provide life insurance coverage and cash value that increases based on a credited interest rate which is periodically reset. These policies generally permit policyholders to use any increase in cash value to vary the amount of insurance coverage and the timing and amount of premium payments. Our universal life insurance product portfolio also includes corporate owned life insurance and bank owned life insurance products which are sold to banks to fund post-retirement employee benefit plan liabilities. We participate in the bank owned life insurance market selectively, as special sales opportunities arise. o Traditional Life Insurance Products. Our traditional life insurance products include single life and joint life (second-to-die) whole life insurance, and term life insurance. Participating whole life insurance combines a death benefit with a cash value that generally increases gradually in amount over a period of years, and typically pays a policy dividend. Term life insurance provides only a death benefit, does not build up cash value, and does not pay a dividend. o Long-Term Care Insurance. We entered the individual long-term care insurance (LTC) market in 1987 and the group long-term care insurance market in 1988 and acquired the long-term care insurance business of Fortis, Inc. (Fortis) in March 2000. Our long-term care insurance products provide protection against the large and escalating costs of home health care, assisted living, and nursing home care. With the aging population, the expected inability of government entitlement programs to meet retirement long-term care needs, and a growing public awareness of long-term care insurance, we believe there is excellent growth potential for the long-term care insurance market. Our long-term care insurance products are reimbursement products, which provide benefits only for documented nursing home, assisted living or home or health care expenses. These products are sold on a guaranteed renewable basis, meaning that we are required to renew the policies each year as long as the premium is paid. However, this also gives us the ability to reset the price of the product prospectively, if needed. Our claims history on these products has been favorable relative to our pricing assumptions. 6 JOHN HANCOCK FINANCIAL SERVICES, INC. o Individual Long-Term Care Insurance. Our individual long-term care insurance products are sold to pre-retired and retired customers. The insured typically pays the premium for this product. Throughout 2000 and 2001, we introduced enhanced features in our product. In 2001, we continued to roll out a co-branded Fortis/John Hancock product, introduced a process to use immediate annuity income to pay long-term care premiums, re-joined the California Partnership program and introduced a new portfolio in that state. o Group Long-Term Care Insurance. Our group long-term care insurance products are sold through employer-sponsored plans to employees and retirees, and their eligible relatives. The insured, not the employer, generally pays the premium for this insurance although there is a growing trend among employers to purchase a "core" plan on behalf of their employees, with the option for those employees to "buy up" for additional amounts of coverage. Following selection of one of our plans by an employer, we market our products directly to the employee base. The principal market for our group long-term care insurance products is companies with over 4,000 employees and retirees. We also pursue smaller employers with 1,000 or more employees and retirees in selected industries. In 2001, the Company was selected in partnership with Metropolitan Life Insurance Company, (Met Life), as the providers to the Federal Long-Term Care Insurance Program, which is expected to be the largest LTC program in the country. The government's decision to provide access to LTC insurance is expected to increase awareness of the product among consumers and employers. The Company and Met Life, estimate that a total of about 300,000 individuals will enroll in the program in its first full year of operation, planned to begin later in 2002. Because of the start-up period, the Company does not expect the program to have an impact on earnings in 2002. The following table demonstrates total statutory premiums and deposits, which is the premium we report on the annual statements we file with insurance regulators, life insurance in force and GAAP reserves for our individual life insurance and long-term care products. In addition to premium from sales of new life and long-term care policies, which we refer to as "sales," statutory premiums and deposits includes revenues from renewals of policies, 10% of single premium payments, and premiums from reinsurance assumed by us. We deduct from this measure the premiums that we cede to our reinsurers. Statutory premiums and deposits differ from premiums based on accounting principles generally accepted in the United States (or GAAP) because GAAP requires that premiums on variable and universal life insurance products be accounted for using deposit accounting. Deposit accounting excludes from revenue, the premiums received on these products, and generally shows the fees earned from the products as revenues.
Selected Financial Data Individual Life and Long-Term Care Insurance As of or for the Years Ended December 31 2001 2000 1999 ------------------------------------------------------ (in millions) Total statutory premiums and deposits: Variable life.................................. $ 948.5 $ 922.0 $ 829.8 Universal life (1)............................. 456.1 173.5 117.9 Traditional life............................... 997.3 965.5 1,043.6 Individual long-term care...................... 562.6 455.3 258.6 Group long-term care........................... 98.9 89.8 78.4 ------------------------------------------------------ Total....................................... $ 3,063.4 $ 2,606.1 $ 2,328.3 ====================================================== Life insurance in force: Variable life.................................. $ 58,104.4 $ 57,716.2 $ 56,691.1 Universal life................................. 10,604.5 9,085.6 8,967.2 Traditional life............................... 71,166.0 66,989.3 57,284.8 ------------------------------------------------------ Total....................................... $139,874.9 $133,791.1 $122,943.1 ====================================================== GAAP Reserves: Variable life.................................. $ 6,479.9 $ 6,517.1 $ 6,560.0 Universal life................................. 2,758.1 2,268.7 2,065.7 Traditional life (2)........................... 10,632.2 10,104.8 9,786.3 Individual long-term care...................... 1,717.2 1,317.3 658.0 Group long-term care........................... 474.8 403.4 334.3 ------------------------------------------------------ Total....................................... $ 22,062.2 $ 20,611.3 $ 19,404.3 ======================================================
7 JOHN HANCOCK FINANCIAL SERVICES, INC. (1) Includes bank owned life insurance premiums of $200.0 million and $52.5 million for the years ended December 31, 2001 and 2000. There were no bank owned life insurance premiums for the year ended December 31, 1999. (2) The 2000 balance was adjusted to reflect the adoption of the provisions of SOP 00-3, "Accounting by Insurance Enterprises for Demutualization and Formations of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts" as outlined in Note 1 to the consolidated financial statements. The result was $74.2 million additional reserves for the traditional life product line as of December 31, 2000. Distribution Protection products are distributed through multiple distribution channels including Signator, M Financial Group, Banks, the Internet, and through Group and private label relationships. Our strategy is to provide competitive products and outstanding service. Signator. Signator, created in 1999, is a separate distribution subsidiary. Signator is comprised of our Signator General Agency (GA) which includes our Career Agents and Signator GA Brokerage, Direct Brokerage and Broker/Dealers. The Signator General Agency system includes approximately 1,700 sales personnel. We have transitioned our Career Agents to financial advisors by providing them with highly tailored financial planning tools and market support, as well as an open architecture system which enables them to sell other companies' products. This structure has enabled us to recruit, develop and retain top producers. The biggest opportunity exists in the brokerage arena. More agencies are developing dedicated brokerage structures as part of their overall business model. We have made significant strides to expand into the direct brokerage channel, as well as into the regional Broker/Dealer channel, traditionally an asset-oriented channel that is moving into the protection arena. M Financial Group. M Financial Group is a national producer group founded in 1978 comprised of approximately 105 life insurance producing firms with approximately 425 individual producers operating exclusively in the upper end of the wealth transfer and executive benefit markets. We believe the Life Company has been either the first or second largest provider of life insurance products to the M Financial Group in each of the past three years, although the member firms also sell the products of other prominent U.S. life insurance companies. For the year 2001, we believe we were the largest provider. We have jointly developed a proprietary life insurance product line with M Financial Group to meet the distinct requirements of its producers. We also offer four proprietary investment options of M Fund, Inc. on all variable life insurance products sold by M Financial Group members, in addition to the investment options supported by the variable series trust (VST). In 2000, we became the first provider to roll out Magnastar, M Group's proprietary private placement life insurance product, co-manufactured by M Life, John Hancock Life Insurance Company and John Hancock Variable Life Insurance Company. In addition to these proprietary products, we provide a number of exclusive services to M Financial Group members, including a deferred compensation plan, dedicated sales, underwriting and services teams and participation in special marketing events, as well as M Financial Group sponsored systems and technology initiatives. In addition, M Life Insurance Company shares the insurance risk, through reinsurance, on 50% of most of our policies that its members sell. These products and services and this reinsurance arrangement serve to align M Financial Group producers' incentives with ours. During 2000, the Life Company was the only provider to extend debt financing for M Financial Holdings, Inc.'s purchase of one of its own COLI firms, to assist it in the first step of its long-term aggregation process. The business generated by M Financial Group producers has experienced lower termination or non-renewal (referred to in the industry as "lapse") and mortality rates than the industry average. 8 JOHN HANCOCK FINANCIAL SERVICES, INC. e-Business & Retail Partnerships. This unit, launched in 1996, complements our traditional sales efforts. Through this unit, we sell our products over the Internet and on the telephone directly to consumers. Consumers can call a toll-free number or go directly to our web site to get information, obtain a quote or start an application. This channel offers customers term life insurance, variable life insurance, long-term care insurance and variable annuities. Additionally, we distribute these products through several online partners and key aggregators. To support our efforts we have built a call center and case management unit and developed a streamlined application, payment and issue process. Banks. We offer a full line of life and individual long-term care insurance products through banks that have established an insurance sales force. Sales of insurance products in this channel build on our well developed sales of fixed and variable annuity and mutual fund product sales in the bank channel. Group sales force. Group long-term care insurance products are marketed by a dedicated sales force located in major cities around the country. The sales force works closely with consultants, brokers, and other intermediaries to generate sales and grow existing accounts. Private label arrangements. In 1999, we launched an individual long-term care product which is being sold through another insurer under a private label arrangement. We continue to explore private label arrangements with respect to various other products. 9 JOHN HANCOCK FINANCIAL SERVICES, INC. The table below shows Protection Segment sales by distribution channel for the periods indicated. Individual life insurance sales exclude excess premiums, which are premiums that build cash value but do not purchase any additional face amount of insurance, on variable life and universal life insurance products and premiums on corporate owned life insurance and bank owned life insurance policies covering more than 200 lives. Sales include 10% of single premium payments on universal life and whole life insurance policies. Group long-term care sales include (i) sales made to new employer groups initially effective in the year, (ii) re-enrollments on existing accounts, (iii) sales constituting increased coverage to existing insureds, (iv) and sales to non-employer groups and new employees added to a group. COLI is sold only by Signator, M Financial Group and through banks. BOLI is sold only by Signator and M Financial Group.
Protection Segment Sales by Distribution Channel For the Years Ended December 31 2001 2000 1999 --------------------------------------- (in millions) Signator: (1) Individual life--excluding COLI and BOLI (2)......... $137.7 $136.0 $125.1 Individual life--COLI................................ 74.2 23.7 8.5 Individual life--BOLI................................ 12.2 0.8 -- Individual long-term care (3)........................ 98.6 97.3 70.6 M Financial Group: Individual life--excluding COLI...................... 45.9 59.9 55.8 Individual life--COLI................................ 38.4 29.7 18.4 Individual long-term care............................ 0.2 0.2 0.1 e-Business & Retail Partnerships: Individual life...................................... 10.4 19.5 8.6 Individual long term care............................ 0.9 -- -- Dedicated Sales Force: Group long-term care (4)............................. 16.8 11.5 13.7 Other: Individual life...................................... -- 0.2 0.4 Individual long-term care (5)........................ 2.5 2.6 1.5 Total: Individual life--excluding COLI and BOLI............. 194.0 215.6 189.9 Individual life--COLI and BOLI....................... 124.8 54.2 26.9 Individual long-term care (6)........................ 102.2 100.1 72.2 Group long-term care................................. 16.8 11.5 13.7
(1) Signator includes sales by the Signator Financial Network as well as all insurance brokerage sales, including sales related to Fortis. (2) Revised to include broker/dealer and financial institution sales of $7.0 million and $2.2 million for the years ended December 31, 2000 and 1999, respectively. (3) Revised to include broker/dealer sales of $7.3 million and $6.6 million, financial institution sales of $1.0 million and $0.7 million, e-business sales of $0.2 million and $--, and Fortis Reinsurance premiums of $23.9 million and $--, respectively for the years ended December 31, 2000 and 1999. (4) Revised to include new enrollments and coverage additions of $5.4 million and $7.4 million for the years ended December 31, 2000 and 1999, respectively. (5) Revised to include private label sales of $2.3 million and exclude e-business sales of $0.2 million in 2000. (6) Individual long-term care sales were revised for private label sales, including an additional $2.3 million and an additional $1.3 million in the years ended 2000 and 1999, respectively and Fortis Reinsurance premiums, including $23.9 million and $--, respectively, for the years ended 2000 and 1999. 10 JOHN HANCOCK FINANCIAL SERVICES, INC. Underwriting Insurance underwriting involves a determination of the type and amount of risk that an insurer is willing to accept and the premium to be charged. Underwriting also determines the amount and type of reinsurance levels appropriate for a particular type of risk. By utilizing reinsurance, we can limit our risk and improve product pricing. Our underwriting standards for life insurance are intended to result in the issuance of policies that produce mortality experience consistent with the assumptions used in product pricing. Our underwriting is based on our historical mortality experience, as well as the experience of the insurance industry and of the general population. We continually compare our underwriting standards against the industry to mitigate our exposure to higher risk business and to stay abreast of industry trends. For individual long-term care products, we use separate but similar underwriting criteria appropriate to the morbidity risks insured. Our overall profitability depends to a large extent on the degree to which our mortality and/or morbidity experience matches our pricing assumptions. Our life and long-term care insurance underwriters evaluate policy applications on the basis of the information provided by the applicant and others. We implemented new programs to improve our underwriting process. These include the Telephone Interview Program, implemented in 1999, which permits eligible long-term care clients to be interviewed over the telephone by trained nurses, replacing the collection of a physician's statement in 50% of the cases, leading to lower costs and faster cycle times, without any loss of required underwriting information. We also implemented the STAR (System to Assess Risk) underwriting system in 2000 to improve the risk assessment process through automation which has resulted in a reduction of cycle times, improved productivity and a reduction of total costs. We are hard at work on the next phase of our underwriting automation projects including on-line conditional approval and reflexive questioning through our tele-application unit to better set client expectations regarding underwriting classification. These initiatives are expected to further reduce our unit costs by streamlining our underwriting tools and increasing policy taken rates. Group long-term care underwriting is conducted on both the employer group level and the individual level. Our group long-term care corporate customers generally offer their employees the opportunity to purchase coverage on a "guaranteed-issue" basis, meaning that all employees are eligible for insurance coverage, and offer individually underwritten coverage to family members. We rely on our experience in underwriting large groups in order to set prices that take into account the underwriting arrangements, the general health conditions of the corporate customers' employees, the specifics of the negotiated plan design, and other demographic and morbidity trends. Group products are written on a guaranteed renewable basis, which permits repricing if necessary. Our corporate owned and bank owned life insurance policies covering multiple lives are issued on a guaranteed issue basis, where the amount of insurance issued per life on a guaranteed basis is related to the total number of lives being covered and the particular need for which the product is being purchased. Guaranteed issue underwriting applies to employees actively at work, and product pricing reflects the additional guaranteed issue underwriting risk. Reserves We establish and report liabilities for future policy benefits on our balance sheet to meet the obligations under our insurance policies and contracts. Our liability for variable life insurance and universal life insurance policies and contracts is equal to the cumulative account balances. Cumulative account balances include deposits plus credited interest less expense and mortality fees and withdrawals. Future policy benefits for our traditional life, individual long-term care and group long-term care insurance policies are calculated based on a set of actuarial assumptions that we establish and maintain throughout the lives of the policies. Our assumptions include investment yields, mortality, morbidity and expenses. Competition We face significant competition in all our retail protection businesses. Our competitors include other large and highly rated insurance carriers as well as certain banks, securities brokerage firms, investment advisors and other financial intermediaries marketing annuities and mutual funds. Some of these competitors have greater financial strength and resources and have penetrated more markets. In particular, national banks may become more significant competitors in the future for insurers who sell annuities as a result of recently enacted legislation, the Gramm-Leach-Bliley Act, which permits affiliations among banks, securities firms and insurance companies. For additional information, see the Regulation section, included elsewhere in this Form 10-K. In the e-commerce arena, we also face competition from internet start-up companies and traditional competitors that have established internet platforms. 11 JOHN HANCOCK FINANCIAL SERVICES, INC. We believe that we distinguish ourselves from our competitors through the combination of: o our strong and reputable brand name; o our strong financial ratings; o our broad range of competitive and innovative products and our ability to create unique product combinations for various distribution channels; o the depth of our experience as one of the first companies to offer variable life insurance, individual long-term care insurance and group long-term care insurance; o our brand penetration within each channel of distribution; o our dedication to customer service. Competition also exists for agents and other distributors of insurance products. Much of this competition is based on the pricing of products and the agent or distributor compensation structure. We believe that our competitive strengths coupled with the advantages of our Signator network will enable us to compete successfully to attract and retain top quality agents and distributors. Reinsurance We reinsure portions of the risks we assume for our protection products. The maximum amount of individual ordinary life insurance retained by us on any life is $10 million under an individual policy and $20 million under a second-to-die policy. As of January 1, 2001, we established additional reinsurance programs, which limit our exposure to fluctuations in life claims for individuals for whom the net amount at risk is $3 million or more. As of January 1, 2001, the Company entered into an agreement with two reinsurers covering 50% of its closed block business. The treaties are structured so they will not affect policyholder dividends or any other financial items reported within the closed block, which was established at the time of the Life Company's demutualization to protect the reasonable dividend expectations of certain participating life insurance policyholders. 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. For a further description of operating results, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Protection Segment, included elsewhere in this Form 10-K. Asset Gathering Segment Overview Through our Asset Gathering Segment, we offer individual annuities, mutual fund products and investment management services. Individual annuities include variable and fixed annuities, both immediate and deferred. Mutual fund products primarily consist of open-end mutual funds and closed-end funds. Our investment management services include retirement services, and the management of institutional accounts. In this segment, we also include the results of Signator, John Hancock Signature Services, our servicing subsidiary, First Signature Bank & Trust Company, our limited-service banking subsidiary, and Essex Corporation, one of the nation's largest intermediaries between banks and product manufacturers for annuities. 12 JOHN HANCOCK FINANCIAL SERVICES, INC. The Asset Gathering Segment contributed 12.3%, 13.5% and 13.9% of consolidated operating revenues and 18.4%, 17.4% and 18.8% of consolidated after-tax operating income in the years ended December 31, 2001, 2000 and 1999, respectively. The Asset Gathering Segment generated operating revenues of $1,155.0 million, $1,195.9 million and $1,057.3 million and after-tax operating income of $148.3 million, $128.8 million and $115.1 million in 2001, 2000 and 1999, respectively. The Asset Gathering Segment has achieved the following financial results for the periods indicated: As of or for the Years Ended December 31, 2001 2000 1999 -------------------------------------------------- (in millions) Sales: Variable annuities (1).... $ 639.6 $ 1,120.8 $ 847.7 Fixed annuities (1)....... 1,478.0 880.4 648.6 John Hancock Funds (2).... 5,001.4 5,307.0 3,899.6 -------------------------------------------------- Total................ $ 7,119.0 $ 7,308.2 $ 5,395.9 ================================================== Assets: Variable annuities........ $ 6,750.0 $ 7,425.3 $ 7,877.6 Fixed annuities........... 7,428.2 5,988.4 5,693.0 John Hancock Funds........ 338.4 410.5 442.9 Other..................... 223.9 243.0 283.7 -------------------------------------------------- Total................ $14,740.5 $14,067.2 $14,297.2 ================================================== Assets Under Management: Variable annuities........ $ 6,357.1 $ 7,116.0 $ 7,598.1 Fixed annuities........... 6,876.6 5,640.8 5,255.0 John Hancock Funds (3).... 29,285.8 31,725.8 32,696.6 (1) Represents statutory annual statement values. Statutory revenues include premiums and deposits on variable and fixed annuities. Statutory premiums and deposits differ from GAAP premiums because GAAP requires that variable and certain fixed annuity products be accounted for using deposit accounting. Deposit accounting excludes from revenue the premiums and deposits received on these products. Fixed annuity sales include considerations from supplemental contracts. Variable annuity sales in 2001 and 2000 exclude $1,910.5 million and $25.0 million, respectively, in safe harbor internal exchanges. (2) Mutual fund and institutional asset sales are defined as new inflows of funds from investors into our investment products. Sales of mutual fund products are recorded on the trade date. Sales of institutional investment products are recorded on the date a firm commitment is established. Sales of retail money market products are included in the 1999 balances above. If sales of retail money market products had been excluded from mutual fund and institutional asset sales in 1999, sales would have been $3,728.5 million for the year ended December 31, 1999. (3) Includes $3.6 billion, $2.9 billion and $2.3 billion of our general account assets and assets managed for certain John Hancock subsidiaries and assets managed for variable annuities as of December 31, 2001, 2000 and 1999, respectively. Products and Markets Annuities We offer variable and fixed annuities, immediate and deferred, to a broad range of consumers through multiple distribution channels. Annuities may be deferred, where assets accumulate until the contract is surrendered, the contractholder dies, or the contractholder begins receiving benefits under an annuity payout option; or immediate, where payments begin within one year of issue and continue for a fixed period of time or for life with or without a period certain. Variable annuities are separate account products, where the contractholder bears the investment risk and has the right to allocate their funds among various separate investment subaccounts. Our major source of revenues from 13 JOHN HANCOCK FINANCIAL SERVICES, INC. variable annuities is mortality and expense fees charged to the contractholder, generally determined as a percentage of the market value of the underlying assets under management. We introduced a new variable annuity product line, the Revolution series, in 1999, and became the first in the industry to offer assistance with the cost of long-term care, with no underwriting. Revolution is targeted to the needs of aging consumers who want to accumulate funds for retirement and provide a hedge against the cost of long-term care. Revolution sales comprised 88% of total variable annuity sales for 2001. Fixed annuities are general account products, where we bear the investment risk as funds are invested in our general account and a stated interest rate is credited to the contractholders' accounts. Our major source of income from fixed annuities is the spread between the investment income earned on the underlying general account assets and the interest credited to contractholders' accounts. Investment management skills are critical to the growth and profitability of our annuity business. In addition to variable annuity products that offer the same fund choices as our variable life insurance products, we also offer variable annuities that offer funds managed by our subsidiaries. Our variable annuity assets are managed by John Hancock Funds, our mutual fund subsidiary, and by Independence Investment LLC, our internal institutional equity manager. All our fixed annuity assets are managed internally. The relative proportion of our total annuity sales represented by fixed and variable annuities is generally driven by the relative performance of the equity and fixed income markets. JHFS's total annuity deposits were comprised of 69.7% fixed annuity and 30.3% variable annuity for the year ended December 31, 2001 and 43.6% fixed annuity and 56.4% variable annuity for the year ended December 31, 2000. The following table presents certain information regarding our annuity reserve activity for the periods indicated:
Annuity Reserve Activity As of or for the Years Ended December 31 2001 2000 1999 ------------------------------------------------------ (in millions) Variable Annuities: Reserves, beginning of year................................. $ 7,182.8 $ 7,683.2 $ 6,660.4 Deposits and other policy credits (1).................. 641.3 1,162.3 847.7 Interest credited and investment performance........... (570.9) (538.3) 942.1 Surrenders and benefits................................ (814.8) (997.6) (655.1) Product charges........................................ (115.3) (126.8) (111.9) ------------------------------------------------------ Reserves, end of year....................................... $ 6,323.1 $ 7,182.8 $ 7,683.2 ====================================================== Fixed Annuities: Reserves, beginning of year................................. $ 5,365.8 $ 4,946.4 $ 4,591.3 Premiums, deposits and other policy credits (1)........ 1,478.0 899.1 648.6 Interest credited...................................... 344.7 291.0 262.3 Surrenders and benefits................................ (680.7) (759.2) (547.2) Product charges........................................ (10.4) (11.5) (8.6) ------------------------------------------------------ Reserves, end of year....................................... $ 6,497.4 $ 5,365.8 $ 4,946.4 ====================================================== Total Annuities: Reserves, beginning of year................................. $12,548.6 $12,629.6 $11,251.7 Premiums, deposits and other policy credits (1) (2).... 2,119.3 2,061.4 1,496.3 Interest credited and investment performance........... (226.2) (247.3) 1,204.4 Surrenders and benefits................................ (1,495.5) (1,756.8) (1,202.3) Product charges........................................ (125.7) (138.3) (120.5) ------------------------------------------------------ Reserves, end of year....................................... $12,820.5 $12,548.6 $12,629.6 ======================================================
(1) Included in this line for the year ended December 31, 2000 are policy credits of $18.7 million for fixed annuity and $16.5 million for variable annuity which were added to annuity reserves as part of the demutualization. (2) Variable annuity deposits exclude internal exchanges as part of the safe harbor internal exchange program of $1,910.5 million for the year ending December 31, 2001. Variable annuity deposits include $25.0 million in safe harbor internal exchanges for the year ended December 31, 2000. 14 JOHN HANCOCK FINANCIAL SERVICES, INC. John Hancock Funds We offer a variety of mutual fund products and related investment management services through John Hancock Funds. We employ a team style in the management of our funds. These teams manage portfolios in accordance with a variety of specified strategies, which we believe gives us a competitive advantage over competitors, many of whom deploy only one style across a family of funds. As of December 31, 2001, our fixed income and equity research staffs included over 59 portfolio managers and analysts with an average of 16 years of experience. We are recruiting additional investment professionals to enhance our capabilities across both fundamental and quantitative analysis and investment styles. This ongoing commitment to investment research further enables us to develop new products intended to strengthen our fund offerings, across a broad array of investment styles. While this business includes primarily assets managed for third-party retail clients, the investment professionals providing these services also manage assets underlying our general account and separate account products, as well as variable life, annuity products and Maritime. o Mutual Funds. John Hancock Funds offers a broad array of open-end mutual funds and closed-end funds to a broad base of consumers across varying income levels. Open-end mutual funds are subject to redemption at any time by investors. After their initial public offering, the shares of closed-end funds are not subject to redemption and, accordingly, represent a more stable base of assets than open-end funds. As of December 31, 2001, 68.0% of our mutual fund assets under management were invested in open-end mutual funds. We also offer our mutual funds as investment options in variable annuities and variable life insurance products. Our product offerings cover both domestic and international equity and fixed-income markets. In 2001, the Company added a Biotechnology fund to its investment offerings. o Retirement Services. In 2000 and prior years, we offered mutual funds and record-keeping services to 401(k) plan sponsors, primarily small-and mid-size companies, on either a full-service or on an unbundled basis. In March 2001, we sold our full service 401(k) record-keeping business operated out of John Hancock Funds. We will continue to manage the assets of the business and the purchaser has assumed the record-keeping and support responsibilities. The business includes approximately 1,000 plans and 63,000 participants. We also offer traditional IRA programs and a complete line of retirement products, including: SIMPLE IRA and SIMPLE 401(k) plans for companies with no more than 100 eligible employees and no other qualified plan; Simplified Employee Pensions for companies of any size, including self-employed persons, partnerships and corporations; and Roth IRA plans for individuals. o Institutional Services. Through funds and private accounts, John Hancock Funds manages assets for public pension plans, high net-worth individuals, corporate pension plans, pooled separate accounts, union pension plans, foundations and endowments. 15 JOHN HANCOCK FINANCIAL SERVICES, INC. The following table presents certain information regarding the assets under management by John Hancock Funds for the periods indicated:
Asset Flow Summary For the Years Ended December 31 2001 2000 1999 ------------------------------------------------------ (in millions) Retail Mutual Funds: Assets under management, beginning of year......... $26,541.4 $27,842.4 $29,248.7 Deposits and reinvestments.................... 3,958.7 5,333.6 3,565.5 Redemptions and withdrawals................... (4,300.8) (5,394.1) (5,393.3) Net money market funds........................ (205.5) (90.9) (201.0) Market appreciation (depreciation)............ (2,770.2) (713.7) 1,051.4 Fees.......................................... (347.5) (435.9) (428.9) ------------------------------------------------------ Assets under management, end of year (1)........... $22,876.1 $26,541.4 $27,842.4 ====================================================== Institutional Investment Management: Assets under management, beginning of year......... $ 5,184.4 $ 4,854.2 $ 5,696.5 Deposits and reinvestments.................... 1,924.4 677.1 494.3 Redemptions and withdrawals................... (822.3) (571.2) (1,561.1) Market appreciation (depreciation)............ 137.2 237.3 240.3 Fees.......................................... (14.0) (13.0) (15.8) ------------------------------------------------------ Assets under management, end of year............... $ 6,409.7 $ 5,184.4 $ 4,854.2 ====================================================== Total: Assets under management, beginning of year......... $31,725.8 $32,696.6 $34,945.2 Deposits and reinvestments.................... 5,883.1 6,010.7 4,059.8 Redemptions and withdrawals................... (5,123.1) (5,965.2) (6,954.4) Net money market funds........................ (205.5) (90.9) (201.0) Market appreciation (depreciation)............ (2,633.0) (476.4) 1,291.7 Fees.......................................... (361.5) (448.9) (444.7) ------------------------------------------------------ Assets under management, end of year (1)........... $29,285.8 $31,725.8 $32,696.6 ======================================================
(1) Retail mutual fund assets under management includes $3.7 billion, $5.3 billion and $5.4 billion in retirement plan assets at December 31, 2001, 2000 and 1999, respectively. Distribution Asset Gathering products are distributed through Signator, independent broker/dealers, banks, directly to state lottery commissions and, both directly and through consultants to institutions and retirement plan sponsors. Signator. Signator, through its broker/dealer and insurance agency subsidiaries, is the primary distribution channel for our variable annuities. We also sell fixed annuities, mutual funds, 401(k) programs and other retirement programs through these entities. Broker/Dealers. Broker/dealers, which include regional and national brokerage firms and financial planners, are the primary distribution channel for our mutual funds. Broker/dealers also sell our fixed and variable annuities. We support this distribution channel with an internal network of wholesalers. These wholesalers meet directly with broker/dealers and financial planners and are supported by an extensive home office sales staff. Pension Consultants. We market investment management services to pension consultants nationwide who provide advisory services to plan sponsors. Marketing efforts are supported by dedicated client relationship officers who keep clients updated on portfolio performance information. Banks. Starting with sales of fixed annuities, we have expanded our offerings through banks to include mutual funds and variable annuities. Starting in 1998, we added additional products to our bank offerings. We believe we 16 JOHN HANCOCK FINANCIAL SERVICES, INC. are well positioned to take advantage of the growth opportunity we see for multiple product offerings, coupled with added value marketing programs and customized service support for banks. Essex Corporation. In January 1999, we purchased Essex Corporation, one of the nation's largest intermediaries between banks and product manufacturers for annuities. Essex Corporation also serves as an intermediary in the distribution of mutual funds. Essex Corporation's primary source of income is commissions on sales of these products. E-Business and Retail Partnerships. We are currently offering a variable annuity product through the e-Business and Retail Partnerships channel where customers may call a toll-free number and obtain an application to purchase the product. In the fourth quarter of 2000, we also launched our e-variable annuity product, which models our term product aggregator strategy, but in the annuity market. The table below shows Asset Gathering Segment sales by distribution channel for the periods indicated:
Asset Gathering Segment Sales by Distribution Channel For the Years Ended December 31 2001 2000 1999 ------------------------------------------------------ (in millions) Broker/Dealers: Variable annuities (2)............. $ 145.2 $ 334.7 $ 126.5 Fixed annuities ................... 40.5 1.3 37.3 Mutual funds....................... 2,816.6 3,930.3 2,639.2 Signator: Variable annuities (2)............. 414.0 653.0 685.1 Fixed annuities.................... 131.9 80.6 71.2 Mutual funds....................... 367.5 616.6 794.9 Pension Consultants: Mutual funds....................... 1,700.6 596.6 317.8 Banks: Variable annuities................. 45.7 130.0 25.7 Fixed annuities ................... 539.4 189.7 54.4 Mutual funds....................... 104.4 152.8 127.0 Essex: Variable annuities................. 14.3 24.7 6.9 Fixed annuities.................... 729.5 552.3 422.0 Mutual funds....................... 12.3 10.7 20.7 e-Business and Retail Partnerships ..... 19.2 0.7 3.5 Other (1)............................... 37.9 34.2 63.7 ------------------------------------------------------ Total.............................. $7,119.0 $7,308.2 $5,395.9 ======================================================
(1) Other includes single premium immediate annuities, including lottery-related payout contracts, and supplemental contracts involving life contingencies. (2) Variable annuity deposits exclude internal exchanges as part of the safe harbor internal exchange program of $1,910.5 million and $25.0 million, respectively, for the years ending December 31, 2001 and 2000. Reserves We establish and report liabilities for future policy benefits on our balance sheet to meet the obligations under our annuity contracts. Our liability for variable annuity contracts and deferred fixed annuity contracts is equal to the cumulative account balances. Cumulative account balances include deposits plus credited interest or change in investment value less expense and mortality fees, as applicable, and withdrawals. Future policy benefits on our immediate fixed annuity contracts are calculated based on a set of actuarial assumptions that we establish and maintain throughout the lives of the contracts. 17 JOHN HANCOCK FINANCIAL SERVICES, INC. Competition We face substantial competition in all aspects of our asset gathering business. The annuity business is highly competitive. We compete with a large number of insurance companies, investment management firms, mutual fund companies, banks and others in the sale of annuities. We compete for mutual fund business with hundreds of fund companies. Many of our competitors in the mutual fund industry are larger, have been established for a longer period of time, offer less expensive products, have deeper penetration in key distribution channels and have more resources than us. Competition in the asset gathering business is based on several factors. These include investment performance and the ability to successfully penetrate distribution channels, to offer effective service to intermediaries and consumers, to develop products to meet the changing needs of various consumer segments, to charge competitive fees and to control expenses. We believe the Asset Gathering Segment is well positioned to increase assets under management in the face of this competition. Our competitive strengths include our ability to: o deliver strong investment performance, and enhance this performance by expanding the depth and breadth of fundamental research, portfolio management teams, and investment professionals; o develop new products and expand into new markets; and o provide excellent service to investors and distributors. Distribution and Service Organizations Within the Asset Gathering Segment, we also include our distribution company, Signator, our servicing subsidiary, John Hancock Signature Services and Hancock Partners. Signator is the holding company for Signator Investors, Inc. and several insurance agencies. Signator Investors, Inc. representatives are able to offer securities and financial advisory products and services including general securities trading, wrap account products and other financial instruments to their clients, including not only John Hancock mutual funds and variable products, but also the products and services of other companies. John Hancock Signature Services combines and coordinates customer service functions for life insurance, annuity and mutual fund customers. The services provided by John Hancock Signature Services, Inc. include new business processing underwriting, contract change services, claims processing, premium collection and processing, billing, and preparation of annual or quarterly statements. Through this subsidiary, we seek to provide an integrated and comprehensive customer service function on a cost-effective basis. This system permits a customer to have a single point of contact for most servicing needs. Hancock Partners is a distribution organization comprised of leading independent U.S. financial services organizations serving the upscale and business markets. Banking Products and Services First Signature Bank & Trust Company is a limited-service bank, which accepts demand deposits but does not make commercial loans. It provides consumer banking products and services to our customers. First Signature Bank & Trust Company had $156.5 million and $181.8 million in assets as of December 31, 2001 and 2000. For a further description of operating results, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Gathering Segment, included elsewhere in this Form 10-K. 18 JOHN HANCOCK FINANCIAL SERVICES, INC. Guaranteed and Structured Financial Products Segment Overview Through our Guaranteed and Structured Financial Products Segment (G&SFP), we offer a variety of specialized products and services to qualified defined benefit and defined contribution retirement plans, and other domestic and international investors. Our products include non-guaranteed, partially guaranteed and fully guaranteed general account and separate account investment options. We distribute these products through home office and regional sales representatives either directly to institutional buyers or indirectly through financial intermediaries, consultants and brokers. The G&SFP Segment contributed 29.9%, 29.1% and 28.9% of consolidated operating revenues and 30.3%, 28.7% and 33.0% of consolidated after-tax operating income in the years ended December 31, 2001, 2000 and 1999, respectively. The G&SFP Segment generated revenues of $2,793.1 million, $2,574.3 million and $2,194.0 million and after-tax operating income of $244.2 million, $212.1 million and $202.4 million in 2001, 2000 and 1999, respectively. G&SFP Segment financial information is summarized below:
As of December 31 2001 2000 1999 ------------------------------------------------------ (in millions) Assets Under Management: Spread-based products....................................... $22,469.0 $19,514.6 $17,502.2 Fee-based products.......................................... 8,476.3 10,846.1 11,862.8 ------------------------------------------------------ Total....................................................... $30,945.3 $30,360.7 $29,365.0 ====================================================== Spread-based Statutory Premiums and Deposits: Fund-type products General account GICs................................... $ 1,462.6 $ 1,878.7 $ 2,442.2 Funding agreements..................................... 3,256.2 2,578.6 2,775.2 Single premium annuities.................................... 893.6 741.6 451.8 ------------------------------------------------------ Total Spread-based Statutory Premiums and Deposits..... $ 5,612.4 $ 5,198.9 $ 5,669.2 ====================================================== Fee-based Statutory Premiums and Deposits: General account participating pension fund-type products and annuity contracts.................................... $ 468.9 $ 467.0 $ 527.9 Structured separate accounts................................ 77.4 50.3 615.7 Participating separate account annuities.................... 66.9 (46.3) (60.4) Separate investment accounts................................ 72.4 288.9 333.1 ------------------------------------------------------ Total Fee-based Statutory Premiums and Deposits $ 685.6 $ 759.9 $ 1,416.3 ======================================================
Statutory premiums and deposits differ from GAAP premiums because GAAP requires that premiums on general account GICs, funding agreements, general account participating pension products, separate account GICs, separate account annuities and separate investment accounts be accounted for using deposit accounting. Deposit accounting excludes the contributions and deposits received from revenue and generally shows only the fees and investment income earned from these products as revenues. Products and Markets The G&SFP Segment offers spread-based products and fee-based products in a variety of markets. Spread-based products serve the larger and faster growing segment of the market. Fee-based products are typically niche products that have less overall growth potential. The general account Guaranteed Investment Contract (GIC) has been the predominant product issued in the qualified defined contribution plan market. Single premium and separate account annuities are primarily limited to qualified and non-qualified defined benefit plans. Funding agreements are issued to non-qualified domestic and international institutional investors. By working closely with our customers to develop customized investment programs, we have built a leading market share in several important markets, including general account GICs, funding agreements and single premium annuities. 19 JOHN HANCOCK FINANCIAL SERVICES, INC. Spread-Based Products. Our spread-based products provide a guaranteed rate of return to the customer. We derive earnings on these products primarily from the difference between the investment returns on the supporting assets and the guaranteed returns provided to customers. Our spread-based products include both fund-type products and single premium annuities. o Fund-type products. Our fund-type products consist of the following: General account GICs. GICs are annuity contracts that pay a guaranteed rate of return. GICs are primarily marketed to sponsors of tax-qualified retirement plans such as 401(k) plans. The guaranteed rate of return on GICs can be a fixed rate or a floating rate based on an external market index. Funding agreements. Funding agreements are investment contracts that pay a guaranteed rate of return. However, funding agreements generally are issued to corporations, mutual funds and other institutional investors and, unlike GICs, are not typically used to fund retirement plans. The guaranteed rate of return on funding agreements can be a fixed rate or a floating rate based on an external market index. o Single premium annuities. Single premium annuities are immediate or deferred annuity contracts, which provide for payments of a guaranteed amount commencing at a specified time, typically at retirement. These annuities are sold primarily to defined benefit plan closeouts; they are also offered in the structured settlement market. The two most common types of annuities are the straight life annuity, which makes payments for the life of a retired annuitant, and the joint and survivor annuity, which continues to make payments to a spouse after the death of the annuitant. Fee-Based Products. Our fee-based products generally pass the investment results of invested assets through to the contractholder with no, or minimal, guarantees. We derive earnings on these products primarily from expense, risk, and profit charges that are generally assessed on the basis of assets under management. Fee-based businesses provide relatively stable revenues and have lower capital requirements than our spread-based businesses. Our fee-based products include: o Participating general account fund-type products and annuity contracts. These products are funding vehicles for pension plans that pass investment results through to the contractholder, after risk and profit charges. Annuity guarantees for these products are supported by asset adequacy requirements under which assets must be maintained at levels at least 5% above the annuity reserve. If the level of assets held under the contract falls below this threshold, we may liquidate assets equal to the annuity reserve and apply the assets to purchase a fully guaranteed annuity. o Structured Separate Accounts. These products pass the investment results of a separate account through to the contractholder and contain only minimal guarantees. Contractholders may select from among flexible investment options provided by our various investment managers. The structured separate account business leverages the strong marketing relationships developed in our general account GIC business. o Participating separate account annuities. These products are funding vehicles for pension plans which offer customers an insured pension-funding program in conjunction with a broad range of investment options, including both equity and fixed-income investment classes. The risk associated with providing these annuities is mitigated by excess collateral maintenance requirements, which vary depending on the investment option selected. If the collateral falls below the maintenance requirements, we may liquidate assets equal to the annuity reserve and apply the assets to purchase a fully guaranteed annuity. o Separate investment accounts. These are non-guaranteed group annuity contracts under which assets are held in a separate account. We typically use affiliated investment advisors to manage these assets. We may also use non-affiliated investment managers if the customer so requires. Because these products do not provide guarantees, most new sales of separate investment accounts are reported in the Investment Management Segment. Existing agreements, however, continue to be reported in and serviced by the Guaranteed and Structured Financial Products Segment because of customer relationships. Distribution We distribute our guaranteed and structured financial products through a variety of channels. General and separate account GICs are sold through our regional representatives to plan sponsors, or to GIC managers who represent plan sponsors. Funding agreements are sold either directly, through brokers, or through investment banks 20 JOHN HANCOCK FINANCIAL SERVICES, INC. in the form of medium-term notes. Annuities are sold through pension consultants who represent defined benefit plan sponsors or through brokers who receive a commission for sales of our products. We have an experienced sales staff that develop and maintain relationships with target customers, consultants, and other financial intermediaries. We believe that our consistent market presence over the past two decades has created strong and valuable relationships with a large segment of the customer base. Spread-Based Products Risk Management Because of the significant guarantees provided as part of our spread-based product offerings, risk management is particularly important in this line of business. To facilitate risk management, we segregate and manage the assets supporting our spread-based products separately from the rest of our general account. Our risk management strategy incorporates a sophisticated asset/liability matching system that is based on: o Managing interest rate exposure by closely matching the relative sensitivity of asset and liability values to interest rate changes, i.e. controlling the "duration mismatch" of assets and liabilities. o Using sophisticated systems and processes to project cash flows for each asset and each liability and to measure with precision the sensitivity of assets and liabilities to interest rate changes. o Writing contracts that typically have a predictable maturity structure and do not have premature surrender or redemption provisions. o Monitoring all contribution and withdrawal activity in each contract to anticipate deviations from expected cash flows. o Establishing working groups with representatives from our various business units, to facilitate interaction among investment management, sales management, risk management, financial management and the pricing staff. For additional information, see Quantitative and Qualitative Information about Market Risk, included elsewhere in this Form 10-K. Underwriting Underwriting is most significant for the following products in this segment: o General Account GICs. In developing pricing proposals for new contracts, our underwriters estimate both base-line cash flows and also likely variance from the base line due to plan participants reallocating assets from the "stable value" option of their defined contribution plan. Our underwriters utilize customized pricing models that generate plan-specific risk charges for each customer's book value payment provision. If these pricing models project the risk of losses exceeding customary thresholds, instead of rejecting the business, our underwriters can modify the proposal by suggesting the use of risk reduction techniques designed to shift some of the risk of redemptions back to the plan or to a third party. o Single Premium Annuities. We underwrite immediate annuities using recent mortality experience and an assumption of continued improvement in annuitant longevity. We underwrite deferred annuities by analyzing not only mortality risk but also the expected time to retirement. Reserves We establish and report liabilities for contractholders' funds and future policy benefits to meet the obligations on our policies and contracts. Our liability for general account GICs, funding agreements, and fee-based products is equal to the cumulative account balances for these products. Cumulative account balances include deposits plus credited interest or investment earnings less expense charges and withdrawals. Future policy benefits for our single premium annuity contracts are calculated based on a set of actuarial assumptions that we establish and maintain throughout the lives of the contracts. Our assumptions include investment yields, mortality and the expected time to retirement. Competition Our Guaranteed and Structured Financial Products Segment operates in a variety of highly competitive institutional markets. Although a large number of companies offer these products, the market is concentrated. Through the first three quarters of 2001, five insurers, including the Life Company, issued approximately 60% of 21 JOHN HANCOCK FINANCIAL SERVICES, INC. total GICs and funding agreements issued by U.S. insurance companies reporting to LIMRA; and five insurers, including the Life Company, issued more than 70% of total single premium annuities. Our competitors include a variety of well-recognized insurance companies, domestic and foreign banks and other institutional investment advisors. We believe that we are able to compete successfully in our markets as a result of our strong financial ratings, investment management expertise, national distribution, flexible product design and competitive pricing. Competition in this market is restricted almost exclusively to insurance companies with superior or excellent financial ratings. The requirement for strong financial ratings reduces pressure on margins by limiting the number of potential competitors and by lowering our cost of funds. For a further description of operating results, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Guaranteed and Structured Financial Products Segment included elsewhere in this Form 10-K. Investment Management Segment Overview Through our Investment Management Segment, we provide investment management services to domestic and international institutions. While this segment includes primarily assets managed for third-party institutional clients, the investment professionals providing these services also manage assets underlying our general account and separate account products, as well as variable life and annuity and mutual fund products. The Investment Management Segment attracts funds from corporate and public pension plan sponsors, banks, insurance companies, mutual funds, and other domestic and international institutions. The Investment Management Segment represented 23.3%, 26.5% and 31.6% of our total assets under management as of December 31, 2001, 2000 and 1999, which were $124.2 billion, $125.2 billion and $127.3 billion, respectively. Investment Management Segment assets were $2,049.8 million, $3,124.5 million and $3,531.4 million as of December 31, 2001, 2000 and 1999, respectively. The Investment Management Segment contributed $143.2 million, $212.0 million and $189.9 million of consolidated operating revenues and $29.8 million, $46.8 million and $37.3 million of consolidated after-tax operating income in the years ended December 31, 2001, 2000 and 1999, respectively. Products and Markets The Investment Management Segment is primarily a fee-based investment advisory business in which we do not offer guarantees to our customers. We provide a variety of investment structures, such as investment advisory client portfolios, individually managed and pooled separate accounts, registered investment company funds, bond and mortgage securitizations, and mutual fund management capabilities. Our investment management expertise covers a wide range of private and publicly-traded asset classes and is based on fundamental research and disciplined, quantitatively-based analysis and asset-liability management. Our private fixed income, equity, commercial mortgage and alternative asset operations have strong credit analysis capabilities and deal origination expertise. These operations enjoy broad networks of relationships with intermediaries giving them early access to new investment opportunities. The capabilities of the Investment Management Segment include: Public Fixed Income and Equity Investments. Through Independence Investment LLC. We provide active stock and bond management to pension funds, endowments, and other institutions. We provide core, value, growth, medium-cap, balanced and market neutral investment strategies. We also offer international stock and bond management. In addition, we offer active, quantitative investment management services in the high quality fixed income markets, with a special emphasis on structuring and managing portfolios of mortgage-backed securities and Treasury securities combined, when appropriate, with various derivative strategies. These portfolios are either managed directly for investors or structured as collateralized debt obligations (CDOs). Private Fixed Income, Equity and Alternative Asset Class Investments. We manage funds for external institutional clients investing in private fixed-income and equity securities and alternative asset classes. Our strength is in private placement corporate securities, structured and innovative transactions and niche investment opportunities. Our completed offerings include a mezzanine fund investing primarily in subordinated debt with 22 JOHN HANCOCK FINANCIAL SERVICES, INC. equity participation features and collateralized bond obligation funds, which have been marketed domestically and internationally to banks, insurance companies, brokers and other clients outside of the pension market. We are a leading domestic and international manager of equity timberland for large tax-exempt institutional investors, and are among the largest managers of equity farmland investments. This segment also originates, services and securitizes commercial mortgages. In addition, we sponsor affordable housing investments that qualify for Federal tax credits. The following tables present certain information regarding the assets under management by the Investment Management Segment for the periods indicated:
Total Assets Under Management By Asset Class As of December 31 2001 2000 1999 -------------------------------------------- (in millions) Assets Under Management: (1) (2) Domestic equity and balanced................................. $14,952.7 $19,099.3 $26,940.8 International equity and balanced............................ 1,512.6 1,840.1 2,242.9 Domestic and international fixed income...................... 9,385.7 8,469.3 6,879.6 Timber, farmland and independent power....................... 2,919.6 3,136.0 3,983.9 -------------------------------------------- Total................................................... $28,770.6 $32,544.7 $40,047.2 ============================================ Asset Flow Summary As of December 31 2001 2000 1999 -------------------------------------------- (in millions) Assets Under Management: Assets under management, beginning of year (1) (3)........... $32,544.7 $40,047.2 $39,549.6 Sales and reinvestments...................................... 3,506.7 3,648.3 5,435.9 Redemptions and withdrawals.................................. (5,304.8) (9,708.7) (7,984.8) Market (depreciation) appreciation........................... (1,976.0) (1,442.1) 3,046.5 -------------------------------------------- Assets under management, end of year (1) (2)................. $28,770.6 $32,544.7 $40,047.2 ============================================
(1) Includes $1,234.6 million, $1,120.1 million and $1,060.8 million of assets managed by subsidiaries for our general account for the year ended December 31, 2001, 2000 and 1999, respectively. (2) Does not include $151.3 million, $106.9 million and $164.5 million of general account cash and invested assets as of December 31, 2001, 2000 and 1999, respectively. (3) Does not include $106.9 million, $164.5 million and $88.1 million of general account cash and invested assets as of January 1, 2001, 2000 and 1999, respectively. Distribution We sell our investment management products and services through multiple distribution channels. Marketing to pension funds, endowments, foundations and other institutional clients is conducted primarily by our experienced sales professionals and dedicated marketing and client relationship staff. Products are also offered through independent marketing specialists, consulting firms, and investment banking firms. Competition The institutional asset management industry is highly competitive. We compete with other investment management firms, insurance companies, banks and mutual fund companies, many of who are larger and have greater resources than us. Consolidation activity in recent years has increased the concentration of competitors within the industry. We believe the key bases for competition are investment performance and customer service. Our competitive strategy focuses on attracting assets through superior performance. Consistent with this strategy, we continually evaluate opportunities to develop internally, acquire, or divest investment management units and strive to improve 23 JOHN HANCOCK FINANCIAL SERVICES, INC. our investment management products and services. In addition, we believe our leading role in non-traditional asset classes helps to create a distinct and competitively advantageous profile in the institutional asset management marketplace. Corporate and Other Segment Overview Our Corporate and Other Segment consists primarily of our international insurance operations, corporate operations, including the holding company, John Hancock Financial Services (JHFS), and non-core businesses that are either in the process of winding down (i.e., are in "run-off") or have been divested. This segment contributed approximately 20.1%, 19.4% and 16.6% of consolidated operating revenues and 10.5%, 13.9% and 11.1% of consolidated after-tax operating income in the years ended December 31, 2001, 2000 and 1999, respectively. The Corporate and Other Segment generated revenues of $1,884.9 million, $1,721.4 million and $1,260.6 million and after-tax operating income of $84.7 million, $102.5 million and $67.8 million in 2001, 2000 and 1999, respectively. The Corporate and Other Segment assets are summarized below: For the Years Ended December 31, 2001 2000 1999 ----------------------------------------- (in millions) Assets: International insurance operations.. $11,121.5 $ 9,703.8 $ 8,810.8 Corporate operations................ 7,010.7 5,822.8 4,942.3 Non-core businesses................. 1,004.0 1,106.3 1,212.2 Intra-segment eliminations.......... (4,923.4) (4,126.1) (3,948.1) ----------------------------------------- Total.......................... $14,212.8 $12,506.8 $11,107.2 ========================================= International Insurance Operations Our international insurance operations include The Maritime Life Assurance Company, (Maritime) the 8th largest Canadian life insurance company based on total domestic assets under management at year-end 2000. Maritime distributes a full range of individual life and health insurance products, investment products and group life and health products through independent agencies, investment brokerage firms, and employee benefit brokers and consultants. Our international insurance operations also offer individual life and group insurance and pension products through local affiliates doing business in five Southeast Asian countries. In addition, we have formed a joint venture life insurance company in China which will provide us an early foothold in this emerging economy with its vast population. The joint venture company's license initially is restricted to operations in the city of Shanghai. All required regulatory approvals were received during the fourth quarter of 2000, and operations commenced in January 2001. As of December 31, 2001, the Company's net investment in these Southeast Asian affiliates was $39.4 million. Working with an international network of 46 insurers, we also coordinate and/or reinsure group life, health, disability and pension coverage for foreign and globally mobile employees of multinational companies in 50 countries and territories. Corporate Operations Corporate operations consist principally of (1) revenues and expense of the holding company, investment and treasury activities, and assets, investment income, interest expense and other expenses not specifically allocated to segments or the holding company level and (2) group life insurance operations. Our group life insurance business generated $225.8 million, $240.6 million and $226.2 million in premium in the years ended December 31, 2001, 2000, and 1999, respectively. Non-Core Businesses We have certain non-core businesses that have been divested or put in run-off, reflecting a strategic decision to focus on our retail and investment management businesses. Non-core businesses consist primarily of run-off property and casualty insurance companies that were sold in 1999, a portion of our group life and accident and health business and related subsidiaries that were sold in 1997, and other small subsidiaries in various stages of running-off their operations. 24 JOHN HANCOCK FINANCIAL SERVICES, INC. For a further description of operating results, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Corporate and Other Segment, included elsewhere in this Form 10-K. General Account Investments General Account and Separate Accounts 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 business segments and product lines. Separate account assets are managed in accordance with specific investment contracts. We generally do not bear any investment risk on assets held in separate accounts, but rather receive investment management fees based on levels of assets under management, measured at fair value, as well as mortality fees, policy administration fees and surrender charges. Generally, assets held in separate accounts are not available to satisfy general account obligations. For a further description of our investments, see Management's Discussion and Analysis of Financial Condition and Results of Operations - General Account Investments, included elsewhere in this Form 10-K. Ratings Insurance companies are rated by rating agencies based upon factors relevant to policyholders. Ratings provide both industry participants and insurance consumers meaningful information on specific insurance companies. Ratings with respect to claims-paying ability and financial strength have become an increasingly important factor in establishing the competitive position of insurance companies. Higher ratings generally indicate financial stability and a strong ability to pay claims. As of December 31, 2001, JHFS has been assigned an A+ rating by Standard and Poor's and an A1 debt rating by Moody's. As of December 31, 2001, John Hancock Life Insurance Company is rated A++ (Superior) by A.M. Best, AAA (Highest) by Fitch IBCA, AA+ (second highest rating) by S&P, and Aa2 (third highest rating) by Moody's. We believe that our strong ratings are an important factor in marketing our products to our distributors and customers, since ratings information is broadly disseminated and generally used throughout the industry. Our ratings reflect each rating agency's current opinion of our financial strength, operating performance and ability to meet our obligations to policyholders, and are not evaluations directed toward the protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security, including our common stock. REGULATION General Our business is subject to extensive regulation at both the state and Federal level, including regulation under state insurance and Federal and state securities laws. State Insurance Regulation The Company and its insurance subsidiaries are subject to supervision and regulation by the insurance authorities in each jurisdiction in which they transact business. Currently, we are licensed to transact business in all fifty states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands, 5 Canadian provinces, and several Asian countries, including one city in the People's Republic of China and therefore are subject to regulation in all these jurisdictions. Most states have laws and regulations governing such issues as: what lines of business a company may engage in; underwriting practices, including a company's ability to request results of applicants' genetic tests; what premium rates may be charged in various lines of business; what products a company may sell; mandating certain insurance benefits and policy forms; minimum rates for accumulation of cash values and maximum rates for policy loans; licensing of insurance companies and agents; advertising and marketing 25 JOHN HANCOCK FINANCIAL SERVICES, INC. practices; statutory accounting and reporting requirements; reserve requirements and solvency standards; admitted statutory assets; the appropriate mix of investments; dividend payments; transactions with affiliates; and level of ownership regarding acquisitions of control. State insurance departments periodically review the business and operations of an insurance company by examining its financial condition and how its agents sell its products. Our insurance subsidiaries are also required to file various reports, relating to their financial condition, including quarterly filings and detailed annual financial statements. This is required in each jurisdiction where an insurance business is licensed. State insurance regulatory authorities and other state law enforcement agencies and attorneys general from time to time make inquiries concerning whether our insurance businesses are in compliance with the regulations covering their businesses. We reasonably and promptly respond to such inquiries and take corrective action if warranted. The Illinois, California and Vermont insurance departments have ongoing market conduct examinations involving John Hancock Life Insurance Company. The Company believes that it conducts its business in accordance with all applicable state regulations and does not expect that the outcome of these examinations will have a material impact on our business, financial condition or results of operations. State insurance regulators and the National Association of Insurance Commissioners are continually re-examining existing laws and regulations. Among other things, these laws and regulations may focus on insurance company investments, financial reporting and solvency issues, risk-adjusted capital guidelines, interpretations of existing laws, the development of new laws, the implementation of non-statutory guidelines and the circumstances under which dividends may be paid. Regulation Governing Potential Acquisitions of Control We are subject to regulation under the insurance holding company statutes of the states in which our insurance subsidiaries are organized, principally Massachusetts, which is our state of domicile. The Massachusetts insurance law contains provisions which, in general, provide that the acquisition or change of "control" of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Massachusetts Commissioner of Insurance. In general, a presumption of "control" arises from the ownership, control, possession with the power to vote or possession of proxies with respect to, 10% or more of the voting securities of an insurer or of a person that controls an insurer. A person seeking to acquire control, directly or indirectly, of a Massachusetts insurance company or of any person controlling a Massachusetts insurance company must file an application for approval of the acquisition of control with the Massachusetts Commissioner of Insurance and obtain the approval of the Massachusetts Commissioner of Insurance before consummating the acquisition. In addition, we may in the future become subject to New York insurance law governing the activities of insurance holding companies. Delaware insurance holding company laws and similar Canadian laws apply to us as well because we have insurance subsidiaries organized in Delaware and Canada. Accordingly, any direct or indirect acquisition of control of John Hancock Life Insurance Company will be subject to the prior approval of the Delaware Commissioner of Insurance and may also be subject to the prior approval of the New York Superintendent of Insurance in the event John Hancock Life Insurance Company is deemed a New York domestic insurer under the provisions of the New York insurance holding company law. Moreover, any acquisition of JHFS, if the acquisition qualifies as an "acquisition of control" or "control in fact" as those terms are defined by the Insurance Companies Act of Canada, may also be subject to the prior approval of the Office of the Superintendent of Financial Institutions of Canada. 26 JOHN HANCOCK FINANCIAL SERVICES, INC. In addition to the restrictions under applicable insurance holding company statutes, the Plan of Reorganization governing our reorganization also prohibits: o any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock until February 1, 2002; and o without prior approval of the board of directors of JHFS and the Massachusetts Commissioner of Insurance, any person, or persons acting in concert, from directly or indirectly acquiring or offering to acquire beneficial ownership of 10% or more of the outstanding shares of our common stock until February 1, 2003. By virtue of these provisions of the Plan of Reorganization, John Hancock Life Insurance Company was not subject to an acquisition by another company during the two years following the effective date of the reorganization and, until February 1, 2003, may not be subject to acquisition without the prior approval of the board of directors of JHFS and the Massachusetts Commissioner of Insurance. There is an exception to the foregoing prohibition for an acquisition by a person that becomes a beneficial owner of 10% or more of our common stock as a result of our issuance of such common stock to such person as consideration in an acquisition of another entity that was initiated, by the authority of our Board of Directors. The restrictions described above may deter, delay or prevent a future acquisition of control, including transactions that could be perceived as advantageous to our sole shareholders. Regulation of Dividends and Other Payments from Insurance Subsidiaries JHFS is a holding company and its primary assets are the outstanding capital stock of John Hancock Life Insurance Company, along with Maritime and several other international subsidiaries. As an insurance holding company, JHFS depends primarily on dividends from John Hancock Life Insurance Company to pay dividends to its shareholders, and pay operating expenses and implement its capital management strategies. Any inability of John Hancock Life Insurance Company to pay dividends to JHFS in the future in an amount sufficient for JHFS to pay dividends to its shareholders, implement some of its capital management plans and meet its cash obligations may materially adversely affect the market price of its common stock and its business, financial condition or results of operations. The Massachusetts insurance law limits how and when John Hancock Life Insurance Company can pay dividends to JHFS. Under the Massachusetts insurance law, no insurer may pay any shareholder dividend from any source other than statutory unassigned funds without the prior approval of the Massachusetts Commissioner of Insurance. The Massachusetts insurance holding company act requires that a report be given to the Massachusetts Commissioner of Insurance no later than five days following declaration, and at least ten days' prior to payment, of any dividend or distribution by a Massachusetts insurance company. Further, this act provides that no extraordinary dividend may be paid without thirty days' prior written notice to the Massachusetts Commissioner of Insurance, and only if the Massachusetts Commissioner of Insurance has not disapproved, or has approved, the payment within the thirty day notice period. An extraordinary dividend is any dividend or distribution of cash or other property whose fair market value, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (1) 10% of an insurance company's surplus as regards policyholders as of the preceding December 31, and (2) a life insurance company's statutory net gain from operations for the twelve months ending on the preceding December 31. Although not currently viewed as such, John Hancock Life Insurance Company, in the future, could also be viewed as being commercially domiciled in New York and, if so, dividend payments may also be subject to New York's insurance holding company act as well as Massachusetts law. Surplus and Capital Requirements Insurance regulators have the discretionary authority, in connection with the ongoing licensing of our insurance businesses, to limit or prohibit the ability to issue new policies if, in the regulators' judgment, the insurer is not maintaining a minimum amount of surplus or is in hazardous financial condition. Limits may also be established on the ability to issue new life insurance policies and annuity contracts above an amount based upon the face amount and premiums of policies of a similar type issued in the prior year. 27 JOHN HANCOCK FINANCIAL SERVICES, INC. Risk-Based Capital The National Association of Insurance Commissioners (NAIC) has established risk-based capital (RBC) standards for life insurance companies as well as a model act to apply such standards at the state level. The model act provides that life insurance companies must submit an annual risk-based capital report to state regulators reporting their risk-based capital based on five categories of risk: asset risk-affiliates, asset risk-other, insurance risk, interest rate risk and business risk. The formula is intended to be used by insurance regulators as an early warning tool to identify possible weakly capitalized companies for purposes of initiating further regulatory action. In 2001, the NAIC changed the risked-based capital formula which resulted in RBC charges or a higher risk-based capital ratio. The most significant change made by NAIC is to tax effect the RBC, which is similar to reducing the risk factors being applied to the different risk categories. One other change was the creation of a common stock asset risk category and its treatment in the covariance calculation. This change also lowered RBC. John Hancock took certain actions to improve the risk-based capital ratio. The two most significant actions were the partial reinsurance of the closed block and the upstreaming of some of the Life Company's foreign insurance affiliates to JHFS. John Hancock Life Insurance Company exceeded the level of risk-based capital that would require it to propose actions to correct a deficiency by 151.2 percentage points as of December 31, 2001. Statutory Investment Valuation Reserves Life insurance companies are required to establish an asset valuation reserve (AVR) consisting of two components: (i) a "default component," which provides for future credit-related losses on fixed maturity investments, and (ii) an "equity component," which provides for losses on all types of equity investments, including equity securities and real estate. Insurers also are required to establish an interest maintenance reserve (IMR) for net realized capital gains and losses on fixed maturity securities, net of tax, related to changes in interest rates. The IMR is required to be amortized into statutory earnings on a basis reflecting the remaining period to maturity of the fixed maturity securities sold. These reserves are required by state insurance regulatory authorities to be established as a liability on a life insurer's statutory financial statements, but do not affect our financial statements prepared in accordance with GAAP. Although future additions to AVR will reduce the future statutory capital and surplus of John Hancock Life Insurance Company, we do not believe that the impact under current regulations of such reserve requirements will materially affect the ability of John Hancock Life Insurance Company to increase its statutory capital and surplus and pay future dividends to John Hancock Financial Services, Inc. IRIS Ratios The National Association of Insurance Commissioners has developed a set of financial tests known as the Insurance Regulatory Information System (IRIS) for early identification of companies which may require special attention by insurance regulators. Insurance companies submit data on an annual basis to the National Association of Insurance Commissioners. This data is used to calculate ratios covering various categories of financial data, with defined "usual ranges" for each category. IRIS consists of 13 key financial ratios for life insurance companies. An insurance company may fall out of the usual range with respect to one or more ratios because of specific transactions that are in themselves immaterial or eliminated at the consolidated level. Departure from the usual range on four or more of the ratios may lead to inquiries from individual states' insurance departments. During the five-year period ended December 31, 2001, John Hancock Life Insurance Company was outside the usual range for Net Change in Capital Surplus ratio for the year 2000, and the Change in Product Mix and Change in Reserving ratios in 2001. The Change in Capital Surplus ratio fell outside the usual range in 2000 because of the demutualization transaction. Specifically, under the applicable statutory accounting rules, the Company was required to exclude the proceeds from the stock offering from surplus while the demutualization consideration paid in cash was deducted from surplus, thereby distorting the ratio. This adjustment did not recur in the year 2001 and it is not expected to occur in 2002. The unusual ratios in 2001 were the result of the implementation of new statutory accounting rules and are not expected to recur. During the same period, John Hancock Variable Life Insurance Company and Investors Partner Life Insurance Company, which are wholly owned direct and indirect subsidiaries of John Hancock Life Insurance Company, respectively, had several ratios outside of the usual range. John Hancock Variable Life Insurance Company had eight unusual ratios, all of which resulted from growth in the business and the effect of reinsurance contracts with John Hancock Life Insurance Company. Investors Partner Life Insurance Company had ten unusual ratios due to the fact it writes no new business. 28 JOHN HANCOCK FINANCIAL SERVICES, INC. Regulation of Investments Our insurance businesses are subject to state laws and regulations that require diversification of their investment portfolios. Some of these laws and regulations also limit the amount of investments in specified investment categories, such as below investment grade fixed maturity securities, equity real estate, other equity investments and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as nonadmitted assets for purposes of measuring statutory surplus, in some instances, requiring divestiture. State regulatory authorities from the domiciliary states of our insurance subsidiaries have not indicated any non-compliance with any such regulations. Valuation of Life Insurance Policies Model Regulation The National Association of Insurance Commissioners has adopted a revision to the Valuation of Life Insurance Policies Model Regulation (known as Revised XXX). This model regulation established new minimum statutory reserve requirements for certain individual life insurance policies written in the future. Before the new reserve standards can become effective, individual states must adopt the model regulation. Massachusetts adopted the Regulation effective January 1, 2001 and JHFS established increased reserves to be consistent with the new minimum standards with respect to policies issued after the effective date of the regulation. In addition, JHFS revised its term life insurance products with guaranteed premium periods and is in the process of revising and expanding its universal life insurance products with no-lapse guarantees. Federal Insurance Initiatives and Legislation Although the Federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on our business. Current and proposed measures that may significantly affect the insurance business generally include limitations on anti-trust immunity, minimum solvency requirements and health care reform. On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 became law, implementing fundamental changes in the regulation of the financial services industry in the United States. The act permits the transformation of the already converging banking, insurance and securities industries by permitting mergers that combine commercial banks, insurers and securities firms under one holding company. Under the act, national banks retain their existing ability to sell insurance products in some circumstances. In addition, bank holding companies that qualify and elect to be treated as "financial holding companies" may engage in activities, and acquire companies engaged in activities, that are "financial" in nature or "incidental" or "complementary" to such financial activities, including acting as principal, agent or broker in selling life, property and casualty and other forms of insurance, including annuities. A financial holding company can own any kind of insurance company or insurance broker or agent, but its bank subsidiary cannot own the insurance company. Under state law, the financial holding company would need to apply to the insurance commissioner in the insurer's state of domicile for prior approval of the acquisition of the insurer, and the act provides that the commissioner, in considering the application, may not discriminate against the financial holding company because it is affiliated with a bank. Under the act, no state may prevent or interfere with affiliations between banks and insurers, insurance agents or brokers, or the licensing of a bank or affiliate as an insurer or agent or broker. On October 26, 2001, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 was enacted into law as part of the USA PATRIOT Act. Among its many provisions the law requires that financial institutions adopt anti-money laundering programs that include policies, procedures and controls to detect and prevent money laundering, designate a compliance officer to oversee the program and provide for employee training, and periodic audits in accordance with regulations to be issued by the U.S. Treasury Department. The Company is actively developing a program in order to fully comply with the applicable provisions of the Act and the related Treasury Regulations. Tax Legislation Currently, under the Internal Revenue Code, holders of many life insurance and annuity products, including both traditional and variable products, are entitled to tax-favored treatment on these products. For example, income tax 29 JOHN HANCOCK FINANCIAL SERVICES, INC. payable by policyholders on investment earnings under traditional and variable life insurance and annuity products which are owned by natural persons is deferred during the product's accumulation period and is payable, if at all, only when the insurance or annuity benefits are actually paid or to be paid. Also, for example, interest on loans up to $50,000 secured by the cash value of life insurance policies owned by businesses on key employees is eligible for deduction even though investment earnings during the accumulation period are tax-deferred. In the past, legislation has been proposed that would have curtailed the tax-favored treatment of some of our insurance and annuity products. If any such proposals were enacted, market demand for such products would be adversely affected. In addition, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), enacted by Congress in 2001, provides for the gradual reduction and eventual elimination of Federal estate taxes by the year 2010. But EGTRRA also contains a sunset provision which would reinstate Federal estate taxes in the year 2011, based on the Internal Revenue Code in effect prior to the enactment of EGTRRA. Many insurance products are designed and sold to help policyholders reduce the effect of Federal estate taxation on their estates. The enactment of EGTRRA has adversely affected sales of certain of our insurance and investment advisory products, but this effect is mitigated somewhat by the sunset provision. If the sunset provision of EGTRRA is eliminated in the future, the adverse affect on the sales of these products could increase. In addition, sales of split dollar life insurance products have been adversely affected by proposed changes being considered by the Internal Revenue Service. Securities Laws Certain of our investment advisory activities are subject to federal and state securities laws and regulations. Our mutual funds are registered under the Securities Act of 1933, as amended (the "Securities Act"), and the Investment Company Act. All of our separate investment accounts that fund retail variable annuity contracts and retail variable life insurance products issued by us, other than those which fund private placement investment options that are exempt from registration or support fixed rate investment options that are also exempt from registration, are registered both under the Securities Act and the Investment Company Act. Institutional products such as group annuity contracts, guaranteed investment contracts and funding agreements are sold to tax qualified pension plans or are sold to other sophisticated investors as "private placements," and are exempt from registration under both acts. Some of our subsidiaries are registered as broker/dealers under the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"), and with the National Association of Securities Dealers, Inc., and a number are registered as investment advisers under the Investment Advisers Act of 1940. One subsidiary is registered as a commodity pool operator and as a commodity trading advisor under the Commodity Exchange Act. Our insurance companies or other subsidiaries also own or manage other investment vehicles that are exempt from registration under the Securities Act and the Investment Company Act but may be subject to other requirements of those laws, such as antifraud provisions and the terms of applicable exemptions. We are also subject to similar laws and regulations in the states and foreign countries in which we provide investment advisory services, offer the products described above or non-variable life and annuity products or conduct other securities and investment related activities. Environmental Considerations As owners and operators of real property, we are subject to extensive federal, state and local environmental laws and regulations. Inherent in such ownership and operation is the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties. When deemed appropriate, we routinely conduct environmental assessments for real estate being acquired for investment and before taking title to property acquired through foreclosure or deed in lieu of foreclosure. Based on these environmental assessments and compliance with our internal environmental procedures, we believe that any costs associated with compliance with environmental laws and regulations or any remediation of such properties would not be material to our consolidated financial position or results of operations. Furthermore, although we hold equity positions in subsidiaries and investments that could potentially be subject to environmental liabilities, we believe, based on our assessment of the business and properties of these companies and our level of involvement in the operation and management of such companies, that we would not be subject to any environmental liabilities with respect to these investments which would have a material adverse effect on our business, financial position or results of operations. 30 JOHN HANCOCK FINANCIAL SERVICES, INC. ERISA Considerations Certain of our lines of business, including our management of employee benefit plan assets in our advisory capacity in separate accounts, are subject to the requirements of ERISA. In addition, the Small Business Job Protection Act, which we refer to as the SBJPA, offers insurers protection from potential litigation exposure prompted by the 1993 U.S. Supreme Court decision in John Hancock Mutual Life Insurance Company v. Harris Trust & Savings Bank, which we refer to as the Harris Trust Decision, in which the Court held that, with respect to a portion of the funds held under certain general account group annuity contracts, an insurer is subject to the fiduciary requirements of ERISA. The pertinent SBJPA provisions provide that insurers are protected from liability for breaches of fiduciary duties under ERISA for past actions with respect to their general account contracts. However, insurers remain subject to federal criminal law and liable for actions brought by the U.S. Secretary of Labor alleging breaches of fiduciary duties that also constitute a violation of federal or state criminal law. The SBJPA also provides that contracts issued from an insurer's general account on or before December 31, 1998, that are not guaranteed benefit policies, will not be subject to ERISA's fiduciary requirements if they meet the requirements of regulations issued by the United States Department of Labor. The SBJPA further provides that contracts issued from an insurer's general account after December 31, 1998, that are not guaranteed benefit policies will be subject to ERISA. In January 2000, the Department of Labor published a regulation pursuant to the SBJPA which provides, among other things, that if an employee benefit plan acquired an insurance policy (other than a guaranteed benefit policy) issued on or before December 31, 1998 that is supported by the assets of the insurer's general account, the plan's assets for purposes of ERISA will not be deemed to include any of the assets of the insurer's general account, provided that the requirements of the regulation are met. Accordingly, if those requirements are met, the insurer is not subject to the fiduciary obligations of ERISA in connection with such an insurance policy. These requirements include detailed disclosures to be made to the employee benefit plan and the requirement that the insurer must permit the policyholder to terminate the policy on 90 days' notice and receive without penalty, at the policyholder's option, either (1) the accumulated fund balance (which may be subject to market value adjustment) or (2) a book value payment of such amount in annual installments with interest. John Hancock Life Insurance Company has implemented procedures to comply with the requirements set forth therein to secure the exemption provided by the regulations from the fiduciary obligations of ERISA. However, John Hancock Life Insurance Company's exposure to disintermediation risk could increase due to the termination options that it would be required to provide to policyholders. Any such increase, however, would not be material. Since there has been no final ruling in the Harris Trust case (described under "Item 3. Legal Proceedings" in this Form 10-K), we are unable at this time to determine the effects of the decision, and therefore cannot compare the litigation risk to the disintermediation risk created by compliance with the regulations. With respect to employee welfare benefit plans subject to ERISA, Congress periodically has considered amendments to the law's Federal preemption provision, which would expose John Hancock Life Insurance Company, and the insurance industry generally, to state law causes of action, and accompanying extra-contractual (e.g., punitive) damages in lawsuits involving, for example, group life and group disability claims. To date, all such amendments to ERISA have been defeated. Employees As of January 31, 2002, we employed approximately 8,355 people. We believe our relations with our employees are satisfactory. 31 JOHN HANCOCK FINANCIAL SERVICES, INC. ITEM 1A. Executive Officers of the Registrant The names of the executive officers of John Hancock Financial Services, Inc. and their respective ages and positions, as of March 15, 2002:
NAME AGE POSITION David F. D'Alessandro 51 Chairman, President, Chief Executive Officer and Director Michael A. Bell 46 Senior Executive Vice President Wayne A. Budd 60 Executive Vice President, General Counsel and Director Derek Chilvers 62 Executive Vice President John M. DeCiccio 53 Executive Vice President and Chief Investment Officer Maureen R. Ford 46 Executive Vice President Thomas E. Moloney 58 Senior Executive Vice President and Chief Financial Officer Robert F. Walters 52 Executive Vice President and Chief Information Officer
David F. D'Alessandro, 51, has been the Chairman of John Hancock Financial Services, Inc. and John Hancock Life Insurance Company since 2001, the President and Chief Executive Officer and a director of the Company since 2000. He had been President and Chief Operations Officer of John Hancock Life Insurance Company since 1998 and a John Hancock Life Insurance Company director since 1990. From 1988 to 1997 he was Senior Executive Vice President of John Hancock Life Insurance Company. He is Chairman of the Executive Committee of the board of directors of John Hancock Financial Services, Inc., Chairman and Chief Executive Officer of John Hancock Variable Life Insurance Company and Chairman of John Hancock Subsidiaries, LLC and a director of The Berkeley Financial Group, LLC. He is a director of Partners HealthCare System, Inc., an integrated healthcare delivery system. Michael A. Bell, 46, has been a Senior Executive Vice President of John Hancock Financial Services, Inc. since 2001. From 1983 to the present, Mr. Bell has been a Managing Director of Monitor Company. From 1997 to the present, he has been Managing Director of Monitor Clipper Partners, Inc. He is a director of Partners HealthCare System, Inc., an integrated healthcare delivery system. Wayne A. Budd, 60, has been the Executive Vice President and General Counsel and a director of John Hancock Financial Services, Inc. since 2000 and a John Hancock Life Insurance Company director since 1998. He is a director of John Hancock Subsidiaries, LLC. From 1996 to 2000, Mr. Budd was Group President - - New England for the Bell Atlantic Corporation (now Verizon Communications, Inc.). Prior to his position with Bell Atlantic, Mr. Budd was a Senior Partner in the law firm of Goodwin Procter LLP. Derek Chilvers, 62, has been an Executive Vice President of John Hancock Financial Services, Inc. and John Hancock Life Insurance Company since 2001. He was Senior Vice President of John Hancock Life Insurance Company from 1986 to 2001. He also has been Chairman and Chief Executive Officer of John Hancock International Holdings, Inc. since 1999 and Chairman and Chief Executive Officer of John Hancock International, Inc. since 2000. He has been a director of John Hancock Subsidiaries, LLC since 2001. John M. DeCiccio, 53, has been the Executive Vice President of John Hancock Financial Services, Inc. and Chief Investment Officer of John Hancock Life Insurance Company since 2000. From 1994 through 2000, he was Senior Vice President, Investment and Pension Sector, of John Hancock Mutual Life Insurance Company. From 1997 through 2000, he led the demutualization project for John Hancock Mutual Life Insurance Company. He is a director of John Hancock Subsidiaries, LLC, Signator Investors, Inc., John Hancock Signature Services, Inc., Independence Investment, LLC, and The Berkeley Financial Group, LLC. Maureen R. Ford, 46, has been an Executive Vice President of John Hancock Financial Services, Inc. and a director of John Hancock Subsidiaries, LLC since 2001. She has been Chairman and Chief Executive Officer of The Berkeley Financial Services Group, LLC (the John Hancock Funds' complex) since 2001. She was Vice Chairman and Chief Executive Officer of John Hancock Funds, LLC from 1999 to 2001. 32 JOHN HANCOCK FINANCIAL SERVICES, INC. Thomas E. Moloney, 58, has been a Senior Executive Vice President of John Hancock Financial Services, Inc. since 2001. He has also been Chief Financial Officer of John Hancock Financial Services, Inc. since 1999 and of John Hancock Life Insurance Company since 1992. He is the Chairman and a director of John Hancock Management Company and John Hancock Reassurance Co., Ltd. He is Chairman of John Hancock Signature Services. He is Chief Financial Officer of John Hancock Subsidiaries, LLC since 1992. He is a director of The Berkeley Financial Group, LLC, John Hancock Realty Services Corp., The Maritime Life Assurance Company and John Hancock Canadian Holdings Limited. Robert F. Walters, 52, has been the Executive Vice President and Chief Information Officer of John Hancock Financial Services, Inc. and Executive Vice President of John Hancock Life Insurance Company since 2001. He was Senior Vice President and Chief Information Officer of John Hancock Life Insurance Company from 1995 to 2001. He is a director of Essex Corporation. ITEM 2. Properties Our home office consists of our 60-story landmark office tower and five other buildings located in Boston, Massachusetts. We own this facility and occupy approximately 44.0% of the 3.8 million gross square feet of space in these buildings. The balance of the space in these buildings is rented to commercial tenants. 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. ITEM 3. Legal Proceedings Sales Practice Class Action Settlement Over the past several years, companies engaged in the life insurance business have faced extensive claims, including class-action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. On December 31, 1997, the United States District Court for the District of Massachusetts approved a settlement of a nationwide class action lawsuit regarding sales practices against John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company and John Hancock Distributors, Inc., captioned Duhaime, et al. v. John Hancock Mutual Life Insurance ----------------------------------------------------- Company, John Hancock Variable Life Insurance Company and John Hancock - ---------------------------------------------------------------------- Distributors, Inc. With certain limited exceptions, the class that is bound by - ------------------ the terms of the settlement includes persons and entities who at any time during the class period (January 1, 1979 through December 31, 1996) had an ownership interest in one or more of our whole life, universal life or variable life insurance policies (and certain annuities and mutual funds) issued during the class period. In conjunction with this settlement, we had a total reserve that stood at $52.7 million and $224.0 million at December 31, 2001 and 2000, respectively. We incurred settlement related costs of $30.0 million and $140.2 million in 2001 and 1999, respectively. No such costs were incurred in 2000. In 1999, the Company updated its estimate of the cost of claims subject to alternative dispute resolution (ADR) relief and revised its reserve estimate accordingly. The reserve estimate was further evaluated quarterly, and was adjusted as noted above in 2001. The adjustment to the reserve in 2001 was the result of the Company being able to better estimate the cost of settling the remaining claims, which on average tend to be the larger more complicated claims. The better estimate is from experience with actual settlement of similar claims. Administration of the ADR component of the settlement continues to date. Although some uncertainty remains as to the cost of claims in the final phase (i.e. arbitration) of the ADR process, it is expected that the final cost of the settlement will not differ materially from the amounts presently provided for by the Company. Harris Trust Litigation Since 1983, we have been involved in complex litigation known as Harris Trust and Savings Bank, as Trustee of Sperry Master Retirement Trust No. 2 v. John Hancock Mutual Life Insurance Company (S.D.N.Y. Civ. 83-5491). This lawsuit originally raised only state law causes of action, but in 1984, the plaintiff amended the Complaint to allege that John Hancock was a fiduciary and party in interest under ERISA in rendering investment advice and exercising control over plan assets. Plaintiff alleged that John Hancock breached its fiduciary duty in failing to act for the exclusive benefit of plan participants by retaining excess funds of the plan, by imposing arbitrary charges for a return of plan funds, by failing to pay an appropriate rate of interest on plan funds, and by 33 JOHN HANCOCK FINANCIAL SERVICES, INC. charging the plan excessive compensation. In 1989, the District Court dismissed all of plaintiff's ERISA claims and, in 1991, also dismissed all of plaintiff's state law claims. The plaintiff appealed to the Second Circuit Court of Appeals, seeking reversal of several of the District Court's rulings, including two of the rulings regarding the applicability of ERISA to the dispute. The District Court's state law rulings were upheld, and the ERISA rulings were affirmed in part and reversed in part. Specifically, the Second Circuit upheld the District Court's conclusion that John Hancock was not a fiduciary under ERISA with respect to the insurance policy as a contract. The Second Circuit, however, reversed the District Court's determination that none of the assets, held by John Hancock in its general account in connection with this contract were plan assets, and held that "free funds" associated with this contract constitute plan assets for ERISA purposes. This decision was appealed to the Supreme Court, which affirmed the Second Circuit's ruling in 1993. The Department of Labor filed an amicus brief in support of John Hancock's position on the merits before the Supreme Court. The case was remanded to the District Court. The case was tried to a Federal District Court judge in 1997, and the judge issued an opinion in November 2000. In that opinion the judge determined that John Hancock should have allowed the Trust to withdraw the free funds by means of an extracontractual payout. The Court awarded the Trust approximately $13.8 million in relation to this claim together with unspecified additional pre-judgment interest on this amount from October 1988. The Court also determined that Hancock violated its fiduciary duty when it failed to revalue the liabilities for guaranteed benefits, which had been established at rates set out in the contract, on a basis which was more favorable to the Trust. In addition, the Court concluded that certain of Hancock's internal allocations of expenses and investment income violated ERISA. Damages in the amount of approximately $5.7 million, together with unspecified pre-judgment interest from December 1996, were awarded on these issues. As part of the relief, the judge ordered the removal of Hancock as a fiduciary to the plan. On April 11, 2001, the Court entered a judgment against John Hancock for approximately $84.9 million which includes damages to plaintiff, pre-judgment interest, attorney's fees and other costs. We believe that the underlying case was incorrectly decided and there are promising grounds for challenging the District Court's decision. We have filed an appeal and believe that it is probable that the Appeals Court will reverse the lower court's decision. Notwithstanding what we believe to be the merits of the Company's position in this case, if unsuccessful, our ultimate liability, including fees, costs and interest could have a material adverse impact on net income. However, we do not believe that any such liability would be material in relation to our financial position or liquidity. Other Legal and Regulatory Proceedings We are regularly involved in other litigation, both as a defendant and as a plaintiff. The litigation naming us as a defendant ordinarily involves our activities as a provider of insurance protection products, as well as an investment adviser, employer and taxpayer. In addition, state regulatory bodies, the United States Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and other regulatory bodies regularly make inquiries and, from time to time conduct examinations concerning our compliance with, among other things, insurance laws, securities laws, and laws governing the activities of broker/dealers. We do not believe at this time that the ultimate resolution of any of these legal or regulatory matters that are currently pending, either individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders of John Hancock Financial Services, Inc. during the fourth quarter of the fiscal year covered by this report. 34 JOHN HANCOCK FINANCIAL SERVICES, INC. PART II ITEM 5. Market for John Hancock Financial Services, Inc. Common Stock and Related Shareholder Matters JHFS's common stock began trading on the New York Stock Exchange (NYSE) under the symbol "JHF" on January 27, 2000. Prior to such date, there was no established public trading market for the common stock. As of February 28, 2001, there were approximately 780,000 shareholders of record and 297.3 million shares outstanding. The following table presents the high and low prices for the common stock of John Hancock on the NYSE for the periods indicated and the dividends declared per share during such periods. High Low Dividends 2001 First Quarter $40.00 $31.50 -- Second Quarter 41.40 33.86 -- Third Quarter 41.70 33.15 -- Fourth Quarter 41.93 33.34 $0.31 2000 For the period from February 1, 2001 through March 31, 2001 18.81 13.44 -- Second Quarter 24.63 16.38 -- Third Quarter 28.13 20.63 -- Fourth Quarter 38.25 25.63 0.30 JHFS paid annual cash dividends of $0.31 and $0.30 per common share on December 13, 2001 and December 14, 2000 to shareholders of record on the close of business on November 16, 2001 and November 20, 2000, respectively. Future dividend decisions will be based on, and affected by, a number of factors, including the operating results and financial requirements of the Company and the impact of regulatory restrictions. See Regulation and Management's Discussion and Analysis - Liquidity and Capital Resources, included elsewhere in this Form 10-K. 35 JOHN HANCOCK FINANCIAL SERVICES, INC. ITEM 6. Selected Financial Data The following table sets forth certain selected historical consolidated financial data. The selected income statement data for each of the years in the three year period ended December 31, 2001 and balance sheet data as of December 31, 2001 and 2000 have been derived from our consolidated financial statements and related notes, included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, also included elsewhere in this Form 10-K. The following selected income statement data for the years ended December 31, 1998 and 1997 and balance sheet data as of December 31, 1999, 1998 and 1997 have been derived from our consolidated financial statements not included herein. The following selected consolidated financial data has been prepared in accordance with GAAP, except that the statutory data presented below has been prepared in accordance with applicable statutory accounting practices and was taken from our annual statements filed with insurance regulatory authorities. Certain reclassifications to prior periods have been made to conform to the current period presentations.
For the Years Ended December 31, -------------------------------- 2001 2000 1999 1998 1997 --------------------------------------------------------------- (in millions) Income Statement Data: (1) Revenues Premiums......................................... $3,851.3 $3,452.1 $2,717.5 $2,197.9 $2,473.6 Universal life and investment-type Product charges.............................. 772.5 749.3 703.5 597.0 512.0 Net investment income............................ 3,944.9 3,864.8 3,524.1 3,330.7 3,190.7 Net realized investment gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders and amounts credited to policyholder dividend obligation (2)................................ (249.1) 88.7 175.1 106.4 157.0 Investment management revenues, commissions and other fees.................................... 602.9 764.8 680.9 659.7 554.7 Other revenue.................................... 186.5 17.6 6.5 10.3 58.3 --------------------------------------------------------------- Total revenues............................ 9,109.0 8,937.3 7,807.6 6,902.0 6,946.3 Total benefits and expenses (3) (4)....... 8,282.9 7,779.0 7,545.4 6,275.9 6,356.6 --------------------------------------------------------------- Income before income taxes and cumulative effect of accounting changes.................. 826.1 1,158.3 262.2 626.1 589.7 Income taxes..................................... 214.6 339.6 99.3 177.6 106.4 --------------------------------------------------------------- Income before cumulative effect of accounting changes....................................... 611.5 818.7 162.9 448.5 483.3 Cumulative effect of accounting changes.......... 7.2 -- (9.7) -- -- --------------------------------------------------------------- Net income................................ $ 618.7 $818.7 $153.2 $448.5 $483.3 =============================================================== Basic earnings per common share (5) Income before cumulative effect of accounting changes.......................... $2.01 $2.60 $0.52 Cumulative effect of accounting changes....... 0.02 -- (0.03) -------------------------------------- Net income................................ $2.03 $2.60 $0.49 ====================================== Diluted earnings per common share (5) Income before cumulative effect of accounting changes.......................... $1.99 $2.59 $0.52 Cumulative effect of accounting changes....... 0.02 -- (0.03) -------------------------------------- Net income................................ $2.01 $2.59 $0.49 ====================================== Cash dividends paid per share.................... $0.31 $0.30 --
36 JOHN HANCOCK FINANCIAL SERVICES, INC.
As of or for the Years Ended December 31, ----------------------------------------- 2001 2000 1999 1998 1997 --------------------------------------------------------------- (in millions) Balance Sheet Data: General account assets........................... $68,425.7 $60,940.1 $56,408.1 $52,000.1 $49,906.4 Separate account assets.......................... 22,718.5 26,454.8 28,047.6 24,966.6 21,511.1 Total assets..................................... 91,144.2 87,394.9 84,455.7 76,966.7 71,417.5 General account liabilities...................... 61,079.3 54,557.1 50,986.6 46,416.9 44,667.7 Long-term debt................................... 1,359.1 534.0 536.9 602.7 543.3 Separate account liabilities..................... 22,718.5 26,454.8 28,047.6 24,966.6 21,511.1 Total liabilities................................ 85,156.9 81,545.9 79,571.1 71,986.2 66,722.1 Minority interest................................ 122.3 93.5 93.5 25.3 25.3 Shareholders' equity (6)......................... 5,865.0 5,755.5 4,791.1 4,955.2 4,670.1
We evaluate segment performance and base management's incentives on segment after-tax operating income. For a discussion of segment after-tax operating income see Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. 1) In December 2000, the American Institute of Certified Public Accountants (AICPA) issued SOP 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts." The SOP, which was adopted with respect to accounting for demutualization expenses by the Company on December 31, 2000, requires that demutualization related expenses be classified as a single line item within income from continuing operations and should not be classified as an extraordinary item. The adoption of SOP 00-3 resulted in the reclassification of demutualization expenses previously recorded as an extraordinary item in 1999 of $93.6 million (net of tax of $2.6 million). On October 1, 2001, the Company adopted the remaining provisions of SOP 00-3 which required the reclassification of $9,710.0 million and $12,035.9 million of closed block assets and liabilities, respectively at December 31, 2000, and $1,467.7 million and $1,343.6 million of closed block revenues, and benefits and expenses, respectively, for the period from February 1, 2000 (date of demutualization) to December 31, 2000, all of which were reclassified to other existing asset, liability, revenue, and benefit and expense accounts. The required implementation of SOP 00-3 also resulted in a reduction of net income of $20.2 million (net of tax of $6.6 million) or $0.06 diluted earnings per common share for the period from February 1, 2000 to December 31, 2000 and $3.4 million (net of tax of $1.8) or $0.01 diluted earnings per common share for the nine months ended September 30, 2001. Finally, adoption also resulted in the recognition of a policyholder dividend obligation of $77.0 million at December 31, 2000, which represents cumulative actual closed block earnings in excess of expected periodic amounts calculated at the date of the demutualization. See Note 5 to the consolidated financial statements for a summary description of the closed block assets, liabilities, revenues and expenses. 2) Net realized investment and other gains (losses) have been reduced by: (1) amortization of deferred policy acquisition costs to the extent that such amortization results from net realized gains and losses, (2) the portion of net realized investments and other gains and losses credited to participating pension contractholder accounts, and (3) amounts credited to the policyholder dividend obligation. We believe presenting net realized investment and other 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. For a presentation of net realized investment and other gains and related amounts see Management's Discussion and Analysis of Financial Condition and Results of Segment Operations included elsewhere in this Form 10-K. 3) Total benefits and expenses includes benefits to policyholders of $5,904.7 million, $5,375.6 million, $5,368.5 million, $4,152.0 million, $4,303.1 million for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. Benefits to policyholders excludes amounts related to net realized investment and other gains credited to participating pension contractholders and policyholder dividend obligation of $25.3 million, $21.0 million, $35.3 million, $79.1 million and $29.3 million for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. 4) Total benefits and expenses includes amortization of deferred policy acquisition costs of $306.8 million, $242.0 million, $166.8 million, $249.7 million, and $312.0 million for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. Amortization of deferred policy acquisition costs excludes amounts related to net 37 JOHN HANCOCK FINANCIAL SERVICES, INC. realized investment and other gains (losses) of $(26.4) million, $(9.3) million, $50.5 million, $41.2 million and $31.2 million for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. 5) This is unaudited pro forma information which gives effect to the Reorganization and Initial Public Offering (IPO) of the Company referred to in Note 1 to our consolidated financial statements. Because the Company did not have outstanding common stock prior to its IPO on February 1, 2000, the 1999 per share balances represent earnings per common share on a pro forma basis for the period January 1, 1999 through December 31, 1999 using 314.8 million outstanding common shares for the basic and diluted calculations. The 2000 earnings per common share balances represent earnings per common share on a pro forma basis for the period from January 1, 2000 through December 31, 2000 using 314.5 million and 316.2 million outstanding shares for the basic and diluted earnings per share calculations, respectively. Actual net income per common share for the period from February 1, 2000 through December 31, 2000 was $2.46 and $2.45 for the basic and diluted calculations, respectively, after restatement for implementation of SOP 00-3 (see note 1 above). No cumulative effect of accounting change occurred in 2000. Pro forma earnings per share for the periods prior to 1999 are not presented, as it would not be meaningful. 6) Includes adjustment under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", starting in 2001 Balances prior to 2000 are formerly referred to as policyholders' equity. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations, which is included in Exhibit 13 to this Form 10-K. ITEM 7A. Quantitative and Qualitative Information About Market Risk John Hancock Financial Services, Inc.'s exposure to market risk is primarily related to credit risk and interest rate risk. Quantitative and Qualitative Information About Market Risk resulting from credit issues and interest rates are incorporated herein by reference to Quantitative and Qualitative Information About Market Risk in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report to Shareholders which is included in Exhibit 13 to this Form 10-K. ITEM 8. Financial Statements and Supplementary Data The Company's Financial Statements and Supplementary Data, which are included in Exhibit 13 to this Form 10-K, are incorporated herein by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 38 JOHN HANCOCK FINANCIAL SERVICES, INC. PART III ITEM 10. Directors and Executive Officers of John Hancock Financial Services Certain of the information called for by Item 10 is set forth in the definitive proxy statement for the 2002 annual meeting of shareholders (the Proxy Statement) filed or to be filed by John Hancock Financial Services with the United States Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K under the caption "Election of Directors" and "The Board of Directors and Its Committees - General Information and Committees," which information is incorporated herein by reference. Additional information required by Item 10 regarding John Hancock Financial Services' executive officers is set forth in Item 1A of this Form 10-K under the caption "Executive Officers of the Registrant". ITEM 11. Executive Compensation The information called for by Item 11 is set forth in the Proxy Statement under the captions "Executive Compensation" and "The Board of Directors and Its Committees - Compensation of Directors" and is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information called for by Item 12 is set forth in the Proxy Statement under the caption "Security Ownership" and is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions The information called for by Item 13 is set forth in the Proxy Statement under the captions "The Board of Directors and Its Committees - Certain Relationships" and "Executive Compensation - Stock Ownership Loan Program" and is incorporated herein by reference. 39 JOHN HANCOCK FINANCIAL SERVICES, INC. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report. 1. Financial Statements (See Item 8. Financial Statements and Supplementary Data) Report of Ernst & Young LLP, Independent Auditors Consolidated Financial Statements Balance Sheets Income Statements Statements of Shareholders' Equity and Comprehensive Income Statements of Cash Flows Notes to Financial Statements 2. Financial Statement Schedules Schedule I - Summary of Investments - Other Than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant (Parent only) Schedule III - Supplementary Insurance Information Schedule IV - Reinsurance Note: All other financial statement schedules are omitted because they are inapplicable. 3. Exhibits. Exhibit Number Description - ------- ----------- 2.1 Plan of Reorganization* 3.1 Restated Certificate of Incorporation of John Hancock Financial Services, Inc.* 3.2 Amended and Restated By-Laws of John Hancock Financial Services, Inc. (As Adopted on February 11, 2002)** 10.1.1 Credit Agreement dated as of August 3, 2000, among John Hancock Financial Services, Inc., John Hancock Life Insurance Company, John Hancock Capital Corporation, the Banks listed therein, Fleet National Bank, as Co-Administrative Agent, The Chase Manhattan Bank, as Co-Administrative Agent, Citicorp USA, Inc., as Syndication Agent, and BankOne, NA as Documentation Agent, and FleetBoston Robertson Stephens, Inc., and Chase Securities, Inc., as Joint Book Managers and Joint Lead Arrangers.*** 10.1.2 First Amendment dated as of July 27, 2001 to the Credit Agreement dated as of August 3, 2000 among John Hancock Financial Services, Inc., John Hancock Life Insurance Company, the Banks listed therein, Fleet National Bank, as Co-Administrative Agent, The Chase Manhattan Bank, as Co-Administrative Agent, Citicorp USA, Inc., as Syndication Agent, BankOne, NA as Documentation Agent (Multi-Year Revolver), The Bank of New York, as Co-Documentation Agent (364-Day Revolver) and The Bank of Nova 40 JOHN HANCOCK FINANCIAL SERVICES, INC. Scotia, as Co-Documentation Agent (364-Day Revolver) and Fleet Securities, Inc., and J.P. Morgan Securities, Inc., as Joint Book Managers and Joint Lead Arrangers.**** 10.2.1 Employment Continuation Agreement between John Hancock Life Insurance Company, John Hancock Financial Services, Inc. and Michael A. Bell#+ 10.2.2 Second Amended and Restated Employment Continuation Agreement between John Hancock Life Insurance Company, John Hancock Financial Services, Inc. and Thomas E. Moloney#+ 10.2.3 Second Amended and Restated Employment Continuation Agreement between John Hancock Life Insurance Company, John Hancock Financial Services, Inc. and David F. D'Alessandro#+ 10.2.4 Second Amended and Restated Employment Continuation Agreement between John Hancock Life Insurance Company, John Hancock Financial Services, Inc. and Derek Chilvers#+ 10.2.5 Second Amended and Restated Employment Continuation Agreement between John Hancock Life Insurance Company, John Hancock Financial Services, Inc. and Maureen Ford#+ 10.2.6 Second Amended and Restated Employment Continuation Agreement between John Hancock Life Insurance Company, John Hancock Financial Services, Inc. and Robert Walters#+ 10.2.7 Amended and Restated Employment Continuation Agreement between John Hancock Life Insurance Company, John Hancock Financial Services, Inc. and John M. DeCiccio#+ 10.2.8 Amended and Restated Employment Continuation Agreement between John Hancock Life Insurance Company, John Hancock Financial Services, Inc. and Wayne A. Budd#+ 10.3 Fiscal Agency Agreement, dated as of February 25, 1994 by and between John Hancock Mutual Life Insurance Company, as Issuer, and First National Bank of Boston, as Fiscal Agent* 10.4 Reinsurance Agreement, dated as of July 30, 1992 by and between John Hancock Mutual Life Insurance Company and Provident Life and Accident Insurance Company* 10.5 Reinsurance Agreement, dated as of July 30, 1992 by and between John Hancock Mutual Life Insurance Company and Provident Life and Accident Insurance Company* 10.6 Coinsurance Agreement, dated as of March 1, 1997 by and between John Hancock Mutual Life Insurance Company and UNICARE Life & Health Insurance Company* 10.7 Letter of Credit Agreement, dated as of January 2, 1997 by and among John Hancock Mutual Life Insurance Company, Banks named therein and Morgan Guaranty Trust Company of New York as Issuing Bank and Agent* 10.8 Long-Term Incentive Plan for Senior Executives (as Amended and Restated Effective February 11, 2002)**+ 10.9 Incentive Compensation Plan for Certain Senior Executives (as Amended and Restated Effective February 11, 2002)**+ 10.10 Form of Shareholder Rights Agreement* 41 JOHN HANCOCK FINANCIAL SERVICES, INC. 10.10.1 Amendment No. 1 to the Rights Agreement (As Adopted on March 4, 2002)** 10.11 1999 Long-Term Stock Incentive Plan (As Amended and Restated as of May 14, 2001)##+ 10.12 Form of Capitalized Interest Note for stock ownership Loan Program###+ 10.12.1 Form of Promissory Note for stock ownership loan program**+ 10.13 Deferred Compensation Plan for Non-Employee Directors###+ 10.14 Non-Employee Directors' Long-Term Stock Incentive Plan##+ 10.15 Deferred Compensation Plan for Executives####+ 13 Portions of John Hancock Financial Services, Inc. 2001 Annual Report to Shareholders that are expressly incorporated herein by reference in this Form 10-K. Other sections of the Annual Report furnished for the information of the Commission are not deemed "filed" as part of this Form 10-K** 21.1 Subsidiaries of the Registrant** 23.1 Consent of Ernst & Young LLP** - ---------- The principal amount of debt outstanding under each instrument (excepting those listed above) defining the rights of holders of our long-term debt does not exceed ten percent (10%) of our total assets on a consolidated basis. The Company agrees to furnish the SEC, upon request, a copy of each instrument defining the rights of holders of our long-term debt. Any exhibit not included with this Form 10-K when furnished to any shareholder of record will be furnished to such shareholder upon written request and payment of up to $.25 per page plus postage (except no payment will be required for the financial statements and schedules included in Exhibit 13 if not included). Such requests should be directed to John Hancock Financial Services, Inc., Investor Relations, John Hancock Place, Post Office Box 111, Boston, Massachusetts 02117. * Previously filed as an exhibit to John Hancock Financial Services, Inc.'s S-1 Registration Statement (file no. 333-87271), and incorporated by reference herein. ** Filed herewith. *** Previously filed as an exhibit to John Hancock Financial Services, Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2000, and incorporated by reference herein. **** Previously filed as an exhibit to John Hancock Financial Services, Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2001, and incorporated by reference herein. # Previously filed as an exhibit to John Hancock Financial Services, Inc.'s quarterly report on Form 10-Q for the quarter ended September 30, 2001, and incorporated by reference herein. ## Previously filed with John Hancock Financial Services, Inc. definitive proxy statement for the 2001 annual meeting of shareholders, and incorporated by reference herein. 42 JOHN HANCOCK FINANCIAL SERVICES, INC. ### Previously filed as an exhibit to John Hancock Financial Services, Inc.'s annual report on Form 10-K for the year ended December 31, 2000, and incorporated by reference herein. #### Previously filed as an exhibit to John Hancock Financial Services, Inc.'s S-8 Registration Statement (file no. 333-55064), and incorporated by reference herein. + Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. During the Fourth Quarter of 2001 the Company filed the following Current Reports on Form 8-K: On November 2, 2001, the Company filed a Current Report on Form 8-K, dated November 1, 2001, reporting under Item 5 thereof the Company's operating results for the third quarter of 2001. On November 6, 2001, the Company filed a Current Report on Form 8-K dated November 5, 2001 reporting under Item 5 thereof that the Company's Board of Directors had declared a dividend of $0.31 per common share to shareholders of record at the close of business on November 16, 2001. On December 3, 2001, the Company filed a Current Report on Form 8-K, dated November 29, 2001, reporting under Item 5 thereof the Company's execution of an Underwriting Agreement relating to the sale of $500 million aggregate principal amount of 5.625% Senior Notes due December 1, 2008; and that the Company expected to take a fourth quarter 2001 after tax charge in connection with its investment exposure to Enron Corporation. On December 5, 2001, the Company filed a Current Report on Form 8-K, dated November 29, 2001, reporting under Items 5 and 7 thereof the filing of certain documents relating to the sale of $500 million aggregate principal amount of 5.625% Senior Notes due December 1, 2008. (c) See Item 14 (a) 3. (d) See Item 14 (a) 2. 43 JOHN HANCOCK FINANCIAL SERVICES, INC. SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES As of December 31, 2001 (in millions)
Column A Column B Column C Column D AMOUNT AT WHICH SHOWN IN THE CONSOLIDATED TYPE OF INVESTMENT COST (2) VALUE BALANCE SHEET - ------------------------------------------------------------------------------------------------------------ Fixed maturity securities, available-for-sale: Bonds: United States government and government agencies and authorities $ 340.7 $ 338.0 $ 338.0 States, municipalities and political subdivisions 220.9 225.2 225.2 Foreign governments 1,643.2 1,729.9 1,729.9 Public utilities 3,183.8 3,203.1 3,203.1 Convertibles and bonds with warrants attached 496.7 503.5 503.5 All other corporate bonds 32,148.2 32,465.6 32,465.6 Certificates of deposits 0.0 0.0 0.0 Redeemable preferred stock 708.5 695.0 695.0 ------------------------------------------------- Total fixed maturity securities, available-for-sale $38,742.0 $39,160.3 $39,160.3 ------------------------------------------------- Equity securities, available-for-sale: Common stocks: Public utilities $ 7.9 $ 8.8 $ 8.8 Banks, trust and insurance companies 34.1 34.1 34.1 Industrial, miscellaneous and all other 584.4 715.3 715.3 Non-redeemable preferred stock 125.9 128.6 128.6 ------------------------------------------------- Total equity securities, available-for-sale $ 752.3 $ 886.8 $ 886.8 ------------------------------------------------- Fixed maturity securities, held-to-maturity: Bonds United States government and government agencies and authorities $ 25.8 $ 27.2 $ 25.8 States, municipalities and political subdivisions 509.8 499.6 509.8 Foreign governments 0.0 0.0 0.0 Public utilities 140.2 140.1 140.2 Convertibles and bonds with warrants attached 0.0 0.0 0.0 All other corporate bonds 1,175.6 1,170.3 1,175.6 Certificates of deposits 78.6 76.9 78.6 Redeemable preferred stock 0.0 0.0 0.0 ------------------------------------------------- Total fixed maturity securities, held-to-maturity $ 1,930.0 $ 1,914.1 $ 1,930.0 -------------------------------------------------
The condensed financial information should be read in conjunction with the audited consolidated financial statements and notes thereto. 44 JOHN HANCOCK FINANCIAL SERVICES, INC. SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES -- (CONTINUED) As of December 31, 2001 (in millions)
Column A Column B Column C Column D AMOUNT AT WHICH SHOWN IN THE CONSOLIDATED TYPE OF INVESTMENT COST (2) VALUE BALANCE SHEET - ------------------------------------------------------------------------------------------------------------ Fixed maturity securities, trading: Bonds All other corporate bonds $ 16.4 $ 16.5 $ 16.5 - ------------------------------------------------------------------------------------------------------------ Total fixed maturity securities, trading $ 16.4 $ 16.5 $ 16.5 - ------------------------------------------------------------------------------------------------------------ Equity securities, trading: Common stocks: Public utilities $ 2.2 $ 2.3 $ 2.3 Banks, trust and insurance companies 7.1 7.5 7.5 Industrial, miscellaneous and all other 280.2 294.3 294.3 Non-redeemable preferred stock 0.0 0.0 0.0 ------------------------------------------------- Total equity securities, trading $ 289.5 $ 304.1 $ 304.1 ------------------------------------------------- Mortgage loans on real estate, net (1) $11,106.9 XXXX $10,993.2 Real estate, net: Investment properties (1) 352.0 XXXX 315.3 Acquired in satisfaction of debt (1) 174.0 XXXX 127.1 Policy loans 2,008.2 XXXX 2,008.2 Other long-term investments (2) 1,806.1 XXXX 1,786.1 Short-term investments 153.5 XXXX 153.5 ------------------------------------------------- Total investments $57,330.9 $42,281.8 $57,681.1 =================================================
(1) Difference between Column B and Column D is primarily due to valuation allowances due to impairments on mortgage loans on real estate and due to accumulated depreciation and valuation allowances due to impairments on real estate. See notes to the consolidated financial statements. (2) Difference between Column B and Column C is primarily due to operating gains (losses) of investments in limited partnerships. The condensed financial information should be read in conjunction with the audited consolidated financial statements and notes thereto. 45 JOHN HANCOCK FINANCIAL SERVICES, INC. SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Only) BALANCE SHEET (in millions)
December 31 --------------------------------- 2001 2000 --------------------------------- Assets Investments: Investment in unconsolidated subsidiaries $6,197.5 $5,653.6 --------------------------------- Total Investments 6,197.5 5,653.6 Cash and cash equivalents 109.4 106.5 Account receivable 46.9 3.6 Income taxes receivable 14.2 3.6 Other assets 13.3 5.3 --------------------------------- Total Assets $6,381.3 $5,772.6 ================================= Liabilities and Shareholders' Equity Liabilities: Interest payable 1.9 -- Dividends payable to shareholders 15.8 17.1 Long-term debt 498.6 -- --------------------------------- Total Liabilities 516.3 17.1 Shareholders' Equity Common stock, $.01 par value; 2.0 billion shares authorized; 315.8 million and 315.0 million shares issued, respectively 3.2 3.2 Additional paid in capital 5,099.3 5,086.4 Retained earnings 1,206.7 680.4 Accumulated other comprehensive income 228.0 77.3 Treasury stock, at cost (18.5 million shares and 3.0 million shares, respectively) (672.2) (91.8) --------------------------------- Total Shareholders' Equity 5,865.0 5,755.5 Total Liabilities and Shareholders' Equity $6,381.3 $5,772.6 =================================
The condensed financial information should be read in conjunction with the audited consolidated financial statements and notes thereto. 46 JOHN HANCOCK FINANCIAL SERVICES, INC. SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Only) STATEMENT OF INCOME
For the Period Year Ended February 1 through December 31, 2001 December 31, 2000 ---------------------------------------- (in millions) Revenues Net investment income $ 5.4 $ 11.9 Other revenue 0.1 0.2 ---------------------------------------- Total revenues 5.5 12.1 Benefits and expenses Other operating costs and expenses 38.8 31.7 ---------------------------------------- Total benefits and expenses 38.8 31.7 Loss before income taxes (33.3) (19.7) Income taxes 14.4 3.6 ---------------------------------------- Net loss after taxes (18.9) (16.1) Equity in the net income of unconsolidated subsidiaries 637.6 790.8 ---------------------------------------- Net income $618.7 $774.7 ========================================
The condensed financial information should be read in conjunction with the audited consolidated financial statements and notes thereto. 47 JOHN HANCOCK FINANCIAL SERVICES, INC. SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Only) STATEMENT OF CASH FLOWS
Year Ended December 31, 2001 December 31, 2000 ------------------------------------ (in millions) Net income $ 618.7 $ 774.7 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 0.3 0.1 Equity in the undistributed net income of unconsolidated subsidiaries (637.6) (790.8) Amounts received from unconsolidated subsidiaries related to stock option plans 14.2 3.5 Decrease (increase) in accounts receivables (43.3) (3.6) Increase in other assets (5.5) (5.4) Increase in interest payable 1.9 - Decrease (increase) in dividend payable to shareholders (1.4) 17.1 Increase in income taxes (10.6) (3.6) ------------------------------------ Net cash used in operating activities (63.3) (8.0) Cash flows from investing activities: Capital contributed to unconsolidated subsidiaries (6.8) (1,823.1) Dividends received from unconsolidated subsidiaries 250.0 466.0 ------------------------------------ Net cash provided by (used in) investing activities 243.2 (1,357.1) Cash flows from financing activities Issuance of common stock -- 1,657.7 Acquisition of treasury stock at cost (580.4) (91.8) Dividends paid on common stock (92.4) (94.3) Issuance of long term bond 495.8 -- ------------------------------------ Net cash (used in) provided by financing activities (177.0) 1,471.6 Net increase in cash and cash equivalents 2.9 106.5 ------------------------------------ Cash and cash equivalents at beginning of year 106.5 -- ------------------------------------ Cash and cash equivalents at the end of the year $ 109.4 $ 106.5 ====================================
The condensed financial information should be read in conjunction with the audited consolidated financial statements and notes thereto. 48 JOHN HANCOCK FINANCIAL SERVICES, INC. SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION As of December 31, 2001, 2000 and 1999 and for each of the years then ended (in millions)
FUTURE OTHER POLICY POLICY BENEFITS, CLAIMS DEFERRED LOSSES, AND POLICY CLAIMS AND BENEFITS ACQUISITION LOSS UNEARNED PAYABLE PREMIUM SEGMENT COSTS EXPENSES PREMIUMS (1) (1) REVENUE 2001: Protection $2,743.2 $18,369.2 $280.4 $102.0 $1,688.1 Asset Gathering 616.2 6,689.4 -- 0.1 74.8 Guaranteed & Structured Financial Products 8.8 24,401.7 65.7 4.9 899.8 Investment Management -- -- -- -- -- Corporate & Other 349.2 6,819.3 463.2 155.7 1,188.6 ----------------------------------------------------------------------------------------- Total $3,717.4 $56,279.6 $809.3 $262.7 $3,851.3 ========================================================================================= 2000: Protection $2,595.3 $16,671.2 $262.6 $89.9 $ 1,549.2 Asset Gathering 558.2 5,619.9 -- (4.5) 63.4 Guaranteed & Structured Financial Products 8.5 21,962.4 60.4 0.7 763.4 Investment Management -- -- -- -- -- Corporate & Other 355.0 6,471.6 348.3 224.0 1,076.1 ----------------------------------------------------------------------------------------- Total $3,517.0 $50,725.1 $671.3 $310.1 $3,452.1 ========================================================================================= 1999: Protection $2,383.8 $15,035.0 $217.4 $112.1 $1,431.7 Asset Gathering 521.5 5,166.8 -- 0.2 17.2 Guaranteed & Structured Financial Products 8.4 20,310.4 56.1 0.5 463.7 Investment Management -- -- -- -- -- Corporate & Other 321.2 6,629.1 216.7 246.1 804.9 ----------------------------------------------------------------------------------------- Total $3,234.9 $47,141.3 $490.2 $358.9 $2,717.5 =========================================================================================
The condensed financial information should be read in conjunction with the audited consolidated financial statements and notes thereto. 49 JOHN HANCOCK FINANCIAL SERVICES, INC. SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION -- (CONTINUED) As of December 31, 2001, 2000 and 1999 and for each of the years then ended (in millions)
AMORTIZATION OF DEFERRED POLICY BENEFITS, ACQUISITION COSTS, CLAIMS, EXCLUDING AMOUNTS NET LOSSES, AND RELATED TO NET REALIZED OTHER INVESTMENT SETTLEMENT INVESTMENT AND OTHER OPERATING SEGMENT INCOME EXPENSES GAINS (LOSSES) EXPENSES 2001: Protection $1,264.7 $1,882.2 $ 182.2 $ 364.3 Asset Gathering 498.5 441.6 75.0 452.4 Guaranteed & Structured Financial Products 1,835.6 2,328.7 2.4 61.9 Investment Management 28.7 -- -- 97.9 Corporate & Other 317.4 1,252.2 47.2 523.6 ----------------------------------------------------------------------------------------- Total $3,944.9 $5,904.7 $ 306.8 $1,500.1 ========================================================================================= 2000: Protection $1,203.6 $1,752.7 $ 113.8 $454.6 Asset Gathering 445.8 371.3 78.8 557.2 Guaranteed & Structured Financial Products 1,743.2 2,125.5 2.6 79.5 Investment Management 22.7 -- -- 132.7 Corporate & Other 449.5 1,126.1 46.8 362.4 ----------------------------------------------------------------------------------------- Total $3,864.8 $5,375.6 $ 242.0 $1,586.4 ========================================================================================= 1999: Protection $1,107.3 $1,709.4 $ 71.8 $ 427.3 Asset Gathering 388.6 299.3 53.5 542.1 Guaranteed & Structured Financial Products 1,681.4 2,130.9 3.1 88.3 Investment Management 45.9 -- -- 127.2 Corporate & Other 300.9 1,228.9 38.4 227.4 ----------------------------------------------------------------------------------------- Total $3,524.1 $5,368.5 $ 166.8 $1,412.3 =========================================================================================
(1) Unearned premiums and other policy claims and benefits payable are included in Column C amounts. (2) Allocations of net investment income and certain operating expenses are based on a number of assumptions and estimates, and reported operating results would change by segment if different methods were applied. The condensed financial information should be read in conjunction with the audited consolidated financial statements and notes thereto. 50 JOHN HANCOCK FINANCIAL SERVICES, INC. SCHEDULE IV -- REINSURANCE As of December 31, 2001, 2000 and 1999 and for each of the years then ended: (in millions)
ASSUMED PERCENTAGE CEDED TO FROM OF AMOUNT GROSS OTHER OTHER NET ASSUMED TO AMOUNT COMPANIES COMPANIES AMOUNT NET 2001: Life insurance in force $397,486.1 $161,341.5 $27,940.6 $264,085.2 10.6% ======================================================================= Premiums: Life insurance $ 3,560.7 $ 624.2 $ 235.4 $ 3,171.9 7.4% Accident and health insurance 529.7 44.8 194.5 679.4 28.6% P&C -- -- -- -- 0.0% ----------------------------------------------------------------------- Total $ 4,090.4 $ 669.0 $ 429.9 $ 3,851.3 11.2% ======================================================================= 2000: Life insurance in force $416,109.7 $119,770.1 $28,126.1 $324,465.7 8.7% ======================================================================= Premiums: Life insurance $ 2,745.0 $ 544.0 $ 279.3 $ 2,480.3 11.3% Accident and health insurance 1,338.6 554.3 187.5 971.8 19.3% P&C -- -- -- -- 0.0% ----------------------------------------------------------------------- Total $ 4,083.6 $ 1,098.3 $ 466.8 $ 3,452.1 13.5% ======================================================================= 1999: Life insurance in force $380,019.3 $ 83,232.3 $29,214.6 $326,001.6 9.0% ======================================================================= Premiums: Life insurance $ 2,292.8 $ 302.0 $ 139.4 $ 2,130.2 6.5% Accident and health insurance 1,142.4 728.5 173.1 587.0 29.5% P&C -- -- 0.3 0.3 100.0% ----------------------------------------------------------------------- Total $ 3,435.2 $ 1,030.5 $ 312.8 $ 2,717.5 11.5% =======================================================================
Note: The life insurance caption represents principally premiums from traditional life insurance and life-contingent immediate annuities and excludes deposits on investment products and the universal life insurance products. The condensed financial information should be read in conjunction with the audited consolidated financial statements and notes thereto. 51 JOHN HANCOCK FINANCIAL SERVICES, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JOHN HANCOCK FINANCIAL SERVICES, INC. By: /s/ Thomas E. Moloney ----------------------------------- Thomas E. Moloney Senior Executive Vice President and Chief Financial Officer Date: March 19, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ David F. D'Alessandro - ------------------------------- David F. D'Alessandro Chairman, President, Chief Executive March 19, 2002 Officer and Director (Principal Executive Officer) /s/ Thomas E. Moloney - ------------------------------- Thomas E. Moloney Senior Executive Vice President and March 19, 2002 Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Wayne A. Budd - ------------------------------- Wayne A. Budd Executive Vice President, General March 19, 2002 Counsel and Director /s/ John M. Connors, Jr. - ------------------------------- John M. Connors, Jr. Director March 19, 2002 /s/ Robert E. Fast - ------------------------------- Robert E. Fast Director March 19, 2002 /s/ Kathleen Foley Feldstein - ------------------------------- Kathleen Foley Feldstein Director March 19, 2002 /s/ Nelson S. Gifford - ------------------------------- Nelson S. Gifford Director March 19, 2002 /s/ Thomas P. Glynn - ------------------------------- Thomas P. Glynn Director March 19, 2002 /s/ Michael C. Hawley - ------------------------------- Michael C. Hawley Director March 19, 2002 /s/ Edward H. Linde - ------------------------------- Edward H. Linde Director March 19, 2002 /s/ Judith A. McHale - ------------------------------- Judith A. McHale Director March 19, 2002 /s/ R. Robert Popeo - ------------------------------- R. Robert Popeo Director March 19, 2002
52 JOHN HANCOCK FINANCIAL SERVICES, INC. /s/ Richard F. Syron - ------------------------------- Richard F. Syron Director March 19, 2002 /s/ Robert J. Tarr, Jr. - ------------------------------- Robert J. Tarr, Jr. Director March 19, 2002
53 EX-3.2 3 ex3-2.txt Exhibit 3.2 - -------------------------------------------------------------------------------- JOHN HANCOCK FINANCIAL SERVICES, INC. AMENDED AND RESTATED BY-LAWS As Adopted on February 11, 2002 - -------------------------------------------------------------------------------- ARTICLE I. STOCKHOLDERS........................................................1 Section 1.01. Annual Meetings.................................................1 Section 1.02. Special Meetings................................................1 Section 1.03. Notice of Meetings; Postponements; Waiver.......................1 Section 1.04. Quorum..........................................................2 Section 1.05. Voting..........................................................2 Section 1.06. Voting by Ballot................................................2 Section 1.07. Adjournment.....................................................2 Section 1.08. Proxies.........................................................3 Section 1.09. Organization; Procedure.........................................3 Section 1.10. Notice of Stockholder Business and Nominations..................4 Section 1.11. Inspectors of Elections.........................................6 Section 1.12. Opening and Closing of Polls....................................7 Section 1.13. No Stockholder Action by Written Consent........................7 ARTICLE II. BOARD OF DIRECTORS.................................................7 Section 2.01. General Powers..................................................7 Section 2.02. Number of Directors.............................................7 Section 2.03. Classified Board; Election of Directors.........................7 Section 2.04. Annual and Regular Meetings.....................................8 Section 2.05. Special Meetings; Notice........................................8 Section 2.06. Quorum; Voting..................................................8 Section 2.07. Adjournment.....................................................9 Section 2.08. Action Without a Meeting........................................9 Section 2.09. Regulations; Manner of Acting...................................9 Section 2.10. Action by Telephonic Communications.............................9 Section 2.11. Resignations....................................................9 Section 2.12. Removal of Directors............................................9 Section 2.13. Vacancies and Newly Created Directorships.......................9 Section 2.14. Compensation...................................................10 Section 2.15. Reliance on Accounts and Reports, etc..........................10 ARTICLE III. BOARD COMMITTEES.................................................10 Section 3.01. General........................................................10 Section 3.02. Notices of Times of Meetings of Committees and Presiding Officers.........................................................10 Section 3.03. Powers.........................................................11 Section 3.04. Proceedings....................................................11 Section 3.05. Quorum and Manner of Acting....................................11 Section 3.06. Action by Telephonic Communications............................11 Section 3.07. Absent or Disqualified Members.................................11 Section 3.08. Resignations...................................................11 Section 3.09. Removal........................................................12 Section 3.10. Vacancies......................................................12 ARTICLE IV. OFFICERS..........................................................12 Section 4.01. Number.........................................................12 Section 4.02. Election.......................................................12 Section 4.03. Salaries.......................................................12 Section 4.04. Removal and Resignation; Vacancies.............................12 Section 4.05. Authority and Duties of Officers...............................13 Section 4.06. The Chairman of the Board; Vice Chairman of the Board..........13 Section 4.07. The Chief Executive Officer....................................13 Section 4.08. The President..................................................13 Section 4.09. The Vice Presidents............................................14 Section 4.10. The Secretary..................................................14 Section 4.11. The Chief Financial Officer....................................15 Section 4.12. The Treasurer..................................................16 Section 4.13. General Counsel................................................16 Section 4.14. Additional Officers............................................16 Section 4.15. Security.......................................................16 ARTICLE V. CAPITAL STOCK......................................................17 Section 5.01. Certificates of Stock, Uncertificated Shares...................17 Section 5.02. Signatures; Facsimile..........................................17 Section 5.03. Lost, Stolen or Destroyed Certificates.........................17 Section 5.04. Transfer of Stock..............................................17 Section 5.05. Record Date....................................................18 Section 5.06. Registered Stockholders........................................18 Section 5.07. Transfer Agent and Registrar...................................18 ARTICLE VI. INDEMNIFICATION...................................................19 Section 6.01. Nature of Indemnity for Directors and Officers.................19 Section 6.02. Nature of Indemnity for Employees and Agents...................19 Section 6.03. Limitation on Indemnities......................................20 Section 6.04. Expenses to be Reimbursed......................................20 Section 6.05. Determination that Indemnification is Proper...................20 Section 6.06. Advance Payment of Expenses....................................21 Section 6.07. Survival.......................................................21 Section 6.08. Preservation of Other Rights...................................21 Section 6.09. Insurance......................................................21 Section 6.10. Severability...................................................21 Section 6.11. Procedure for Indemnification of Directors and Officers........22 ARTICLE VII. OFFICES..........................................................22 Section 7.01. Registered Office..............................................22 Section 7.02. Other Offices..................................................22 ARTICLE VIII. GENERAL PROVISIONS..............................................23 Section 8.01. Dividends......................................................23 Section 8.02. Reserves.......................................................23 Section 8.03. Execution of Instruments.......................................23 Section 8.04. Corporate Indebtedness.........................................23 Section 8.05. Deposits.......................................................24 Section 8.06. Checks.........................................................24 Section 8.07. Sale, Transfer, etc. of Securities.............................24 Section 8.08. Voting Upon Stock..............................................24 Section 8.09. Fiscal Year....................................................24 Section 8.10. Seal...........................................................25 Section 8.11. Books and Records; Inspection..................................25 ARTICLE IX. AMENDMENT OF BY-LAWS; EMERGENCY BY-LAWS...........................25 Section 9.01. Amendment......................................................25 Section 9.02. Emergency By-Laws..............................................25 ARTICLE X. CONSTRUCTION.......................................................26 Section 10.01. Construction..................................................26 JOHN HANCOCK FINANCIAL SERVICES, INC. AMENDED AND RESTATED BY-LAWS As adopted on February 11, 2002 ------------------------------------------ ARTICLE I. STOCKHOLDERS Section 1.01. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of Directors and for the transaction of such other business as properly may come before such meeting shall be held at such place, either within or without the State of Delaware, and at such date and at such time, as may be fixed from time to time by resolution of the Board of Directors and set forth in the notice or waiver of notice of the meeting. Section 1.02. Special Meetings. Special meetings of the stockholders may be called at any time by the Chairman of the Board, the Chief Executive Officer (or, in the event of his or her absence or disability, by the President), or by the Board of Directors. Such special meetings of the stockholders shall be held at such places, within or without the State of Delaware, as shall be specified in the respective notices or waivers of notice thereof. Section 1.03. Notice of Meetings; Postponements; Waiver. Except as otherwise provided by law or the Certificate of Incorporation, notice given in writing or by electronic transmission of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting, such notice to specify the place, date and hour and, in the case of a special meeting, the purpose or purposes for which such meeting is called. Without limiting the manner by which notice otherwise may be given to stockholders, any notice given by electronic transmission shall be deemed to have been given to a stockholder at the time specified in the Delaware General Corporation Law. If such notice is mailed, it shall be deemed to have been given to a stockholder when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the record of stockholders of the Corporation, or, if a stockholder shall have filed with the Secretary of the Corporation a written request that notices to such stockholder be mailed to some other address, then directed to such stockholder at such other address. Such further notice shall be given as may be required by law. The Board of Directors may postpone any meeting prior to the scheduled meeting time. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 1 of 26 Notice of the time, place, and purpose of any meeting of stockholders may be waived (i) in writing signed by the person entitled to notice thereof or (ii) by electronic transmission made by the person entitled to notice, either before or after such meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in a written waiver of notice. Notice will be waived by any stockholder by his or her attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. Section 1.04. Quorum. Except as otherwise required by law or by the Certificate of Incorporation, the presence in person or by proxy of the holders of record of one-third of the shares entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business at such meeting. Section 1.05. Voting. If, pursuant to Section 5.05 of these By-Laws, a record date has been fixed, every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote for each share outstanding in his or her name on the books of the Corporation at the close of business on such record date. If no record date has been fixed, then every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote for each share of stock standing in his or her name on the books of the Corporation at the close of business on the day next preceding the day on which notice of the meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. At any meeting at which a quorum is present the vote of a majority of the shares represented in person or by proxy and voting on the subject matter shall be sufficient for the transaction of any business at such meeting, except as otherwise required by law or by the Certificate of Incorporation or by these By-Laws, and except that the election of directors shall be by a plurality of the shares represented in person or by proxy at such a meeting and voting on the election of directors. Section 1.06. Voting by Ballot. No vote of the stockholders need be taken by written ballot unless otherwise required by law. Any vote not required to be taken by ballot may be conducted in any manner approved at the meeting at which such vote is taken. Section 1.07. Adjournment. If a quorum is not present at any meeting of the stockholders, the stockholders present in person or by proxy shall have the power to adjourn any such meeting from time to time until a quorum is present. Whether or not a quorum is present, the presiding officer of the meeting may adjourn the meeting from time to time. Notice of any adjourned meeting of the stockholders of the Corporation need not be given if the place, date and hour thereof are announced at the meeting at which the adjournment is taken, provided, however, that if the adjournment is for more than thirty days, or if after the adjournment a new record date for the adjourned meeting is fixed pursuant to Section 5.05 of these By-Laws, a notice of the adjourned meeting, conforming to the requirements of Section 1.03 hereof, shall be given to each stockholder John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 2 of 26 of record entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. Section 1.08. Proxies. Any stockholder entitled to vote at any meeting of the stockholders may authorize another person or persons to vote at any such meeting and express such consent or dissent for him or her by proxy. A stockholder may authorize a valid proxy by executing a written instrument signed by such stockholder, or by causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature, or by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person designated as the holder of the proxy, a proxy solicitation firm or a like authorized agent. No such proxy shall be voted or acted upon after the expiration of three years from the date of such proxy, unless such proxy expressly provides for a longer period. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where applicable law provides that a proxy shall be irrevocable. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the Secretary. Proxies by telegram, cablegram or other electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Any copy, facsimile telecommunication or other reliable reproduction of a writing or transmission created pursuant to this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 1.09. Organization; Procedure. The Chairman of the Board, or, in his or her absence or disability, the Vice-Chairman of the Board, if any, the Chief Executive Officer, the President, any Senior Executive Vice President or any Executive Vice President, in the order named, shall call meetings of the stockholders to order, and shall act as presiding officer of such meetings. The Secretary, or in the event of his or her absence or disability, the Assistant Secretary, if any, or if there be no Assistant Secretary, in the absence of the Secretary, an appointee of the presiding officer, shall act as Secretary of the meeting. The order of business and all other matters of procedure at every meeting of stockholders may be determined by such presiding officer. Except to the extent inconsistent with applicable law or any rules and regulations adopted by the Board of Directors, the presiding officer of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts, including causing an adjournment of such meeting, as, in the judgment of such presiding officer, are appropriate. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the presiding officer of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the presiding officer shall permit; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; (e) limitations on the time John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 3 of 26 allotted to questions or comments by participants; and (f) establishing times for opening and closing of the voting polls for each item upon which a vote is to be taken. Unless, and to the extent determined by the Board of Directors or the presiding officer of the meeting, meetings of the stockholders shall not be required to be held in accordance with rules of parliamentary procedure. Section 1.10. Notice of Stockholder Business and Nominations. (1) Annual Meetings of Stockholders. (i) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) by or at the direction of the Board of Directors or the Chairman of the Board, or (B) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in clauses (ii) and (iii) of this paragraph and who was a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder, pursuant to clause (B) of paragraph (1)(i) of this Section 1.10, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than ninety days nor more than one hundred and twenty days prior to the first anniversary of the preceding year's annual meeting and, in addition, at least 45 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting of stockholders; provided that, if, in any succeeding year, the date of the annual meeting is advanced or delayed by more than thirty days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than one hundred and twenty days prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. In no event shall the adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (A) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provisions, including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected; (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of any beneficial owner on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and any beneficial owner on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 4 of 26 (iii) Notwithstanding anything in the second sentence of paragraph (1)(ii) of this Section 1.10 to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for Director or specifying the size of the increased Board of Directors made by the Corporation at least one hundred days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice under this paragraph shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (2) Special Meetings of Stockholders. Only such business as shall have been brought before the special meeting of the stockholders pursuant to the Corporation's notice of meeting pursuant to Section 1.03 of these By-Laws shall be conducted at such meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which Directors are to be elected pursuant to the Corporation's notice of meeting (1) by or at the direction of the Board of Directors or (2) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this Section 1.10 and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. Nominations by stockholders of persons for election to the Board of Directors may be made at such special meeting of stockholders if the stockholder's notice as required by paragraph (1)(ii) of this Section 1.10 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the one hundred and twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (3) General. (i) Only persons who are nominated in accordance with the procedures set forth in this Section 1.10 may be elected as Directors at a meeting and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.10. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 1.10 and, if any proposed nomination or business is not in compliance with this Section 1.10, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this Section 1.10, "public announcement" shall mean disclosure in a press release or other means reasonably designed to provide broad distribution of the information to the public, or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 5 of 26 (iii) Notwithstanding the foregoing provisions of this Section 1.10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 1.10. Nothing in this Section 1.10 shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act, or (B) of the holders of any series of Preferred Stock, if any, to elect Directors, if so provided under any applicable Preferred Stock Certificate of Designation (as defined in the Certificate of Incorporation). Section 1.11. Inspectors of Elections. Preceding any meeting of the stockholders, the Board of Directors shall appoint one or more persons to act as Inspectors of Elections, and may designate one or more alternate inspectors. In the event no inspector or alternate is able to act, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of the duties of an inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector shall: (1) ascertain the number of shares outstanding and the voting power of each; (2) determine the shares represented at a meeting and the validity of proxies and ballots; (3) count all votes and ballots; (4) specify the information relied upon to determine the validity of electronic transmissions in accordance with Section 1.08 hereof; (5) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (6) certify his or her determination of the number of shares represented at the meeting, and his or her count of all votes and ballots; (7) the inspector may appoint or retain other persons or entities to assist in the performance of the duties of inspector; and (8) when determining the shares represented and the validity of proxies and ballots, the inspector shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 1.08 of these By-Laws, ballots and the regular books and records of the Corporation. The inspector may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers or their nominees or a similar person which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspector considers other reliable information as outlined in this section, the John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 6 of 26 inspector, at the time of his or her certification pursuant to (6) of this section, shall specify the precise information considered, the person or persons from whom the information was obtained, when this information was obtained, the means by which the information was obtained, and the basis for the inspector's belief that such information is accurate and reliable. Section 1.12. Opening and Closing of Polls. The date and time for the opening and the closing of the polls for each matter to be voted upon at a stockholder meeting shall be announced at the meeting. The inspector of the election shall be prohibited from accepting any ballots, proxies or votes or any revocations thereof or changes thereto after the closing of the polls, unless the Court of Chancery upon application by a stockholder shall determine otherwise. Section 1.13. No Stockholder Action by Written Consent. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of the stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is specifically denied. ARTICLE II. BOARD OF DIRECTORS Section 2.01. General Powers. Except as may otherwise be provided by law, by the Certificate of Incorporation or by these By-Laws, the property, affairs and business of the Corporation shall be managed by or under the direction of the Board of Directors and the Board of Directors may exercise all the powers of the Corporation. Section 2.02. Number of Directors. Subject to the rights of the holders of any class or series of Preferred Stock, if any, the number of Directors shall be fixed from time to time by a majority of the Board of Directors then in office; provided, however, that the Board shall at no time consist of fewer than three (3) Directors. Section 2.03. Classified Board; Election of Directors. The Directors of the Corporation, subject to the rights of the holders of shares of any class or series of preferred stock, shall be classified with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class ("Class I") whose initial term expires at the 2000 annual meeting of stockholders, another class ("Class II") whose initial term expires at the 2001 annual meeting of stockholders, and another class ("Class III") whose initial term expires at the 2002 annual meeting of stockholders, with each class to hold office until its successors are elected and qualified. Except as otherwise provided in Sections 2.12 and 2.13 of these By-Laws, at each annual meeting of stockholders of the corporation, and subject to the rights of the holders of shares of any class or series of preferred stock, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 7 of 26 Section 2.04. Annual and Regular Meetings. The annual meeting of the Board of Directors for the purpose of electing officers and for the transaction of such other business as may come before the meeting shall be held as soon as possible following adjournment of the annual meeting of the stockholders at the place of such annual meeting of the stockholders. Notice of such annual meeting of the Board of Directors need not be given. The Board of Directors from time to time may by resolution provide for the holding of regular meetings and fix the place (which may be within or without the State of Delaware) and the date and hour of such meetings. Notice of regular meetings need not be given, provided, however, that if the Board of Directors shall fix or change the time or place of any regular meeting, notice of such action shall be mailed promptly, or sent by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means, to each Director who shall not have been present at the meeting at which such action was taken, addressed to him or her at his or her usual place of business, or shall be delivered to him or her personally. Notice of such action need not be given to any Director who attends the first regular meeting after such action is taken without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting. Section 2.05. Special Meetings; Notice. Special meetings of the Board of Directors shall be held whenever called by the Chief Executive Officer (or, in the event of his or her absence or disability, by the President or any Vice President), or by the Chairman or Vice Chairman, if any, of the Board of Directors, at such place (within or without the State of Delaware), date and hour as may be specified in the respective notices or waivers of notice of such meetings. Special meetings of the Board of Directors may be called on twenty-four (24) hours' notice, if notice is given to each Director personally or by telephone, including a voice messaging system, or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means, or on five (5) days' notice, if notice is mailed to each Director, addressed to him or her at his or her usual place of business. Notice of any special meeting need not be given to any Director who attends such meeting without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting, and any business may be transacted thereat. Section 2.06. Quorum; Voting. At all meetings of the Board of Directors, the presence of at least a majority of the Directors then in office (but not less than one-third of the total number of directors as then fixed by the Board of Directors) shall constitute a quorum for the transaction of business. Except as otherwise required by law, the Certificate of Incorporation or these By-Laws, the vote of at least a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, provided however, that in accordance with Section 9.9 of the Plan of Reorganization of John Hancock Mutual Life Insurance Company, dated August 31, 1999 (the "Plan"), the affirmative vote of at least three-fourths (3/4) of the Directors then in office shall be required to amend the Plan following the effective date of the reorganization of John Hancock Mutual Life Insurance Company. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 8 of 26 Section 2.07. Adjournment. A majority of the Directors present, whether or not a quorum is present, may adjourn any meeting of the Board of Directors to another time or place. No notice need be given of any adjourned meeting unless the time and place of the adjourned meeting are not announced at the time of adjournment, in which case notice conforming to the requirements of Section 2.05 of these By-Laws shall be given to each Director. Section 2.08. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.09. Regulations; Manner of Acting. To the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws, the Board of Directors may adopt such rules and regulations for the conduct of meetings of the Board of Directors and for the management of the property, affairs and business of the Corporation as the Board of Directors may deem appropriate. Section 2.10. Action by Telephonic Communications. Members of the Board of Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 2.11. Resignations. Any Director may resign at any time by delivering a written notice of resignation signed by such Director to the Chairman or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 2.12. Removal of Directors. Subject to the rights of the holders of any class or series of Preferred Stock, if any, to elect additional Directors under specified circumstances, any Director may be removed at any time, but only for cause, upon the affirmative vote of the holders of a majority of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the election of Directors. Any vacancy in the Board of Directors caused by any such removal may be filled at such meeting by the stockholders entitled to vote for the election of the Director so removed. If such stockholders do not fill such vacancy at such meeting, such vacancy may be filled in the manner provided in Section 2.13 of these By-Laws. Section 2.13. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any class or series of Preferred Stock, if any, to elect additional Directors under specified circumstances, and except as provided in Section 2.12, if any vacancies shall occur in the Board of Directors, by reason of death, resignation, removal or otherwise, or if the authorized number of Directors shall be increased, the Directors then in office shall continue to act, and such vacancies and newly created directorships shall be filled by a majority of the Directors then in office, although less than a quorum, provided that in lieu of filling any vacancy the Board of Directors may reduce the number of Directors pursuant to Section 2.02. A Director elected to fill a vacancy John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 9 of 26 shall hold office for the unexpired term of his or her predecessor and until his or her successor has been elected and qualified or until his or her earlier death, resignation or removal. A Director elected to fill a newly created directorship shall hold office for the term remaining of the class to which he or she is elected and until his or her successor has been elected and qualified or until his or her earlier death, resignation or removal. Section 2.14. Compensation. The amount, if any, which each Director shall be entitled to receive as compensation for such Director's services as such shall be fixed from time to time by the Board of Directors. Section 2.15. Reliance on Accounts and Reports, etc. A Director, or a member of any committee designated by the Board of Directors shall, in the performance of such Director's duties, be fully protected in relying in good faith upon the records of the Corporation and upon information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees designated by the Board of Directors, or by any other person as to the matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. ARTICLE III. BOARD COMMITTEES Section 3.01. General. The Board of Directors may designate one or more other committees, each such committee to consist of such number of Directors as from time to time may be fixed by the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any such committee, who may replace any absent or disqualified member or members at any meeting of such committee. Thereafter, members (and alternate members, if any) of each such committee may be designated at the annual meeting of the Board of Directors or at any other time. Any such committee may be abolished or re-designated from time to time by the Board of Directors. Each member (and each alternate member) of any such committee (whether designated at an annual meeting of the Board of Directors or to fill a vacancy or otherwise) shall hold office until his or her successor shall have been designated or until he or she shall cease to be a Director, or until his or her earlier death, resignation or removal. Section 3.02. Notices of Times of Meetings of Committees and Presiding Officers. Meetings of a committee shall be held upon call of the Chief Executive Officer, or upon call of the chairman of such committee or two members of such committee. Meetings of each committee may also be held at such other times as it may determine. A meeting of a committee shall be held at such place and upon such notice as shall be determined by the person or persons who call such meeting. Any such chairman, if present, or such member or members of each committee as may be designated by the Chief Executive Officer shall preside at meetings thereof or, in the event of the absence or disability of any thereof or failing such designation, the committee shall select from among its members present a presiding officer. Meetings of any committee may be attended by John Hancock Financial Services, Inc. - Amended & Restated By-Laws John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 10 of 26 Directors who are not members of such committee unless the chairman of such committee requests otherwise. Section 3.03. Powers. Each committee of the Board of Directors shall have and may exercise such powers of the Board of Directors as shall be specified by the Board of Directors. An action by any such committee shall, for purposes of these By-Laws, and otherwise, be deemed to be the same as an action by the Board of Directors; provided, however, that no committee shall have or exercise any powers which may not be delegated to a committee under applicable law. Any committee may be granted by the Board of Directors power to authorize the seal of the Corporation to be affixed to any or all papers which may require it. Section 3.04. Proceedings. Each such committee may fix its own rules of procedure and may meet at such place (within or without the State of Delaware), at such time and upon such notice, if any, as it shall determine from time to time. Each such committee shall keep minutes of its proceedings and shall report such proceedings to the Board of Directors at the meeting of the Board of Directors next following any such proceedings. Section 3.05. Quorum and Manner of Acting. At all meetings of any committee, the presence of members (or alternate members) constituting a majority of the members then serving on such committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at any meeting at which a quorum is present shall be the act of such committee. Any action required or permitted to be taken at any meeting of any such committee may be taken without a meeting, if all members of such committee shall consent to such action in writing and such writing or writings are filed with the minutes of the proceedings of the committee. Notwithstanding anything to the contrary set forth in this Section 3.05 or elsewhere in these By-Laws, committees of two or fewer directors may operate otherwise as determined by the Board of Directors. Section 3.06. Action by Telephonic Communications. Members of any committee designated by the Board of Directors may participate in a meeting of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 3.07. Absent or Disqualified Members. In the absence or disqualification of a member of any committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 3.08. Resignations. Any member (and any alternate member) of any committee may resign at any time by delivering a written notice of resignation, signed by such member, to the Chairman or the Secretary. Unless otherwise specified therein, such resignation shall take effect John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 11 of 26 upon delivery. Any resignation from the Board of Directors shall automatically constitute a resignation from any committee on which such Director may serve. Section 3.09. Removal. Any member (and any alternate member) of any committee may be removed at any time, either for or without cause, by resolution adopted by the Board of Directors. Removal of a Director as such shall automatically constitute removal from any committees on which such Director may serve. Section 3.10. Vacancies. If any vacancy shall occur in any committee, by reason of disqualification, death, resignation, removal or otherwise, the remaining members (and any alternate members) shall continue to act, and any such vacancy may be filled by the Board of Directors. ARTICLE IV. OFFICERS Section 4.01. Number. The officers of the Corporation shall be a Chief Executive Officer, President, one or more Vice Presidents (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents and Senior Managing Directors, or other positions of equivalent rank) as the Board of Directors may from time to time determine, a Chief Financial Officer, a General Counsel, a Secretary and a Treasurer. The Board of Directors also may elect one or more Assistant Secretaries and Assistant Treasurers in such numbers as the Board of Directors may determine. Any number of offices may be held by the same person. The Board of Directors may also elect from its own membership a Chairman of the Board of Directors and a Vice Chairman. Section 4.02. Election. The officers of the Corporation (except such officers as may be appointed in accordance with the provisions of Section 4.14 hereof) shall be elected by the Board of Directors at the annual meeting of the Board of Directors or at any other time and in any other manner as the Board of Directors may determine. Each officer shall hold office until the next ensuing annual meeting of the Board of Directors and until such officer's successor shall have been elected and qualified, or until such officer's death, or until such officer shall resign in the manner provided in Section 4.04 hereof, or shall have been removed in the manner provided in Section 4.04 hereof or until such officer's employment otherwise ceases. Any number of offices may be held by the same person. Each of the Chairman of the Board and the Vice Chairman, if any, shall be and remain a Director of the Corporation during his or her respective term of office. No other officer need be a Director. Section 4.03. Salaries. The salaries of the Chairman of the Board and all other officers of the Corporation shall be fixed in a manner as determined by the Board of Directors. Section 4.04. Removal and Resignation; Vacancies. Any officer of the Corporation may be removed for or without cause at any time by the Board of Directors. Any other officer appointed in John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 12 of 26 accordance with the provisions of Section 4.14 hereof may also be removed, either for or without cause, by the Chief Executive Officer, or any other officer upon whom such power of removal shall have been conferred by the Board of Directors. Any officer may resign at any time by delivering a written notice of resignation, signed by such officer, to the Chief Executive Officer, the President or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, shall be filled as determined by the Board of Directors. Section 4.05. Authority and Duties of Officers. Except as may otherwise be provided by the Board of Directors, the officers of the Corporation shall have such authority and shall exercise such powers and perform such duties as may be specified in these By-Laws, provided that in any event each officer shall exercise such powers and perform such duties as may be required by law. Section 4.06. The Chairman of the Board; Vice Chairman of the Board. The Directors shall elect from among the members of the Board of Directors a "Chairman" of the Board. The Chairman shall have such duties and powers as set forth in these By-Laws or as shall otherwise be conferred upon the Chairman from time to time by the Board of Directors. The Chairman shall preside over all meetings of the Stockholders and the Board of Directors. The Vice Chairman, if any, shall perform the duties of the Chairman in the Chairman's absence. Section 4.07. The Chief Executive Officer. The Chief Executive Officer shall have general control and supervision of the policies and operations of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He or she shall manage and administer the Corporation's business and affairs and shall also perform all duties and exercise all powers usually pertaining to the office of a chief executive officer of a corporation. He or she shall have the authority to sign, in the name and on behalf of the Corporation, checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or an Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. He or she shall have the authority to cause the employment or appointment of such employees and agents of the Corporation as the conduct of the business of the Corporation may require, to fix their compensation, and to remove or suspend any such employee or agent. The Chief Executive Officer shall, in the absence of the Chairman of the Board and Vice Chairman, if any, preside at all meetings of the Board of Directors. The Chief Executive Officer shall be vested with the powers, and perform the duties, of the Chairman of the Board in the absence of the Chairman and the Vice Chairman, if any. The Chief Executive Officer shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 4.08. The President. The President, subject to the authority of the Chief Executive Officer, shall be the Chief Operating Officer of the Corporation and shall have primary responsibility for, and authority with respect to, the management of the day-to-day business and affairs of the Corporation. He or she shall have the authority to sign, in the name and on behalf of the Corporation, checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 13 of 26 an Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. The President shall have the authority to cause the employment or appointment of such employees and agents of the Corporation as the conduct of the business of the Corporation may require, to fix their compensation, and to remove or suspend any employee or agent elected or appointed by the President. The President shall perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. Section 4.09. The Vice Presidents. The Vice Presidents, if any, shall have such designations (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice President, Vice President, Second Vice President and Senior Managing Directors or positions of equivalent rank) and shall perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer or President may from time to time prescribe. Section 4.10. The Secretary. The Secretary shall have the following powers and duties, except as may be otherwise determined by the Board of Directors or the Chief Executive Officer: (1) he or she shall keep or cause to be kept a record of all the proceedings of the meetings of the stockholders and of the Board of Directors in books provided for that purpose. (2) he or she shall cause all notices to be duly given in accordance with the provisions of these By-Laws and as required by law. (3) whenever any committee shall be appointed pursuant to a resolution by the Board of Directors, he or she shall furnish a copy of such resolution to the members of such committee. (4) he or she shall be the custodian of the records and of the seal of the Corporation and cause such seal (or a facsimile thereof) to be affixed to all certificates representing shares of the Corporation prior to the issuance thereof and to all instruments the execution of which on behalf of the Corporation under its seal shall have been duly authorized in accordance with these By-Laws, and when so affixed he or she may attest the same. (5) he or she shall properly maintain and file all books, reports, statements, certificates and all other documents and records required by law, the Certificate of Incorporation or these By-Laws. (6) he or she shall sign (unless the Chief Financial Officer, the Treasurer, an Assistant Treasurer or Assistant Secretary shall have signed) certificates representing shares of the Corporation, the issuance of which shall have been authorized by the Board of Directors. (7) he or she shall perform, in general, all duties incident to the office of Secretary and such other duties as may be specified in these By-Laws or as may be assigned to him or her John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 14 of 26 from time to time by the Board of Directors, the Chief Executive Officer, the President or the General Counsel. Section 4.11. The Chief Financial Officer. The Chief Financial Officer of the Corporation shall have the following powers and duties: (1) he or she shall be the principal financial and accounting officer of the Corporation and shall be responsible for all financial and operating statements, tax reports and returns, and reports to government agencies. (2) he or she shall have charge and supervision over and be responsible for the moneys, securities, receipts and disbursements of the Corporation, and shall keep or cause to be kept full and accurate records of all receipts of the Corporation. (3) he or she shall cause the moneys and other valuable effects of the Corporation to be deposited in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as shall be selected in accordance with Section 8.05 of these By-Laws. (4) he or she shall cause the moneys of the Corporation to be disbursed by checks or drafts (signed as provided in Section 8.06 of these By- Laws) upon the authorized depositaries of the Corporation and cause to be taken and preserved proper vouchers for all moneys disbursed. (5) he or she shall render to the Board of Directors, the Chief Executive Officer or the President, whenever requested, a statement of the financial condition of the Corporation and of all his or her transactions as Chief Financial Officer, and render a full financial report at the annual meeting of the stockholders, if called upon to do so. (6) he or she shall be empowered from time to time to require from all officers or agents of the Corporation reports or statements giving such information as he or she may desire with respect to any and all financial transactions of the Corporation. (7) he or she may sign (unless the Treasurer, an Assistant Treasurer or the Secretary or an Assistant Secretary shall have signed) certificates representing stock of the Corporation, the issuance of which shall have been authorized by the Board of Directors. (8) he or she shall have charge of the stock books and ledgers of the Corporation and shall cause the stock and transfer books to be kept in such manner as to show at any time the number of shares of stock of the Corporation of each class issued and outstanding, the names (alphabetically arranged) and the addresses of the holders of record of such shares, the number of shares held by each holder and the date as of which each became such holder of record. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 15 of 26 (9) he or she shall perform, in general, all duties as may be specified in these By-Laws or as may be assigned to him or her from time to time by the Board of Directors, the Chief Executive Officer or the President. Section 4.12. The Treasurer. The Treasurer shall perform such duties and exercise such powers as may be assigned to him or her from time to time by the Chief Financial Officer. In the absence of the Chief Financial Officer, the duties of the Chief Financial Officer shall be performed and his or her powers may be exercised by the Treasurer; subject in any case to review and superseding action by the Board of Directors, the Chief Executive Officer or the President. Section 4.13. General Counsel. The General Counsel of the Corporation shall be the principal legal officer of the Corporation and shall be responsible for all legal affairs of the Corporation. He or she shall perform all other duties as may be assigned to him or her from time to time by the Board of Directors, the Chief Executive Officer or the President. Section 4.14. Additional Officers. The Board of Directors may appoint such other officers and agents as it may deem appropriate, and such other officers and agents shall hold their offices for such terms and shall exercise such powers and perform such duties as may be determined from time to time by the Board of Directors. The Board of Directors from time to time may delegate to any officer or agent the power to appoint subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Any such officer or agent may remove any such subordinate officer or agent appointed by him or her, for or without cause. Section 4.15. Security. The Board of Directors may require any officer, agent or employee of the Corporation to provide security for the faithful performance of his or her duties, in such amount and of such character as may be determined from time to time by the Board of Directors. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 16 of 26 ARTICLE V. CAPITAL STOCK Section 5.01. Certificates of Stock, Uncertificated Shares. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until each such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock in the Corporation represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of, the Corporation, by the Chief Executive Officer, the President or a Vice President, and by the Chief Financial Officer, the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, representing the number of shares registered in certificate form. Such certificate shall be in such form as the Board of Directors may determine, to the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws. Section 5.02. Signatures; Facsimile. All of such signatures on the certificates referred to in Section 5.01 of these By-Laws may be a facsimile, engraved or printed, to the extent permitted by law. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Section 5.03. Lost, Stolen or Destroyed Certificates. The Board of Directors, or the Chief Financial Officer, Treasurer or other officer as authorized by the Board of Directors, may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon delivery to the Board of Directors, or the Chief Financial Officer, Treasurer or other officer as authorized by the Board of Directors, of an affidavit of the owner or owners of such certificate, setting forth such allegation. The Board of Directors, or the Chief Financial Officer, Treasurer or other officer as authorized by the Board of Directors, may require the owner of such lost, stolen or destroyed certificate, or his or her legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate. Section 5.04. Transfer of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Within a reasonable time after the transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the General Corporation John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 17 of 26 Law of the State of Delaware. Subject to the provisions of the Certificate of Incorporation and these By-Laws, the Board of Directors may prescribe such additional rules and regulations as it may deem appropriate relating to the issue, transfer and registration of shares of the Corporation. Section 5.05. Record Date. In order to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5.06. Registered Stockholders. Prior to due surrender of a certificate for registration of transfer, the Corporation may treat the registered owner as the person exclusively entitled to receive dividends and other distributions, to vote, to receive notice and otherwise to exercise all the rights and powers of the owner of the shares represented by such certificate, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have notice of such claim or interests. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer or uncertificated shares are requested to be transferred, both the transferor and transferee request the Corporation to do so. Section 5.07. Transfer Agent and Registrar. The Board of Directors may appoint one or more transfer agents and one or more registrars, and may require all certificates representing shares to bear the signature of any such transfer agents or registrars. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 18 of 26 ARTICLE VI. INDEMNIFICATION Section 6.01. Nature of Indemnity for Directors and Officers. The Corporation shall indemnify any person who is or was or has agreed to become a Director or Officer of the Corporation and who was, is or may be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of (i) any action alleged to have been taken or omitted in such capacity, (ii) activities with a non-profit organization, or pro bono or volunteer services, which services have been requested or endorsed by the Corporation or (iii) service at the Corporation's request with respect to any employee benefit plan. In addition, the Corporation shall indemnify any person, whether or not such person is or was a Director or Officer of the Corporation, who is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise in which the Corporation has a financial interest, direct or indirect, and who was, is or may be made a party to any Proceeding by reason of any action alleged to have been taken or omitted in such capacity. Any indemnification of an individual pursuant to this Section 6.01 (unless ordered by a court) shall be made by the Corporation, unless a determination is made that the individual failed to act in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful; provided that, to the extent that a present or former director or officer of the Corporation or of another entity covered under this Section 6.01 has been successful on the merits or otherwise in defense of any Proceeding, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Notwithstanding the foregoing, the Corporation shall not be obligated to indemnify a director or officer of the Corporation or of another entity covered under this Section 6.01 in respect of a Proceeding (or part thereof) instituted by such director or officer, unless such Proceeding (or part thereof) has been authorized by the Board of Directors. Section 6.02. Nature of Indemnity for Employees and Agents. The Corporation may indemnify any person who is or was or has agreed to become an employee or agent of the Corporation, or who is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise in which the Corporation has a financial interest, direct or indirect, and who was or is or may be made a party to a Proceeding by reason of (i) any action alleged to have been taken or omitted in such capacity, (ii) activities with a non-profit organization, or pro bono or volunteer services, which services have been requested or endorsed by the Corporation or (iii) service at the Corporation's request with respect to any employee benefit plan. Any indemnification of a present or former employee or agent under this Section 6.02 (unless ordered by a court) may be made by the John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 19 of 26 Corporation, unless a determination is made that the present or former employee or agent failed to act in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Section 6.03. Limitation on Indemnities. In the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor against any person described in Sections 6.01 and 6.02 above, (i) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit and (ii) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. Section 6.04. Expenses to be Reimbursed. Without limitation, any indemnification provided by the Corporation pursuant to Section 6.01 shall cover, or with respect to an indemnification provided pursuant to Section 6.02, may cover, judgments, fines, court costs, reasonable attorneys' fees and the cost of reasonable settlements, to the extent such expenses are actually and reasonably incurred in connection with the Proceeding. Section 6.05. Determination that Indemnification is Proper. Any indemnification of a present or former director or officer of the Corporation or of another entity under Section 6.01 hereof (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the present or former director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 6.01. Any indemnification of a present or former employee or agent of the Corporation or of another entity under Section 6.02 hereof (unless ordered by a court) may be made by the Corporation unless a determination is made that indemnification of the present or former employee or agent is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 6.02. Any such determination shall be made, with respect to a person who is a Director or Officer of the Corporation at the time of such determination, (1) by a majority vote of the Directors of the Corporation who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such Directors designated by majority vote of such Directors, even though less than a quorum, or (3) if there are no such Directors, or if such Directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that the person had reasonable cause to believe that his or her conduct was unlawful. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 20 of 26 Section 6.06. Advance Payment of Expenses. Expenses (including attorneys' fees) incurred by a director or officer described in Section 6.01 in defending any Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it should be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by employees or agents described in Section 6.02 in defending any Proceeding may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate. The Board of Directors may authorize the Corporation's counsel to represent any director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. Section 6.07. Survival. The foregoing indemnification provisions shall be deemed to be a contract between the Corporation and each director, officer, employee and agent who serves in any such covered capacity at any time while these provisions, as well as the relevant provisions of any applicable law, are in effect. Any repeal or modification of these provisions or applicable law shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any Proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Rights arising under this Article may not be modified retroactively without the consent of any affected director, officer, employee or agent or former director, officer, employee or agent. Section 6.08. Preservation of Other Rights. The indemnification provided under this Article VI shall not be deemed exclusive of any other rights to which any person may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 6.09. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was or has agreed to become a Director, Officer, employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person or on such person's behalf in any capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article VI. Section 6.10. Severability. If this Article VI or any portion hereof shall be invalidated on any ground by any court, then the Corporation shall nevertheless indemnify each director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 21 of 26 of this Article VI that shall not have been invalidated and to the fullest extent permitted by applicable law. Section 6.11. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer pursuant to these By-Laws, or advance of costs, charges and expenses to a director or officer under Section 6.06 of these By-Laws, shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this Article VI shall be enforceable by the director or officer in a court of law. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 6.06 of these By-Laws where the required undertaking of repayment, if any, has been received by the Corporation) that the claimant has not met the standard of conduct requiring indemnification by the Corporation, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 6.01 of these By-Laws, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. ARTICLE VII. OFFICES Section 7.01. Registered Office. The registered office of the Corporation in the State of Delaware shall be located at Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. Section 7.02. Other Offices. The Corporation may maintain offices or places of business at such other locations within or without the State of Delaware as the Board of Directors may from time to time determine or as the business of the Corporation may require. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 22 of 26 ARTICLE VIII. GENERAL PROVISIONS Section 8.01. Dividends. Subject to any applicable provisions of law and the Certificate of Incorporation, dividends upon the shares of the Corporation may be declared by the Board of Directors at any regular or special meeting of the Board of Directors and any such dividend may be paid in cash, property, or shares of the Corporation's capital stock. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the Director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid. Section 8.02. Reserves. There may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall think conducive to the interest of the Corporation, and the Board of Directors may similarly modify or abolish any such reserve. Section 8.03. Execution of Instruments. The Chief Executive Officer, the President, any Vice President (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents and Senior Managing Directors or positions of equivalent rank), the Secretary, any Assistant Secretary, the Chief Financial Officer, the Treasurer or any Assistant Treasurer may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors, the Chief Executive Officer or the President may authorize any other officer or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization may be general or limited to specific contracts or instruments. Section 8.04. Corporate Indebtedness. No loan shall be contracted on behalf of the Corporation, and no evidence of indebtedness shall be issued in its name, unless authorized by the Board of Directors or the Chief Executive Officer. Such authorization may be general or confined to specific instances. Loans so authorized may be effected at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual. All bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation issued for such loans shall be made, executed and delivered as the Board of Directors or the Chief Executive Officer shall authorize. When so authorized by the Board of Directors or the Chief John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 23 of 26 Executive Officer, any part of or all the properties, including contract rights, assets, business or good will of the Corporation, whether then owned or thereafter acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in trust as security for the payment of such bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation, and of the interest thereon, by instruments executed and delivered in the name of the Corporation. Section 8.05. Deposits. Any funds of the Corporation may be deposited from time to time in such banks, trust companies or other depositaries as may be determined by the Board of Directors or the Chief Executive Officer, or by such officers or agents as may be authorized by the Board of Directors or the Chief Executive Officer to make such determination. Section 8.06. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as the Board of Directors or the Chief Executive Officer from time to time may determine. Section 8.07. Sale, Transfer, etc. of Securities. Subject to the limitation contained in these By-Laws, and except as otherwise provided by the Board of Directors, the Chairman of the Board, the President, the Chief Financial Officer or any Vice President (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents, Executive Managing Directors and Senior Managing Directors or positions of equivalent rank), the Treasurer, the Secretary , an Assistant Treasurer or a Treasury Officer of the Corporation with the approval in writing of the Treasurer, the Controller, the Auditor, an Associate Auditor or an Assistant Auditor is hereby authorized to do any and all things necessary to assign or transfer any stock in any corporation or any bonds, debentures, notes or other evidences of indebtedness now or hereafter owned by or standing in the name of the Corporation, and may make, execute and deliver in the name of and as the act of the Corporation, under its corporate seal, any and all instruments in writing necessary or proper to carry such sales, transfers, endorsements and assignments into effect. Section 8.08. Voting Upon Stock. Unless otherwise ordered by the Board of Directors, the President, the Chief Financial Officer, Treasurer or any Vice President (including, without limitation, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents, Executive Managing Directors and Senior Managing Directors or positions of equivalent rank) shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or in the name of the Corporation to execute proxies to vote, at any meeting of stockholders of any corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise, in person or by proxy, any and all rights, powers and privileges incident to the ownership of such stock. The Board of Directors may, from time to time, confer like powers upon any other person or persons. Section 8.09. Fiscal Year. The fiscal year of the Corporation shall commence on the first day of January of each year (except for the Corporation's first fiscal year which shall commence on the date of incorporation) and shall terminate in each case on December 31. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 24 of 26 Section 8.10. Seal. The seal of the Corporation shall be circular in form and shall contain the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Delaware". The form of such seal shall be subject to alteration by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or reproduced, or may be used in any other lawful manner. Section 8.11. Books and Records; Inspection. Except to the extent otherwise required by law, the books and records of the Corporation shall be kept at such place or places within or without the State of Delaware as may be determined from time to time by the Board of Directors. ARTICLE IX. AMENDMENT OF BY-LAWS; EMERGENCY BY-LAWS Section 9.01. Amendment. These By-Laws may be amended, altered or repealed (1) by resolution adopted by a majority of the Board of Directors then in office at any special or regular meeting of the Board of Directors if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting; or (2) at any regular or special meeting of the stockholders upon the affirmative vote of the holders of two-thirds (2/3) or more of the combined voting power of the outstanding shares of the Corporation entitled to vote generally in the election of Directors if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting. Notwithstanding the foregoing, the proviso to Section 2.06 of these By-Laws may be amended, altered or repealed only to the extent necessary to reflect an amendment of Section 9.9 of the Plan and only with the affirmative vote of the same number of Directors as was required under the Plan for such amendment. Section 9.02. Emergency By-Laws. The Board of Directors may adopt additional or alternative By-Laws or provisions hereof to be operative during an emergency in the manner contemplated by and subject to applicable provisions of the Delaware General Corporation Law. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 25 of 26 ARTICLE X. CONSTRUCTION Section 10.01. Construction. In the event of any conflict between the provisions of these By-Laws as in effect from time to time and the provisions of the Certificate of Incorporation of the Corporation as in effect from time to time, the provisions of such Certificate of Incorporation shall be controlling. John Hancock Financial Services, Inc. - Amended & Restated By-Laws Page 26 of 26 EX-10.8 4 ex10-8.txt Exhibit 10.8 LONG-TERM INCENTIVE PLAN FOR SENIOR EXECUTIVES (As Amended and Restated Effective February 11, 2002) Section 1. PURPOSE. To provide a long-term incentive opportunity for certain members of senior management based on the Company's success over a period of years. Section 2. ELIGIBILITY AND PARTICIPATION. The term "Eligible Employee" shall mean a member of the Policy Committee, a Senior Vice President, or, (for years prior to January 1, 2000) a Vice President, and other Senior Officers of the Company or John Hancock Life Insurance Company, or officers of a subsidiary selected by and on such terms as the Chairman of the Board and the President, with the approval of the Directors' Compensation Committee, may determine. An Eligible Employee participating in any Performance Cycle shall be a Participant for purposes of that Cycle. Section 3. PERFORMANCE CYCLES. There will be overlapping three-year Performance Cycles. A new Performance Cycle will commence each January 1. Each calendar year will be a factor in three Performance Cycles. The last Performance Cycle under this Plan shall commence on January 1, 2000. Section 4. GOALS FOR PERFORMANCE CYCLES. The Directors' Compensation Committee (the "Committee"), in consultation with the Chairman of the Board and the President, shall establish a goal for each Performance Cycle as early in the first year of such cycle as is practicable. As soon as practicable following the end of each Performance Cycle, the Chairman of the Board and the President will report to the Committee on the Company's performance during such cycle and the extent to which the goal has been attained, and, on the basis of its findings in such respect, the Committee shall determine the amount of the liability and the appropriation described in Section 9. In establishing goals and determining such liability, the Committee shall, from time to time, adopt such methods and apply such standards as it shall deem relevant and suitable, taking into consideration both the internal needs of the Company and the effect upon it of anticipated external developments including the performance of its competitors. Such methods and standards shall be included in the principles of the Plan which the Committee shall approve. Section 5. EQUITY RIGHTS. A. At the commencement of each Performance Cycle, Participants will be awarded Equity Rights. The number of Equity Rights awarded to each Participant shall be determined by dividing his or her Target Award by 100. B. Employees who first become eligible to participate during a Performance Cycle may be granted Equity Rights which are prorated according to the number of months left in the Performance Cycle. Participants who are promoted during a Performance Cycle may be granted additional Equity Rights which are prorated according to the number of months left in the Performance Cycle. C. In the event that the goal described in Section 4 is exactly met at the end of any Performance Cycle, each Equity Right will be worth $100.00. The maximum value of an Equity Right at the end of any Performance Cycle shall be $300.00. If the Value of the Equity Right is zero at the end of any Performance Cycle, all Equity Rights will be eliminated for that Performance Cycle. D. At the end of a Performance Cycle, the value of an Equity Right between zero and $300.00 will be determined on a leveraged basis in accordance with the principles of the Plan. E. Except as otherwise determined by the Committee, effective as of the calendar year beginning January 1, 2001, no additional Equity Rights shall be awarded under the Plan. For Equity Rights awarded prior to January 1, 2000 for which a Performance Cycle is not yet completed as of that date, and for the Equity Rights awarded for the calendar year 2000, the value of the Equity Rights as of January 1, 2000 shall be adjusted for the remainder of the Performance Cycle based on the goals established by the Committee for the years beginning on or after January 1, 2000, such goals to be based on measurements related to the Company's return on equity and the earnings per share of the Company's common stock, as determined by the Committee. Section 6. TARGET AWARD. A. The Target Award for each Participant for a Performance Cycle shall be the Participant's salary as of the first pay period in the first year of each Performance Cycle multiplied by that percentage determined by the Committee. 2 B. The Target Award which shall be determined for each Participant may be zero or more, but in general shall be based on the following guideline percentage of a Participant's salary: Chairman of the Board 100% President and CEO 100% Other Policy Committee Members 70% Senior Vice President 50 - 70% Vice President 20 - 45% Other Eligible Employees (as recommended by the Chairman of the Board or President). C. Notwithstanding the above or other provisions of the Plan (other than the second paragraph of Section 7.B), the Board of Directors, for members of the Policy Committee, and the Committee, for all other eligible Participants, may, in its discretion, establish Special Target Awards, on a case by case basis, for specified individuals for a particular Performance Cycle. The Equity Rights associated with these Special Target Awards shall vest at the end of the third Vesting Date described in Section 7.A and shall be surrendered and become payable, subject to the elections under Sections 7.C and 8., no later than the next March 15, or the next business day if March 15 falls on a Saturday, Sunday or holiday. For Special Target Awards awarded to individuals who were within 5 years of their normal retirement date on June 8, 1998, a Performance Cycle in progress at the time of the individual's normal retirement date under the Company's pension plan shall continue to its normal completion and payments of the Equity Rights associated with these Special Target Awards shall be surrendered and become payable, subject to the elections under Sections 7.C and 8., no later than the next March 15 following the end of the Performance Cycle or the Participant's date of retirement. The Special Target Awards and rules established under this subparagraph shall be in lieu of a Participant's general Target Awards under the Plan. Section 7. VESTING, SURRENDER AND DEFERRAL OF EQUITY RIGHTS. A. Vesting. The Vesting Date for each year shall be January 1. Except as otherwise provided herein, Equity Rights for each Performance Cycle shall vest in three installments commencing upon the completion of the Performance Cycle. One-third shall vest on the Vesting Date next following the end of the Performance Cycle, and one-third shall vest on each of the two succeeding Vesting Dates. Notwithstanding the above 3 sentences, if a Participant attains his normal retirement date under the John Hancock Financial Services, Inc. Pension Plan, his Equity Rights shall vest on his actual retirement date; provided, however, that a Chairman of the Board who retired prior to January 1, 2002, shall continue to participate in the remaining Performance Cycles under the Plan. Effective as of January 1, 2000, the value of all unvested Equity Rights shall be adjusted for the remainder of the vesting period based on the goals established by the Committee, such goals to be based on measurements related to the Company's return on equity, as determined by the Committee. B. SURRENDER. Equity Rights not subject to an election under either paragraphs C of this Section or Section 8 shall be deemed surrendered on the Vesting Date, and payment therefore shall be made in cash no later than the next March 15, or the next business day if March 15 falls on a Saturday, Sunday or holiday. Notwithstanding anything provided for in paragraph A of this Section, or Section 6.C (relating to Special Target Awards), effective as of January 1, 2001, Equity Rights for each completed Performance Cycle shall vest in full on the Vesting Date next following the completion of the Performance Cycle, such Equity Rights not subject to an election under either paragraph C of this Section or Section 8 shall be deemed surrendered on the Vesting Date, and payment therefore shall be made in cash no later than the next March 15, or the next business day if March 15 falls on a Saturday, Sunday or holiday. For Performance Cycles that ended prior to December 31, 2000, any remaining Equity Rights under those Performance Cycles not previously surrendered or deferred and not subject to an election under either paragraph C of this Section or Section 8 shall be deemed vested and surrendered on January 1, 2001, and payment therefore shall be made in cash no later than March 15, 2001. C. DEFERRAL. A Participant may irrevocably elect to defer the surrender of Equity Rights in order to keep such rights in the Plan until (1) a specific Vesting Date not less than five years from the date of election or (2) the Vesting Date next following the Participant's retirement. Notwithstanding an election to defer the surrender of Equity Rights to a specific Vesting Date, the deferral period shall end as of the Vesting Date next following the Participant's actual retirement if earlier than the specified Vesting Date. An election to defer must be made, on a form and in a manner approved by the Company, on or before the last day of the calendar year preceding the year in which Equity Rights become vested. Except as otherwise provided herein, Equity Rights shall be deemed surrendered on the Vesting Date which ends the deferral period, and payment therefor shall be made in cash as soon thereafter as practicable. 4 If a deferral election is made in accordance with this Paragraph C, the Participant may elect during the calendar year preceding the year in which the deferral ends, one of the following methods of payment: 1) lump sum, 2) annual installments for a period specified by the Participant, commencing on a date selected by the Participant, provided such installments begin within five (5) years from the Vesting Date next following the election of the distribution method and terminate no later than twenty (20) years from said Vesting Date. Unless a Participant makes an election under Section 8, if a Participant fails to make this election under this paragraph, payment shall be made in a lump sum as provided in Paragraph B of this Section. If a Participant makes a deferral election under this Paragraph C, interest on his deferred payments shall be added to and shall become part of the deferred payments on a quarterly basis in an amount equal to the product of (1) times (2), where: (1) is the average annual rate of interest for that year for ten-year Treasury Constant Maturities, and (2) is the balance of the deferred payments on the December 31st prior to the next Vesting Date. Notwithstanding the above paragraph, effective as of January 1, 2000, (or for members of the Policy Committee, February 5, 2001), a Participant may elect (in increments of 25%, 50%, 75%, or 100%) to invest his deferred payments in the form of deferred stock units of the Company. For all deferred payments under the Plan, this shall be a one-time election. Deferred stock units are not actual shares of stock and cannot be settled in or surrendered for shares of stock. Instead, they are distinct investments administered by the Company under this Plan that provide a return on the deferred amount equal to the return that would occur if the deferred amount were actually used to purchase shares of common stock of the Company ("JHFS Stock"), including the immediate reinvestment of cash dividends when paid into shares of JHFS Stock. Holders of deferred stock units have no voting rights or any attributes of stock ownership other than such equivalent economic return. The number of deferred stock units received by each Participant electing under this paragraph upon each deferral shall be equal to the amount of each deferral divided by the per share Fair Market Value (as then defined in the Company's 1999 Long- 5 Term Stock Incentive Plan) of JHFS Stock on the effective date of the deferral. Section 8. Purchase of JHFS Stock A. Effective as of January 1, 2000 (February 5, 2001 for members of the Policy Committee), Participants who are actively employed on the date of payment may elect to utilize up to 50% (in increments of 25% or 50%) of any payments under this Plan to purchase shares of JHFS Stock; provided, however, that a Chairman of the Board who retired prior to January 1, 2002, shall be eligible for this election for payments made in 2002 and 2003. If this election is made, PaineWebber, Inc. (or any successor agent hereafter appointed) acting as an independent agent, will purchase JHFS Stock on the open market on behalf of the electing Participant, provided that, at the option of the Compensation Committee, in lieu of any or all such open market purchases, the Company may issue and sell such shares of JHFS Stock as Stock Awards under the John Hancock Financial Services, Inc. 1999 Amended and Restated Long-Term Stock Incentive Plan (the "1999 Stock Plan") with the number of shares issued to be determined based on a price per share equal to the fair market value of a share of the JHFS Stock as determined by the Compensation Committee. Notwithstanding the preceding paragraph, effective as of January 1, 2001, Participants who are actively employed on the date of payment will be required to elect to apply 25% (50% for members of the Policy Committee, subject to paragraph C, below) of any Award payments under this Plan to purchase JHFS Stock, and Participants other than Policy Committee members may elect to apply an additional 25% of such payments to purchase JHFS Stock, any such purchase to be made as set forth in the preceding paragraph. However, to the extent that such Participants elect to defer the payment of benefits in accordance with Paragraph 7C, then the 25% or 50% election referred to above shall relate to an investment of such deferred payments in deferred stock units. B. A Participant who purchases JHFS Stock (or deferred stock units) pursuant to Paragraph A of this Section shall be provided with a matching number of shares of JHFS Stock (or deferred stock units) equal to 25% (50% in the years 2000 and 2001 for Participants other than members of the Policy Committee, and 50% in the years 2001 and 2002 for Participants who are members of the Policy Committee) of the number of shares of JHFS Stock (or deferred stock units) purchased under Paragraph A of this Section. The additional JHFS Stock provided under this paragraph ("Restricted JHFS Stock") shall be provided under the 1999 Stock Plan. The additional deferred stock units ("Restricted deferred stock units") shall be held in an unfunded account on behalf of the Participants. 6 Both the Restricted JHFS Stock and the Restricted deferred stock units shall be subject to forfeiture by the Participant if (i) his employment with the Company, or an affiliate, terminates within three years of the purchase of the Restricted JHFS Stock (or the establishment of the Restricted deferred stock units), except if such termination results from retirement with the Company's consent, death or disability, or (ii) if the Participant sells any of the JHFS Stock purchased under paragraph A of this section within three years of the purchase of that stock. These restrictions will cease to apply and any Restricted JHFS Stock and Restricted deferred stock units subject to such restrictions will become nonforfeitable if there is a Change in Control of the Company, as defined in the John Hancock Financial Services, Inc. Pension Plan. C. For members of the Policy Committee who previously purchased JHFS Stock with their own funds or through a loan program provided by the Company, the following special rules shall apply. Such Policy Committee member may apply the stock purchased and still held against the amount of JHFS Stock (or deferred stock units) required to be purchased under Paragraph A. For this purpose, the value of the JHFS Stock purchased by the member of the Policy Committee shall be equal to the fair market value of such JHFS Stock when so applied. If so used, any such purchased JHFS Stock so applied under this paragraph shall be subject to the same restrictions that apply to JHFS Stock purchased under Paragraph A for which a matching amount of Restricted JHFS Stock is awarded and shall not also be applied for purposes of the similar provisions of the Company's Incentive Compensation Plan. The total amount of Restricted JHFS Stock or Restricted deferred stock units provided under Paragraph B shall not be more than would have been provided without the application of this Paragraph C. In addition, if a Policy Committee member elects to apply purchased JHFS Stock in accordance with this Paragraph C and such Policy Committee member has an outstanding loan under the loan program provided by the Company for the purchase of JHFS Stock, the requirements of the second paragraph of Paragraph A (relating to the required purchase of 50% of Awards under this Plan in the form of JHFS Stock) must be met by repaying a corresponding amount of the loan taken out by such Policy Committee member under the loan program described above. Section 9. APPROPRIATIONS. At its next regularly scheduled meeting following each date on which the valuation is published, the Board of Directors shall appropriate a sum of money sufficient to pay for all vested Equity Rights surrendered in that year, including those payable to retired, disabled or terminated Participants. Section 10. BENEFICIARIES. Participants may elect a beneficiary or beneficiaries to receive payments under the Plan in the event of the Participant's death. The beneficiary or beneficiaries shall be designated on a form provided by the Company. In 7 the event that no beneficiary is designated, payments shall be made to the estate of the Participant. Section 11. RETIREMENT OR DISABILITY. For each Performance Cycle in progress at a Participant's retirement under the Company's pension plan, or permanent and total disability as determined by the Company, the Participant shall retain that portion of the Equity Rights equal to the elapsed portion of the Performance Cycle on the date of the retirement or disability. The balance of the Participant's Equity Rights for such cycles shall be forfeited. Upon completion of a Performance Cycle, vesting, surrender and deferral will occur as provided in Section 7. Section 12. DEATH. Upon the death of an active or retired Participant, all Equity Rights for completed Performance Cycles which have not previously vested shall vest. For each Performance Cycle in progress at a Participant's death, that portion of the deceased Participant's Equity Rights equal to the elapsed portion of the Performance Cycle at the date of the death shall vest. The balance of the deceased Participant's Equity Rights for Performance Cycles in progress shall be forfeited. All vested Equity Rights subject to a deferral under Paragraph C of Section 7 shall be surrendered by the Company and, along with any unpaid installments under Paragraph D of Section 7, will be paid in a lump sum as soon as practicable after the Participant's death. Vesting, where applicable, surrender and valuation of Equity Rights shall occur on the Vesting Date next following the date of death (or on the date of death if it is also a Vesting Date). Payment shall be made as soon thereafter as practicable. Section 13. HARDSHIP DISTRIBUTION PROVISIONS. A hardship distribution may be paid from deferred vested Equity Rights remaining in the Plan pursuant to Section 7 upon a finding by the Savings Plans Administrative Committee of the Company that a Participant has incurred a Financial Hardship, as defined below. An amount reasonably necessary to meet the Financial Hardship, up to 100% of the value of such Equity Rights, may be paid, and the value of the deferred Vested Equity Rights remaining in the Plan shall be appropriately reduced to reflect the amount of any such hardship distribution. The hardship distribution shall be made in a lump-sum payment. Applications for hardship distributions shall be made in writing. The Savings Plans Administrative Committee shall issue a written determination with respect to such application. Written proof of a Financial Hardship may be requested. The Savings Plans Administrative Committee will determine the date of payment for a hardship distribution. For purposes of this section, a Financial Hardship is any unforeseen, unanticipated emergency that is caused by an event beyond the control of the 8 participant and that would result in severe financial hardship to the individual if early withdrawal was not permitted. Section 14. TERMINATION. Participants whose employment with the Company terminates, other than by retirement, disability or death, shall forfeit all non-vested Equity Rights. All vested Equity Rights, including rights subject to a deferral under Paragraph C of Section 7, shall be surrendered at the Vesting Date next following termination (or on the date of termination if it is also a Vesting Date) and payment thereafter shall be made at the valuation as of that Vesting Date in cash as soon thereafter as practicable. If not so surrendered, the Company reserves the right to declare them forfeited. Section 15. OPERATION, AMENDMENT AND TERMINATION. A. The Chairman of the Board and the President acting in concert shall carry out provisions of this Plan and are authorized to designate appropriate employees of the Company to act in its behalf for all purposes hereof. In questions involving the operation or interpretation of any provision of the Plan, the determination of the Company shall be final. B. The Chairman of the Board and the President, with the approval of the Board of Directors, may, in appropriate individual cases, vary the provisions of Sections 11, 12 and 14 to accommodate special circumstances. C. The Board of Directors may at any time terminate this Plan and from time to time amend it or vary its provisions as they apply to any class; provided that the establishment, determination or variation of annual goals or the principles of the Plan referred to in Section 4, shall not be considered an amendment or variation of the Plan. Notwithstanding the foregoing, the termination of the Plan, any amendments thereto, or any variance in its provisions, goals or principles shall in no way reduce the number of Equity Rights in which a Participant is vested or which have been allocated to any Participant with respect to a Performance Cycle which has been completed prior to the date of such termination, amendment or variance. Notwithstanding the above, for two years after a Change of Control occurs, the Plan may not be terminated, nor may the Plan be amended if such amendment would serve to reduce the amount of Equity Rights or other benefits provided under this Plan below the amount that would have been payable on the date immediately preceding the date the Change of Control occurred or in any way adversely affect the rate or amount of benefit vesting or benefit accrual as compared to the rate or amount of 9 benefit vesting or benefit accrual in effect on the date immediately preceding the date the Change of Control occurred. A "Change of Control" shall be deemed to have occurred if: (i) any Person (as defined below) has acquired "beneficial ownership" (within the meaning of Rule 13d-3, as promulgated under Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing 30% or more of the combined Voting Power (as defined below) of the Company's securities; (ii) as a result of a solicitation subject to Rule 14a-11 under the Exchange Act (or any successor rule thereto), the persons who were directors of the Company immediately before such solicitation shall cease to constitute at least a majority of the Board or the Board of Directors of any successor to the Company; or (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the "Company Shareholders") shall not hold, directly or indirectly, immediately following such Corporate Event a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors. D. Upon termination of the Plan, all Equity Rights for a completed Performance Cycle shall vest. Non-vested Equity Rights for Performance Cycles that are not completed shall be forfeited. Vested Equity Rights must be surrendered for cash at their value on the Vesting Date next preceding the effective date of the Plan termination or the effective date if it is also a Vesting Date. The provisions of Section 7 shall apply in the event of a Plan termination. E. Equity Rights and amounts received upon surrender of Equity Rights shall be excluded from the base for computing benefits under, or 10 contributions to, benefit plans maintained by the Company for its employees. F. The Plan is intended to be a non-qualified, unfunded, deferred compensation plan. The Company will not be required to reserve, segregate or deposit any funds or assets of any kind to meet the obligations hereunder. Nothing in this Plan will give a Participant, a Participant's beneficiary or any other person any equity or other interest in the assets of the Company, or create a trust of any kind or a fiduciary relationship of any kind between the Company and any such person. Any rights that a Participant, beneficiary or other person may have under this Plan shall not be assignable by any such person. Nothing contained herein shall prevent the Company, in its sole discretion, from establishing a trust, including a so-called rabbi trust, for the purpose of providing for the payment of obligations arising under the Plan. The assets of such trust shall remain subject to the claims of the Company's creditors, and no Participant shall have any interest in the assets of such trust. The Company shall have no further obligation with respect to amounts paid from any such trust. G. The Company may adopt any rules and procedures it deems appropriate to provide for the orderly and efficient administration of the Plan. 11 EX-10.9 5 ex10-9.txt Exhibit 10.9 INCENTIVE COMPENSATION PLAN FOR CERTAIN SENIOR EXECUTIVES (Amended and Restated Effective February 11, 2002) Section 1. Purpose This Plan has been established in order to provide short term incentive compensation to those Eligible Employees as determined under the terms of this Plan. Section 2. Goals The Committee shall establish goals for each year as early as is practicable therein. In establishing goals, the Committee shall adopt such methods and apply such standards as it shall deem relevant and suitable, taking into consideration both the internal needs of the Company and the effect upon it of anticipated external developments including the growth rates of its competitors. In order for awards under this Plan to qualify as performance-based compensation under the provisions of Section 162(m) of the Internal Revenue Code of 1986, within 90 days after the beginning of each calendar year, the Committee shall establish, in writing, Qualifying Performance Criteria for the target awards for Eligible Employees (as defined below). Notwithstanding the satisfaction of the annual goals established under the Qualifying Performance Criteria, the awards provided to the Eligible Employees may be adjusted by the Committee in its sole discretion; except that the Committee may not increase the amount of any such award that results from the satisfaction of the annual goals established under the Qualifying Performance Criteria. In addition, the maximum annual award that shall be granted to each Eligible Employees shall be $5,000,000 for the Chairman and President, and $3,000,000 for each other Eligible Employees. For purposes of this section, the Qualifying Performance Criteria shall be any one or more of the following performance criteria, either individually, alternatively, or in any combination, applied to either the Company as a whole or to a business unit or subsidiary, either individually, alternatively, or in any combination, and measured either on an absolute basis or relative to a pre-established target, to previous years' results or to a designated comparison group, in each case as pre-established by the Committee: (a) shareholder value added; (b) cash flow; (c) earnings per share; (d) earnings before interest, taxes, depreciation and amortization ("EBITDA"); (e) return on equity; (f) return on capital; (g) return on assets or net assets; (h) revenue growth; (i) income or net income; (j) cost control; (k) operating income or net operating income; (l) operating profit or net operating profit; (m) operating margin; (n) return on operating revenue; (o) market share; (p) statutory gain from operations; and (q) stock price. Section 3. Eligibility a. As used in this Plan, the term "Eligible Employee" for any year shall mean any Officer of the Company or John Hancock Life Insurance Company as selected by the Committee from time to time to participate in this Plan. Participation by an individual with respect to one award shall not entitle the individual to participate with respect to subsequent awards. b. For the purposes of the allocations to be made pursuant to Section 5, every Eligible Employee shall in each year be a member of whichever of the following classes describes his or her status on the date in such year applicable for determining his or her eligibility: Class 1. Chairman & CEO Class 2. Chief Investment Officer Executive Vice President - Retail Executive Vice President - JH Funds Executive Vice President & Chief Financial Officer Class 3. Executive Vice President & Chief Information Officer Executive Vice President & General Counsel Executive Vice President - International Class 4. Senior Vice Presidents Section 4. Target Awards The average or target award for each class shall be as follows: Class 1. Chairman & CEO 100% of Salary Class 2. Chief Investment Officer 70% of Salary Senior Executive Vice President - Retail Executive Vice President - JH Funds Executive Vice President & Chief Financial Officer Class 3. Executive Vice President & 60% of Salary Chief Information Officer Executive Vice President & General Counsel Executive Vice President - International Class 4. Senior Vice Presidents 50% of Salary 2 Section 5. Allocation As soon as is practicable after the end of the year, the Compensation Committee, acting in accordance with the principles of the Plan as approved by the Directors' Compensation Committee, shall allocate among such Eligible Employees such amounts as shall have been determined by the Compensation Committee. Subject to the provisions of Section 6, each amount so allocated shall be paid to the employee in cash no later than March 15, or the next business day if March 15 falls on a Saturday, Sunday or holiday. Seventy-five (75%) of any Award allocated to an Eligible Employee under this Plan on or after January 1, 2003 shall be paid in cash. In lieu of the receiving the remaining twenty-five (25%) of the Award in cash, the Eligible Employee will be granted non-qualified options (Options) to purchase shares under the terms of the John Hancock Financial Services, Inc. 1999 Long-Term Stock Incentive Plan (the "1999 Stock Plan"). The number of such Options shall be determined by the Company, using appropriate methodologies and calculations, taking into account twenty-five (25%) percent of the Award allocated to the Eligible Employee and the share price as of the date of the allocation of the Award. In addition, each Eligible Employee receiving Options will receive additional non-qualified stock options ("Premium Options") equal in number to 15% of the number of Options. Premium Options shall be subject to the same terms and conditions as Options. Options and Premium Options shall be subject to terms and conditions as shall be determined by the Company. Awards may be given to all Eligible Employees. Awards allocated to individual employees may vary from the target award, and any employee may be denied an award for poor performance or other reasons. Section 6. Election to Purchase Common Stock of the Company a. Eligible Employees who are actively employed on the date of payment, may elect to utilize up to 50% (in increments of 25% or 50%) of any Award paid in cash under this Plan to purchase shares of the common stock of the Company ("JHFS Stock"); provided, however, that Eligible Employees in Class 1 who retired prior to December 31, 2001, shall be eligible for this election for payments made in 2002. If this election is made, PaineWebber, Inc. (or any successor agent hereafter appointed) acting as an independent agent, will purchase JHFS Stock in the open market on behalf of the electing Eligible Employee, provided that, at the option of the Compensation Committee, in lieu of any or all such open market purchases, the Company may issue and sell such shares of JHFS Stock as Stock Awards under the 1999 Stock Plan with the number of shares issued to be determined based on a price per share equal to the fair market value of a share of the JHFS Stock as determined by the Compensation Committee. 3 b. However, to the extent that such Eligible Employees elect to defer the payment of benefits in accordance with the Deferred Compensation Plan for Executives of John Hancock Financial Services, Inc. (the "Deferred Compensation Plan"), then the 25% or 50% election referred to above shall relate to an investment of such deferred payments in deferred stock units. Deferred stock units are not actual shares of stock and cannot be settled in or surrendered for shares of stock. Instead, they are distinct investments administered under the Deferred Compensation Plan by the Company that provide a return on the deferred amount equal to the return that would occur if the deferred amount were actually used to purchase JHFS Stock, including the immediate reinvestment of cash dividends when paid into shares of JHFS Stock. Holders of deferred stock units have no voting rights or any attributes of stock ownership other than such equivalent economic return. The number of deferred stock units received by each Eligible Employee electing under this paragraph upon each deferral shall be equal to the amount of each deferral divided by the per share Fair Market Value (as then defined in the 1999 Stock Plan) of JHFS Stock on the date any amount deferred would have been paid, but for the deferral. c. An Eligible Employee who elects to purchase JHFS Stock (or deferred stock units) pursuant to paragraph a of this Section 6 shall be provided with a matching number of shares of JHFS Stock (or deferred stock units) equal to 25% (50% in the year 2002 for Eligible Employees in Classes 1 through 3) of the number of shares of JHFS Stock (or deferred stock units) purchased under paragraph a of this Section 6. For Awards made in 2003 and later, the number of such matching Restricted JHFS Stock shares or matching Restricted deferred stock units provided under this Section 6.c shall be equal to 25% of the number of JHFS Stock shares or deferred stock units that would have been provided pursuant to the Eligible Employee's election under Section 6 a if the entire Award under Section 5 had been made in the form of cash. The additional JHFS Stock provided under this paragraph ("Restricted JHFS Stock") shall be provided under the 1999 Stock Plan. The additional deferred stock units ("Restricted deferred stock units") shall be held under the Deferred Compensation Plan in an unfunded account on behalf of the Eligible Employees. Both the Restricted JHFS Stock and the Restricted deferred stock units shall be subject to forfeiture by the Eligible Employee if (i) his employment with the Company or an affiliate terminates within three years of the of the receipt of the Restricted JHFS Stock (or the establishment of the Restricted deferred stock units), except if such termination results from retirement with the Company's consent, death or disability, or (ii) if the Eligible Employee sells any of the JHFS Stock purchased under paragraph a of this section within three years of the purchase of that stock. These restrictions will cease to apply and any Restricted JHFS Stock and Restricted deferred stock units subject to such restrictions will become nonforfeitable if there is a Change in Control of the Company, as defined in the John Hancock Financial Services, Inc. Pension Plan. d. For Eligible Employees in Classes 1 through 3 who previoulsy purchased JHFS Stock with their own funds or through a loan program provided by the Company, the following special rules shall apply. Such Eligible Employee may apply the stock previously purchased and still held against the amount of JHFS Stock (or 4 deferred stock units) required to be purchased under Paragraph a of this Section 6 in order to receive Restricted JHFS Stock or Restricted deferred stock units under Paragraph c of this Section 6. For this purpose, the value of the JHFS Stock purchased by the Eligible Employee shall be equal to the fair market value of such JHFS Stock when so applied. If so used, any such purchased JHFS Stock so applied under this paragraph shall be subject to the same restrictions that apply to JHFS Stock purchased under Paragraph a for which a matching amount of Restricted JHFS Stock is awarded and shall not also be applied for purposes of the similar provisions of the Company's Long-Term Incentive Compensation Plan. The total amount of Restricted JHFS Stock or Restricted deferred stock units provided under Paragraph c shall not be more than would have been provided without the application of this Paragraph d. Section 7. Benefits a. The amounts paid under this Plan shall be excluded from the base for computing benefits under, or contributions to, benefit plans maintained by the Company for its employees, with the exception of the following: the John Hancock Financial Services, Inc. Cash Balance Pension Plan, and any Company non-qualified pension plan covering Eligible Employees. b. Benefits attributable to amounts paid under this Plan shall be as described in each of the plans providing for such benefits as they may be determined from time to time. Section 8. Operation, Amendment, Termination a. The Chairman of the Board and the President acting in concert shall carry out the provisions of this Plan, and are authorized to designate appropriate officers of the Company to act in its behalf for all purposes hereof. b. The Board of Directors or the Directors' Compensation Committee may at any time terminate this Plan and from time to time amend it, or, for any year prior to the appropriation being voted pursuant to Section 1, vary its provisions as they apply to any Class; provided that the establishment, determination or variation of annual goals in accordance with Section 2 or the principles referred to in Section 5 shall not be considered an amendment or variation of the Plan. Notwithstanding the foregoing, the termination of the Plan, any amendments thereto, or any variance in its provisions, goals or principles shall in no way change the amount of the allocation to any Eligible Employee approved prior to the date of such termination, amendment or variance. 5 EX-10.10.1 6 ex10-10_1.txt Exhibit 10.10.1 AMENDMENT NO. 1 TO THE RIGHTS AGREEMENT Amendment No. 1, dated as of March 8, 2002 (this "Amendment"), to the Rights Agreement, dated as of January 26, 2000 (the "Rights Agreement"), between John Hancock Financial Services, Inc., a Delaware corporation (the "Company"), and EquiServe Trust Company, N.A., a national banking association (the "Rights Agent"). Unless otherwise defined herein, capitalized terms used herein shall have the same meanings as those set forth in the Rights Agreement. WHEREAS, the Company desires to amend the Rights Agreement in accordance with this Amendment; WHEREAS, the Company deems this Amendment to be appropriate and desirable and in the best interests of the holders of Common Stock and has duly approved this Amendment; WHEREAS, Section 27 of the Rights Agreement permits the Company to amend the Rights Agreement in the manner provided herein; WHEREAS, Section 27 of the Rights Agreement provides that the Rights Agent shall execute this Amendment upon delivery of a certificate from an appropriate officer of the Company which states that this Amendment is in compliance with the terms of Section 27 of the Rights Agreement (the "Officer's Certificate"); and WHEREAS, the Officer's Certificate is being delivered to the Rights Agent concurrently with this Amendment. NOW, THEREFORE, the Company hereby amends the Rights Agreement as follows: 1. Amendment to Section 7(b). Section 7(b) is hereby amended by deleting the Purchase Price of "$76.50" and replacing it with "$170.00". 2. Amendment to Exhibit B. Exhibit B to the Rights Agreement is hereby amended by deleting the Purchase Price of "$76.50" in the first sentence and replacing it with "170.00". 3. Amendment to Exhibit C. Exhibit C to the Rights Agreement is hereby amended by deleting the Purchase Price of "$76.50" in the first sentence of the second paragraph and replacing it with "170.00". 4. No Other Effect. The Rights Agreement shall not otherwise be supplemented or amended by virtue of this Amendment, but shall remain in full force and effect as amended hereby. 5. Delaware Contract. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed and enforced in accordance with the laws of such state applicable to contracts to be made and performed entirely within such state . 6. Counterparts. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the Company and the Rights Agent have executed this Amendment as of the date and year first written above. Attest: JOHN HANCOCK FINANCIAL SERVICES, INC. By: ___________________________ By: ___________________________ Name: Name: Title: Title: Attest: EQUISERVE TRUST COMPANY, N.A. By: ___________________________ By: ___________________________ Name: Name: Title: Title: EX-13 7 ex-13.txt Exhibit 13 JOHN HANCOCK FINANCIAL SERVICES, INC. PORTIONS OF 2001 ANNUAL REPORT TO SHAREHOLDERS MANAGEMENT'S DISCUSSION AND ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS Management's discussion and analysis reviews our consolidated and segment financial condition as of December 31, 2001 and 2000, the consolidated results of operations for the years ended December 31, 2001, 2000 and 1999 and, where appropriate, factors that may affect future financial performance. This discussion should be read in conjunction with the consolidated financial statements and related notes, included elsewhere in this Form 10-K. Forward-Looking Statements The statements, analyses, and other information contained herein relating to trends in John Hancock Financial Services, Inc.'s, (the Company's) operations and financial results, the markets for the Company's products, the future development of the Company's business, and the contingencies and uncertainties to which the Company may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their potential effects on the Company. Future events and their effects on the Company may not be those anticipated by management. The Company's actual results may differ materially from the results anticipated in these forward-looking statements. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the risks that (1) a significant downgrade in our ratings for claims-paying ability and financial strength may lead to policy and contract withdrawals and materially harm our ability to market our products; (2) changes to or elimination of Federal tax benefits for our products and other changes in laws and regulations (including those relating to the Federal Estate Tax Laws) which the Company expects would adversely affect sales of our insurance and investment advisory products; (3) as a holding company, we depend on dividends from our subsidiaries, Massachusetts insurance law, and similar Canadian laws, may restrict the ability of John Hancock Life Insurance Company and Maritime Life Assurance Company to pay dividends to us; (4) we face increasing competition in our retail businesses from mutual fund companies, banks and investment management firms as well as from other insurance companies; (5) 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 a third party distribution relationship; (8) customers may not be responsive to new or existing products or distribution channels, (9) interest rate volatility may adversely affect our profitability; (10) our net income and revenues will suffer if customers surrender annuities and variable and universal life insurance policies or redeem shares of our open-end mutual funds; (11) the independent 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 shareholders; (13) there are a number of provisions in our Plan of Reorganization, our Restated Certificate of Incorporation and by-laws, laws applicable to us, agreements that we have entered into with our senior management, and our shareholder rights plan, that will prevent or discourage takeovers and business combinations that our shareholders might otherwise consider to be in their best interests; (14) 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; (15) we face investment and credit losses relating to our investment portfolio (16) we may experience volatility in net income due to changes in standards for accounting for derivatives and other changes; (17) our United States insurance companies are subject to risk-based capital requirements and possible guaranty fund assessments; (18) the National Association of Insurance Commissioners' codification of statutory accounting practices will adversely affect the statutory surplus of John Hancock Life Insurance Company; (19) we may be unable to retain personnel who are key to our business; (20) we may incur losses from assumed reinsurance business in respect of personal 1 JOHN HANCOCK FINANCIAL SERVICES, INC. accident insurance and the occupational accident component of workers compensation insurance; (21) litigation and regulatory proceedings may result in financial losses, harm our reputation and divert management resources, and (22) we face unforeseen liabilities arising from our acquisitions and dispositions of businesses. 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. Overview John Hancock Financial Services (JHFS, or the Company) is a leading financial services company providing a broad range of products and services in two major businesses: (1) the retail business, which offers insurance protection and asset gathering products and services primarily to retail consumers; and (2) the institutional business, which offers guaranteed and structured financial products and investment management products and services primarily to institutional customers. Our retail business is comprised of the Protection Segment and Asset Gathering Segment while our institutional business is comprised of the Guaranteed and Structured Financial Products Segment and the Investment Management Segment. In addition, we have a Corporate and Other Segment. Our revenues are derived principally from: o premiums on individual life insurance, individual and group long-term care insurance, annuities with life contingencies, single premium annuity contracts and group life insurance; o product charges from variable and universal life insurance products and annuities; o asset management fees from mutual fund and investment management products ; o sales charges and commissions derived from sales of investment and insurance products and distribution fees; and o net investment income and net realized investment and other 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. Our profitability depends in large part upon: (1) the adequacy of our product pricing, which is primarily a function of competitive conditions, our ability to assess and manage trends in mortality and morbidity experience, our ability to generate investment earnings and our ability to maintain expenses in accordance with pricing assumptions; (2) the amount of assets under management; and (3) the maintenance of our target spreads between the rate of earnings on our investments and credited rates on policyholders' general account balances. Overall financial market conditions have a significant impact on all of these profit drivers. The Company estimates that a full year increase (decrease) in interest rates of 1.0 % would increase (decrease) segment after tax operating income by approximately $9.0 million, and that a full year increase (decrease) in equity markets of 5% would increase (decrease) segment after tax operating income by approximately $17.0 million. Critical Accounting Policies General We have identified the accounting policies below as critical to our business operations and understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 1 in the Notes to Consolidated Financial Statements. Note that the application of these accounting policies in the preparation of this report requires management to use judgments involving assumptions and estimates concerning future results 2 JOHN HANCOCK FINANCIAL SERVICES, INC. or other developments including the likelihood, timing or amount of one or more future transactions or events. There can be no assurance that actual results will not differ from those estimates. These judgments are reviewed frequently by senior management, and an understanding of them may enhance the reader's understanding of the Company's financial statements and Management's Discussion and Analysis. Amortization of Deferred Acquisition Costs We amortize deferred acquisition costs on term life and long-term care insurance ratably with premiums. We amortize our deferred policy acquisition costs on our annuity products and retail life insurance, other than term, based on a percentage of the estimated gross profits over the life of the policies, which are generally twenty years for annuities and thirty years for life policies. Our estimated gross profits are computed based on assumptions related to the underlying policies including mortality, lapse, expenses, and asset growth rates. We amortize deferred acquisition costs such that the percentage of gross profits to the amount of deferred acquisition costs amortized is constant over the life of the policies. Estimated gross profits are adjusted periodically to take into consideration the actual experience to date and changes in the remaining gross profits. When estimated gross profits are adjusted, we also adjust the amortization of deferred acquisition costs to maintain a constant amortization percentage over the life of the policies. Our current estimated gross profits include certain judgments concerning mortality, lapse and asset growth that are based on a combination of actual company experience and historical market experience of equity and fixed income returns. Short-term variances of actual results from the judgments made by management can impact quarter to quarter earnings. Benefits to Policyholders Reserves for future policy benefits are calculated using management's judgments of mortality, morbidity, lapse, investment experience and expense levels that are based primarily on the Company's past experience and are therefore reflective of the Company's proven underwriting and investing experience. Once these assumptions are made for a given policy or group of policies, they will not be changed over the life of the policy unless the Company recognizes a loss on the entire line of business. The Company periodically reviews its policies for loss recognition and based on management's judgment the Company from time to time may recognize a loss on certain lines of business. Short-term variances of actual results from the judgments made by management are reflected in current period earnings and can impact quarter to quarter earnings. Investment in Debt and Equity Securities Impairments on our investment portfolio are recorded as a charge to income in the period when the impairment is judged by management to occur. See the discussion of Credit Risk in the Quantitative and Qualitative Information About Market Risk section of this document for a more detailed discussion of the judgments involved in determining impairments. Certain of our fixed income securities classified as held-to-maturity and available-for-sale are not publicly traded, and quoted market prices are not available from brokers or investment bankers on these securities. The change in the fair value of the available-for-sale securities is recorded in other comprehensive income as an unrealized gain or loss. We calculate the fair value of these securities ourselves through the use of pricing models and discounted cash flows calling for a substantial level of management's judgment. See the discussion in the General Account Investments section of this document for a more detailed discussion of this process and the judgments used therein. Benefit Plans The Company annually reviews its pension and other employee benefit plan assumptions concerning the discount rate and the long-term growth rate on plan assets and expected rate of compensation increase. The discount rate is generally set as an average of the prior year's discount rate and current year December daily average of long-term corporate bond yields, as published by Moody's Investor Services less a 5% allowance for expenses and default. The long-term rate on plan assets reflects the long-term rate expected to be earned based on the investment 3 JOHN HANCOCK FINANCIAL SERVICES, INC. policy and the various classes of the invested funds. The compensation rate increase is the average of the expected rates of compensation increase, which are based on current and expected long-term salary and compensation policy. Any variation of actual results from management's judgments may result in future earnings being materially different than anticipated. Income Taxes We establish reserves for possible penalty and interest payments to various taxing authorities with respect to the admissability and timing of tax deductions. Management makes judgments concerning the eventual outcome of these items and reviews those judgments on an ongoing basis. Economic Trends The sales and other financial results of our retail business over the last several years have been affected by general economic and industry trends. Variable products, including variable life insurance and variable annuities, have accounted for the majority of recent increases in total premiums and deposits for the insurance industry as a result of the strong equity market growth in recent years and the "baby boom" generation reaching its high-earnings years and seeking tax-advantaged investments to prepare for retirement. This trend has been challenged recently by fluctuations in stock market performance and we have seen investors return to stable investment products. Our diverse distribution network and product offerings will assist in the maintenance of assets and provide for sales growth. Although sales of traditional life insurance products have experienced continued declines, sales of fixed annuity products and corporate owned life insurance have increased. With respect to our long-term care insurance products, premiums have increased due to the aging of the population and the expected inability of government entitlement programs to meet retirement needs. Premiums and deposits of our individual annuity products increased 4.1% to $2,119.3 million in 2001 as compared to 2000. Our variable life insurance product deposits in 2001 increased 2.9% to $948.5 million compared to 2000, while premiums on our long-term care insurance increased 21.4%, to $661.5 million in 2001 due to the acquisition of the long-term care insurance business of Fortis, Inc. (Fortis) in the prior year. Primarily due to aggressive marketing of both retail and institutional investment management services, new fund offerings, and refocusing the sales organization on regional broker/dealers and financial planners, mutual fund deposits and reinvestments remained stable, decreasing $183.1 million, or 3.0%, to $5,883.1 million in 2001. In addition, redemptions decreased $842.1 million, or 14.1%, to $5,123.1 million in 2001 due to conservation initiatives. We have reduced operating expenses to protect profit margins as we work to stabilize and grow assets under management in the mutual funds business. However, our mutual fund operations are impacted by general market trends, and a continued downturn in the mutual fund market may negatively affect our future operating results. Recent economic and industry trends also have affected the sales and financial results of our institutional business. Sales of fund-type products increased $804.7 million, or 21.1%, to $4,635.1 million. The increase was driven by increasing demand for funding agreements in the non-qualified institutional market, primarily Global Medium Term notes. Premiums from single premium annuity contracts increased to $893.6 million in 2001 from $741.6 million in 2000, primarily due to the sale of three single premium annuity contracts totaling $795.0 million. Moreover, our investment management services provided to domestic and international institutions include services and products such as investment advisory client portfolios, individually managed and pooled separate accounts, registered investment company funds, bond and mortgage securitizations, collateralized bond obligation funds and mutual fund management capabilities. Assets under management of our Investment Management Segment decreased to $28,770.6 million as of December 31, 2001 from $32,544.7 million as of December 31, 2000. The Reorganization The Board of Directors of John Hancock Mutual Life Insurance Company unanimously adopted the Plan of Reorganization on August 31, 1999. Under the terms of the Plan of Reorganization, effective February 1, 2000, John Hancock Mutual Life Insurance Company converted from a mutual life insurance company to a stock life insurance company and became a wholly owned subsidiary of John Hancock Financial Services, Inc., which is a holding company. In connection with the reorganization, John Hancock Mutual Life Insurance Company changed its name to John Hancock Life Insurance Company. 4 JOHN HANCOCK FINANCIAL SERVICES, INC. Under the Plan of Reorganization, as of February 1, 2000, John Hancock Life Insurance Company, created a closed block for the benefit of policies included therein. The purpose of the closed block is to protect the policy dividend expectations of the policies included in the closed block after demutualization. Unless the Massachusetts Commissioner of Insurance and, in certain circumstances, the New York Superintendent of Insurance, consent to an earlier termination, the closed block will continue in effect until the date none of such policies is in force. As of February 1, 2000, John Hancock Life Insurance Company segregated closed block assets of $9,343.0 million, an amount that is expected to produce cash flows which, together with anticipated revenues from policies included in the closed block, is expected to be reasonably sufficient to provide for payment of policy benefits, taxes and direct asset acquisition and disposal costs, and for continuation of policy dividend scales payable in 1999, so long as the experience underlying such dividend scales continues. The assets allocated to the closed block and any cash flows provided by these assets will solely benefit the holders of policies included in the closed block. Total closed block liabilities were $12,118.3 million as of February 1, 2000. For additional information on the creation of the closed block see Note 5 to the consolidated financial statements. Costs relating to the demutualization, excluding costs relating to the offering, were $129.1 million net of income taxes, of which $17.0 million was recognized in the year ended December 31, 2000. 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, the New York Insurance Department as to the demutualization process and related matters. Transactions Affecting Comparability of Results of Operations The following acquisitions 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 the applicable date of acquisition. Each purchase price was allocated to the assets acquired and the liabilities assumed based on estimated fair values, with the excess of the applicable purchase price over the estimated fair values, if any, recorded as goodwill. These entities or books of business were generally acquired by the Company in execution of its plan to acquire businesses that have strategic value, meet its earning requirements and advance the growth of its current businesses. The unaudited pro forma revenues, assuming the transactions had taken place at the beginning of the year of acquisition and the preceding year, for 2001, 2000 and 1999, were approximately $9,228.6 million, $9,277.2 million and $8,300.4 million, an increase of $119.6 million, $339.9 million and $492.8 million, respectively, from reported balances. The unaudited pro forma net income for the years ended December 31, 2001, 2000 and 1999, was approximately $622.0 million, $813.7 million and $153.6 million, a change of $3.3 million, $(5.0) million and $0.4 million, respectively, from reported balances. The unaudited pro forma earnings per share of the Company for the years ended December 31, 2001, 2000 and 1999, was approximately $2.02, $2.57 and $0.49, a change of $0.01, $(0.02) and $--, respectively, from reported balances. On October 1, 2001, Maritime, a majority owned subsidiary of the Company, completed its purchase of all of the shares of Royal & Sun Alliance Life Insurance Company of Canada (RSAF) for an amount of approximately $149.9 million. This transaction resulted in the recognition of goodwill of $77.6 million as of the date of purchase. The goodwill calculation is preliminary, further refinements might be necessary, and the calculation is expected to be finalized in 2002. RSAF's business includes life insurance, guaranteed interest savings and retirement products. The net income relating to the acquired operations included in the Company's results from the date of acquisition through December 31, 2001 was $2.4 million. On April 2, 2001, a subsidiary of the Company, Signature Fruit Company, LLC (Signature Fruit), purchased certain assets and assumed certain liabilities out of bankruptcy proceedings of Tri Valley Growers, Inc., a cooperative association, for approximately $53.0 million. The net losses related to the acquired operations included in the Company's results from the date of acquisition through December 31, 2001 were $3.4 million. On March 1, 2000, the Company acquired the individual long-term care insurance business of Fortis through a coinsurance agreement for approximately $165.0 million. The net income relating to the acquired operations is included in the Company's results from the date of aquisition through December 31, 2000. On October 1, 1999, Maritime completed its purchase of Aetna Canada Holdings Limited (Aetna Canada) for approximately $296 million. The net income relating to the acquired operations is included in the Company's results from the date of aquisition through December 31, 1999. Transactions Occurring Subsequent to Year End On January 9, and February 5, 2002, the Compensation Committee of the Board of Directors approved stock and stock option grants to members of the Policy Committee and certain key employees of the Company. See Note 14 to the consolidated financial statements. On January 7, 2002, as part of its ongoing expense reduction program, the Company eliminated certain jobs and incurred severance benefits. See Note 1 to the consolidated financial statements. 5 JOHN HANCOCK FINANCIAL SERVICES, INC. Results of Operations The table below presents our consolidated results of operations and consolidated financial information for the years ended 2001, 2000 and 1999.
For the Years Ended December 31 ------------------------------- 2001 2000 1999 ------------------------------- Revenues Premiums ............................................. $3,851.3 $3,452.1 $2,717.5 Universal life and investment- type product charges ................................... 772.5 749.3 703.5 Net investment income ................................ 3,944.9 3,864.8 3,524.1 Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders and ......... (249.1) 88.7 175.1 the policyholder dividend obligation (1) Investment management revenues, commissions, and other fees ....................... 602.9 764.8 680.9 Other revenue (expense) .............................. 186.5 17.6 6.5 -------- -------- -------- Total revenues .................................... 9,109.0 8,937.3 7,807.6 Benefits and expenses Benefits to policyholders, excluding amounts related to net realized investment and other gains (losses) credited to participating pension contractholders and the policyholder dividend obligation (2) .................................... 5,904.7 5,375.6 5,368.5 Other operating costs and expenses ................... 1,500.1 1,586.4 1,412.3 Amortization of deferred policy acquisition costs, excluding amounts related to net realized investment and other gains (losses) (3) ........... 306.8 242.0 166.8 Dividends to policyholders ........................... 571.3 564.4 501.6 Demutualization expenses ............................. -- 10.6 96.2 -------- -------- -------- Total benefits and expenses ....................... 8,282.9 7,779.0 7,545.4 -------- -------- -------- Income before income taxes and cumulative effect of accounting changes ............................. 826.1 1,158.3 262.2 Income taxes ............................................ 214.6 339.6 99.3 -------- -------- -------- Income before cumulative effect of accounting changes ........................................... 611.5 818.7 162.9 Cumulative effect of accounting changes, net of taxes (4) .................................. 7.2 -- (9.7) -------- -------- -------- Net income .............................................. $ 618.7 $ 818.7 $ 153.2 ======== ======== ========
(1) Net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders and the policyholder dividend obligation of $(1.1) million, $11.7 million, and $85.8 million for the years ended 2001, 2000, and 1999, respectively. (2) Excluding amounts related to net realized investment and other gains (losses) credited to participating pension contractholders and the policyholder dividend obligation of $25.3 million, $21.0 million, and $35.3 million for the years ended 2001, 2000, and 1999, respectively. (3) Excluding amounts related to net realized investment and other gains (losses) of $(26.4) million, $(9.3) million, and $50.5 million for the years ended 2001, 2000, and 1999, respectively. 6 JOHN HANCOCK FINANCIAL SERVICES, INC. (4) Cumulative effect of accounting changes is shown net of taxes of $(4.2) million and $5.9 million for 2001 and 1999, respectively. There was no cumulative effect of accounting changes in 2000. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 The following discussion reflects the adoption of Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formation of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts" for all periods subsequent to the adoption of the closed block on February 1, 2000. In addition, the following discussion includes gains and losses, both realized and unrealized, on equity securities classified as trading in benefits to policyholders, a reclassification from net investment income as part of investment returns related to equity indexed universal life insurance policies sold at Maritime, otherwise these gains and losses are included in net realized investment and other gains (losses). Consolidated income before income taxes and cumulative effect of accounting changes of $826.1 million for the year ended December 31, 2001 decreased by $332.2 million, or 28.7%, as compared to consolidated income before income taxes and cumulative effect of accounting changes of $1,158.3 million for the year ended December 31, 2000. The decrease in consolidated income before income taxes was driven by $249.1 million in net realized investment and other losses for the year ended December 31, 2001, compared to $88.7 million in net realized investment and other gains for the year ended December 31, 2000. The $249.1 million in net realized investment and other losses in 2001 are net of $42.3 million in net realized investment and other gains allocated to the participating pension contractholders and $17.0 million in net realized investment and other losses allocated to the policyholder dividend obligation in 2001. The change in net realized investment and other gains (losses) is the result of debt write-downs of approximately $381.0 million driven by write-downs on securities of issuers affiliated with Enron Corporation, the Argentina government and other investments in that country, K-Mart Corporation and equity interests in certain collateralized debt obligations (CDO). The Company's Enron Corporation related debt write-downs were mitigated by approximately $77.3 million in net realized investment and other gains in credit swap protection. In addition, partially offsetting the debt write-down were $223.7 million in net realized investment and other gains on common stock sold during the year. The decrease in income before income taxes and cumulative effect of accounting changes was primarily attributable to decreases of $235.5 million in the Corporate and Other Segment, $72.5 million in the Asset Gathering Segment, $41.5 million in the Investment Management Segment, and $15.3 million in the Guaranteed and Structured Financial Products Segment. These decreases in income before income taxes and cumulative effect of accounting changes were partially offset by a $32.6 million increase in the Protection Segment. The decrease in the Corporate and Other Segment was primarily due to lower net realized investment and other gains (losses), which decreased $131.0 million, and lower net investment income, which decreased $132.0 million. The decrease in the Asset Gathering Segment was primarily due to a $70.2 million increase in net realized investment and other losses primarily related to the annuity business and an increase in expenses in the mutual funds business which are one-time in nature related primarily to the sale of the full service retirement business. The decrease in the Investment Management Segment is driven by a $74.8 million decrease in management advisory fees due to lower assets under management, partially offset by a decrease in operating expenses primarily due to non-recurring prior year amounts related to timber management contracts and performance fees paid for the management of the mezzanine fund and lower compensation expense in the current period. The decrease in the Guaranteed and Structured Financial Products Segment is primarily due to decreases in the fee businesses on lower average reserves driven by customer withdrawals and an increase in net realized investment and other losses of $56.3 million. The Protection Segment experienced an increase in income before income taxes and cumulative effect of accounting changes partially offset by an increase in net realized investment and other losses of $73.0 million, primarily due to fee revenues on growth in non-traditional life insurance products . Premium revenue was $3,851.3 million for 2001, an increase of $399.2 million, or 11.6%, from $3,452.1 million in 2000. The increase was primarily due to a $138.9 million increase in premiums in the Protection Segment, driven by renewal premium growth in the long-term care business of $116.1 million. Renewal premiums are growing due to the acquisition of the Fortis long-term care business in the prior year. Another significant driver was the Guaranteed and Structured Financial Products Segment which increased $136.5 million primarily due to growth in the single premium annuity business. Premiums in the Corporate and Other segment increased $112.5 million primarily due to the acquisition of Royal & Sun Alliance Life Insurance Company during 2001. Universal life and investment-type product charges were $772.5 million for 2001, an increase of $23.2 million, or 3.1%, from $749.3 million in 2000. 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 growth in the average account values in universal life insurance products, partially offset by lower average account balances in variable annuities and surrender fees. Net investment income was $3,944.9 million for 2001, an increase of $80.1 million, or 2.1%, from $3,864.8 million in 2000. The increase was primarily the result of higher average invested assets, which increased $4,659.2 million, or 9.3%, to $54,623.7 million in 2001, as compared to $49,964.5 million in 2000, partially offset by a lower net yield on average invested assets which decreased to 7.23% in 2001. The decrease in yield from the prior year is consistent with the average market rates in 2001 compared to 2000. The average 10-year U.S. Treasury rate in 2001 was 101 basis points lower than in 2000. 7 JOHN HANCOCK FINANCIAL SERVICES, INC. Net realized investment and other losses were $249.1 million for 2001, a decrease of $337.8 million from net realized investment and other gains of $88.7 million in 2000. The decrease was driven by the result of debt write-downs on securities of issuers affiliated with Enron Corporation, the Argentina government and other investments in that country, K-Mart Corporation and CDO. Partially offsetting debt losses were net realized investment and other gains on common stock of $223.7 million and approximately $77.3 million in net realized investment and other gains on credit swap protection investment strategy. Investment management revenues, commissions, and other fees were $602.9 million, a decrease of $161.9 million, or 21.2%, from $764.8 million in 2000. The decrease in fee revenue was the result of a lower assets under management. Assets under management decreased $983.1 million compared to the prior year period. Underwriting and distribution fees decreased $72.1 million, or 23.7%, to $232.5 million in 2001 primarily due to the decrease in front-end load mutual fund sales, and accordingly, commission revenue. Mutual fund advisory fees declined $16.3 million in 2001, primarily due to lower average assets under management. Other revenue was $186.5 million in 2001, an increase of $168.9 million, or 959.7%, from $17.6 million reported in 2000. The increase in other revenue is due to the Signature Fruit transaction in 2001. Signature Fruit, a subsidiary of the Company as of April 2, 2001, acquired certain assets and assumed certain liabilities out of bankruptcy proceedings of Tri Valley Growers, Inc., a cooperative association. 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. Signature Fruit generated $177.8 million in revenue in the year ended December 31, 2001. Benefits to policyholders were $5,904.7 million for 2001, an increase of $529.2 million, or 9.8%, from $5,375.6 million in 2000. The increase in benefits to policyholders was driven by growth in the long-term care insurance business primarily due to the acquisition of the long-term care insurance business of Fortis, Inc., the growth in the single premium annuities business in the G&SFP Segment and growth in the Corporate and Other Segment driven by the international operations, primarily Maritime who acquired an insurance operation in Canada in the fourth quarter of 2001 and an additional $30.0 million pre-tax charge in connection with the class action settlement involving individual life insurance policies sold from 1979 through 1996. Other operating costs and expenses were $1,500.1 million for 2001, a decrease of $86.3 million, or 5.4%, from $1,586.4 million for 2000. The decrease was primarily due to cost containment measures and lower commission expense in the mutual fund business on lower front-end load charge mutual fund sales and lowered deferred sales charges due to lower redemptions. In addition, lower compensation costs in our Investment Management Segment resulted from lower assets under management. Partially offsetting the decreases in other operating costs, was the inclusion of $183.0 million in operating costs of Signature Fruit in other operating costs and expenses in 2001. Amortization of deferred policy acquisition costs was $306.8 million for 2001, an increase of $64.8 million, or 26.8%, from $242.0 million for 2000. The increase was primarily due to higher amortization expense on non-traditional life insurance products resulting from higher current net investment income which increased margins in the business during 2001 . Dividends to policyholders were $571.3 million in 2001, an increase of $6.9 million, or 1.2%, from $564.4 million in 2000. The increase primarily resulted from normal growth in dividends on traditional life insurance products where average reserves have increased approximately 3.9% from the prior period. No demutualization costs were incurred during the year ended December 31, 2001. Demutualization expenses were $10.6 million for 2000. These expenses include printing and mailing fees, fees of the regulators' advisors and our financial, legal, actuarial and accounting advisors. While demutualization expenses were previously classified as an extraordinary item in our financial results, recent accounting literature now requires demutualization expenses to be classified as a single line item within income from continuing operations. Income taxes were $214.6 million in 2001, compared to $339.6 million for 2000. Our effective tax rate was 26.0% in 2001, as compared to 29.3% in 2000. The lower effective tax rate was primarily due to a decrease in the deferred tax liability associated with the lease residual management strategy, enacted tax rate reduction in Canada applicable to Maritime, lower state taxes associated with conversions of Independence Investment Associates and our non life subsidiary holding company to limited liability corporations, and increased affordable housing tax credits. Increased tax benefits associated with dividends received deductions and employee stock ownership plan interest exclusions also contributed to the overall effective tax rate decrease. 8 JOHN HANCOCK FINANCIAL SERVICES, INC. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 The following discussion reflects the adoption of SOP 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formation of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts" for all periods subsequent to the adoption of the closed block on February 1, 2000. In addition, the following discussion includes gains and losses, both realized and unrealized, on equity securities classified as trading in benefits to policyholders, a reclassification from net investment income as part of investment returns related to equity indexed universal life insurance policies sold at Maritime, otherwise these gains and losses are included in net realized investment and other gains (losses). Consolidated income before income taxes and cumulative effect of accounting change of $1,158.3 million for the year ended December 31, 2000 increased by $896.1 million, or 341.8%, as compared to consolidated income before income taxes and cumulative effect of accounting change of $262.2 million for the year ended December 31, 1999. The increase was primarily attributable to increases in income before income taxes and cumulative effect of accounting change of $234.9 million in the Guaranteed and Structured Financial Products Segment, $601.1 million in the Corporate and Other Segment, $65.9 million in the Asset Gathering Segment and $20.7 million in the Investment Management Segment. These increases were partially offset by a decrease in the Protection Segment of $26.5 million. The increase in the Guaranteed and Structured Financial Products Segment was primarily due to the recognition of a $345.5 million pre-tax charge in the prior year for compensation of group participating contractholders for assets transferred in conjunction with the formation of the corporate account. The increase in the Corporate and Other Segment was primarily due to a $208.6 million pre-tax charge in the prior year 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 1998 and a $140.2 million pre-tax charge in the prior year in connection with the class action settlement. The increase in the Asset Gathering Segment was primarily due to an improvement in realized gains from the prior year: $15.4 million in realized gains were recognized in 2000 compared to $11.0 million in realized losses in 1999. In addition, demutualization and restructuring expenses decreased compared to the prior year. The increase in the Investment Management Segment was due primarily to higher investment advisory fees resulting from an incentive fee on contract restructuring and performance fees earned by the mezzanine fund manager. The Protection Segment decreased $26.5 million due to the adoption of SOP 00-3 in the fourth quarter of 2001 and its retroactive application to the origination of the closed block on February 1, 2000. Premium revenue was $3,452.1 million for 2000, an increase of $734.6 million, or 27.0%, from $2,717.5 million in 1999. The increase was primarily due to a $299.7 million increase in premiums in the Guaranteed and Structured Financial Products Segment, including the sale of two single premium annuity contracts totaling $509.0 million, and a $117.5 million increase, or 8.2%, in the Protection Segment primarily due to premiums on individual long-term care insurance products from the acquisition of a block of business. Universal life and investment-type product charges were $749.3 million for 2000, an increase of $45.8 million, or 6.5%, from $703.5 million in 1999. 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 account values in universal life insurance products and higher average variable annuity liabilities and surrender fees. Net investment income was $3,864.8 million for 2000, an increase of $340.7 million, or 9.7%, from $3,524.1 million in 1999. Net investment income in the prior year includes $9.0 million in net investment income earned in operations of disposed businesses. The increase was primarily the result of higher average invested assets, which increased $2,966.5 million, or 6.3%, to $49,964.5 million in 2000, as compared to $46,998.0 million in 1999. The net yield on average invested assets increased to 7.73% in 2000. The increase in yield from the prior year is consistent with the average market rates in 2000 compared to 1999, the average 10-year U.S. Treasury rate in 2000 was 34 basis points higher than in 1999. Net realized gains on investments were $88.7 million for 2000, a decrease of $86.4 million from $175.1 million in 1999. Net realized gains in the prior year include $23.0 million in net realized losses in the operations of disposed businesses in 1999. The decrease was primarily the result of 1999 gains on sales of real estate relating to the planned program to divest the Company of much of its real estate portfolio. The Company recognized approximately $115.1 million in realized gains from the sales of real estate in the prior year compared to net realized losses of approximately $21.1 million in 2000. Investment management revenues, commissions, and other fees were $764.8 million, an increase of $83.9 million, or 12.3%, from $680.9 million in 1999. The increase was the result of an increase in the Investment Management segment which increased $45.9 million primarily due to the $45.3 million incentive fee received on the restructuring of a timber management contract and the favorable settlement of a lawsuit. Underwriting and distribution fees increased $25.7 million primarily resulting from the increase in front-end load mutual fund sales, partially offset by a decrease in deferred sales charges due to improved retention of existing accounts. Mutual fund advisory fees declined $6.4 million in 2000, primarily due to lower average assets under management along with a 9 JOHN HANCOCK FINANCIAL SERVICES, INC. slight decline in the average investment advisory fee rate, as fixed income assets, which bear a lower advisory fee than equity assets, increased as a percentage of total assets. Other revenue was $17.6 million in 2000, an increase of $11.1 million, or 170.8%, from $6.5 million reported in 1999. Other revenue in the prior year includes $2.9 million in other losses in the operations of disposed businesses in 1999. Benefits to policyholders were $5,375.6 million for 2000, an increase of $7.1 million, or 0.1%, from $5,368.5 million in 1999. Benefits to policyholders in the prior year includes $243.6 million in the operations of disposed businesses in 1999. The increase was primarily due to a $349.1 million, or 19.6% increase in the single premium annuity business, a $200.2 million increase primarily attributable to the acquisition of Aetna Canada which is included in our results for a full year in 2000, and a $72.0 million increase due to our Fixed Annuities business on the sales of single premium immediate annuities. In addition, we experienced an increase of $158.8 million increase in benefits on individual long-term care insurance products, primarily due to the acquisition of the long-term care business of Fortis, Inc. as of March 1, 2000. These increases were partially offset by recognizing a $345.5 million pre-tax charge in the prior year for compensation of group participating contractholders for assets transferred in conjunction with the formation of the corporate account, a $208.6 million pre-tax charge in the prior year 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 a prior year, a $140.2 million pre-tax charge in the prior year in connection with the class action settlement involving individual life insurance policies sold from 1979 through 1996, and $61.7 million in reserves established in the prior year for incurred but unreported deaths identified as a result of the policyholder demutualization mailing. In addition, the Company reclassified investment returns related to equity indexed universal life insurance policies sold through the Maritime with benefits to policyholders, which decreased benefits to policyholders by $49.9 million in the prior year, while the adoption of SOP 00-3 and the Maritime reclassification discussed previously increased benefits to policyholders by $48.5 million in 2000. Other operating costs and expenses were $1,586.4 million for 2000, an increase of $174.1 million, or 12.3%, from $1,412.3 million for 1999. The increase was primarily due to the acquisition of Aetna Canada as of October 1, 1999 and the long-term care business of Fortis, Inc. as of March 1, 2000. In addition, other operating costs increased in the Investment Management Segment primarily resulting from the $15.7 million in incentive compensation payments related to incentive fees on a timber management contract and $9.1 million in performance fees paid for the management of the mezzanine fund. Amortization of deferred policy acquisition costs was $242.0 million for 2000, a increase of $75.2 million, or 45.1%, from $166.8 million for 1999. The increase was primarily due to higher amortization expense on non-traditional life insurance products resulting from higher current net investment income increasing margins in the business during 2000 which increased amortization of deferred acquisition costs. In addition, amortization expense increased in the Variable Annuity business, primarily resulting from poor separate account performance during 2000, which resulted in revised projections of estimated gross profits based upon decreases in estimated future margins, thus increasing current amortization. Dividends to policyholders were $564.4 million in 2000, an increase of $62.8 million, or 12.5%, from $501.6 million in 1999. The increase primarily resulted from normal growth in dividends on traditional life insurance products. Demutualization expenses were $10.6 million for 2000, a decrease of $85.6 million, or 89.0%, from $96.2 million for 1999. The decrease was related to the extensive preparations for the demutualization occurring in 1999. These expenses include printing and mailing fees, fees of the regulators' advisors and our financial, legal, actuarial and accounting advisors. While demutualization expenses were previously classified as an extraordinary item in our financial results, recent accounting literature now requires demutualization expenses be classified as a single line item within income from continuing operations. Income taxes were $339.6 million in 2000, compared to $99.3 million for 1999. Income taxes in the prior year includes $113.8 million in income tax credits due to the loss from operations of disposed businesses in 1999. Our effective tax rate was 29.3% in 2000, as compared to 37.9% in 1999, taking into account the prior year income tax credit generated from operations of disposed businesses. We had 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. 10 JOHN HANCOCK FINANCIAL SERVICES, INC. Results of Operations by Segment We evaluate segment performance and base management's incentives on segment after-tax operating income, which excludes the effect of net realized investment and other 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 and other gains and losses, 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. A discussion of the adjustments to GAAP reported income, many of which affect each operating segment, follows. A reconciliation of segment after-tax operating income, as adjusted, to GAAP reported net income precedes each segment discussion.
For the Years Ended December 31 ------------------------------- 2001 2000 1999 ------- ------- ------- Segment Data: (1) (in millions) Segment after-tax operating income: Protection Segment .......................................... $ 298.7 $ 248.6 $ 190.6 Asset Gathering Segment ..................................... 148.3 128.8 115.1 ------- ------- ------- Total Retail Segments .................................... 447.0 377.4 305.7 Guaranteed and Structured Financial Products Segment ........ 244.2 212.1 202.4 Investment Management Segment ............................... 29.8 46.8 37.3 ------- ------- ------- Total Institutional Segments ............................. 274.0 258.9 239.7 Corporate and Other Segment ................................. 84.7 102.5 67.8 ------- ------- ------- Total segment after-tax operating income ................ 805.7 738.8 613.2 After-tax adjustments: (1) Net realized investment and other gains (losses), net (1) ... (160.7) 57.2 119.9 Class action lawsuit ........................................ (19.5) -- (91.1) Workers' compensation reinsurance reserve ................... -- -- (133.7) Restructuring charges ....................................... (27.4) (12.0) (17.0) Group pension dividend transfer ............................. -- 5.7 (205.8) Demutualization expenses .................................... -- (7.0) (93.6) Other demutualization related costs ......................... -- (10.0) (6.8) Surplus tax ................................................. 13.4 46.0 (22.2) ------- ------- ------- Total after-tax adjustments ............................. (194.2) 79.9 (450.3) ------- ------- ------- GAAP Reported: Income before cumulative effect of accounting changes .................................... 611.5 818.7 162.9 Cumulative effect of accounting changes, net of tax ......... 7.2 -- (9.7) ------- ------- ------- Net income .................................................. $ 618.7 $ 818.7 $ 153.2 ======= ======= =======
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. Adjustments to GAAP Reported Net Income Our GAAP reported net income was significantly affected by net realized investment and other 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 and other gains (losses), except for gains and losses from mortgage securitizations, investments backing our short-term funding agreements, a business line that we exited in 1999, 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 11 JOHN HANCOCK FINANCIAL SERVICES, INC. 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. Net realized investment and other 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 an integral part of the core business of those operations. Net realized investment and other gains have been reduced by: (1) amortization of deferred policy acquisition costs to the extent that such amortization results from net realized investment and other gains (losses), (2) the portion of net realized investment and other gains (losses) credited to certain participating contractholder accounts and (3) the portion of net realized investment and other gains (losses) credited to the policyholder dividend obligation. We believe presenting net realized investment and other gains (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 and other gains (losses) per the consolidated financial statements and (b) the adjustment made for net realized investment and other gains (losses) to calculate segment after-tax operating income for the years ended December 31, 2001, 2000 and 1999.
For the Years Ended December 31 ------------------------------- 2001 2000 1999 ------- ------- ------- (in millions) Net realized investment and other gains (losses) ................. $(250.2) $ 100.4 $ 260.9 Less amortization of deferred policy acquisition costs related to net realized investment and other gains (losses) ... 26.4 9.3 (50.5) Less amounts credited to participating pension contractholder accounts ............................... (42.3) (6.9) (35.3) Less amounts credited to the policyholder dividend obligation .... 17.0 (14.1) -- ------- ------- ------- Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders and amounts credited to the policyholder dividend obligation per consolidated financial statements .............. (249.1) 88.7 175.1 Less net realized investment and other gains (losses) attributable to mortgage securitizations and investments backing short-term funding agreements ......................... (3.2) (3.2) (27.7) Less gain on sale of business .................................... -- -- (33.0) ------- ------- ------- Net realized investment and other gains (losses), net - pre-tax adjustment to calculate segment operating income ...... (252.3) 85.5 169.8 Less income tax effect ........................................... 91.6 (28.3) (49.9) ------- ------- ------- Net realized investment and other gains (losses), net - after-tax adjustment to calculate segment operating income .... $(160.7) $ 57.2 $ 119.9 ======= ======= =======
During 1997, the Company entered into a court-approved settlement relating to a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996. In entering into the settlement, the Company specifically denied any wrongdoing. The total 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 $52.7 million and $224.0 million at December 31, 2001 and 2000, respectively. Costs incurred related to the settlement were $19.5 million and $91.1 million, after-tax, in 2001 and 1999, respectively. No such costs were incurred in 2000. The estimated reserve is based on a number of factors, including the estimated cost per claim and the estimated costs to administer the claims. 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. During the fourth quarter of 1999 and early 2000, we received additional 12 JOHN HANCOCK FINANCIAL SERVICES, INC. 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. The Company believes that any exposure to loss from this issue, in addition to amounts already provided for as of December 31, 2001, would not be material. During 2001, 2000 and 1999, we incurred restructuring charges as part of a plan to reduce costs and increase future operating efficiency by consolidating portions of our operations. The plan consists primarily of reducing staff in the home office. During 2000 and 1999, we recorded amounts for the transfer of certain assets from the Guaranteed and Structured Financial Products Segment to the corporate account. These assets included investments in certain subsidiaries and the home office real estate complex (collectively, corporate purpose assets). Certain group contracts 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 net realized investment and other gains (losses) in the general account. These participating contractholders were compensated for transferred assets based on the fair value of the assets transferred. The difference between the fair value and carrying value of the assets transferred were credited to affected participating contractholders through the crediting rates and dividends on their contracts. In December 2000, the American Institute of Certified Public Accountants (AICPA) issued SOP 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts." The SOP, which was adopted with respect to accounting for demutualization expenses by the Company on December 31, 2000, requires that demutualization related expenses be classified as a single line item within income from continuing operations and should not be classified as an extraordinary item. The adoption of SOP 00-3 resulted in the reclassification of demutualization expenses previously recorded as an extraordinary item in 1999 of $93.6 million after-tax. In addition, the Company recognized $7.0 million, after-tax, of demutualization expenses for the year ended December 31, 2000. The Company considers demutualization expenses to be an adjustment to GAAP recorded net income. During 2000 and 1999, we incurred other demutualization related costs to improve our financial analysis and financial reporting abilities. These charges primarily included consulting fees and planning and expense management costs. The Company considers these other demutualization related costs to be an adjustment to GAAP recorded net income. We had 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. Amortization of Goodwill The excess of cost over the fair value of the net assets of businesses acquired was $280.0 million and $228.6 million at December 31, 2001 and 2000, respectively. Goodwill is amortized with the exception of RSAF which was acquired as of October 1, 2001, pursuant to Statement of Financial Accounting Standards (SFAS) No. 142, on a systematic basis over periods not exceeding 40 years, which correspond with the benefits estimated to be derived from the acquisitions. Accumulated amortization was $72.9 million and $63.6 million at December 31, 2001 and 2000, respectively. Amortization expense included in other operating costs and expenses was $16.4 million, $20.3 million, and $9.7 million in 2001, 2000 and 1999, respectively. The Company reevaluates the recoverability of recorded goodwill based on the undiscounted cash flows of the related business whenever significant events or changes indicate an impairment may exist. If the undiscounted cash flows do not support the amount recorded, an impairment is recognized by a charge to current operations to reduce the carrying value of the goodwill based on the expected discounted cash flows of the related business. 13 JOHN HANCOCK FINANCIAL SERVICES, INC. The following table shows the amount of goodwill amortization by applicable segment:
For the Years Ended December 31 ------------------------------- 2001 2000 1999 ----- ----- ----- (in millions) Amortization of Goodwill: Protection Segment ..................................... $ 4.0 $ 3.8 $ -- Asset Gathering Segment ................................ 6.8 6.8 6.8 ----- ----- ----- Total Retail Segments ............................... 10.8 10.6 6.8 Guaranteed and Structured Financial Products Segment ... -- -- -- Investment Management Segment .......................... 0.5 1.1 1.1 ----- ----- ----- Total Institutional Segments ....................... 0.5 1.1 1.1 Corporate and Other Segment ............................ 5.1 8.6 1.8 ----- ----- ----- Total goodwill amortization expense ................ $16.4 $20.3 $ 9.7 ===== ===== =====
Goodwill was not amortized for acquisitions completed subsequent to June 30, 2001, pursuant to the adoption of SFAS No. 141, "Business Combinations." See Note 1 to the consolidated financial statements. Segment Allocations We allocate surplus to the segments in amounts sufficient to support the associated liabilities of each segment and to maintain capital levels consistent with the overall business segment and corporate strategies. Allocations of net investment income are based on the amount of assets owned by 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 allocation methodologies. 14 JOHN HANCOCK FINANCIAL SERVICES, INC. Retail-Protection Segment The following table presents certain summary financial data relating to the Protection Segment for the periods indicated.
For the Years Ended December 31 -------------------------------- 2001 2000 1999 -------- -------- -------- (in millions) Operating Results: Revenues Premiums ............................................................ $1,688.1 $1,549.2 $1,431.7 Universal life and investment-type product charges .................. 423.9 388.3 361.1 Net investment income ............................................... 1,264.7 1,203.6 1,107.3 Other revenue ....................................................... 8.4 7.1 2.9 -------- -------- -------- Total revenues ................................................... 3,385.1 3,148.2 2,903.0 Benefits and expenses Benefits to policyholders (3) ....................................... 1,882.2 1,752.7 1,709.4 Other operating costs and expenses .................................. 357.6 433.2 407.1 Amortization of deferred policy acquisition costs, excluding amounts related to net realized investment and other gains (losses)(3) ................................................ 182.2 113.8 71.8 Dividends to policyholders .......................................... 499.9 475.6 452.0 -------- -------- -------- Total benefits and expenses ...................................... 2,921.9 2,775.3 2,640.3 Segment pre-tax operating income (1) (3) ............................... 463.2 372.9 262.7 Income taxes (3) ....................................................... 164.5 124.3 72.1 -------- -------- -------- Segment after-tax operating income (1) (3) ............................. 298.7 248.6 190.6 After-tax adjustments: (1) Net realized investment and other (losses) gains, net (3) ........... (62.2) (18.8) 108.5 Restructuring charges ............................................... (4.4) (6.7) (8.6) Demutualization expenses ............................................ -- 1.6 (61.3) Other demutualization related costs ................................. -- (6.8) (4.6) Surplus tax ......................................................... 9.6 20.8 (12.5) -------- -------- -------- Total after-tax adjustments (3) ................................ (57.0) (9.9) 21.5 -------- -------- -------- GAAP Reported: Income before cumulative effect of accounting changes (3) ........... 241.7 238.7 212.1 Cumulative effect of accounting changes, net of tax ................. 11.7 -- -- -------- -------- -------- Net income (3) ......................................................... $ 253.4 $ 238.7 $ 212.1 ======== ======== ======== Amortization of goodwill, net of tax ................................... 2.6 2.2 -- -------- -------- -------- Net income before amortization of goodwill (3) ......................... $ 256.0 $ 240.9 $ 212.1 ======== ======== ========
15 JOHN HANCOCK FINANCIAL SERVICES, INC.
For the Years Ended December 31 -------------------------------- 2001 2000 1999 -------- -------- -------- (in millions) Other Data: Segment after-tax operating income (loss) Non-traditional life (variable life and universal life) .. $ 121.0 $ 97.0 $ 92.8 Traditional life (3) ..................................... 107.8 97.1 68.2 Long-term care ........................................... 73.0 56.4 28.5 Other .................................................... (3.1) (1.9) 1.1 Statutory premiums (2) Variable life ............................................ 948.5 922.0 829.8 Universal life ........................................... 456.1 173.5 117.9 Traditional life ......................................... 997.3 965.5 1,043.6 Long-term care ........................................... 661.5 545.1 337.0
- ---------- (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 Life Insurance Company (formerly 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. (3) Certain 2000 amounts were adjusted for the adoption of the provisions of SOP 00-3, "Accounting by Insurance Enterprises for Demutualization and Formations of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts" as outlined in Note 1 to the consolidated financial statements. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Segment after-tax operating income was $298.7 million in 2001, an increase of $50.1 million, or 20.1%, from $248.6 million in 2000. Non-traditional life insurance segment after-tax operating income increased $24.0 million, or 24.7%, primarily due to higher fee income and an increase in net investment income offset by increased amortization of deferred policy acquisition costs. Traditional life insurance segment after-tax operating income increased $10.7 million, or 11.0%, primarily resulting from lower operating expenses offset by increased benefits to policyholders. Long-term care insurance segment after-tax operating income increased $16.6 million, or 29.4%, resulting from lower expenses, higher investment income and positive morbidity gains. Total revenues were $3,385.1 million in 2001, an increase of $236.9 million, or 7.5%, from $3,148.2 million in 2000. Premiums increased $138.9 million, or 9.0%, primarily due to an increase in long-term care insurance premiums, which increased $116.1 million, or 20.6%, driven by continued growth in the business. Universal life and investment-type product charges consist primarily of cost of insurance fees and separate account fees and were $423.9 million in 2001, an increase of $35.6 million, or 9.2%, from $388.3 million in 2000. The increase was primarily due to growth in average account values and variable life product fee increases. Net investment income increased $61.1 million, or 5.1%, primarily due to increased asset balances. Total benefits and expenses were $2,921.9 million in 2001, an increase of $146.6 million, or 5.3%, from $2,775.3 million in 2000. Benefits to policyholders increased $129.5 million, or 7.4%, due to growth in the long-term care insurance business. Long-term care insurance benefits increased $126.3 million primarily due to additions to reserves for premium growth and to higher claim volume from the expansion of the business. Other operating costs and expenses decreased $75.6 million, or 17.5%, to $357.6 million in 2001 from $433.2 million in 2000, primarily due to a decrease of $72.0 million in operating expenses on traditional life insurance products mainly attributable to ongoing operating cost reduction programs. Amortization of deferred policy acquisition costs of $182.2 million in 2001 increased $68.4 million, or 60.1%, from $113.8 million in 2000 primarily due to higher gross profits on non-traditional life products. Dividends to policyholders increased $24.3 million, or 5.1%, due to a higher dividend scale and aging of the in-force business on traditional life insurance products. The segment's effective tax 16 JOHN HANCOCK FINANCIAL SERVICES, INC. rate increased to 35.5% in 2001 from 33.4% in 2000, primarily due to a tax charge in 2001 associated with the closed block policyholder dividend obligation. Amortization of goodwill in 2001 and 2000 relates to the acquisition of the individual long-term care insurance business from Fortis during 2000. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income was $248.6 million in 2000, an increase of $58.0 million, or 30.4%, from $190.6 million in 1999. Non-traditional life insurance segment after-tax operating income increased $4.2 million, or 4.5%, primarily due to an increase in net investment income resulting from higher yields on higher net average invested assets. Traditional life insurance segment after-tax operating income increased $28.9 million, or 42.4%, primarily resulting from higher net investment income due to higher portfolio rates, lower operating expenses, and not repeating a $29.3 million charge, net of deferred acquisition costs, taken in 1999 for previously unreported claims associated with the demutualization. Long-term care insurance segment after-tax operating income increased $27.9 million, or 97.9%, resulting from an increase in net investment income due to the addition of the Fortis business in 2000 and growth in average net invested assets. Total revenues were $3,148.2 million in 2000, an increase of $245.2 million, or 8.4%, from $2,903.0 million in 1999. Premiums increased $117.5 million or 8.2%, primarily due to an increase in long-term care insurance premiums, which increased $207.8 million, or 58.5%, resulting from both additional premiums assumed relating to the acquisition of Fortis and continued growth in the business. Partially offsetting this increase was a decline in traditional life insurance premiums. Universal life and investment-type product charges consist primarily of cost of insurance fees and separate account fees and were $388.3 million in 2000, an increase of $27.2 million, or 7.5%, from $361.1 million in 1999. The increase was primarily due to growth in average account values. Net investment income increased $96.3 million, or 8.7%, primarily due to increases in average net invested assets and portfolio yields. Total benefits and expenses were $2,775.3 million in 2000, an increase of $135.0 million, or 5.1%, from $2,640.3 million in 1999. Benefits to policyholders increased $43.3 million, or 2.5%, due to several offsetting items, including a decrease of $147.2 million in benefits to policyholders on traditional life insurance products due to improved mortality, and not repeating the prior year $61.7 million charge for previously unreported death claims identified as part of the demutualization. Offsetting this decrease was an increase of $169.8 million in benefits to policyholders of long-term care insurance due to both the acquisition of the Fortis business and growth in the business. Benefits to policyholders included a $20.7 million increase on non-traditional life insurance products. Other operating costs and expenses increased $26.1 million, or 6.4%, to $433.2 million in 2000 from $407.1 million in 1999, primarily due to an increase of $34.9 million in operating expenses associated with the long-term care business due to the acquisition of Fortis and growth in the business. Amortization of deferred policy acquisition costs of $113.8 million in 2000 increased $42.0 million, or 58.5%, from $71.8 million in 1999. The increase resulted from lower amortization of deferred acquisition costs in the prior year for traditional life products due to revised projections of estimated gross profits based on the recording of additional unreported claims related to the demutualization. In addition, amortization expense on non-traditional life products increased due to revised projections of estimated gross profits based upon changes in estimated future interest margins. Dividends to policyholders increased $23.6 million, or 5.2%, primarily due to aging of the in-force business on traditional life insurance products. The segment's effective tax rate increased to 33.4% in 2000 from 27.4% in 1999, primarily due to the transfer of tax-preferenced assets to the Corporate and Other Segment in the fourth quarter of 1999. Amortization of goodwill in 2000 relates to the acquisition of the individual long-term care insurance business from Fortis. 17 JOHN HANCOCK FINANCIAL SERVICES, INC. Retail-Asset Gathering Segment The following table presents certain summary financial data relating to the Asset Gathering Segment for the periods indicated.
For the Years Ended December 31 ----------------------------------- 2001 2000 1999 --------- --------- --------- (in millions) Operating Results: Revenues Premiums ....................................................... $ 74.8 $ 63.4 $ 17.2 Investment-type product charges ................................ 125.6 138.3 120.6 Net investment income .......................................... 498.5 445.8 388.6 Investment management revenues, commissions, and other fees .... 456.4 547.1 528.8 Other revenue (expense) ........................................ (0.3) 1.3 2.1 --------- --------- --------- Total revenues .............................................. 1,155.0 1,195.9 1,057.3 Benefits and expenses Benefits to policyholders ...................................... 441.6 371.3 299.3 Other operating costs and expenses ............................. 424.4 552.9 529.2 Amortization of deferred policy acquisition costs, excluding amounts related to net realized investment and other gains (losses) ........................................ 75.0 78.8 53.5 Dividends to policyholders ..................................... 0.1 0.1 0.1 --------- --------- --------- Total benefits and expenses ................................. 941.1 1,003.1 882.1 Segment pre-tax operating income (1) .............................. 213.9 192.8 175.2 Income taxes ...................................................... 65.6 64.0 60.1 --------- --------- --------- Segment after-tax operating income (1) ............................ 148.3 128.8 115.1 After-tax adjustments (1): Net realized investment and other gains (losses), net .......... (34.7) 18.6 (6.9) Restructuring charges .......................................... (17.6) (1.4) (7.3) Demutualization expenses ....................................... -- 0.4 (13.0) Other demutualization related costs ............................ -- (1.3) (0.9) Surplus tax .................................................... 0.2 0.6 (1.0) --------- --------- --------- Total after-tax adjustments ................................. (52.1) 16.9 (29.1) --------- --------- --------- GAAP Reported: Income before cumulative effect of accounting changes ....... 96.2 145.7 86.0 Cumulative effect of accounting changes, net of tax ......... (0.5) -- (9.6) --------- --------- --------- Net income ..................................................... $ 95.7 $ 145.7 $ 76.4 ========= ========= ========= Amortization of goodwill, net of tax ........................... 4.5 4.5 4.4 --------- --------- --------- Net income before amortization of goodwill ..................... $ 100.2 $ 150.2 $ 80.8 ========= ========= ========= Other Data: Segment after-tax operating income Annuity ........................................................ $ 90.3 $ 87.5 $ 67.0 Mutual funds ................................................... 55.5 46.3 46.9 Other .......................................................... 2.5 (5.0) 1.2 Annuity premiums and deposits (2) Fixed .......................................................... 1,463.5 854.3 621.0 Variable (3) ................................................... 639.6 1,120.8 847.7 Mutual fund assets under management, end of year .................. 29,285.8 31,725.8 32,696.6
18 JOHN HANCOCK FINANCIAL SERVICES, INC. (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 Life Insurance Company and John Hancock Variable Life Insurance Company, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. (3) Variable annuity deposits exclude internal exchanges as part of the safe harbor internal exchange program of $1,910.5 million and $25.0 million, respectively, for the years ending December 31, 2001 and 2000. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Segment after-tax operating income was $148.3 million in 2001, an increase of $19.5 million, or 15.1%, from $128.8 million in 2000. Mutual fund segment after-tax operating income increased $9.2 million, or 19.9%, primarily due to a decrease in operating expenses, partially offset by a decrease in management advisory fees. Segment after-tax operating income increased $7.5 million in other Asset Gathering businesses, driven by John Hancock Signature Services. Annuity segment after-tax operating income increased $2.8 million, or 3.2%, primarily due to decreased operating expense related to distribution in variable annuities. The fixed annuity business remained stable despite decreasing investment spread, due to growth in invested assets. Spreads on fixed annuities decreased 42 basis points for the year ended December 31, 2001. Total revenues decreased $40.9 million, or 3.4%, to $1,155.0 million in 2001 from $1,195.9 million in 2000, primarily driven by lower investment management revenues. The decrease in investment management revenues was partially offset by growth in net investment income of $52.7 million, or 11.8%, and premiums of $11.4 million, or 18.0%. Net investment income increased primarily due to a higher level of invested assets backing fixed annuity products. The average investment yield on invested assets backing fixed annuity products decreased 23 basis points in 2001, reflecting lower market interest rates on new fixed income investments. Premiums increased due to continued growth in the single premium immediate annuity business. Investment-type product charges decreased $12.7 million, or 9.2%, due to a decrease in average variable fund values, which decreased 9.1% from 2000. Mortality and expense fees as a percentage of average account balances decreased 16 basis points in 2001, while the advisory fees increased 12 basis points. Investment management revenues, commissions, and other fees decreased $90.7 million, or 16.6%, to $456.4 million in 2001 from $547.1 million in 2000. Average mutual fund assets under management decreased $3,044.0 million, or 9.3%, to $29,561.2 million in 2001 from $32,605.2 million in 2000, primarily due to market depreciation of $2,633.0 million in 2001. During 2001, redemptions decreased $842.1 million compared to the prior year. The result was net deposits of $554.5 million for the year ended December 31, 2001 compared to net redemptions of $45.5 million for the year ended December 31, 2000, an improvement of $600.0 million. Redemptions improved despite $538.0 million in redemptions for the year ended December 31, 2001, related to the sale of the full service retirement plan business. Absent the impact on assets under management of the sale of the full service retirement plan business, the mutual fund business experienced net deposits of $1,092.5 million for the same period. The improvement in net deposits is primarily due to the marketing of both retail investment management services and increased sales of institutional separate accounts and private managed accounts. Investment advisory fees decreased $16.3 million, or 8.4%, to $177.6 million in 2001 and were 0.60% and 0.59% of average mutual fund assets under management for the years ended December 31, 2001 and 2000, respectively. Underwriting and distribution fees decreased $72.1 million, or 23.7%, to $232.5 million in 2001 primarily due to the decrease in front-end load mutual fund sales and, accordingly, commission revenue. Shareholder service and other fees were $46.4 million in 2001 compared to $48.6 million in 2000, primarily reflecting lower assets under management. Total benefits and expenses decreased $62.0 million, or 6.2%, to $941.1 million in 2001 from $1,003.1 million in 2000. Benefits to policyholders increased $70.3 million, or 18.9%, primarily due to an increase in interest credited on fixed annuity account balances of $50.2 million. In addition, benefits to policyholders increased due to growth in immediate annuities. Premiums on immediate annuities increased $11.3 million, or 19.1%, for the year ended December 31, 2001. Interest credited on fixed annuity account balances increased primarily due to higher average fixed annuity account balances in 2001. In addition to the increase in average fixed annuity account balances, the average interest credited rate on fixed annuity account balances increased 19 basis points in 2001. The average interest credited rate pattern is dependent upon the general trend of market interest rates, frequency of credited rate resets, bonus interest on new sales and business mix. Other operating costs and expenses decreased $128.5 million, or 23.2%, to $424.4 million in 2001 from $552.9 million in 2000. The decrease was primarily due to a decrease in 19 JOHN HANCOCK FINANCIAL SERVICES, INC. operating expenses. Cost savings in the mutual fund business were driven by company wide cost reduction programs and the sale of the full service retirement plan business. The commission expenses incurred in the mutual funds business decreased primarily due to lower front-end load charge mutual fund sales and lower deferred sales charges due to lower redemptions. Amortization of deferred policy acquisition costs decreased $3.8 million, or 4.8%, to $75.0 million in 2001 from $78.8 million in 2000, largely due to favorable lapse and separate account experience in the variable annuity product line. The segment's effective tax rate was 30.6% and 33.2% in 2001 and 2000, respectively. The decrease in the effective tax rate is primarily due to increased dividend received deductions in variable annuity separate accounts and a one-time tax charge in 2000 associated with the repatriation of the mutual fund business' United Kingdom subsidiary. Amortization of goodwill did not change from the prior year. No new acquisitions were entered into by the Asset Gathering Segment in 2001. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income was $128.8 million in 2000, an increase of $13.7 million, or 11.9%, from $115.1 million in 1999. Annuity segment after-tax operating income increased $20.5 million, or 30.6%, primarily due to an increase in investment spread and higher invested assets on fixed annuity products, partially offset by a decrease in after-tax operating income in the variable annuity business. Spreads increased 18 basis points to 2.28% for the year ended December 31, 2000. Mutual fund segment after-tax operating income decreased $0.6 million, or 1.3%, primarily due to an increase in operating expenses, partially offset by a 1.0% increase in management advisory fees. Total revenues increased $138.6 million, or 13.1%, to $1,195.9 million in 2000 from $1,057.3 million in 1999. Premiums increased $46.2 million, or 268.6%, due to increased sales of immediate fixed annuities with life contingencies. Investment-type product charges increased $17.7 million, or 14.7%, due to growth in average variable annuity liabilities, which increased 3.6% from 1999 and increased fees earned on surrenders. Mortality and expense fees as a percentage of average account balances increased 6 basis points in 2000. Net investment income increased $57.2 million, or 14.7%, primarily due to a higher level of invested assets backing fixed annuity products, and an increase in the average investment yield on invested assets backing fixed annuity products. The average investment yield on invested assets backing fixed annuity products increased 43 basis points from 1999, reflecting higher market interest rates on new fixed income investments. Investment management revenues, commissions, and other fees increased $18.3 million, or 3.5%, to $547.1 million in 2000 from $528.8 million in 1999. Average mutual fund assets under management decreased $742.8 million, or 2.2%, to $32,605.2 million in 2000 from $33,348.0 million in 1999, primarily due to market depreciation of $476.4 million in 2000. During 2000, sales increased $1,950.9 million and redemptions decreased $989.2 million compared to the prior year. The result was net redemptions of $45.5 million for the year ended December 31, 2000 compared to net redemptions of $3,095.6 million for the year ended December 31, 1999, an improvement of $3,050.1 million. The improvement in sales and redemptions is primarily due to the marketing of retail investment management services in addition to the launch of a multi-sector fund in September 2000 and lower redemptions in the financial sector funds and private managed accounts from the prior year. Investment advisory fees decreased $6.4 million, or 3.1%, to $193.9 million in 2000 and were 0.59% and 0.61% of average mutual fund assets under management for the years ended December 31, 2000 and 1999, respectively. The decline in the investment advisory fee rate occurred primarily because fixed income assets, which bear a lower advisory fee than equity assets, increased as a percentage of total assets. Underwriting and distribution fees increased $25.7 million, or 9.2%, to $304.6 million in 2000 primarily due to the increase in front-end load mutual fund sales, and accordingly, commission revenue. The increase in front-end load charges was partially offset by a decrease in deferred sales charges due to improved retention of existing accounts. Shareholder service and other fees were $48.6 million in 2000 compared to $49.6 million in 1999, primarily reflecting lower assets under management. Total benefits and expenses increased $121.0 million, or 13.7%, to $1,003.1 million in 2000 from $882.1 million in 1999. Benefits to policyholders increased $72.0 million, or 24.1%, primarily due to an increase in benefits paid on immediate annuities and interest credited on fixed annuity account balances. The increase in benefits paid on immediate annuities is the result of increased premiums in this business. Premiums on immediate annuities increased $45.0 million, or 316.9%, for the year ended December 31, 2000. Interest credited on fixed annuity account balances increased primarily due to higher average fixed annuity account balances of $5,211.6 million in 2000, as compared to $4,862.2 million in 1999. In addition to the increase in average fixed annuity account 20 JOHN HANCOCK FINANCIAL SERVICES, INC. balances, the average interest credited rate on fixed annuity account balances increased by 25 basis points in 2000 from the prior year. The average interest credited rate pattern is dependent upon the general trend of market interest rates, frequency of credited rate resets, bonus interest on new sales and business mix. Deferred fixed annuities' interest credited rates generally are reset annually on the policy anniversary. Other operating costs and expenses increased $23.6 million, or 4.5%, to $552.9 million in 2000 from $529.3 million in 1999. The increase was primarily due to an increase in the commission fees incurred in the mutual funds business, primarily the result of increased front-end load charge mutual fund sales. In addition, other operating costs and expenses increased due to increased commission expense in Signator, partially offset by a decrease in the annuities business. The increase in other operating costs were partially offset by additional deferrals of acquisition expenses in the annuities business. Amortization of deferred policy acquisition costs increased $25.4 million, or 47.6%, to $78.8 million in 2000 from $53.4 million in 1999, primarily due to poor separate account performance and increased surrenders in the variable annuities business which accelerated current amortization. The segment's effective tax rate was 33.2% and 34.3% in 2000 and 1999, respectively. Amortization of goodwill increased $0.1 million in 2000 as compared to 1999. No new acquisitions were entered into by the Asset Gathering Segment in 2000. 21 JOHN HANCOCK FINANCIAL SERVICES, INC. Guaranteed and Structured Financial Products Segment The following table presents certain summary financial data relating to the Guaranteed and Structured Financial Products Segment for the periods indicated.
For the Years Ended December 31 -------------------------------- 2001 2000 1999 -------- -------- -------- (in millions) Operating Results: Revenues Premiums ......................................................... $ 899.9 $ 763.4 $ 463.7 Investment-type product charges .................................. 57.3 67.3 79.5 Net investment income ............................................ 1,835.6 1,743.2 1,681.4 Net realized investment and other gains (losses), net (1) ........ -- -- (31.2) Other revenue .................................................... 0.3 0.4 0.6 -------- -------- -------- Total revenues ................................................ 2,793.1 2,574.3 2,194.0 Benefits and expenses: Benefits to policyholders, excluding amounts related to net realized investment and other gains (losses) credited to participating pension contractholders ......................... 2,328.7 2,134.4 1,785.4 Other operating costs and expenses ............................... 60.1 73.0 85.8 Amortization of deferred policy acquisition costs ................ 2.4 2.6 3.1 Dividends to policyholders ....................................... 36.1 43.5 25.9 -------- -------- -------- Total benefits and expenses ................................... 2,427.3 2,253.5 1,900.2 Segment pre-tax operating income (1) ................................ 365.8 320.8 293.8 Income taxes ........................................................ 121.6 108.7 91.4 -------- -------- -------- Segment after-tax operating income (1) .............................. 244.2 212.1 202.4 After-tax adjustments: (1) Net realized investment and other gains (losses), net ............ (76.9) (40.5) 58.4 Restructuring charges ............................................ (1.2) (2.6) (0.6) Group pension dividend transfer................................... -- 5.7 (205.8) Demutualization expenses ......................................... -- 0.4 (16.1) Other demutualization related costs .............................. -- (1.7) (1.1) Surplus tax ...................................................... 2.6 6.5 (6.5) -------- -------- -------- Total after-tax adjustments ................................... (75.5) (32.2) (171.7) -------- -------- -------- GAAP Reported: Income before cumulative effect of accounting changes ............ 168.7 179.9 30.7 Cumulative effect of accounting changes, net of tax .............. (1.2) -- -- -------- -------- -------- Net income .......................................................... $ 167.5 $ 179.9 $ 30.7 ======== ======== ======== Amortization of goodwill, net of tax ................................ -- -- -- -------- -------- -------- Net income before amortization of goodwill .......................... $ 167.5 $ 179.9 $ 30.7 ======== ======== ========
22 JOHN HANCOCK FINANCIAL SERVICES, INC.
For the Years Ended December 31 ------------------------------- 2001 2000 1999 -------- -------- -------- (in millions) Other Data: Segment after-tax operating income Spread-based products GIC's and funding agreements .............................. $ 163.7 $ 133.1 $ 131.5 Single premium annuities .................................. 57.0 45.5 33.2 Fee-based products ........................................... 23.5 33.5 37.7 Statutory premiums and deposits (2) Spread-based products GICs and funding agreements ............................... 4,718.8 4,457.3 5,217.4 Single premium annuities .................................. 893.6 741.6 451.8 Fee-based products Participating contracts and conversion annuity contracts .. 468.9 467.0 527.9 Separate account GICs ..................................... 77.4 50.3 615.7 Other separate account contracts .......................... 139.3 242.6 272.7
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. (2) Statutory data has been derived from the annual statements, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Segment after-tax operating income was $244.2 million in 2001, an increase of $32.1 million, or 15.1% from $212.1 million in 2000. Spread-based products' segment after-tax operating income increased $42.1 million, or 23.6%, to $220.7 million primarily due to higher investment spreads as a result of growth in the average invested assets backing spread-based products, partially offset by a 15 basis point decline in the interest rate margin. Fee-based products' segment after tax operating income decreased $10.0 million, or 29.9%, to $23.5 million in 2001 from $33.5 million in 2000. The decrease was primarily due to a decline in average reserves of $1,710.0 million to $9,274.3 million in 2001 from $10,984.3 million in 2000, resulting from the withdrawal of several contracts from the Structured Separate Accounts and the transfer of non-participating annuities from the fee-based business to the spread-based business during 2000. Total revenues increased $218.8 million, or 8.5%, to $2,793.1 million in 2001 from $2,574.3 million in 2000, largely driven by growth in premiums and net investment income. Premiums increased $136.5 million, or 17.9% to $899.9 million in 2001 from $763.4 million in 2000, driven by higher single premium annuity sales. Investment-type product charges for fee-based products declined to $47.7 million for 2001, a decrease of $13.6 million, or 22.2%, from $61.3 million in 2000 due to lower expense charges on participating contracts. Investment-type product charges were 0.51% and 0.56% of average fee-based policy reserves in 2001 and 2000, respectively. Net investment income increased $92.4 million, or 5.3%, to $1,835.6 million in 2001 compared to $1,743.2 million in 2000, mainly due to an increase of interest earned on higher asset balances on spread-based products. Average invested assets backing spread-based products increased $3,848.3 million, or 22.8%, to $20,728.1 million in 2001 from $16,879.8 million in 2000 as a result of increased sales of spread-based products. The average investment yield on these invested assets decreased to 7.66% in 2001 compared to 8.64% in 2000, as a result of declining interest rates. Total benefits and expenses increased $173.8 million, or 7.7%, to $2,427.3 million in 2001 from $2,253.5 million in 2000. The increase was primarily due to increased sales of single premium annuity contracts. Benefits to policyholders also increased due to interest credited on account balances for spread-based products, which increased $77.9 million, or 6.7%, to $1,243.1 million in 2001, from $1,165.2 million in 2000. The change was driven by higher average account balances for spread-based products of $3,382.1 million, or 20.9%, to $19,567.3 million in 2001 from $16,185.2 million in 2000. Average account balances increased, despite a decrease in the average interest credited rate on account balances for spread-based products, which was 6.35% in 2001 compared to 7.18% in 2000. In addition, the benefits to policyholders of $2,328.7 million increased $194.3 million, or 9.1%, from $2,134.4 million in 2000 as the result of increased single premium annuity sales. Other operating costs and expenses were 23 JOHN HANCOCK FINANCIAL SERVICES, INC. $60.1 million in 2001, a decrease of $12.9 million, or 17.7%, from $73.0 million in 2000, primarily due to lower management fee expenses and lower systems expenses related to projects completed during 2000. Dividends of $36.1 million in 2001 decreased $7.4 million, or 17.0%, from $43.5 million in 2000, reflecting lower earnings on participating contractholders' accounts. The segment's effective tax rate was 33.3% in 2001, as compared to 33.9% in 2000. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income was $212.1 million in 2000, an increase of $9.7 million, or 4.8% from $202.4 million in 1999. Spread-based products' segment after-tax operating income increased $13.9 million, or 8.4%, to $178.6 million primarily due to higher investment spread as a result of an increase in average invested assets backing spread-based products. Fee-based products' segment after-tax operating income decreased $4.2 million, or 11.1%, to $33.5 million in 2000 from $37.7 million in 1999 primarily due to lower separate account GIC fees partially offset by increased gains from non-participating annuities. Total revenues increased $380.3 million, or 17.3%, to $2,574.3 million in 2000 from $2,194.0 million in 1999, primarily due to a $299.7 million increase in premiums. During 2000, we sold two large single premium annuity contracts totaling $509.0 million. Investment-type product charges were $67.3 million for 2000, a decrease of $12.2 million, or 15.3%, primarily due to lower general account expense recoveries and slower separate account GIC sales in the current year. Investment-type product charges were 0.56% and 0.65% of average fee-based policy reserves in 2000 and 1999, respectively. The decrease primarily reflects lower expense charges on participating contracts and the impact of slower sales in the current year. Net investment income increased $61.8 million, or 3.7%, to $1,743.2 million in 2000 compared to $1,681.4 million in 1999, primarily as a result of a higher yield on average invested assets backing spread-based products. Average invested assets backing spread-based products decreased $196.5 million, or 1.2%, to $16,879.8 million in 2000 from $17,076.3 million in 1999 reflecting the termination of the short-term funding agreements in 1999, largely offset by asset growth in 2000. The average investment yield on these invested assets increased to 8.64% in 2000 compared to 8.10% in 1999, reflecting the reinvestment of proceeds from lower-yielding assets into relatively higher-yielding securities. Realized investment losses associated with the termination of the short-term funding agreement business in 1999 were not repeated in 2000. Total benefits and expenses increased $353.3 million, or 18.6%, to $2,253.5 million in 2000 from $1,900.2 million in 1999. The increase was primarily due to a $349.1 million increase in benefits to policyholders as a result of increased sales of single premium annuity contracts. Benefits to policyholders also includes interest credited on account balances for spread-based products, which was $1,165.1 million in 2000, an increase of $46.8 million, or 4.2%, from $1,118.3 million in 1999. Excluding interest credited in 1999 on short-term funding agreements that were terminated in that year, the interest credited for spread-based products increased $102.9 million, or 9.7%. The increase was primarily due to an increase in average account balances for spread-based products of $810.9 million, excluding short-term funding agreement balances from 1999, to $16,185.2 million in 2000 from $15,374.4 million in 1999 and an increase in the average interest credited rate on account balances for spread-based products, which was 7.18% in 2000 compared to 6.81% in 1999. The increase in the average interest credited rate on account balances for spread-based products was primarily due to the sale of GICs and funding agreements with higher average interest credited rates. Other operating costs and expenses were $73.0 million in 2000, a decrease of $12.8 million, or 14.9%, from $85.8 million in 1999. The decrease was primarily due to lower deficiency interest charges. Dividends of $43.5 million in 2000, increased $17.6 million, or 68.0%, from $25.9 million in 1999, reflecting higher earnings on participating contractholders' accounts. The segment's effective tax rate was 33.9% in 2000, as compared to 31.1% in 1999. 24 JOHN HANCOCK FINANCIAL SERVICES, INC. Investment Management Segment The following table presents certain summary financial data relating to the Investment Management Segment for the periods indicated.
For the Years Ended December 31, ---------------------------------- 2001 2000 1999 --------- --------- --------- (in millions) Operating Results: Revenues Net investment income .............................. $ 28.7 $ 22.7 $ 45.9 Net realized investment and other gains (losses), net (1) ......................................... 3.2 3.2 3.5 Investment management revenues, commissions, and other fees ..................... 111.3 186.1 140.2 Other revenue ...................................... -- -- 0.3 --------- --------- --------- Total revenues .................................. 143.2 212.0 189.9 Benefits and expenses Other operating costs and expenses ................. 96.4 132.7 127.2 --------- --------- --------- Total benefits and expenses ........................ 96.4 132.7 127.2 Segment pre-tax operating income (1) .................. 46.8 79.3 62.7 Income taxes .......................................... 17.0 32.5 25.4 --------- --------- --------- Segment after-tax operating income (1) ................ 29.8 46.8 37.3 After-tax adjustments: (1) Net realized investment and other gains (losses), net ............................. (0.2) 4.4 2.0 Restructuring charges, net of tax .................. (0.9) -- -- Surplus tax ........................................ 0.1 -- -- --------- --------- --------- Total after-tax adjustments, net of tax ............ (1.0) 4.4 2.0 --------- --------- --------- GAAP Reported: Income before cumulative effect of accounting changes .............................. 28.8 51.2 39.3 Cumulative effect of accounting changes, net of tax ...................................... (0.2) -- (0.1) --------- --------- --------- Net income ............................................ $ 28.6 $ 51.2 $ 39.2 ========= ========= ========= Amortization of goodwill, net of tax .................. 0.5 0.8 0.7 --------- --------- --------- Net income before amortization of goodwill ............ $ 29.1 $ 52.0 $ 39.9 ========= ========= ========= Other Data: Assets under management, end of year (2) .............. $28,921.8 $32,651.6 $40,211.7
- ---------- (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 $151.3 million, $106.9 million, and $164.5 million as of December 31, 2001, 2000, and 1999, respectively. 25 JOHN HANCOCK FINANCIAL SERVICES, INC. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Segment after-tax operating income was $29.8 million in 2001, a decrease of $17.0 million, or 36.3%, from $46.8 million in 2000. The decrease was primarily due to lower investment advisory fees, resulting from the non-recurrence of prior-year one-time events and from lower average assets under management in 2001, partially offset by lower operating expenses in 2001. Total revenues decreased $68.8 million, or 32.6%, to $143.2 million in 2001 from $212.0 million in 2000. Net investment income was $28.7 million in 2001, an increase of $6.0 million from $22.7 million in 2000. Investment management revenues, commissions, and other fees decreased $74.8 million, or 40.2% in 2001, due primarily to a decrease in investment advisory fees, which decreased $75.9 million to $104.7 million compared to $180.6 million reported in 2000. The decrease in investment advisory fees was primarily due to $60.6 million of non-recurring prior year items; $45.3 million in incentive fees received in connection with the restructuring of timber management contracts, and $15.3 million in performance fees earned by the mezzanine fund manager. Also, asset-based advisory fees decreased $17.2 million at Independence Investment LLC on lower average assets under management resulting from net redemptions and market declines during the year. Investment advisory fees were .36% and .50% of average advisory assets under management in 2001 and 2000, respectively, for the segment. Mortgage origination and servicing fees were $6.6 million compared to $5.4 million in 2000. Net realized investment and other gains (losses) were flat at $3.2 million for both 2001 and 2000. Other operating costs and expenses were $96.4 million in 2001, a decrease of $36.3 million, or 27.4%, from $132.7 million in 2000. The decrease was primarily due to two non-recurring prior year amounts; $15.7 million in incentive compensation payments related to the receipt of incentive fees on timber management contracts and $9.1 million in performance fees paid for the management of the mezzanine fund. Operating expenses were down $14.7 million at Independence Investment LLC, based on lower compensation levels and the results of an overall expense management program. Operating expenses were down $5.2 million at John Hancock Real Estate Finance, primarily from lower borrowing costs due to lower lending activity and lower interest rates, and also from savings from on-going expense management efforts. The segment's effective tax rate was 36.2% and 41.0% in 2001 and 2000, respectively. The decrease in the effective tax rate is primarily due to lower state taxes associated with the conversion of Independence Investment Associates to a limited liability corporation. The Investment Management Segment of the Company manages invested assets for customers under various fee-based arrangements. We use a variety of special purpose entities to hold assets under management for customers under these arrangements. These entities include limited partnership funds, separate investment accounts, and collateralized bond obligations (CBOs) and collateralized debt obligations (CDOs). In certain cases other business units of the Company make investments in the equity of these entities to support their insurance liabilities. The partnership results are consolidated with the Company's financial results where the Company also owns a controlling majority interest of the partnership, otherwise they are shown on the equity method. The separate investment accounts are included in the Company's consolidated financial statements as Separate Account Assets and Separate Account Liabilities. Results of two of the CBOs are consolidated with the Company's financial results, while the remaining CBOs and CDOs are not consolidated since the Company's equity interest is minor and the Company does not guarantee payment of the CBOs' or CDOs' liabilities. These transactions have no impact on the Company's liquidity and capital resources. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income was $46.8 million in 2000, an increase of $9.5 million, or 25.5%, from $37.3 million in 1999. The increase was primarily due to higher investment advisory fees. Total revenues increased $22.1 million, or 11.6%, to $212.0 million in 2000 from $189.9 million in 1999. Net investment income was $22.7 million in 2000, a decrease of $23.2 million from $45.9 million for 1999. The decrease in net investment income was partially due to the purchased equity interest in collateralized bond obligations by other business segments of $31.7 million. Offsetting this decrease was a $7.8 million increase in interest income on mortgage loans held for sale. Investment management revenues, commissions, and other fees increased $45.9 million, or 32.7% in 2000, due primarily to an increase in investment advisory fees, which increased $47.0 million to $180.6 million compared to $133.6 million reported in 1999. The increase in investment advisory fees was primarily due to the $45.3 million in incentive fee receipts in connection with the restructuring of timber management contracts and $15.3 million in performance fees earned by the mezzanine fund manager. Investment 26 JOHN HANCOCK FINANCIAL SERVICES, INC. advisory fees were .50% and .34% of average advisory assets under management in 2000 and 1999, respectively. Mortgage origination and servicing fees were $5.4 million compared to $6.6 million in 1999. Realized investment gains decreased $0.3 million due to lower securitization activity in 2000. Other operating costs and expenses were $132.7 million in 2000, an increase of $5.5 million, or 4.3%, from $127.2 million in 1999. The increase was primarily due to $15.7 million in incentive compensation payments related to the receipt of incentive fees on timber management contracts and $9.1 million in performance fees paid for the management of the mezzanine fund. Offsetting these increases was a $19.8 million transfer of expenses on equity interest in collateralized bond obligations to the other business segments owning these assets. The segment's effective tax rate on operating income was 41.0% in 2000 and 1999. The effective tax rate for the Investment Management Segment is higher than our other business segments due to the state tax on certain subsidiaries. 27 JOHN HANCOCK FINANCIAL SERVICES, INC. Corporate and Other Segment The following table presents certain summary financial data relating to the Corporate and Other Segment for the periods indicated.
For the Years Ended December 31 ------------------------------- 2001 2000 1999 ------- ------- ------- (in millions) Operating Results: Segment after-tax operating income (loss) (1) International insurance operations ..................... $ 51.8 $ 32.2 $ 26.0 Corporate operations ................................... 23.7 62.7 31.2 Non-core businesses .................................... 9.2 7.6 10.6 ------- ------- ------- Total ..................................................... 84.7 102.5 67.8 After-tax adjustments (1): Net realized investment and other gains (losses), net .. 13.3 93.5 (42.1) Class action lawsuit ................................... (19.5) -- (91.1) Restructuring charges .................................. (3.3) (1.3) (0.5) Demutualization expenses ............................... -- (9.4) (3.2) Other demutualization related costs .................... -- (0.2) (0.2) Workers' compensation reinsurance reserve .............. -- -- (133.7) Surplus tax ............................................ 0.9 18.1 (2.2) ------- ------- ------- Total after-tax adjustments ............................... (8.6) 100.7 (273.0) ------- ------- ------- GAAP Reported: Income (loss) before cumulative effect of accounting changes ............................................. $ 76.1 $ 203.2 $(205.2) Cumulative effect of accounting changes, net of tax .... (2.6) -- -- ------- ------- ------- Net income (loss) ......................................... $ 73.5 $ 203.2 $(205.2) ======= ======= ======= Amortization of goodwill, net of tax ...................... 5.0 8.6 1.2 ------- ------- ------- Net income (loss) before amortization of goodwill ............................................ $ 78.5 $ 211.8 $(204.0) ======= ======= =======
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's Discussion and Analysis. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Segment after-tax operating income from international operations was $51.8 million for 2001, an increase of $19.6 million from $32.2 million reported in 2000. The primary driver of the increase was Maritime with an increase in after-tax operating income of $20.7 million favorable mortality, morbidity, expense and asset margins improved earnings by $15.1 million. On October 1, 2001, Maritime purchased Royal & Sun Alliance Financial (RSAF). Accordingly, Maritime's results include RSAF's fourth quarter results of $2.4 million. Maritime also benefited from a reduction in the Canadian statutory tax rate in 2001. Segment after-tax operating income from corporate operations was $23.7 million for 2001, a decrease of $39.0 million from $62.7 million reported in 2000. The decrease was primarily due to nonrecurring investment income on the proceeds from the IPO in 2000, lower investment income on corporate surplus due to greater surplus requirements in our other business lines and the negative impact to net investment income associated with both the stock buyback program and dividends paid to shareholders. Partially offsetting these negative items was a significant improvement in the performance of our corporate owned life insurance plans as we transferred the asset backing the plans out of equity securities and into fixed maturities. Segment after-tax operating income from non-core businesses was $9.2 million in 2001, an increase of $1.6 million from $7.6 million in 2000. We continue with the orderly run-off of business in this segment. 28 JOHN HANCOCK FINANCIAL SERVICES, INC. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Segment after-tax operating income from international insurance operations was $32.2 million for 2000, an increase of $6.2 million from $26.0 million for 1999. On October 1, 1999, Maritime purchased Aetna Holdings Canada Limited (Aetna). Accordingly, Aetna's results of operations are included with Maritime's from the date of the acquisition. The increase in segment after-tax operating income primarily resulted from the inclusion of Aetna's operations for a full year in 2000 compared to one quarter in 1999. Segment after-tax operating income from corporate operations was $62.7 million in 2000, an increase of $31.5 million from $31.2 million in 1999. During the fourth quarter of 1999, a corporate account was formed and all corporate type assets, including certain tax advantaged assets, were moved from the other segments to the Corporate and Other Segment. Tax credits, associated with the tax advantaged assets, were $15.9 million in 2000 and $0.5 million in 1999. In addition, as part of this move, the group pension participating contractholders were reimbursed at fair market value for these contracts. Because of this transaction, in 2000 there was no longer a need to credit participating policyholders with a share of the change in these assets which amounted to a charge to this segment of $13.7 million for the first nine months of 1999. Segment after-tax operating income from non-core businesses was $7.6 million in 2000, a decrease of $3.0 million from $10.6 million in 1999. The decrease was due primarily to lower net investment income resulting from the previously described disposals. Amortization of goodwill increased $7.4 million in 2000, as compared to 1999, due to the acquisition of Aetna in the fourth quarter of 1999. 29 JOHN HANCOCK FINANCIAL SERVICES, INC. General Account Investments Overall Composition of the General Account Invested assets, excluding separate accounts, totaled $59.0 billion and $52.2 billion as of December 31, 2001 and December 31, 2000, respectively. The portfolio composition has not significantly changed at December 31, 2001 as compared to December 31, 2000. The following table shows the composition of investments in the general account portfolio.
As of December 31 ------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------ Carrying % of Carrying % of Value Total Value Total ------------------------------------------------------------------ (in millions) (in millions) Fixed maturity securities (1)....... $41,106.8 69.8% $32,573.4 62.4% Mortgage loans (2).................. 10,993.2 18.6 10,900.0 20.9 Real estate......................... 442.4 0.7 519.0 1.0 Policy loans (3).................... 2,008.2 3.4 1,969.2 3.8 Equity securities................... 1,190.9 2.0 1,372.3 2.6 Other invested assets............... 1,786.1 3.0 1,393.7 2.6 Short-term investments.............. 153.5 0.3 214.0 0.4 Cash and cash equivalents (4)....... 1,313.7 2.2 3,280.0 6.3 ------------------------------------------------------------------ Total invested assets........... $58,994.8 100.0% $52,221.6 100.0% ==================================================================
(1) In addition to bonds, the fixed maturity security portfolio contains redeemable preferred stock with a carrying value of $695.0 million and $735.3 million as of December 31, 2001 and December 31, 2000, respectively. The total fair value of the fixed maturity security portfolio was $41,090.9 and $32,393.5 million, at December 31, 2001 and December 31, 2000, respectively. (2) The fair value for the mortgage loan portfolio was $10,216.9 million and $11,359.6 million as of December 31, 2001 and December 31, 2000, respectively. (3) Policy loans are secured by the cash value of the underlying life insurance policies and do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. (4) Cash and cash equivalents are included in total invested assets in the table above for the purposes of calculating yields on the income producing assets for the Company. Consistent with the nature of the Company's product liabilities, assets are heavily oriented toward fixed maturity securities. The Company determines the allocation of assets primarily on the basis of cash flow and return requirements of its products and by the level of investment risk. Fixed Maturity Securities. The fixed maturity securities portfolio is predominantly comprised of low risk, investment grade, publicly and privately traded corporate bonds and senior tranches of asset-backed securities (ABS) and mortgage-backed securities (MBS), with the balance invested in government bonds. The fixed maturity securities portfolio also includes redeemable preferred stock. As of December 31, 2001, fixed maturity securities represented 69.8% of general account invested assets with a carrying value of $41.1 billion, comprised of 57% public securities and 43% private securities. Each year, the Company directs the majority of net cash inflows into investment grade fixed maturity securities. Typically, between 5% and 15% of funds allocated to fixed maturity securities are invested in below-investment-grade bonds while maintaining a policy to limit the overall level of these bonds to no more than 10% of invested assets and the majority of that balance in the BB category. 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. 30 JOHN HANCOCK FINANCIAL SERVICES, INC. The following table shows the composition by issuer of the fixed maturity securities portfolio. Fixed Maturity Securities -- By Issuer
As of December 31 ------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------ Carrying % of Carrying % of Value Total Value Total ------------------------------------------------------------------ (in millions) (in millions) Corporate securities............................... $32,628.5 79.4% $25,193.6 77.4% MBS/ABS............................................ 6,326.9 15.4 5,483.5 16.8 U.S. Treasury securities and obligations of U.S. government agencies........................ 299.9 0.7 205.8 0.6 Debt securities issued by foreign governments..................................... 1,729.9 4.2 1,549.9 4.8 Obligations of states and political subdivisions.................................... 121.6 0.3 140.6 0.4 ------------------------------------------------------------------ Total........................................ $41,106.8 100.0% $32,573.4 100.0% ==================================================================
In keeping with the investment philosophy of tightly managing interest rate risk, the Company's MBS & ABS holdings are heavily concentrated in commercial MBS where the underlying loans are largely call protected, which means they are not pre-payable without penalty prior to maturity at the option of the issuer. By investing in MBS and ABS securities with relatively predictable repayments, the Company adds high quality, liquid assets to our portfolios without incurring the risk of cash flow variability. The Company believes the portion of our MBS/ABS portfolio subject to prepayment risk as of December 31, 2001 and December 31, 2000 was limited to 10.1% and 3.3% of our total MBS/ABS portfolio and 1.6% and 0.6% of our total fixed maturity securities holdings, respectively. The increase is due to a $500 million portfolio in a new duration neutral strategy, implemented in 2000 and used in the corporate segment as a liquid alternative to a cash portfolio. The Securities Valuation Office (SVO) of the National Association of Insurance Commissioners evaluates all public and private bonds purchased as investments by insurance companies. The SVO assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating, and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as S&P and Moody's (i.e., BBB-/Baa3 or higher), while Categories 3-6 are the equivalent of below-investment grade securities. SVO ratings are reviewed and may be revised at least once a year. The following table sets forth the SVO ratings for the bond portfolio along with an equivalent S&P rating agency designation. The majority of the fixed maturity investments are investment grade, with 88.3% of fixed maturity investments invested in Category 1 and 2 securities as of December 31, 2001. Below investment grade bonds were 11.7% of fixed maturity investments and 8.0% of total invested assets as of December 31, 2001. This allocation reflects the Company strategy of avoiding the unpredictability of interest rate risk in favor of relying on the Company's bond analysts' ability to better predict credit or default risk. The bond analysts operate in an industry-based, team-oriented structure that permits the evaluation of a wide range of below investment grade offerings in a variety of industries resulting in a well-diversified high yield portfolio. Valuation techniques for the bond portfolio vary by security type and the availability of market data. Pricing models and their underlying assumptions impact the amount and timing on unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. External pricing services are used where available, broker dealer quotes are used for thinly traded securities, and a spread pricing matrix is used when price quotes are not available. When utilizing the spread pricing matrix, securities are valued by utilizing a discounted cash flow method where each bond is assigned a spread, that is added to the current U.S. Treasury rates to discount the cash flows of the security. The spread assigned to each security is derived from external market data. Certain market events that could impact the valuation of securities include issuer credit ratings, business climate, management changes, litigation, and government actions among others. The Company's pricing analysts take appropriate actions to reduce valuations of securities where such an event occurs which negatively impacts the 31 JOHN HANCOCK FINANCIAL SERVICES, INC. securities' value. To the extent that bonds have longer maturity dates, management's estimate of fair value may involve greater subjectivity since they involve judgment about events well into the future. A majority (59.1%) 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 near default was $393.1 million and $216.7 million as of December 31, 2001 and 2000, respectively. For the years ended December 31, 2001 and 2000, $2.5 million and $2.6 million of interest on bonds near default was included in accrued investment income. It is the Company's policy to reverse any accrued investment income and cease accruing interest income on bonds in default and to only accrue interest income on bonds near default that the Company expects to collect. Management judgment is used and the actual results could be materially different. Fixed Maturity Securities -- By Credit Quality
As of December 31 ------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------ SVO S&P Equivalent Carrying % of Carrying % of Rating (1) Designation (2) Value (3) Total Value (3) Total - ------------------------------------------------------------------------------------------------------------------------ (in millions) (in millions) 1 AAA/AA/A..................... $16,876.8 41.8% $14,614.2 45.9% 2 BBB.......................... 18,800.2 46.5 12,877.8 40.5 3 BB........................... 2,796.5 6.9 2,793.3 8.8 4 B............................ 1,102.4 2.7 1,066.4 3.3 5 CCC and lower................ 442.8 1.1 269.7 0.8 6 In or near default........... 393.1 1.0 216.7 0.7 ------------------------------------------------------------------------ Total........................ $40,411.8 100.0% $31,838.1 100.0% ========================================================================
(1) For securities that are awaiting an SVO rating, the Company has assigned a rating based on an analysis that it believes is equivalent to that used by the SVO. (2) Comparisons between SVO and S&P ratings are published by the National Association of Insurance Commissioners. (3) Does not include redeemable preferred stock with a carrying value of $695.0 million and $735.3 million as of December 31, 2001 and 2000, respectively. Mortgage Loans. As of December 31, 2001 and December 31, 2000, the Company held mortgage loans with a carrying value of $11.0 billion and $10.9 billion, respectively, including $2.5 billion, respectively at each period end of agricultural loans and $1.3 billion of loans managed by Maritime, of which $0.6 billion at each period end were government-insured by the Canada Mortgage and Housing Corporation (CMHC). The following table shows the distribution of our mortgage loan portfolio by property type as of the dates indicated. Our commercial mortgage loan portfolio consists primarily of non-recourse fixed-rate mortgages on fully, or nearly fully, leased commercial properties.
As of December 31 ----------------------------------------------------------------------- 2001 2000 ----------------------------------------------------------------------- Carrying % of Carrying % of Value Total Value Total ----------------------------------------------------------------------- (in millions) (in millions) Apartment............................................ $ 2,308.2 21.0% $ 2,393.1 22.0% Office Buildings..................................... 2,744.9 25.0 2,465.1 22.6 Retail............................................... 1,621.0 14.6 1,623.7 14.9 Agricultural......................................... 2,472.7 22.5 2,511.1 23.0 Industrial........................................... 962.0 8.8 905.8 8.3 Hotels............................................... 464.0 4.2 414.7 3.8 Multi-Family......................................... 60.8 0.6 71.8 0.7 Mixed Use............................................ 107.2 1.0 274.7 2.5 Other................................................ 252.4 2.3 240.0 2.2 ----------------------------------------------------------------------- Total.......................................... $10,993.2 100.0% $10,900.0 100.0% =======================================================================
32 JOHN HANCOCK FINANCIAL SERVICES, INC. The following table shows the distribution of our mortgage loan portfolio by geographical region, as defined by the American Council of Life Insurers (ACLI). Mortgage Loans -- By ACLI Region
As of December 31 -------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------- Number Carrying % of Carrying % of of Loans Value Total Value Total -------------------------------------------------------------------------- (in millions) (in millions) East North Central................................. 137 $ 1,061.7 9.7% $ 1,101.0 10.1% East South Central................................. 38 457.7 4.2 530.4 4.9 Middle Atlantic.................................... 114 1,478.2 13.4 1,481.3 13.6 Mountain........................................... 88 414.3 3.8 401.9 3.7 New England........................................ 121 884.8 8.0 838.6 7.7 Pacific............................................ 258 1,799.5 16.4 1,969.5 18.0 South Atlantic..................................... 196 2,082.3 18.9 2,048.6 18.8 West North Central................................. 70 382.0 3.5 368.2 3.4 West South Central................................. 142 900.2 8.2 817.2 7.5 Canada............................................. 871 1,532.5 13.9 1,343.3 12.3 -------------------------------------------------------------------------- Total........................................ 2,035 $10,993.2 100.0% $10,900.0 100.0% ==========================================================================
The allowance for losses on mortgage loans on real estate and real estate to be disposed of is maintained at a level that is adequate enough to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the allowance for losses is based on past experience, known and inherent risks, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying security, the general composition of the portfolio, current economic conditions and other factors. This evaluation is inherently subjective and is susceptible to significant changes and no assurance can be given that the allowances taken will in fact be adequate to cover all losses or that additional valuation allowances or asset write-downs will not be required in the future. The portion of the investment valuation allowance for our real estate to be disposed of was $83.6 million, or 15.9% of carrying value before reserves and $43.5 million, or 7.7% of carrying value before reserves as of December 31, 2001 and 2000, respectively. Investment Results Overall, the yield, net of investment expenses, on the general account portfolio decreased from the year ended December 31, 2000 compared to December 31, 2001. The decrease in portfolio yield in 2001 was driven primarily by the sharp drop in short-term interest rates during the year. As of December 31, 2001, we had $8.9 billion of exposure to short-term LIBOR rates, mostly created through interest rate swaps designed to match our portfolio with an increasing volume of floating rate liabilities. As a result, at least two-thirds of the decline in portfolio yields is offset dollar for dollar by declining payments on floating rate liabilities. The actual balance of cash and short-term investments declined during 2001, offsetting some of the decline in portfolio yield that would otherwise have occurred. In addition, the overall decline in interest rates during 2001 reduced yields on new acquisitions relative to those on maturing investments, as the 10-year U.S. Treasury rate averaged 101 basis points lower than in 2000 while BAA spreads narrowed by 11 basis points. The yield, net of investment expenses, on the general account portfolio increased from year ended December 31, 1999 compared to December 31, 2000. The December 31, 2000 yield benefited from higher U.S Treasury rates and relatively wide spreads in both the public and private sector. Indicative of this environment, the 10-year U.S. Treasury rate increased 34 basis points from December 31, 1999 to December 31, 2000. A similar trend was also experienced with BAA spreads during the same time period as BAA spreads increased 42 basis points. 33 JOHN HANCOCK FINANCIAL SERVICES, INC. The following table summarizes the Company's investment results for the periods indicated:
For the Years Ended December 31 -------------------------------------------------------------------------- 2001 2000(1) 1999(1) Yield Amount Yield Amount Yield Amount -------------------------------------------------------------------------- (in millions) (in millions) (in millions) General account assets-excluding policy loans Gross income ................................. 7.60% $ 4,069.4 8.27% $ 4,013.7 8.31% $ 3,761.4 Ending assets-excluding policy loans ......... 56,986.6 50,252.4 46,766.9 Policy loans Gross income ................................. 6.23% 123.9 6.07% 118.6 5.75% 109.8 Ending assets .................................. 2,008.2 1,969.2 1,938.8 Total gross income ........................... 7.55% 4,193.3 8.19% 4,132.3 8.21% 3,871.2 Less: investment expenses .................... (248.4) (267.5) (347.1) --------- --------- --------- Net investment income .................... 7.09% $ 3,944.9 7.66% $ 3,864.8 7.47% $ 3,524.1 ========= ========= =========
(1) Prior period results have been reclassified to conform with 2001 presentation due to a reclassification of investment returns related to equity indexed universal life insurance policies sold through Maritime, to benefits to policyholders. Liquidity and Capital Resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of business operations. John Hancock Financial Services, Inc. (the Company) is an insurance holding company. The assets of the Company consist primarily of the outstanding capital stock of the Life Company, John Hancock Canadian Holding Company and investments in other international subsidiaries. The Company's cash flow consists of dividends from its subsidiaries and proceeds from debt offerings offset by expenses, shareholder dividends and stock repurchases. As a holding company, the Company's ability to meet its cash requirements, including to pay interest on any debt, pay expenses related to its affairs, pay dividends on its common stock and continue to repurchase stock, substantially depends upon dividends from its subsidiaries. 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 limit is the greater of 10% of the statutory surplus or the prior calendar year's statutory net gain from operations of the Life Company. 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 March and December 2001, the Commissioner of Insurance for the Commonwealth of Massachusetts approved, and the Life Company paid, dividends to JHFS in the amount of $250.0 million and $479.5 million, respectively. None of these dividends was classified as extraordinary by state regulators. The March dividend was a cash transfer and the December dividend consisted of the transfer to JHFS of the remaining portion of John Hancock Canadian Holdings Limited and certain international subsidiaries held by the Life Company. The funds from the March dividends, together with the net proceeds of the Company's 2000 stock offering, were principally used to repurchase JHFS common stock and pay $92.4 million in dividends to JHFS common shareholders. JHFS paid a dividend on its common stock of $0.31 per share on December 13, 2001 to shareholders of record as of November 16, 2001. 34 JOHN HANCOCK FINANCIAL SERVICES, INC. Sources of cash for the Company's insurance subsidiaries are from premiums, deposits and charges on policies and contracts, investment income, maturing investments, and proceeds from sales of investment assets. In addition to the need for cash flow to meet operating expenses, our liquidity requirements relate principally to the liabilities associated with various insurance, annuity, and structured investment products, and to the funding of investments in new products, processes, and technologies. Product liabilities include the payment of benefits under insurance, annuity and structured investment products and the payment of policy surrenders, withdrawals and policy loans. The Company periodically adjusts its investment policy to respond to changes in short-term and long-term cash requirements and provide adequate funds to pay benefits without forced sales of investments. The liquidity of our insurance operations is also related to the overall quality of our investments. As of December 31, 2001, $35,677.0 million, or 88.3% of the fixed maturity securities held by us and rated by Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc. (S&P) or the National Association of Insurance Commissioners were rated investment grade (BBB or higher by S&P or 1 or 2 by the National Association of Insurance Commissioners). The remaining $4,734.8 million, or 11.7% of fixed maturity investments, were rated non-investment grade. For additional discussion of our investment portfolio see the General Account Investments section on page 30 in this Management's Discussion and Analysis of Financial Condition and Results of Segment Operations. We employ an asset/liability management approach tailored to the specific requirements of each of our product lines. Each product line has an investment strategy based on the specific characteristics of the liabilities in the product line. As part of this approach, we develop investment policies and operating guidelines for each portfolio based upon the return objectives, risk tolerance, liquidity, and tax and regulatory requirements of the underlying products and business segments. Net cash provided by operating activities was $2,633.8 million, $2,042.2 million, and $1,688.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. The increase in 2001 compared to 2000 resulted primarily from an increase in premiums received of $406.5 million, net investment income received of $161.9 million, and a $78.4 million decrease in expenses partially offset by a $112.1 million increase in benefits paid. The increase in 2000 compared to 1999 resulted primarily from an increase to net income and income taxes partially offset by an increase to other assets net of other liabilities, an increase in the purchases of trading securities and a decrease in policy liabilities. Net cash used in investing activities was $6,782.9 million, $1,809.4 million and $1,996.9 million for the years ended December 31, 2001, 2000, and 1999, respectively. The increase in cash used in 2001 as compared to 2000 resulted from a larger increase in acquisitions of fixed maturities during the year ended December 31, 2001 than their sales, maturities and redemptions as compared to the prior year period. The modest decrease in net cash used in 2000 as compared to 1999 resulted primarily from almost offsetting reductions in the sales, redemptions and maturities of fixed maturities as compared to purchases of fixed maturities. Net cash provided by financing activities was $2,182.8 million, $1,229.3 million and $250.1 million, for the years ended December 31, 2001, 2000 and 1999, respectively. The increase in 2001 as compared to 2000 resulted from a $1,335.3 million increase in deposits net of cash payments made on withdrawals of universal life insurance and investment-type contracts. Deposits on such universal life insurance and investment-type contracts exceeded withdrawals by $2,324.8 million and $989.5 million for the years ended December 31, 2001 and December 31, 2000, respectively. In addition, the Company issued $776.0 million in long-term debt in 2001, including a medium-term bond issue for $500.0 million maturing in 2008. These increases were partially offset by the non-recurrence of the impact from the prior year IPO and the continuation of the treasury stock repurchase program. The increase in 2000 as compared to 1999 resulted primarily from a reduction in net cash payments made on withdrawals of universal life insurance and investment-type and the proceeds from the IPO net of cash payments to policyholders as a result of the demutualization. On October 26, 2000, the Company announced that its Board of Directors authorized a stock repurchase program, with no termination date, under which the Company was authorized to purchase up to $500 million of its outstanding common stock. On August 6, 2001, the Company's board of directors authorized a $500 million increase to the stock repurchase program, bringing the total amount authorized to be used to repurchase Company stock to $1.0 billion. Under the stock repurchase program, purchases have been and will be, made from time to time, 35 JOHN HANCOCK FINANCIAL SERVICES, INC. depending on market conditions, business opportunities and other factors, in the open market or through privately negotiated transactions. Through December 31, 2001, the Company has repurchased 18.5 million shares with a total cost of $671.6 million, of which 15.5 million shares were repurchased in 2001 at a cost of $579.8 million. Cash flow requirements also are supported by a committed line of credit of $1.0 billion and an effective shelf registration statement which provides for the issuance, from time to time, of up to $1.0 billion of the Company's debt and equity securities. The line of credit agreement provides for two facilities: one for $500 million pursuant to a 364-day commitment (subject to renewal) and a second multi-year facility for $500 million (renewable in 2005). The line of credit is available for general corporate purposes. The line of credit agreement contains various covenants, among these being that shareholders' equity meet certain requirements. To date, we have not borrowed any amounts under the line of credit. On November 29, 2001, JHFS sold, under the $1.0 billion shelf registration statement, $500.0 million in 7-year senior unsecured notes at a coupon of 5.625 percent with the proceeds used for general corporate purposes. The remaining capacity of the shelf registration is currently $500.0 million. As of December 31, 2001, we had $1,440.1 million of debt outstanding consisting of $498.6 million of medium-term bonds, $447.3 million of surplus notes, $248.1 million of Canadian debt and $246.1 million of other notes payable. The commercial paper program established at the Company has replaced the commercial paper program at its indirect subsidiary, John Hancock Capital Corporation. During 2001, the Company issued $2,740.0 million in commercial paper, none of which was outstanding at December 31, 2001. A primary liquidity concern with respect to life insurance and annuity products is the risk of early policyholder and contractholder withdrawal. The following table summarizes our annuity policy reserves and deposit fund liabilities for the contractholder's ability to withdraw funds for the indicated periods: (1)
As of December 31, ------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------ Amount % Amount % ------------------------------------------------------------------ (in millions) (in millions) Not subject to discretionary withdrawal provisions............ $27,070.5 80.6% $22,264.5 77.7% Subject to discretionary withdrawal adjustment: With market value adjustment............................... 405.6 1.2 1,230.7 4.3 At contract value.......................................... 2,319.4 6.9 1,897.3 6.6 Subject to discretionary withdrawal at contract value less surrender charge........................................... 3,784.8 11.3 3,248.6 11.4 ------------------------------------------------------------------ Total annuity reserves and deposit funds liability............ $33,580.3 100.0% $28,641.1 100.0% ==================================================================
(1) Withdrawal characteristics table amended for 2000 to include certain foreign subsidiaries. Individual life insurance policies are less susceptible to withdrawal than are individual annuity contracts because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Annuity benefits under group annuity contracts are generally not subject to early withdrawal. As indicated in the table above, there is a substantial percentage of annuity reserves and deposit fund liabilities that are not subject to withdrawal. As a matter of policy, we seek to include provisions limiting withdrawal rights from general account institutional structured investment products. These include GICs and funding agreements sold to plan sponsors where the contract prohibits the contractholder from making withdrawals other than on a scheduled maturity date. In addition, none of these obligations can be accelerated based on any change in the Company's credit rating. Individual life insurance policies (other than term life insurance) increase in cash value over their lives. Policyholders have the right to borrow from us an amount generally up to the cash value of their policy at any time. As of December 31, 2001, we had approximately $18.5 billion in cash values in which policyholders have rights to policy loans. The majority of cash values eligible for policy loans are at variable interest rates which are reset annually on the policy anniversary. Moreover, a portion of our fixed interest rate policy loans have features that provide for reduced crediting rates on the portion of cash values loaned. The amount of policy loans has remained consistent over the past three years, at approximately $2.0 billion, $1.6 billion of which are in the closed block at December 31, 2001. 36 JOHN HANCOCK FINANCIAL SERVICES, INC. The following tables summarize the Company's information about contractual obligations and other commercial commitments by due date and expiration date as of December 31, 2001. Contractual obligations of the Company are those obligations fixed by agreement as to dollar amount and date of payment. Other commercial commitments are those commitments entered into by the Company with known expiration dates. These obligations are inputs into the Company's asset liability management system described elsewhere in this document. Contractual Obligations
Payments due by period ----------------------------------------------------------------- Less than 1 Total year 1-3 years 4-5 years After 5 years ----- ---- --------- --------- ------------- (in millions) Debt .................................... $ 1,440.1 $ 81.0 $ 60.6 $ 32.9 $ 1,265.6 GIC's ................................... 8,232.9 2,024.0 3,442.6 1,485.5 1,280.8 Funding agreements ...................... 12,281.1 426.8 3,293.5 4,251.5 4,309.3 Institutional structured settlements .... 1,283.7 9.5 25.3 29.4 1,219.5 Annuity certain ......................... 13,579.9 661.2 1,378.7 1,170.3 10,369.7 Investment commitments .................. 1,321.5 1,321.5 -- -- -- Other insurance liabilities ............. -- -- -- -- -- Operating lease obligations ............. 141.8 27.4 43.1 23.4 47.9 Other long-term obligations ............. 26.2 5.6 3.6 2.6 14.4 ----------------------------------------------------------------- Total contractual cash obligations ... $38,307.2 $ 4,557.0 $ 8,247.4 $ 6,995.6 $18,507.2 =================================================================
Other Commercial Commitments
Amount of commitment expiration per period ------------------------------------------------------------------ Total Amounts Less than 1 Committed year 1-3 years 4-5 years Over 5 years --------- ---- --------- --------- ------------ (in millions) Lines of credit ......................... -- -- -- -- -- Standby letters of credit ............... -- -- -- -- -- Guarantees .............................. $1.8 $0.1 $1.2 $0.5 -- Standby repurchase obligations .......... -- -- -- -- -- Other commercial commitments ............ 0.2 0.2 -- -- -- Other commitments ....................... 0.9 0.9 -- -- -- ------------------------------------------------------------------ Total commercial commitments ......... $2.9 $1.2 $1.2 $0.5 -- ==================================================================
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, 2001, were above the ranges that would require regulatory action. We maintain reinsurance programs designed to protect against large or unusual losses. Based on our periodic review of our reinsurers' financial statements, financial strength ratings and reputations in the reinsurance marketplace, we believe that our reinsurers are financially sound, and, therefore, that we have no significant exposure to uncollectible reinsurance in excess of uncollectible amounts recognized in our consolidated financial statements. Given the historical cash flow of our subsidiaries and current financial results, management believes that the cash flow from the operating activities over the next year will provide sufficient liquidity for our operations, as well as to satisfy debt service obligations and to pay other operating expenses. Although we anticipate that we will be able to meet our cash requirements, we can give no assurances in this regard. 37 JOHN HANCOCK FINANCIAL SERVICES, INC. Quantitative and Qualitative Information About Market Risk Capital Markets Risk Management The Company maintains a disciplined, comprehensive approach to managing capital market risks inherent in its business and investment operations. To mitigate capital market risks, and effectively support Company objectives, investment operations are organized and staffed to focus investment management expertise on specific classes of investments, with particular emphasis placed on private placement markets. In addition, a dedicated unit of asset/liability risk management (ALM) professionals centralizes the Life Insurance Company's and its subsidiaries' implementation of the interest rate risk management program. As an integral component of its ALM program, derivative instruments are used in accordance with risk reduction techniques established through Company policy and with formal approval granted from the New York Insurance Department. The Company's use of derivative instruments is monitored on a regular basis by the Company's Investment Compliance Department and reviewed quarterly with senior management and the Committee of Finance of the Company's wholly-owned subsidiary, John Hancock Life Insurance Company, (the Company's Committee of Finance). The Company's principal capital market exposures are credit and interest rate risk, which includes the impact of inflation, although we have certain exposures to changes in equity prices and foreign currency exchange rates. Credit risk pertains to the uncertainty associated with the ability of an obligor or counterparty to continue to make timely and complete payments of contractual principal and interest. Interest rate risk pertains to the change in fair value that occurs within fixed maturity securities or liabilities as market interest rates move. Equity and foreign currency risk pertain to price fluctuations, associated with the Company's ownership of equity investments or non-US dollar denominated investments and liabilities, driven by dynamic market environments. Credit Risk The Company manages the credit risk inherent in its fixed maturity securities by applying strict credit and underwriting standards, with specific limits regarding the proportion of permissible below investment grade holdings. We also diversify our fixed maturity securities with respect to investment quality and credit concentration. Concentrations are monitored with respect to issuer, industry, geographic location, and loan property-type. Where possible, consideration of external measures of creditworthiness, such as ratings assigned by nationally recognized rating agencies, supplement our internal credit analysis. The Company uses simulation models to examine the probability distribution of credit losses to ensure that it can readily withstand feasible adverse scenarios. In certain limited circumstances the Company may use the credit derivatives market to exchange credit risk for fixed rate payments if it believes this approach is more efficient than entering into a cash-based security transaction. In addition, the Company periodically examines, on various levels of aggregation, its actual default loss experience on significant asset classes to determine if the losses are consistent with the (1) levels assumed in product pricing, (2) ACLI loss experience and (3) rating agencies' quality-specific cohort default data. These tests have generally found the Company's aggregate experience to be favorable relative to these external benchmarks and consistent with priced-for-levels. The Company evaluates fixed Company's income securities on a case by case basis for issues of collectibility. The Company's bond analysts operate in an industry-based, team-oriented structure that facilitates the evaluation of the Company's entire fixed income holdings quarterly and formal presentations to management twice annually. In addition, trading levels of publicly traded securities and other market factors and industry trends are followed and their impact on individual credits are assessed as they occur. Indenture covenants which provide the Company additional protection in the event of credit deterioration are also monitored continuously. When as a result of any of these analyses, management believes that the collectibility of any amounts owed is other than temporarily impaired, the underlying asset is written down to fair value. As of December 31, 2001, the Company's fixed maturity portfolio was comprised of 88.3% investment grade securities and 11.7% below-investment-grade securities. These percentages are consistent with recent experience and indicative of the Company's long-standing investment philosophy of pursuing moderate amounts of credit risk in anticipation of earning higher expected returns. We believe that credit risk can be successfully managed given our proprietary credit evaluation models and experienced personnel. For additional information regarding the credit quality of the Company's portfolio see Note 2 to our consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Segment Operations. 38 JOHN HANCOCK FINANCIAL SERVICES, INC. Interest Rate Risk The Company maintains a tightly controlled approach to managing its potential interest rate risk. Interest rate risk arises from many of our primary activities, as we invest substantial funds in interest-sensitive assets to support the issuance of our various interest-sensitive liabilities, primarily within our Protection, Asset Gathering and Guaranteed and Structured Financial Products Segments. We manage interest rate sensitive segments of our business, and their supporting investments, under one of two broadly defined risk management methods designed to provide an appropriate matching of assets and liabilities. For guaranteed rate products, where contractual liability cash flows are highly predictable (e.g., GICs or immediate annuities) we apply sophisticated duration-matching techniques to manage the segment's exposure to both parallel and non-parallel yield curve movements. Typically this approach involves a duration mismatch tolerance of less than +/- .05 years, with other techniques used for limiting exposure to non-parallel risk. Duration measures the sensitivity of the fair value of assets and liabilities to changes in interest rates. For example, should interest rates increase by 100 basis points, the fair value of an asset with a 5-year duration is expected to decrease in value by approximately 5.0%. For non-guaranteed rate products we apply scenario-modeling techniques to develop investment policies with what we believe to be the optimal risk/return tradeoff given our risk constraints. Each scenario is based on near term reasonably possible hypothetical changes in interest rates that illustrate the potential impact of such events. We project asset and liability cash flows on guaranteed rate products and then discount them against credit-specific interest rate curves to attain fair values. Duration is then calculated by re-pricing these cash flows against a modified or "shocked" interest rate curve and evaluating the change in fair value versus the base case. As of December 31, 2001, the fair value of fixed maturity securities and mortgage loans supporting duration managed liabilities was approximately $30,990.3 million. The risk management method for non-guaranteed rate products, such as whole life insurance or single premium deferred annuities, is less formulaic, but more complex, due to the less predictable nature of the liability cash flows. For these products, we manage interest rate risk based on scenario-based portfolio modeling that seeks to identify the most appropriate investment strategy given probable policyholder behavior and liability crediting needs under a wide range of interest rate environments. As of December 31, 2001, the fair value of fixed maturity securities and mortgage loans supporting liabilities managed under this modeling was approximately $24,205.8 million Derivative Instruments The Company uses a variety of derivative financial instruments, including swaps, caps, floors, and exchange traded futures contracts, in accordance with Company investment policy. Permissible derivative applications include the reduction of economic risk (i.e., hedging) related to changes in yields, prices, cash flows, and currency exchange rates. In addition, certain limited applications of income generation are allowed. Examples of this type of use include the purchase of call options to offset the sale of embedded options in Company liability issuance or the purchase of swaptions to offset the purchase of embedded put options in certain investments. The Company does not make a market or trade derivatives for speculative purposes. As of January 1, 2001, SFAS No. 133 became effective for all companies reporting under GAAP in the United States. Briefly stated, SFAS No. 133 requires that all derivative instruments must be recorded as either assets or liabilities on the Company's balance sheet, with quarterly recognition thereafter of changes in derivative fair values through its income statement. The income effect of derivatives that meet all requirements of a "qualified hedge" under SFAS No. 133 guidance may be offset, in part or in its entirety, by recognition of changes in fair value on specifically identified underlying hedged-items. These hedged-items must be identified at the inception of the hedge and may consist of assets, liabilities, firm commitments or forecasted transactions. Depending upon the designated form of the hedge (i.e., fair value or cash flow), changes in fair value must either be recorded immediately through income or through shareholders' equity (Other Comprehensive Income) for subsequent amortization into income. In preparing for the implementation of SFAS No. 133, the Company invested significant time and resources to achieve two primary objectives. First, preserving the ability to hedge economic risks inherent in its business operations, with assurance that such hedges were structured in a SFAS No. 133 compliant fashion. Second, the reduction of income volatility arising from "ineffective" or less than perfect hedges, whereby income from hedged-item fair value recognition only partially offsets income from derivatives fair value recognition. In the course of achieving these objectives the Company undertook an extensive examination of its derivatives hedging program. The examination identified two areas where the Company's risk management applications required adjustment to 39 JOHN HANCOCK FINANCIAL SERVICES, INC. accommodate the requirements of SFAS No. 133. Each of these hedging applications was modified so as to retain its economic effectiveness and achieve compliance with SFAS No. 133. In addition, the examination proved beneficial in several other ways, including the implementation and customization of a vendor derivatives valuation and accounting software, improved front and back office derivatives capabilities, refinement of responsibilities to ensure appropriate separation of duties, and enhanced derivatives compliance procedures. Through the year ended December 31, 2001 ,the reported income volatility attributable to SFAS No. 133 accounting treatment was $(16.3) million and well in line with our pre-SFAS No. 133 implementation expectations. We also reported income volatility of $2.3 million during 2001 due to GAAP derivatives accounting treatment on options that predated SFAS No. 133. This volatility relates to the "inherent ineffectiveness" associated with marking-to-market each quarter out-of-the-money interest rate and equity options. These options hedge interest rate and equity risks present in certain of our asset and liability portfolios. The Company continues to seek process improvements to further reduce expected income volatility, without unduly hindering our objective of aggressively managing economic risks inherent in its lines of business. The Company's Investment Compliance Unit monitors all derivatives activity for consistency with internal policies and guidelines. All derivatives trading activity is reported monthly to the Company's Committee of Finance for review, with a comprehensive governance report provided jointly each quarter by the Company's Derivatives Supervisory Officer and Chief Investment Compliance Officer. The table below reflects the Company's derivative positions hedging interest rate risk as of December 31, 2001. The notional amounts in the table represent the basis on which pay or receive amounts are calculated and are not reflective of credit risk. These fair value exposures represent only a point in time and will be subject to change as a result of ongoing portfolio and risk management activities.
As of December 31, 2001 ------------------------------------------------------------------------------------------- Fair Value ---------------------------------------------------- Weighted- Notional Average Terms -100 Basis As of +100 Basis Amount (Years) Point Change (2) 12/31/01 Point Change (2) ------------------------------------------------------------------------------------------- (in millions, except for Weighted-Average Terms) Interest rate swaps.............. $13,462.5 7.8 $(629.0) $(359.4) $(97.5) CMT swaps........................ 353.0 1.0 8.4 8.3 8.3 Futures contracts (1)............ 310.6 6.0 (6.0) (1.0) 5.7 Interest rate caps............... 297.0 5.4 1.9 3.6 6.6 Interest rate floors............. 8,328.0 8.3 120.0 56.5 30.7 Swaptions........................ 30.0 23.4 (3.0) (1.3) (0.5) ------------------------------------------------------------------------------------------- Totals...................... $22,781.1 7.8 $(507.7) $(293.3) $(46.7) ================== ====================================================
- ---------- (1) Represents the notional value on open contracts as of December 31, 2001. (2) The selection of a 100 basis point immediate change in interest rates should not be construed as a prediction by us of future market events but rather as an illustration of the potential impact of such an event. Our non-exchange-traded derivatives are exposed to the possibility of loss from a counterparty failing to perform its obligations under terms of the derivative contract. We believe the risk of incurring losses due to nonperformance by our counterparties is remote. To manage this risk, Company procedures include the (a) on-going evaluation of each counterparty's credit ratings, (b) the application of credit limits and monitoring procedures based on an internally developed, scenario-based risk assessment system, (c) quarterly reporting of each counterparty's "potential exposure", (d) master netting agreements, and (e) the use of collateral agreements. Futures contracts trade on organized exchanges and have effectively no credit risk. Equity Risk Equity risk is the possibility that we will incur economic losses due to adverse changes in a particular common stock or warrant. In order to reduce our exposure to market fluctuations on some of our common stock portfolio, we use equity collar agreements. These equity collar agreements limit the market value fluctuations on their underlying equity securities. Our equity collars are comprised of an equal number of purchased put options and written call 40 JOHN HANCOCK FINANCIAL SERVICES, INC. options, each with strike rates equidistant from the stock price at the time the contract is established. As of December 31, 2001, the fair value of our equity securities portfolio was $1,190.9 million. The fair value of our equity collar agreements as of December 31, 2001 was $(2.2) million. A hypothetical 15% decline in the December 31, 2001 value of the equity securities hedged with equity collar agreements would result in an unrealized loss of approximately $3.6 million. The selection of a 15% immediate change in the value of equity securities should not be construed as a prediction by us of future market events but rather as an illustration of the potential impact of such an event. The fair value of any unhedged common stock holdings will rise or fall with equity market and company-specific trends. In certain cases the Company classifies its equity holdings as trading securities. These holdings are marked-to-market through the income statement, creating investment income volatility that is effectively neutralized by changes in corresponding liability reserves. Foreign Currency Risk Foreign currency risk is the possibility that we will incur economic losses due to adverse changes in foreign currency exchange rates. This risk arises in part from our international operations and the issuance of certain foreign currency-denominated funding agreements sold to non-qualified institutional investors in the international market. We apply currency swap agreements to hedge the exchange risk inherent in our investments and funding agreements denominated in foreign currencies. We also own fixed maturity securities that are denominated in foreign currencies. We use derivatives to hedge the foreign currency risk of these securities (both interest and principal payments). At December 31, 2001, the fair value of our foreign currency denominated fixed maturity securities was approximately $707.8 million. The fair value of our currency swap agreements at December 31, 2001 supporting foreign denominated bonds was $42.6 million. We estimate that as of December 31, 2001, a hypothetical 10% immediate change in each of the foreign currency exchange rates to which we are exposed, including the currency swap agreements, would result in no material change to the net fair value of our foreign currency-denominated instruments identified above. The selection of a 10% immediate change in all currency exchange rates should not be construed as a prediction by us of future market events but rather as an illustration of the potential impact of such an event. Our largest individual currency exposure is to the Canadian dollar. The modeling technique we use to calculate our exposure does not take into account correlation among foreign currency exchange rates or correlation among various markets. Our actual experience may differ from the results noted above due to the correlation assumptions utilized or if events occur that were not included in the methodology, such as significant illiquidity or other market events. Effects of Inflation Inflation has not been a material factor in our operations during the past decade in terms of our investment performance, expenses, or product sales. 41 JOHN HANCOCK FINANCIAL SERVICES, INC. INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors............................................. 2 Audited Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2001 and 2000............... 3 Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999..................................... 5 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for Years Ended December 31, 2001, 2000 and 1999........................................................ 7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999..................................... 9 Notes to Consolidated Financial Statements................................. 11 1 REPORT OF INDEPENDENT AUDITORS The Board of Directors John Hancock Financial Services, Inc. We have audited the accompanying consolidated balance sheets of John Hancock Financial Services, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. 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. As discussed in Note 1 to the consolidated financial statements, in 2001 the Company changed its method of accounting for its employee pension plan and postretirement health and welfare plans, derivatives and certain long-duration participating contracts. /s/ ERNST & YOUNG LLP Boston, Massachusetts February 7, 2002 2 JOHN HANCOCK FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS
December 31 2001 2000 -------------------------------- (in millions) Assets Investments - Notes 2 and 3 Fixed maturities: Held-to-maturity--at amortized cost (fair value: 2001--$1,914.1; 2000--$13,978.6) .. $ 1,930.0 $14,158.5 Available-for-sale--at fair value (cost: 2001--$38,742.0; 2000--$18,208.4) ....... 39,160.3 18,414.9 Trading securities--at fair value (cost: 2001--$16.4, 2000--$ - ) ................ 16.5 -- Equity securities: Available-for-sale--at fair value (cost: 2001--$752.3; 2000--$875.9) ............. 886.8 1,140.7 Trading securities--at fair value (cost: 2001--$289.5; 2000--$193.4) ............. 304.1 231.6 Mortgage loans on real estate ..................... 10,993.2 10,900.0 Real estate ....................................... 442.4 519.0 Policy loans ...................................... 2,008.2 1,969.2 Short-term investments ............................ 153.5 214.0 Other invested assets ............................. 1,786.1 1,393.7 -------------------------------- Total Investments ........................... 57,681.1 48,941.6 Cash and cash equivalents ......................... 1,313.7 3,280.0 Accrued investment income ......................... 782.1 736.2 Premiums and accounts receivable .................. 253.8 237.9 Deferred policy acquisition costs ................. 3,717.4 3,517.0 Reinsurance recoverable - Note 8 .................. 1,909.3 2,021.3 Other assets ...................................... 2,768.3 2,206.1 Separate accounts assets .......................... 22,718.5 26,454.8 -------------------------------- Total Assets ................................ $91,144.2 $87,394.9 ================================
The accompanying notes are an integral part of these consolidated financial statements. 3 JOHN HANCOCK FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
December 31 2001 2000 ------------------------------------------- (in millions) Liabilities and Shareholders' Equity Liabilities Future policy benefits............................................ $34,938.7 $31,402.2 Policyholders' funds.............................................. 20,762.8 18,782.3 Unearned revenue.................................................. 809.3 671.3 Unpaid claims and claim expense reserves.......................... 262.7 310.1 Dividends payable to policyholders................................ 578.1 540.6 Short-term debt - Note 6.......................................... 81.0 245.3 Long-term debt - Note 6........................................... 1,359.1 534.0 Income taxes - Note 4............................................. 866.9 575.5 Other liabilities................................................. 2,779.8 2,029.8 Separate accounts liabilities..................................... 22,718.5 26,454.8 ------------------------------------------- Total Liabilities........................................... 85,156.9 81,545.9 Minority interest - Note 7........................................ 122.3 93.5 Commitments and contingencies - Note 10 Shareholders' Equity - Note 11 3.2 3.2 Common stock, $.01 par value; 2.0 billion shares authorized; 315.8 million and 315.0 million shares issued respectively..... Additional paid in capital........................................ 5,099.3 5,086.4 Retained earnings................................................. 1,206.7 680.4 Accumulated other comprehensive income (loss)..................... 228.0 77.3 Treasury stock, at cost (18.5 million and 3.0 million shares, respectively).................................................. (672.2) (91.8) ------------------------------------------- Total Shareholders' Equity.................................. 5,865.0 5,755.5 ------------------------------------------- Total Liabilities and Shareholders' Equity.................. $91,144.2 $87,394.9 ===========================================
The accompanying notes are an integral part of these consolidated financial statements. 4 JOHN HANCOCK FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 2001 2000 1999 ---------------------------------------------- (in millions) Revenues Premiums ..................................................................... $3,851.3 $3,452.1 $2,717.5 Universal life and investment-type product charges ........................... 772.5 749.3 703.5 Net investment income - Note 2 ............................................... 3,944.9 3,864.8 3,524.1 Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders and the policyholder dividend obligation ($(1.1), $11.7 and $85.8, respectively) - Notes 1, 2 and 12 ......................................... (249.1) 88.7 175.1 Investment management revenues, commissions and other fees ................... 602.9 764.8 680.9 Other revenue ................................................................ 186.5 17.6 6.5 ---------------------------------------------- Total revenues ............................................................ 9,109.0 8,937.3 7,807.6 Benefits and expenses Benefits to policyholders, excluding amounts related to net realized investment and other gains (losses) credited to participating pension contractholders and policyholder dividend obligation ($25.3, $21.0, and $35.3, respectively) - Notes 1, 2 and 12 .............................. 5,904.7 5,375.6 5,368.5 Other operating costs and expenses ........................................... 1,500.1 1,586.4 1,412.3 Amortization of deferred policy acquisition costs, excluding amounts related to net realized investment and other gains (losses) ($(26.4), $(9.3) and $50.5, respectively) - Notes 1, 2 and 12 ............. 306.8 242.0 166.8 Dividends to policyholders ................................................... 571.3 564.4 501.6 Demutualization expenses ..................................................... -- 10.6 96.2 ---------------------------------------------- Total benefits and expenses ............................................... 8,282.9 7,779.0 7,545.4 ---------------------------------------------- Income before income taxes and cumulative effect of accounting changes ........................................................ 826.1 1,158.3 262.2 Income taxes - Note 4 ........................................................... 214.6 339.6 99.3 ---------------------------------------------- Income before cumulative effect of accounting changes ........................... 611.5 818.7 162.9 Cumulative effect of accounting changes, net of tax - Note 1 .................... 7.2 -- (9.7) ---------------------------------------------- Net income ...................................................................... $ 618.7 $ 818.7 $ 153.2 ==============================================
The accompanying notes are an integral part of these consolidated financial statements. 5 JOHN HANCOCK FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
Pro forma (unaudited) Year Ended For the Period Years Ended December 31 December 31, February 1 through ----------------------------- (in millions, except per share data) 2001 December 31, 2000 2000 1999 ===================================================================================================================== Basic earnings per common share: Income before cumulative effect of accounting changes.................... $ 2.01 $ 2.46 $ 2.60 $ 0.52 Cumulative effect of accounting changes.................................. 0.02 -- -- (0.03) ------------------------------------------------------------------- Net income................................. $ 2.03 $ 2.46 $ 2.60 $ 0.49 - --------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share: Income before cumulative effect of accounting changes.................... $ 1.99 $ 2.45 $ 2.59 $ 0.52 Cumulative effect of accounting changes.................................. 0.02 -- -- (0.03) ------------------------------------------------------------------- Net income................................. $ 2.01 $ 2.45 $ 2.59 $ 0.49 - --------------------------------------------------------------------------------------------------------------------- Weighted-average shares used in basic earnings per common share calculations.............. 304.6 314.5 314.5 314.8 Dilutive securities Stock options.............................. 2.7 1.5 1.5 -- Non-vested stock........................... 0.3 0.2 0.2 -- ------------------------------------------------------------------- Weighted-average shares used in diluted earnings per common share calculations.............. 307.6 316.2 316.2 314.8 - --------------------------------------------------------------------------------------------------------------------- Cash dividends paid per common share............ $ 0.31 $ 0.30 -- -- =====================================================================================================================
The unaudited pro forma information above gives effect to the Reorganization and Initial Public Offering referred to in Note 1. The accompanying notes are an integral part of these consolidated financial statements. 6 JOHN HANCOCK FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Additional Accumulated Other Total Outstanding Paid In Retained Comprehensive Treasury Shareholders' Shares Common Stock Capital Earnings Income (Loss) Stock Equity (in thousands) ----------------------------------------------------------------------------------------------- (in millions) Balance at January 1, 1999 ......... -- -- $ 4,671.8 $ 283.4 -- $ 4,955.2 -- Comprehensive income: Net income ....................... 153.2 153.2 Other comprehensive income, net of tax: Net unrealized gains (losses) .. (311.3) (311.3) Foreign currency translation adjustment ................... 16.9 16.9 Minimum pension liability ...... (22.9) (22.9) ---------- Comprehensive income ............... (164.1) ----------------------------------------------------------------------------------------------- Balance at December 31, 1999 ...... -- -- 4,825.0 (33.9) -- 4,791.1 -- Demutualization transaction ........ $2.2 $3,369.8 (4,869.0) (1,497.0) 212,786.5 Initial public offering ............ 1.0 1,656.7 1,657.7 102,000.0 Additional paid in capital ......... 56.4 56.4 Restricted stock issued ............ 4.2 4.2 291.0 Options exercised .................. -- 0.2 Forfeitures of restricted stock .... (0.7) (0.7) (50.8) Comprehensive income: Net income before demutualization ................ 44.0 44.0 Net income after demutualization . 774.7 774.7 ---------- ---------- Net income for the year ........ 818.7 818.7 Other comprehensive income, net of tax: Net unrealized gains (losses) .. 122.1 122.1 Foreign currency translation adjustment ................... (19.1) (19.1) Minimum pension liability .......... 8.2 8.2 ---------- Comprehensive income ............... 929.9 Treasury stock acquired ............ $(91.8) (91.8) (3,038.0) Dividends paid to shareholders ..... (94.3) (94.3) ----------------------------------------------------------------------------------------------- Balance at December 31, 2000 ...... $3.2 $5,086.4 $ 680.4 $ 77.3 $(91.8) $ 5,755.5 311,988.9 ===============================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 7 JOHN HANCOCK FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME -- (CONTINUED)
Additional Accumulated Other Total Outstanding Paid In Retained Comprehensive Treasury Shareholders' Shares Common Stock Capital Earnings Income (Loss) Stock Equity (in thousands) ------------------------------------------------------------------------------------------------ (in millions) Balance at December 31, 2000 ...... $3.2 $5,086.4 $ 680.4 $ 77.3 $ (91.8) $5,755.5 311,988.9 Restricted stock issued ........... 2.8 2.8 81.4 Options exercised ................. 12.2 12.2 868.3 Forfeitures of restricted stock ... (2.1) (2.1) (64.4) Comprehensive income: Net income ...................... 618.7 618.7 Other comprehensive income, net of tax: Net unrealized gains (losses) . (59.9) (59.9) Foreign currency translation adjustment .................. (28.4) (28.4) Minimum pension liability ..... 15.2 15.2 Cash flow hedges .............. (3.8) (3.8) ---------- Comprehensive income .............. 541.8 Treasury stock acquired ........... (580.4) (580.4) (15,444.1) Dividends paid to shareholders .... (92.4) (92.4) Change in accounting principles ... 227.6 227.6 ------------------------------------------------------------------------------------------------ Balance at December 31, 2001 ...... $3.2 $5,099.3 $1,206.7 $228.0 ($672.2) $5,865.0 297,430.1 ================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 8 JOHN HANCOCK FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 2001 2000 1999 -------------------------------------------- (in millions) Cash flows from operating activities: Net income.................................................... $ 618.7 $ 818.7 $ 153.2 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of discount - fixed maturities................ (160.9) (121.8) (77.9) Net realized investment and other (gains) losses........... 249.1 (88.7) (175.1) Change in deferred policy acquisition costs................ (274.1) (331.0) (317.3) Depreciation and amortization.............................. 79.6 98.6 74.3 Net cash flows from trading securities..................... (69.4) (147.5) (16.2) Increase in accrued investment income...................... (38.8) (81.6) (118.0) (Increase) decrease in premiums and accounts receivable............................................... (15.0) (22.3) 11.8 Increase in other assets and other liabilities, net........ (465.1) (488.4) (118.1) Increase in policy liabilities and accruals, net........... 2,472.1 2,055.1 2,253.6 Loss on sale of subsidiaries............................... -- -- 21.3 Increase (decrease) in income taxes........................ 237.6 351.1 (3.3) -------------------------------------------- Net cash provided by operating activities............... 2,633.8 2,042.2 1,688.3 Cash flows from investing activities: Sales of: Fixed maturities held-to-maturity........................... -- -- 28.7 Fixed maturities available-for-sale......................... 16,929.5 5,037.5 9,824.0 Equity securities available-for-sale........................ 616.5 744.2 182.7 Real estate................................................. 57.3 66.4 1,286.3 Short-term investments and other invested assets............ 153.3 101.9 764.4 Maturities, prepayments and scheduled redemptions of: Fixed maturities held-to-maturity........................... 243.8 1,811.9 1,777.1 Fixed maturities available-for-sale......................... 3,211.9 1,642.4 1,880.3 Short-term investments and other invested assets............ 214.0 459.9 311.8 Mortgage loans on real estate............................... 1,575.7 1,585.3 1,509.0 Purchases of: Fixed maturities held-to-maturity........................... (66.7) (2,094.8) (2,725.2) Fixed maturities available-for-sale......................... (27,149.8) (7,952.6) (12,728.5) Equity securities available-for-sale........................ (367.3) (558.6) (386.0) Real estate................................................. (53.5) (46.0) (197.2) Short-term investments and other invested assets............ (537.2) (880.6) (715.4) Mortgage loans on real estate issued.......................... (1,577.9) (1,807.8) (2,414.1) Net cash (paid) received related to acquisition/sale of businesses............................................... (132.5) 141.3 (406.9) Other, net.................................................... 100.0 (59.8) 12.1 -------------------------------------------- Net cash used in investing activities................... (6,782.9) (1,809.4) (1,996.9)
The accompanying notes are an integral part of these consolidated financial statements. 9 JOHN HANCOCK FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Years Ended December 31 2001 2000 1999 ---------------------------------------- (in millions) Cash flows from financing activities: Issuance of common stock........................................... -- $ 1,714.1 -- Payments to eligible policyholders under Plan of Reorganization.... -- (1,076.7) -- Acquisition of treasury stock...................................... $ (580.4) (91.8) -- Dividends paid on common stock..................................... (92.4) (94.3) -- Proceeds from issuance of preferred stock.......................... -- -- $ 68.2 Universal life and investment-type contract deposits............... 10,755.4 8,148.3 8,365.9 Universal life and investment-type contract maturities and withdrawals...................................................... (8,430.6) (7,158.8) (8,144.0) Issuance of long-term debt......................................... 776.0 20.0 6.0 Repayment of long-term debt........................................ (22.9) (73.2) (15.5) Net decrease in commercial paper................................... (222.3) (158.3) (30.5) ---------------------------------------- Net cash provided by financing activities........................ 2,182.8 1,229.3 250.1 ---------------------------------------- Net (decrease) increase in cash and cash equivalents............. (1,966.3) 1,462.1 (58.5) Cash and cash equivalents at beginning of year....................... 3,280.0 1,817.9 1,876.4 ---------------------------------------- Cash and cash equivalents at end of year............................. $ 1,313.7 $ 3,280.0 $ 1,817.9 ========================================
The accompanying notes are an integral part of these consolidated financial statements. 10 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 -- Summary of Significant Accounting Policies Business John Hancock Financial Services, Inc. (the Company), formerly known as John Hancock Mutual Life Insurance Company (the Mutual Company) and Subsidiaries, is a diversified financial services organization that provides a broad range of insurance and investment products and investment management and advisory services. Basis of Presentation 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 accompanying consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Partnerships, joint venture interests and other equity investments in which the Company does not have a controlling interest, but has significant influence, are recorded using the equity method of accounting and are included in other invested assets. Certain prior year amounts have been reclassified to conform to the current year presentation. The following acquisitions 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 the applicable date of acquisition. Each purchase price was allocated to the assets acquired and the liabilities assumed based on estimated fair values, with the excess of the applicable purchase price over the estimated fair values, if any, recorded as goodwill. These entities or books of business were generally acquired by the Company in execution of its plan to acquire businesses that have strategic value, meet its earnings requirements and advance the growth of its current businesses. The unaudited pro forma revenues, assuming the transactions had taken place at the beginning of the year of acquisition and the preceding year, for 2001, 2000 and 1999, were approximately $9,228.6 million, $9,277.2 million and $8,300.4 million, an increase of $119.6 million, $339.9 million and $492.8 million, respectively, from reported balances. The unaudited pro forma net income for the years ended December 31, 2001, 2000 and 1999, was approximately $622.0 million, $813.7 million and $153.6 million, a change of $3.3 million, $(5.0) million and $0.4 million, respectively, from reported balances. The unaudited pro forma earnings per share of the Company for the years ended December 31, 2001, 2000 and 1999 was approximately $2.02, $2.57 and $0.49, a change of $0.01, $(0.02) and $--, respectively, from reported balances. On October 1, 2001, Maritime, a majority owned subsidiary of the Company, completed its purchase of all of the shares of Royal & Sun Alliance Life Insurance Company of Canada (RSAF) for an amount of approximately $149.9 million. RSAF's business includes life insurance, guaranteed interest savings and retirement products. The net income relating to the acquired operations included in the Company's results from the date of acquisition through December 31, 2001 was $2.4 million. On April 2, 2001, a subsidiary of the Company, Signature Fruit Company, LLC (Signature Fruit), purchased certain assets and assumed certain liabilities out of bankruptcy proceedings of Tri Valley Growers, Inc., a cooperative association, for approximately $53.0 million. The net losses related to the acquired operations included in the Company's results from the date of acquisition through December 31, 2001 were $3.4 million. On March 1, 2000, the Company acquired the individual long-term care insurance business of Fortis, Inc. (Fortis) through a coinsurance agreement for approximately $165.0 million. The net income relating to the acquired operations is included in the Company's results from the date of acquisition through December 31, 2000. On October 1, 1999, Maritime completed its purchase of Aetna Canada Holdings Limited (Aetna Canada) for approximately $296 million. The net income relating to the acquired operations is included in the Company's results from the date of acquisition through December 31, 1999. 11 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) Reorganization and Initial Public Offering In connection with the Mutual Company's Plan of Reorganization (the Plan), effective February 1, 2000, the Mutual Company converted from a mutual life insurance company to a stock life insurance company (i.e., demutualized) and became a wholly-owned subsidiary of John Hancock Financial Services, Inc., which is a holding company. All policyholder membership interests in the Mutual Company were extinguished on that date and eligible policyholders of the Mutual Company received, in the aggregate, 212.8 million shares of common stock, $1,438.7 million of cash and $43.7 million of policy credits as compensation. In addition, the Company established a closed block to fund the guaranteed benefits and dividends of certain participating insurance policies. In connection with the Plan, the Mutual Company changed its name to John Hancock Life Insurance Company (the Life Company). In addition, on February 1, 2000, the Company completed its initial public offering (IPO) in which 102.0 million shares of common stock were issued at a price of $17.00 per share. Net proceeds from the IPO were $1,657.7 million, of which $105.7 million was retained by the Company and $1,552.0 million was contributed to the Life Company. Investments The Company classifies its debt and equity investment securities into one of three categories: held-to-maturity, available-for-sale or trading. The Company determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Fixed maturity investments include bonds, mortgage-backed securities, and redeemable preferred stock and are classified as held-to-maturity, available-for-sale, or trading. Those bonds and mortgage-backed securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Fixed maturity investments not classified as held-to-maturity are classified as available-for-sale or trading and are carried at fair value. Unrealized gains and losses related to available-for-sale securities are reflected in shareholders' equity, net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders, amounts credited to the policyholder dividend obligation, and applicable taxes. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. The amortized cost of fixed maturity investments is adjusted for impairments in value deemed to be other than temporary, and such adjustments are reported as a component of net realized investment and other gains (losses). Gains and losses, both realized and unrealized, on fixed maturity securities classified as trading are included in benefits to policyholders as part of investment returns related to equity indexed universal life insurance policies sold at Maritime, otherwise these gains and losses are included in net realized investment and other gains (losses). 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. Equity securities include common stock and non-redeemable preferred stock. Equity securities that have readily determinable fair values are carried at fair value. For equity securities, that the Company has classified as available-for-sale, unrealized gains and losses are reflected in shareholders' equity, as described above for fixed maturity securities. Impairments in value deemed to be other than temporary are reported as a component of net realized investment and other gains (losses). Gains and losses, both realized and unrealized, on equity securities classified as trading, are included in benefits to policyholders as part of investment returns related to equity indexed universal life insurance policies sold at Maritime, otherwise these gains and losses are included in net realized investment and other gains (losses). Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premium or discount, less allowance for probable losses. When it is probable that the Company will be unable to collect all amounts of principal and interest due according to the contractual terms of the mortgage loan agreement, the loan is deemed to be impaired and a valuation allowance for probable losses is established. The valuation allowance is based on the present value of the expected future cash flows, discounted at the loan's original effective interest rate or on the collateral value of the loan if the loan is collateral dependent. Any change to the valuation allowance for 12 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) mortgage loans on real estate is reported as a component of net realized investment and other gains (losses). Interest received on impaired mortgage loans on real estate is included in interest income in the period received. If foreclosure becomes probable, the measurement method used is collateral value. Foreclosed real estate is then recorded at the collateral's fair value at the date of foreclosure, which establishes a new cost basis. 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 are reported as a component of net realized investment and other gains (losses). The Company does not depreciate real estate to be disposed of. Policy loans are carried at unpaid principal balances, which approximate fair value. Short-term investments are carried at amortized cost, which approximates fair value. Net realized investment and other gains (losses), other than those related to separate accounts for which the Company does not bear the investment risk, are determined on the basis of specific identification and are reported net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholder accounts, and amounts credited to the policyholder dividend obligation. 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 to manage the duration of assets and liabilities. All derivative instruments are carried on the consolidated balance sheets at fair value. In certain cases, the Company uses hedge accounting as allowed by Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," by designating derivative instruments as either fair value hedges or cash flow hedges. For derivative instruments that are designated and qualify as fair value hedges, the change in fair value of the derivative instrument as well as the offsetting change in fair value of the hedged item are recorded in net realized investment and other gains (losses). Basis adjustments are amortized into income through net realized investment and other gains (losses). For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the change in fair value of the derivative instrument is recorded in other comprehensive income, and then reclassified into income when the hedged item affects income. Hedge effectiveness is assessed quarterly by a variety of techniques including regression analysis and cumulative dollar offset. In certain cases, there is no hedge ineffectiveness because the derivative instrument was constructed such that all the terms of the derivative exactly match the hedged risk in the hedged item. If a hedge becomes ineffective, the hedge accounting described above ceases. In cases where the Company receives or pays a premium as consideration for entering into a derivative instrument (i.e., interest rate caps and floors, swaptions, and equity collars), the premium is amortized into investment income over the useful life of the derivative instrument. The fair value of such premiums (i.e., the inherent ineffectiveness of the derivative) is excluded from the assessment of hedge effectiveness and is included in net realized investment and other gains (losses). Changes in fair value of derivatives that are not hedges are included in net realized investment and other gains (losses). Cash and Cash Equivalents Cash and cash equivalents include cash and all highly liquid debt investments with a remaining maturity of three months or less when purchased. Deferred Policy Acquisition Costs Costs that vary with, and are related primarily to, the production of new business have been deferred to the extent that they are deemed recoverable. Such costs include commissions, certain costs of policy issue and underwriting, and certain agency expenses. For participating traditional life insurance policies, such costs are being amortized 13 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) over the life of the contracts at a constant rate based on the present value of the estimated gross margin amounts expected to be realized over the lives of the contracts. 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 contracts and investment-type products, such costs are being amortized generally in proportion to the present value of expected gross profits arising principally from surrender charges and investment results, and mortality and expense margins. The effects on the amortization of deferred policy acquisition costs of revisions to estimated gross margins and profits are reflected in earnings in the period such estimated gross margins and profits are revised. For non-participating term life and long-term care insurance products, such costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. Amortization of deferred policy acquisition costs was $280.4 million, $232.7 million and $217.3 million in 2001, 2000 and 1999, respectively. Amortization of deferred policy acquisition costs is allocated to: (1) net realized investment and other gains (losses) for those products in which such gains (losses) have a direct impact on the amortization of deferred policy acquisition costs; (2) unrealized investment gains and losses, net of tax, to provide for the effect on the deferred policy acquisition cost asset that would result from the realization of unrealized gains and losses on assets backing participating traditional life insurance and universal life and investment-type contracts; and (3) a separate component of benefits and expenses to reflect amortization related to the gross margins or profits, excluding realized gains and losses, relating to policies and contracts in force. Net realized investment and other gains (losses) related to certain products have a direct impact on the amortization of deferred policy acquisition costs 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 deferred policy acquisition costs provides information useful in evaluating the operating performance of the Company. This presentation may not be comparable to presentations made by other insurers. Reinsurance The Company utilizes reinsurance agreements to provide for greater diversification of business, allowing management to control exposure to potential losses arising from large risks and provide additional capacity for growth. 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. Goodwill and Value of Business Acquired The excess of cost over the fair value of the net assets of businesses acquired (goodwill) was $280.0 million and $228.6 million at December 31, 2001 and 2000, respectively, and is included in other assets in the consolidated balance sheets. Goodwill relating to acquisitions completed before July 1, 2001 is amortized on systematic bases over periods not exceeding 40 years, which correspond with the benefits estimated to be derived from the acquisitions. Accumulated amortization was $72.9 million and $63.6 million at December 31, 2001 and 2000, respectively. Amortization expense included in other operating costs and expenses was $16.4 million, $20.3 million, and $9.7 million, in 2001, 2000 and 1999, respectively. In accordance with SFAS No. 141, "Business Combinations", goodwill of $77.6 million relating to the RSAF acquisition was not amortized in the year ended December 31, 2001. The Company reevaluates the recoverability of recorded goodwill based on the undiscounted cash flows of the related business whenever significant events or changes indicate an impairment might exist. If the undiscounted cash flows do not support the amount recorded, an impairment is recognized by a charge to current operations to reduce the carrying value of the goodwill based on the expected discounted cash flows of the related business. 14 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) The Company records an asset representing the present value of estimated future profits of insurance policies inforce related to the businesses acquired. This asset is recorded as the value of business acquired (VOBA) and amounted to $390.7 million and $340.0 million at December 31, 2001 and 2000, respectively, and is included in other assets in the consolidated balance sheets. VOBA is amortized in proportion to the present value of expected gross profits. Amortization expense included in other operating costs and expenses was $(2.9) million, $4.9 million and $1.3 million in 2001, 2000 and 1999 respectively. Separate Accounts Separate accounts assets and liabilities reported in the accompanying consolidated balance sheets represent funds that are administered and invested by the Company to meet specific investment objectives of the contractholders. Net investment income and net realized investment and other gains (losses) generally accrue directly to such contractholders who bear the investment risk, subject in some cases to minimum guaranteed rates. The assets of each separate account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate account assets are reported at fair value. Deposits, net investment income and net realized investment and other gains (losses) of separate accounts are not included in the revenues of the Company. Fees charged to contractholders, principally mortality, policy administration and surrender charges, are included in universal life and investment-type product charges. 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 8.0%. 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 contract. For non-participating traditional life insurance policies, future policy benefits are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency, interest and expenses established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on the Company's experience, which, together with interest and expense assumptions, include a margin for adverse deviation. Benefit liabilities for annuities during the accumulation period are equal to accumulated contractholders' fund balances and after annuitization are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 2.5% to 8.0% for life insurance liabilities, from 2.0% to 14.2% for individual annuity liabilities and from 2.0% to 11.3% for group annuity liabilities. Future policy benefits for long-term care insurance policies are based on the net level premium method. Assumptions established at policy issue as to mortality, morbidity, persistency, interest and expenses, which include a margin for adverse deviation, are based on estimates developed by management. Interest rates used in establishing such liabilities range from 6.0% to 8.5%. Liabilities for unpaid claims and claim expenses include estimates of payments to be made on reported individual and group life, long-term care, and group accident and health insurance claims and estimates of incurred but not reported claims based on historical claims development patterns. Estimates of future policy benefit reserves, claim reserves and expenses are reviewed continually and adjusted as necessary; such adjustments are reflected in current earnings. Although considerable variability is inherent in such estimates, management believes that future policy benefit reserves and unpaid claims and claims expense reserves are adequate. Policyholders' funds for universal life and investment-type products, including guaranteed investment contracts and funding agreements, are equal to the policyholder account values before surrender charges. Policy benefits that are charged to expense 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 9.0% for universal life products and from 2.0% to 14.7% for investment-type products. 15 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) Major components of policyholder funds in the consolidated statements of financial position, are summarized as follows:
December 31 2001 2000 --------------------------------- (in millions) Liabilities for policyholder funds Guaranteed investment contracts $ 6,583.5 $ 7,985.5 U.S. funding agreements 67.1 80.9 Global funding agreements backing medium-term notes 9,490.4 6,266.3 Other investment-type contracts 2,247.7 2,341.8 --------------- --------------- Total liabilities for investment type contracts 18,388.7 16,674.5 Liabilities for individual annuities 56.6 62.2 Universal life and other reserves 2,317.5 2,045.6 --------------- --------------- Total liabilities for policyholder funds $20,762.8 $18,782.3 =============== ===============
The Company is authorized to issue up to $15.0 billion in global funding agreements under two distribution programs, and through December 31, 2001, we have $9.5 billion outstanding. Global funding agreements are investment products which require the Company to pay a stated rate of interest on the principal amount and to repay the principal at maturity. These agreements may not be terminated prior to maturity by the Company or the contractholder. Claims for principal and interest under these global funding agreements are afforded equal priority to claims of life insurance and annuity policyholders under the insolvency provisions of Massachusetts Insurance Laws. Under the Company's programs, the global funding agreements are issued to special purpose entities. The special purpose entities fund the purchase of the global funding agreement through the issuance of medium-term notes to investors. These notes are non-recourse to the Company. If the medium-term notes issued by the special purpose entity are denominated in a foreign currency, the Company also enters into a currency swap with the special purpose entity. Similarly, the Company may enter into an interest rate swap with the special purpose entity to match the interest rate characteristics of the global funding agreement to those of the medium term note. As a result, the payment terms of any particular series of notes issued by the special purpose entity correspond to the payment terms of the global funding agreement and swap agreement(s), if any, that secure that series. Under the first program, established in May 1998 for $2.5 billion, expanded to $7.5 billion in 1999, an affiliated offshore special purpose entity issued medium-term notes in Europe, Asia and Australia. Through December 31, 2001, there is $3.9 billion outstanding under this program. This special purpose entity is consolidated in the Company's financial statements. The medium-term notes issued by this special purpose entity are reported with global funding agreements in the Company's consolidated balance sheet. Under the second program, established in June 2000, for $5.0 billion, expanded to $7.5 billion in 2001, the unaffiliated Special purpose entity issued medium-term notes in Europe, Asia, and to institutional investors in the United States. Through December 31, 2001, there is $5.6 billion outstanding under this program. Although this special purpose entity is not consolidated in the Company's financial statements, the funding agreements backing the related medium-term notes are included in policyholders' funds in the Company's consolidated balance sheets. At December 31, 2001, the annual contractual maturities of global funding agreements on notes issued under both programs were as follows: 2002 - $236.6 million; 2003 - $1,227.8 million; 2004 - $1,227.6 million; 2005 - $1,246.3 million; 2006 - $2,047.9 million; 2007 and thereafter - $3,504.2 million. Participating Insurance Participating business represents approximately 76.6%, 86.3%, and 88.1% of the Company's life insurance in force, 98.1%, 97.9%, and 98.3% of the number of life insurance policies in force, and 92.1%, 99.6%, and 97.4%, of life insurance premiums in 2001, 2000 and 1999, respectively. The portion of earnings allocated to participating pension contractholders and closed block policyholders that cannot be expected to inure to the Company is excluded from net income and shareholders' equity. The amount of policyholders' dividends to be paid is approved annually by the Life Company's Board of Directors. 16 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) The determination of the amount of policyholder 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 also 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. Revenue Recognition Premiums from participating and non-participating traditional life insurance and annuity policies with life contingencies are recognized as income when due. Premiums from universal life and investment-type contracts are reported as deposits to policyholders' account balances. Revenues from these contracts consist of amounts assessed during the period against policyholders' account balances for mortality charges, policy administration charges and surrender charges. Premiums for contracts with a single premium or a limited number of premium payments, due over a significantly shorter period than the total period over which benefits are provided, are recorded in income when due. The portion of such premium that is not required to provide for all benefits and expenses is deferred and recognized in income in a constant relationship to insurance in force or, for annuities, the amount of expected future benefit payments. Premiums from long-term care insurance contracts are recognized as income when due. Premiums from group life and health insurance contracts are recognized as income over the period to which the premiums relate in proportion to the amount of insurance protection provided. 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. Federal Income Taxes The provision for federal income taxes includes amounts currently payable or recoverable and deferred income taxes, computed under the liability method, resulting from temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. Foreign subsidiaries and U.S. subsidiaries operating outside of the United States are taxed under applicable foreign statutory rates. Foreign Currency Translation The assets and liabilities of operations in foreign currencies are translated into United States dollars at current exchange rates. Revenues and expenses are translated at average rates during the year. The resulting net translation adjustments for each year are accumulated and included in shareholders' equity. Gains or losses on foreign currency transactions are reflected in earnings. Severance As part of the Company's ongoing Competitive Position Project, the Company has initiated a restructuring plan to reduce costs and increase future operating efficiency by consolidating portions of its operations. The plan consists primarily of reducing staff in the home office and terminating certain operations outside the home office. In connection with the restructuring plan, approximately 924 employees have been or will be terminated. These employees are or have been associated with operations in the Boston office and outside the home office. As of December 31, 2001 and December 31, 2000, the liability for employee termination costs, included in other liabilities was $18.8 million and $20.6 million, respectively. Employee termination costs, included in other operating costs and expenses, were $42.7 million, $18.8 million and $26.3 million for the years ended December 31, 2001, 2000, and 1999, respectively. Of the total number of employees affected, approximately 907 employees were terminated as of December 31, 2001, having received benefit payments of approximately $70.5 million. 17 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) On January 7, 2002, as part of its ongoing expense reduction program, the Company eliminated an additional 160 jobs. During the first quarter of 2002, affected employees will receive severance benefits and outplacement services of approximately $5.7 million. Earnings Per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period excluding the dilutive effects of options, warrants or convertible securities. Diluted earnings per share reflects the potential dilution that could occur if dilutive securities, such as options and non-vested stock grants, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Cumulative Effect of Accounting Changes During the first quarter of 2001, the Company changed the method of accounting for the recognition of deferred gains and losses considered in the calculation of the annual expense for its employee pension plan under SFAS No. 87, "Employers' Accounting for Pensions," and for its postretirement health and welfare plans under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Company changed the method of recognizing gains and losses from deferral within a 10% corridor and amortization of gains outside this corridor over the future working careers of the participants to deferral within a 5% corridor and amortization of gains and losses outside this corridor over the future working careers of the participants. The new method is preferable because in the Company's situation, it produces results that more closely match current economic realities of the Company's retirement and welfare plans through the use of the current fair values of assets while still mitigating the impact of extreme gains and losses. As a result, on January 1, 2001, the Company recorded a credit of $18.6 million (net of tax of $9.9 million), related to its employee benefit pension plans, and a credit of $4.7 million (net of tax of $2.6 million), related to its postretirement health and welfare plans. The total credit recorded as a cumulative effect of an accounting change was $23.3 million (net of tax of $12.5 million), or $0.07 of diluted earnings per share for the year ended December 31, 2001. This change in accounting increased net income for the year ended December 31, 2001 by $4.4 million. The unaudited pro forma results for the year ended December 31, 2001 and 2000, assuming this change in accounting had taken place as of the beginning of 2001 and 2000, would not be materially different from the reported results. On January 1, 2001, the Company adopted SFAS No. 133, as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement 133". The adoption of SFAS No. 133, as amended, resulted in a charge to operations accounted for as a cumulative effect of accounting change of $16.1 million (net of tax of $8.3 million) as of January 1, 2001. In addition, as of January 1, 2001, a $227.6 million (net of tax of $122.6 million) cumulative effect of accounting change was recorded in other comprehensive income for (1) the transition adjustment in the adoption of SFAS No. 133, as amended, an increase of $40.5 million (net of tax of $21.8 million), and (2) the reclassification of $12.1 billion in securities from the held-to-maturity category to the available-for-sale category, an increase of $187.1 million (net of tax of $100.8 million). In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities." The SOP, which was adopted by the Company on January 1, 1999, required that start-up costs capitalized prior to January 1, 1999 be written-off immediately and any start-up costs incurred on or after January 1, 1999 be expensed as incurred. The adoption of SOP 98-5 resulted in a charge to operations of $9.7 million (net of tax of $5.9 million) and was accounted for as a cumulative effect of an accounting change. Recent Accounting Pronouncements In September 2001, the Financial Accounting Standards Board's (FASB's) Emerging Issues Task Force reached a consensus on Issue 01-10, "Accounting for the Impact of the Terrorist Attacks of September 11, 2001." Issue 01-10 presents guidance relative to accounting for and financial reporting of the events of September 11, 2001 (the Events), including both how and when to measure, record and report losses and any resulting liabilities which are directly attributable to the Events. Based on a comprehensive review of the Company's operations, the Company believes that the Events had no material financial impact on the Company's results of operations or financial position. In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for under a single method, the purchase method. Use of the pooling-of-interests method 18 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) is no longer permitted. SFAS No. 141 also clarifies the criteria to recognize intangible assets separately from goodwill, and prohibits the amortization of goodwill relating to acquisitions completed after July 1, 2001. SFAS No. 141 is effective for business combinations initiated after June 30, 2001. As discussed above, on October 1, 2001, the Company acquired RSAF. This transaction resulted in the recognition of goodwill of $77.6 million on October 1, 2001. In accordance with SFAS No. 141, the Company does not amortize this portion of its goodwill. If the Company had not adopted SFAS No. 141, the Company would have incurred additional amortization expense relating to the RSAF goodwill of approximately $1.0 million for the year ended December 31, 2001. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and other intangible assets deemed to have indefinite lives no longer be amortized to earnings, but instead be reviewed at least annually for impairment. Intangible assets with definite lives will continue to be amortized over their useful lives. SFAS No. 142 will be effective January 1, 2002. The Company estimates that adoption of SFAS No. 142 on January 1, 2002, and the cessation of amortization of previously amortizable goodwill, will result in an increase in net income of $12.8 million (net of tax of $3.4 million) for the year ending December 31, 2002. During early 2002, the Company will perform initial impairment tests of goodwill as of January 1, 2002 based on the guidance in SFAS No. 142. The Company plans on evaluating the goodwill of each reporting unit for impairment using valuations of reporting units based on earnings and book value multiples and by reference to similar multiples of publicly traded peers. Any goodwill impairments resulting from these initial impairment tests would be recorded as the cumulative effect of a change in accounting principle. The Company has conducted preliminary impairment tests which resulted in no impairment of goodwill. The Company does not expect the impact of the impairment tests required under SFAS No. 142 to have a material impact on its results of operations, earnings or financial position. In January 2001, the FASB's Emerging Issues Task Force (EITF) reached a consensus on Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". Issue 99-20 requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and specifies evaluation methods with which to evaluate these securities for an other-than-temporary decline in value. The adoption of EITF 99-20 did not have a material financial impact on the Company's results of operations or financial position. In December 2000, the AICPA issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and Certain Long-Duration Participating Contracts." The SOP, which was adopted with respect to accounting for demutualization expenses by the Company on December 31, 2000, requires that demutualization related expenses be classified as a single line item within income from continuing operations and should not be classified as an extraordinary item. The adoption of SOP 00-3 resulted in the reclassification of demutualization expenses previously recorded as an extraordinary item in 1999 of $93.6 million (net of tax of $2.6 million). On October 1, 2001, the Company adopted the remaining provisions of SOP 00-3 which required the reclassification of $9,710.0 million and $12,035.9 million of closed block assets and liabilities, respectively at December 31, 2000, and $1,467.7 million and $1,343.6 million of closed block revenues, and benefits and expenses, respectively, for the period from February 1, 2000 (date of demutualization) to December 31, 2000, all of which were reclassified to other existing asset, liability, revenue, and benefit and expense accounts. The required implementation of SOP 00-3 also resulted in a reduction of net income of $20.2 million (net of tax of $6.6 million), or $0.06 diluted earnings per common share, for the period from February 1, 2000 to December 31, 2000 and $3.4 million (net of tax of $1.8 million), or $0.01 diluted earnings per common share, for the nine months ended September 30, 2001. Finally, adoption also resulted in the recognition of a policyholder dividend obligation of $77.0 million at December 31, 2000, which represents cumulative actual closed block earnings in excess of expected periodic amounts calculated at the date of the demutualization. See Note 5 for a summary description of the closed block assets, liabilities, revenues and expenses. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 provides new accounting and reporting standards which are based on consistent application of a financial components approach that focuses on control. Under this approach, after a transfer of financial assets, the Company recognizes the financial and servicing assets it 19 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies (continued) controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 140 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of SFAS No. 140 did not have a material impact on the Company's results of operations or financial position. Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," provides guidance on how to account for the issuance of stock and stock options to employees. The Company adopted APB No. 25 upon its demutualization and IPO effective February 1, 2000. Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost is recognized over the requisite vesting periods based on market value on the date of grant. APB No. 25 was amended by SFAS No. 123, "Accounting for Stock-Based Compensation," to require pro forma disclosures of net income and earnings per share as if a "fair value" based method was used. On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25." The Interpretation clarifies guidance for certain issues that arose in the application of APB No. 25. The Company was required to adopt the Interpretation on July 1, 2000. Interpretation No. 44 did not have a material impact on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." SAB 101 clarifies the SEC staff's views on applying generally accepted accounting principles to revenue recognition in financial statements. In March 2000, the SEC issued an amendment, SAB 101A, which deferred the effective date of SAB 101. In June 2000, the SEC issued a second amendment, SAB 101B, which deferred the effective date of SAB 101 to no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company adopted SAB 101 in the fourth quarter of fiscal 2000. The adoption of SAB 101 did not have a material impact on the Company's results of operations or financial position. Codification In March 1998, the National Association of Insurance Commissioners (NAIC) adopted codified statutory accounting principles (Codification) effective January 1, 2001. Codification changes prescribed statutory accounting practices and resulted in changes to the accounting practices that the Company and its domestic life insurance subsidiaries use to prepare their statutory-basis financial statements. The states of domicile of the Company and its domestic life insurance subsidiaries have adopted Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results effective January 1, 2001. The cumulative effect of changes in accounting principles adopted to conform to the requirements of Codification is reported as an adjustment to surplus in the statutory-basis financial statements as of January 1, 2001. Implementation of Codification did not have a material impact on the Company's domestic life insurance subsidiaries' statutory-basis capital and surplus, and these companies remain in compliance with all regulatory and contractual obligations. Related Party Transactions Certain directors of the Company are members or directors of other entities that periodically perform services for or have other transactions with Company. Such transactions are either subject to bidding procedures or are otherwise entered into on terms comparable to those that would be available to unrelated third parties and are not material to the Company's results of operations or financial condition. The Company provides certain administrative and asset management services to its pension plans and employee welfare trust (the plan(s)). Fees paid to the Company for these services were $8.4 million, $6.4 million and $6.5 million during the years ended December 31, 2001, 2000 and 1999, respectively. The increase in fees in 2001 is due to a change in legal structure of certain plan asset accounts from general account in nature, to separate account. The change in structure transferred responsibility for management fees on these assets from the Company to the plans. 20 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Investments The following information summarizes the components of net investment income and net realized investment and other gains (losses):
Years Ended December 31 2001 2000 1999 -------------------------------------------- (in millions) Net investment income Fixed maturities............................................. $2,890.8 $2,624.6 $2,500.7 Equity securities............................................ 49.1 52.5 62.6 Mortgage loans on real estate................................ 869.8 886.7 831.7 Real estate.................................................. 76.4 97.1 158.4 Policy loans................................................. 123.9 118.6 109.8 Short-term investments....................................... 72.6 166.5 92.6 Other........................................................ 110.7 186.3 115.4 -------------------------------------------- Gross investment income...................................... 4,193.3 4,132.3 3,871.2 Less investment expenses................................... 248.4 267.5 347.1 -------------------------------------------- Net investment income...................................... $3,944.9 $3,864.8 $3,524.1 ============================================ Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to the policyholder dividend obligation and amounts credited to participating pension contractholders Fixed maturities............................................. $ (352.1) $ (138.4) $ (34.6) Equity securities............................................ 200.6 204.7 113.5 Mortgage loans on real estate and real estate to be disposed of............................................. (59.7) (10.4) 143.5 Derivatives and other invested assets........................ (39.0) 44.5 38.5 Amortization adjustment for deferred policy acquisition costs...................................................... 26.4 9.3 (50.5) Amounts credited to participating pension contractholders.... (42.3) (6.9) (35.3) Amounts credited to the policyholder dividend obligation..... 17.0 (14.1) -- -------------------------------------------- Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to the policyholder dividend obligation and amounts credited to participating pension contractholders $ (249.1) $ 88.7 $ 175.1 ============================================
Gross gains of $358.8 million in 2001, $308.7 million in 2000, and $192.3 million in 1999, and gross losses of $129.4 million in 2001, $124.3 million in 2000, $176.9 million in 1999, were realized on the sale of available-for-sale securities. 21 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Investments (continued) The Company's investments in held-to-maturity securities and available-for-sale securities are summarized below:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------ (in millions) December 31, 2001 Held-to-Maturity: Corporate securities ....................... $ 1,080.4 $ 28.3 $ 15.8 $ 1,092.9 Mortgage-backed securities ................. 844.9 14.5 43.0 816.4 Obligations of states and political subdivisions .................. 4.7 0.1 -- 4.8 ------------------------------------------------------------ Fixed maturities held-to-maturity total ............................. $ 1,930.0 $ 42.9 $ 58.8 $ 1,914.1 ============================================================ Available-for-Sale: Corporate securities ....................... $31,234.1 $1,300.3 $1,002.8 $31,531.6 Mortgage-backed securities ................. 5,450.4 130.5 98.9 5,482.0 Obligations of states and political subdivisions .................. 111.7 5.4 0.2 116.9 Debt securities issued by foreign governments ............................. 1,643.2 98.6 11.9 1,729.9 U.S. Treasury securities and obligations of U.S. government corporations and agencies ............... 302.6 3.8 6.5 299.9 ------------------------------------------------------------ Fixed maturities available-for-sale total ............................. 38,742.0 1,538.6 1,120.3 39,160.3 Equity securities ..................... 752.3 187.4 52.9 886.8 ------------------------------------------------------------ Total fixed maturities and equity securities available-for-sale ..... $39,494.3 $1,726.0 $1,173.2 $40,047.1 ============================================================
22 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Investments (continued)
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------ (in millions) December 31, 2000 Held-to-Maturity: Corporate securities..................... $12,848.1 $ 553.8 $699.1 $12,702.8 Mortgage-backed securities............... 1,202.5 11.5 53.0 1,161.0 Obligations of states and political subdivisions................ 102.3 3.1 0.9 104.5 Debt securities issued by foreign governments........................... 5.6 4.7 -- 10.3 ------------------------------------------------------------ Fixed maturities held-to-maturity total........................... $14,158.5 $ 573.1 $753.0 $13,978.6 ============================================================= Available-for-Sale: Corporate securities..................... $12,314.3 $ 529.0 $497.9 $12,345.4 Mortgage-backed securities............... 4,218.1 96.9 33.7 4,281.3 Obligations of states and political subdivisions................ 36.1 2.1 -- 38.2 Debt securities issued by foreign governments........................... 1,439.3 119.0 14.1 1,544.2 U.S. Treasury securities and obligations of U.S. government corporations and agencies............. 200.6 5.5 0.3 205.8 ------------------------------------------------------------ Fixed maturities available-for-sale total........................... 18,208.4 752.5 546.0 18,414.9 Equity securities................... 875.9 362.3 97.5 1,140.7 ------------------------------------------------------------ Total fixed maturities and equity securities available-for-sale .. $19,084.3 $1,114.8 $643.5 $19,555.6 =============================================================
23 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 - Investments (continued) The amortized cost and fair value of fixed maturities at December 31, 2001, by contractual maturity, are shown below: Amortized Fair Cost Value ---------------------------- (in millions) Held-to-Maturity: Due in one year or less......................... $ 63.9 $ 68.5 Due after one year through five years........... 16.4 23.2 Due after five years through ten years.......... 72.2 69.8 Due after ten years............................. 932.6 936.2 ---------------------------- 1,085.1 1,097.7 Mortgage-backed securities...................... 844.9 816.4 ---------------------------- Total........................................... $ 1,930.0 $ 1,914.1 ============================ Available-for-Sale: Due in one year or less......................... $ 1,965.6 $ 2,014.8 Due after one year through five years........... 10,347.5 10,565.8 Due after five years through ten years.......... 11,381.5 11,422.3 Due after ten years............................. 9,597.0 9,675.4 ---------------------------- 33,291.6 33,678.3 Mortgage-backed securities...................... 5,450.4 5,482.0 ---------------------------- Total........................................... $38,742.0 $39,160.3 ============================ Expected maturities may differ from contractual maturities because eligible borrowers may exercise their right to call or prepay obligations with or without call or prepayment penalties. The sale of fixed maturities held-to-maturity relate to certain securities with amortized cost of $24.3 million for the year ended December 31, 1999, which were sold due to a significant decline in the issuers' credit quality or as part of the sale of the property and casualty operations in 1999. The related net realized investment and other gains on the sales were $0.9 million in 1999. The change in net unrealized gains (losses) on trading securities that has been included in earnings during 2001, 2000 and 1999 amounted to ($23.4) million, $7.9 million, and $15.4 million, respectively. The Company participates in a security lending program for the purpose of enhancing income on securities held. At December 31, 2001 and 2000, $775.4 million and $88.6 million, respectively, of the Company's securities, at market value, were on loan to various brokers/dealers, and were fully collateralized by cash and highly liquid securities. The market value of the loaned securities is monitored on a daily basis, and the collateral is maintained at a level of at least 102.0% of the loaned securities' market value. For 2001, 2000 and 1999, investment results passed through to participating pension contractholders as interest credited to policyholders' account balances amounted to $170.5 million, $171.7 million, and $170.8 million, respectively. Mortgage loans on real estate are evaluated periodically as part of the Company's loan review procedures and are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The allowance for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses that exist at the balance sheet date. Management's periodic evaluation of the adequacy of the allowance for losses is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect 24 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Investments (continued) the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Changes in the allowance for probable losses on mortgage loans on real estate and real estate to be disposed of are summarized below.
Balance at Balance at Beginning End of of Year Additions Deductions Year -------------------------------------------------------- (in millions) Year ended December 31, 2001 Mortgage loans on real estate............ $ 83.6 $37.8 $ 7.7 $113.7 Real estate to be disposed of............ 43.5 46.0 5.9 83.6 -------------------------------------------------------- Total....................................... $127.1 $83.8 $ 13.6 $197.3 ======================================================== Year ended December 31, 2000 Mortgage loans on real estate............ $110.4 $ 5.4 $ 32.2 $ 83.6 Real estate to be disposed of............ 58.1 17.1 31.7 43.5 -------------------------------------------------------- Total....................................... $168.5 $22.5 $ 63.9 $127.1 ======================================================== Year ended December 31, 1999 Mortgage loans on real estate............ $111.0 $39.8 $ 40.4 $110.4 Real estate to be disposed of............ 112.0 22.5 76.4 58.1 -------------------------------------------------------- Total....................................... $223.0 $62.3 $116.8 $168.5 ========================================================
At December 31, 2001 and 2000, 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:
December 31 2001 2000 ------------------------------ (in millions) Impaired mortgage loans on real estate with provision for losses........... $105.4 $ 57.6 Provision for losses....................................................... (43.5) (16.8) ------------------------------ Net impaired mortgage loans on real estate................................. $ 61.9 $ 40.8 ==============================
The average recorded investment in impaired loans and the interest income recognized on impaired loans were as follows:
Year Ended December 31 2001 2000 1999 --------------------------------------- (in millions) Average recorded investment in impaired loans................. $81.5 $102.4 $137.9 Interest income recognized on impaired loans.................. 8.4 2.9 4.9
The payment terms of mortgage loans on real estate may be restructured or modified from time to time. Generally, the terms of the restructured mortgage loans call for the Company to receive some form or combination of an equity participation in the underlying collateral, excess cash flows or an effective yield at the maturity of the loans sufficient to meet the original terms of the loans. 25 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Investments (continued) Restructured commercial mortgage loans aggregated $56.0 million and $68.3 million as of December 31, 2001 and 2000, respectively. The expected gross interest income that would have been recorded had the loans been current in accordance with the original loan agreements and the actual interest income recorded were as follows:
Years Ended December 31 2001 2000 1999 -------------------------------------------- (in millions) Expected.................................... $5.0 $5.8 $12.0 Actual...................................... 3.8 5.2 7.9
At December 31, 2001, the mortgage portfolio was diversified by geographic region and specific collateral property type as displayed below:
Carrying Geographic Carrying Property Type Amount Concentration Amount - ------------------------------------------------------------------------------------------------------------- (in millions) (in millions) Apartments..................... $ 2,320.1 East North Central............. $ 1,072.5 Hotels......................... 467.2 East South Central............. 490.6 Industrial..................... 967.8 Middle Atlantic................ 1,490.4 Office buildings............... 2,768.5 Mountain....................... 417.4 Retail......................... 1,631.5 New England.................... 891.1 Multi-Family................... 60.8 Pacific........................ 1,823.6 Mixed Use...................... 108.0 South Atlantic................. 2,097.5 Agricultural................... 2,529.5 West North Central............. 385.1 Other.......................... 253.5 West South Central............. 907.0 Canada/Other................... 1,531.7 Allowance for losses........... (113.7) Allowance for losses........... (113.7) ----------------- ----------------- Total.......................... $10,993.2 Total.......................... $10,993.2 ================= =================
Mortgage loans with outstanding principal balances of $25.2 million, bonds with amortized cost of $393.1 million and real estate with a carrying value of $1.0 million were non-income producing for the year ended December 31, 2001. The Company sold $592.1 million, $359.2 million and $172.0 million of commercial mortgage loans in securitization transactions in 2001, 2000, and 1999, respectively, for which it received net proceeds of $546.1 million, $362.2 million and $175.5 million, in 2001, 2000 and 1999, respectively. During 2001, 2000 and 1999, the Company recognized pre-tax gains of $3.2 million, $3.2 million and $3.5 million, respectively, related to these transactions. As a result of these securitizations, the Company retained mortgage servicing responsibilities which were recorded as servicing assets. These servicing assets were valued at $6.4 million, and $6.7 million at December 31, 2001 and 2000, respectively. Depreciation expense on investment real estate was $6.0 million, $9.5 million, and $8.1 million in 2001, 2000, and 1999, respectively. Accumulated depreciation was $70.5 million and $66.2 million at December 31, 2001 and 2000, respectively. Investments in other assets, which include unconsolidated joint ventures, partnerships, and limited liability corporations, accounted for by using the equity method of accounting totaled $1,062.1 million and $826.5 million at December 31, 2001 and 2000, respectively. Total combined assets of such investments were $12,541.6 million and $5,040.1 million (consisting primarily of investments), and total combined liabilities were $1,108.6 million and $823.3 million (including $580.0 million and $354.0 million of notes payable) at December 31, 2001 and 2000, respectively. Total combined revenues and expenses of these investments in 2001 were $942.5 million and $645.2 26 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Investments (continued) million, respectively, resulting in $297.3 million of total combined income from operations. Total combined revenues and expenses were $508.0 million and $172.7 million, respectively, resulting in $335.3 million of total combined income from operations in 2000. Net investment income on investments accounted for on the equity method totaled $56.4 million and $143.8 million and $65.1 million in 2001, 2000, and 1999 respectively. Note 3 - Derivatives and Hedging Instruments The fair value of derivative instruments classified as assets at December 31, 2001 was $334.3 million, and appears on the consolidated balance sheet in other assets. The fair value of derivative instruments classified as liabilities at December 31, 2001 was $586.7 million, and appears on the consolidated balance sheet in other liabilities. Fair Value Hedges The Company uses interest rate futures contracts and interest rate swap agreements as part of its overall strategies of managing the duration of assets and liabilities or the average life of certain asset portfolios to specified targets. Interest rate swap agreements are contracts with a counterparty to exchange interest rate payments of a differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal). The net differential to be paid or received on interest rate swap agreements is accrued and recognized as a component of net investment income. The Company also manages interest rate exposure by using interest rate swap agreements to modify certain liabilities, such as fixed rate debt and Constant Maturity Treasuries (CMT) indexed liabilities, by converting them to a LIBOR-based floating rate. The Company enters into interest rate cap agreements, cancelable interest rate swap agreements, and written swaptions to manage the interest rate exposure of options that are embedded in certain assets and liabilities. A written swaption obligates the Company to enter into an interest rate agreement on the expiration date, contingent on future interest rates. Interest rate cap and floor agreements are contracts with a counterparty which require the payment of a premium for the right to receive payments for the difference between the cap or floor interest rate and a market interest rate on specified future dates based on an underlying principal balance (notional principal). Amounts earned on interest rate cap and floor agreements and swaptions are recorded as an adjustment to net investment income. The Company uses equity collar agreements to reduce its equity market exposure with respect to certain common stock investments that the Company holds. A collar consists of a written call option that limits the Company's potential for gain from appreciation in the stock price as well as a purchased put option that limits the Company's potential for loss from a decline in the stock price. Currency rate swap agreements are used to manage the Company's exposure to foreign exchange rate fluctuations. Currency rate swap agreements are contracts to exchange the currencies of two different countries at the same rate of exchange at specified future dates. The net differential to be paid or received on currency rate swap agreements is accrued and recognized as a component of net investment income. For the year ended December 31, 2001, the Company recognized a net loss of $16.5 million related to the ineffective portion of its fair value hedges, and a net gain of $1.9 million, related to the portion of the hedging instruments that were excluded from the assessment of hedge effectiveness. Both of these amounts are recorded in net realized investment and other gains and losses. For year ended December 31, 2001, all of the Company's hedged firm commitments qualified as fair value hedges. 27 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Derivatives and Hedging Instruments (continued) Cash Flow Hedges The Company uses forward starting interest rate swap agreements to hedge the variable cash flows associated with future fixed income asset acquisitions, which will support the Company's long-term care and life insurance businesses. These agreements will reduce the impact of future interest rate changes on the cost of acquiring adequate assets to support the investment income assumptions used in pricing these products. During the periods in the future when the acquired assets are held by the Company, the accumulated gain or loss will be amortized into investment income as a yield adjustment on the assets. The Company used interest rate futures contracts to hedge the variable cash flows associated with variable benefit payments that it will make on certain annuity contracts. Amounts are reclassified from other comprehensive income when benefit payments are made. The Company used interest rate floor agreements to hedge the interest rate risk associated with minimum interest rate guarantees in certain of its life insurance and annuity businesses. Amounts are reclassified from other comprehensive income if interest rates fall below certain levels. For the year ended December 31, 2001, the Company recognized a loss of $0.2 million related to the ineffective portion of its cash flow hedges, and a net gain of $0.4 million related to the portion of the hedging instruments that was excluded from the assessment of hedge effectiveness. Both of these amounts are recorded in net realized investment and other gains and losses. For the year ended December 31, 2001, all of the Company's hedged forecast transactions qualified as cash flow hedges. For the year ended December 31, 2001, a net loss of $0.2 million was reclassified from other accumulated comprehensive income to earnings. It is anticipated that approximately $0.6 million will be reclassified from other accumulated comprehensive income to earnings within the next twelve months. The maximum length for which variable cash flows are hedged is 24 years. For the year ended December 31, 2001, none of the Company's cash flow hedges have been 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. The transition adjustment for the adoption of SFAS No. 133, as amended, resulted in an increase in other comprehensive income of $23.0 million (net of tax of $12.3 million) representing the accumulation in other comprehensive income of the effective portion of the Company's cash flow hedges as of January 1, 2001. For the year ended December 31, 2001, $3.8 million of loss (net of tax of $2.1 million) representing the effective portion of the change in fair value of derivative instruments designated as cash flow hedges was added to accumulated other comprehensive income, resulting in a balance of $19.1 million (net of tax of $10.3 million). Derivatives Not Designated as Hedging Instruments The Company enters into interest rate swap agreements, cancelable interest rate swap agreements, interest rate futures contracts, and interest rate cap and floor agreements to manage exposure to interest rates as described above under Fair Value Hedges without designating the derivatives as hedging instruments. The Company enters into equity indexed futures contracts and equity indexed option contracts and equity swaps to generate investment return related to equity indexed universal life insurance policies. For the years ended December 31, 2001 and 2000, $10.0 million and $14.5 million, respectively, of losses on these derivatives are included in benefits to policyholders and are offset by crediting similar amounts to policyholders' accounts. 28 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 4 -- Income Taxes 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 (the Life Company, John Hancock Variable 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. In addition to taxes on operations, mutual life insurance companies are charged an equity base tax. As the Mutual Company was a mutual life insurance company for the entire year 1999, it was subject to the re-computation of its 1999 equity base tax liability in its 2000 tax return. The equity base tax is determined by application of an industry-based earnings rate to the Mutual Company's average equity base, as defined by the Internal Revenue Code. The industry earnings rate is determined by the Internal Revenue Service (IRS) and is not finalized until the subsequent year. The Mutual Company estimated its taxes for the current year based on estimated industry earnings rates and revised these estimates up or down when the earnings rates were finalized and published by the IRS in the subsequent year. Income before income taxes and cumulative effect of accounting changes includes the following:
Years Ended December 31 2001 2000 1999 ------------------------------------------ (in millions) Domestic....................................................... $760.2 $1,088.7 $214.0 Foreign........................................................ 65.9 69.6 48.2 ------------------------------------------ Income before income taxes and cumulative effect of accounting changes....................................... $826.1 $1,158.3 $262.2 ==========================================
The components of income taxes were as follows:
Years Ended December 31 2001 2000 1999 ------------------------------------------------ (in millions) Current taxes: Federal.................................................. $(38.6) $ 12.2 $(60.6) Foreign.................................................. 8.6 7.5 2.6 State.................................................... 4.6 12.0 5.8 ------------------------------------------------ (25.4) 31.7 (52.2) Deferred taxes: Federal.................................................. 235.9 285.8 137.2 Foreign.................................................. 10.8 23.1 15.4 State.................................................... (6.7) (1.0) (1.1) ------------------------------------------------ 240.0 307.9 151.5 ------------------------------------------------ Total income taxes.......................................... $214.6 $339.6 $ 99.3 ================================================
29 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 4 -- Income Taxes (continued) A reconciliation of income taxes computed by applying the federal income tax rate to income before income taxes and the consolidated income tax expense charged to operations follows: Years Ended December 31 2001 2000 1999 --------------------------------- (in millions) Tax at 35%................................... $ 289.1 $405.4 $ 91.8 Add (deduct): Equity base tax........................... (13.4) (46.0) 22.2 Prior year taxes.......................... 11.4 (0.3) 2.1 Tax credits............................... (28.1) (20.6) (12.9) Foreign taxes............................. 1.3 0.4 1.0 Tax exempt investment income.............. (32.4) (16.4) (19.4) Non-taxable gain on sale of subsidiary.... -- -- (15.4) Disallowed demutualization expenses....... -- -- 31.1 Other..................................... (13.3) 17.1 (1.2) --------------------------------- Total income taxes.................... $214.6 $339.6 $ 99.3 ================================= The significant components of the Company's deferred tax assets and liabilities were as follows: December 31 2001 2000 --------------------------- (in millions) Deferred tax assets: Policy reserve adjustments.................... $ 579.6 $ 623.5 Other postretirement benefits................. 136.6 149.4 Book over tax basis of investments............ 267.3 168.7 Dividends payable to policyholders............ 125.7 117.6 Unearned premium.............................. 182.1 93.3 Interest...................................... 34.5 38.3 Other......................................... 54.5 106.8 --------------------------- Total deferred tax assets................... 1,380.3 1,297.6 --------------------------- Deferred tax liabilities: Deferred policy acquisition costs............. 919.4 777.6 Depreciation.................................. 218.7 212.2 Basis in partnerships......................... 130.7 109.8 Market discount on bonds...................... 72.9 64.2 Pension plan expense.......................... 137.0 114.6 Capitalized charges related to mutual funds... 31.5 56.9 Lease income ................................. 523.2 339.4 Unrealized gains.............................. 170.0 112.3 --------------------------- Total deferred tax liabilities.............. 2,203.4 1,787.0 --------------------------- Net deferred tax liabilities................ $ 823.1 $ 489.4 =========================== The Company made income tax payments of $1.7 million, and received an income tax refund of $25.7 million and made income tax payments of $86.7 million in 2001, 2000 and 1999, respectively. 30 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 5 -- Closed Block As of February 1, 2000, the Company established a closed block for the benefit of certain classes of individual or joint traditional participating whole life insurance policies for which the Company had a dividend scale payable in 1999 and individual term life insurance policies that were in force on February 1, 2000. Assets were allocated to the closed block in an amount that, together with anticipated revenues from policies included in the closed block, was reasonably expected to be sufficient to support such business, including provision for payment of benefits, direct asset acquisition and disposition costs, and taxes, and for continuation of dividend scales payable in 1999, assuming experience underlying such dividend scales continues. Assets allocated to the closed block inure solely to the benefit of the holders of the policies included in the closed block and will not revert to the benefit of the shareholders of the Company. No reallocation, transfer, borrowing, or lending of assets can be made between the closed block and other portions of the Company's general account, any of its separate accounts, or any affiliate of the Company without approval of the Massachusetts Division of Insurance. If, over time, the aggregate performance of the closed block assets and policies is better than was assumed in funding the closed block, dividends to policyholders will be increased. If, over time, the aggregate performance of the closed block assets and policies is less favorable than was assumed in the funding, dividends to policyholders could be reduced. The assets and liabilities allocated to the closed block are recorded in the Company's financial statements on the same basis as other similar assets and liabilities. The carrying amount of closed block liabilities in excess of the carrying amount of closed block assets at the date of demutualization (adjusted to eliminate the impact of related amounts in accumulated other comprehensive income) represents the maximum future earnings from the assets and liabilities designated to the closed block that can be recognized in income over the period the policies in the closed block remain in force. The Company has developed an actuarial calculation of the timing of such maximum future shareholder earnings, and this is the basis of the policyholder dividend obligation. If actual cumulative earnings are greater than expected cumulative earnings, only expected earnings will be recognized in income. Actual cumulative earnings in excess of expected cumulative earnings represents undistributed accumulated earnings attributable to policyholders, which are recorded as a policyholder dividend obligation because the excess will be paid to closed block policyholders as an additional policyholder dividend unless otherwise offset by future performance of the closed block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in income. 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. 31 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 5 -- Closed Block - (Continued) The following tables set forth certain summarized financial information relating to the closed block as of the dates indicated:
December 31, December 31, 2001 2000 ------------ ------------ (in millions) Liabilities Future policy benefits............................................... $ 10,198.7 $ 9,910.5 Policyholder dividend obligation..................................... 251.2 77.0 Policyholders' funds................................................. 1,460.9 1,459.5 Policyholder dividends payable....................................... 433.4 409.8 Other closed block liabilities....................................... 53.7 84.6 ------------ ------------ Total closed block liabilities................................... 12,397.9 11,941.4 ------------ ------------ Assets Investments Fixed maturities: Held-to-maturity--at amortized cost (fair value: 2001--$100.7; 2000--$2,327.4)..................... 103.3 2,269.9 Available-for-sale--at fair value (cost: 2001--$5,204.0; 2000--$2,378.7)......................... 5,320.7 2,353.0 Equity securities: Available-for-sale--at fair value (cost: 2001--$8.8; 2000--$5.3) ................................ 13.4 6.3 Mortgage loans on real estate........................................ 1,837.0 1,944.0 Policy loans......................................................... 1,551.9 1,540.6 Short-term investments............................................... -- 62.1 Other invested assets................................................ 83.1 40.7 ------------ ------------ Total investments................................................. 8,909.4 8,216.6 Cash and cash equivalents............................................ 192.1 305.6 Accrued investment income............................................ 158.9 149.3 Other closed block assets ........................................... 297.5 317.1 ------------ ------------ Total closed block assets......................................... 9,557.9 8,988.6 ------------ ------------ Excess of reported closed block liabilities over assets designated to the closed block.................................... 2,840.0 2,952.8 ------------ ------------ Portion of above representing other comprehensive income: Unrealized appreciation (depreciation), net of tax of $43.3 million and $(8.8) million at 2001 and 2000, respectively ............................................. 80.1 (16.1) Allocated to the policyholder dividend obligation, net of tax $50.8 million and $4.7 million at 2001 and 2000, respectively................................................. (94.4) (8.8) ------------ ------------ Total.......................................................... (14.3) (24.9) ------------ ------------ Maximum future earnings to be recognized from closed block assets and liabilities............................................. $ 2,825.7 $ 2,927.9 ============ ============
32 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 5 -- Closed Block - (Continued)
December 31, December 31, 2001 2000 ------------ ------------ (in millions) Change in the policyholder dividend obligation: Balance at beginning of period.................................... $ 77.0 -- Impact on net income before income taxes....................... 42.5 $63.5 Unrealized investment gains (losses)............................ 67.1 13.5 Cumulative effect of change in accounting principle (1) 64.6 -- ------------ ------------ Balance at end of period......................................... $251.2 $77.0 ============ ============
(1) The cumulative effect of change in accounting principle represents the impact of transferring fixed maturities from held-to-maturity to available-for-sale as part of the adoption of SFAS No. 133 effective January 1, 2001. See Note 1.
For the period Year February 1 Ended through December December 31, 31, 2001 2000 ----------------- ------------------ Revenues Premiums........................................................... $ 940.0 $ 865.0 Net investment income.............................................. 667.5 591.6 Net realized investment and other gains (losses), net of amounts credited to the policyholder dividend obligation of $(17.0) million and $14.1 million, respectively......................... (3.6) (2.9) Other closed block revenues ....................................... 0.6 (0.6) ----------------- ------------- Total closed block revenues .................................... 1,604.5 1,453.1 Benefits and Expenses Benefits to policyholders ....................................... 924.4 870.0 Change in the policyholder dividend obligation ................................................... 54.9 46.6 Other closed block operating costs and expenses.............................................. (6.3) (10.0) Dividends to policyholders ....................................... 474.9 407.1 ----------------- ------------- Total benefits and expenses ................................... 1,447.9 1,313.7 ----------------- ------------- Closed block revenues, net of closed block benefits and expenses, before income taxes and cumulative effect of accounting change .................................... 156.6 139.4 Income taxes, net of amounts credited to the policyholder dividend obligation of $4.6 million and $2.8 million, respectively.................................................... 53.0 52.3 ----------------- ------------- Closed block revenues, net of closed block benefits and expenses and income taxes, before cumulative effect of accounting change ......................................... 103.6 87.1 ----------------- ------------- Cumulative effect of accounting change, net of tax ............ (1.4) -- ----------------- ------------- Closed block revenues, net of closed block benefits and expenses, income taxes and the cumulative effect of accounting change ....................................................... $ 102.2 $ 87.1 ================= =============
33 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 5 -- Closed Block - (Continued) Maximum future earnings from closed block assets and liabilities: Year For the period Ended February 1 through December 31 December 31, 2001 2000 ------------- ------------------ Beginning of period ..................... $2,927.9 $3,015.0 End of period ........................... 2,825.7 2,927.9 ------------- ------------------ Change during period ................. $ 102.2 $ 87.1 ============= ================== 34 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 6 -- Debt and Line of Credit Short-term and long-term debt consists of the following:
December 31 2001 2000 ------------------------- (in millions) Short-term debt: Commercial paper............................................. -- $222.3 Current maturities of long-term debt......................... $ 81.0 23.0 ------------------------- Total short-term debt............................................. 81.0 245.3 ------------------------- Long-term debt: Surplus notes, 7.38% maturing in 2024........................ 447.3 447.2 Bond payable, 5.625%, maturing in 2008....................... 498.6 -- Notes payable, interest ranging from 5.43% to 14.0%, due in varying amounts to 2011........................... 494.2 109.8 ------------------------- Total long-term debt.............................................. 1,440.1 557.0 Less current maturities........................................... (81.0) (23.0) ------------------------- Long-term debt.................................................... 1,359.1 534.0 ------------------------- Total debt................................................... $1,440.1 $779.3 =========================
The Company issues commercial paper primarily to meet working capital needs. The Company had no commercial paper outstanding at December 31, 2001. The weighted-average interest rate for outstanding commercial paper at December 31, 2000 was 6.59%. The weighted-average life for outstanding commercial paper at December 31, 2000 was approximately 11 days. Commercial paper borrowing arrangements are supported by a syndicated line of credit. The issuance of surplus notes was approved by the Massachusetts Commissioner of Insurance, and any payments of interest or principal on the surplus notes requires the prior approval of the Massachusetts Commissioner of Insurance. At December 31, 2001, the Company had a syndicated line of credit with a group of banks totaling $1.0 billion, $500.0 million pursuant to a 364-day commitment, which expires on July 26, 2002 and $500.0 million pursuant to a multi-year facility, which expires on August 3, 2005. The banks will commit, when requested, to loan funds at prevailing interest rates as determined in accordance with the line of credit agreement. Under the terms of the agreement, the Company is required to maintain certain minimum levels of net worth and comply with certain other covenants, which were met at December 31, 2001. At December 31, 2001, the Company had no outstanding borrowings under the agreement. Aggregate maturities of long-term debt are as follows: 2002--$81.0 million; 2003--$32.2 million; 2004--$28.4 million; 2005--$25.4 million; 2006--$7.5 million and thereafter--$1,265.6 million. Interest expense on debt, included in other operating costs and expenses, was $70.3 million, $63.4 million, and $70.1 million in 2001, 2000 and 1999, respectively. Interest paid amounted to $65.3 million in 2001, $63.4 million in 2000, and $70.1 million in 1999. 35 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 7 -- Minority Interest Minority interest relates to preferred stock issued by Maritime, an indirect majority owned subsidiary of the Company, preferred stock issued by Signature Tomato, a subsidiary of Signature Fruit, a subsidiary of the Company, which acquired certain assets and assumed certain liabilities out of bankruptcy proceedings of Tri-Valley Growers, Inc., a cooperative association, and equity interests in consolidated partnerships. For financial reporting purposes, the assets, the liabilities, and earnings of Maritime, Signature Fruit and the partnerships are consolidated in the Company's financial statements. In 1986, Maritime issued $25.3 million of Series A Cumulative Redeemable Preferred Stock (Preferred Stock). Dividends on the Preferred Stock are payable quarterly at 18% of the average of two prime rates of two specified Canadian banks. The Preferred Stock is nonvoting and redeemable at Maritime's sole option at a price of 25 Canadian dollars per share. On November 19, 1999, Maritime issued $68.2 million of Non-Cumulative Redeemable Second Preferred Shares, Series 1 (Series 1 Preferred Shares) at a price of 25 Canadian dollars per share. Dividends on the Series 1 Preferred Shares are payable quarterly, through December 31, 2004, at a rate of 0.38125 Canadian dollars per share. Commencing on January 1, 2005, the Series 1 Preferred Shares dividends will be calculated by applying 25 Canadian dollars to the greater of one quarter of 90% of prime rate and 5.85%. The Series 1 Preferred Shares are nonvoting and redeemable at Maritime's sole option any time after December 31, 2004 at a price of 25.50 Canadian dollars plus all declared and unpaid dividends. In addition, shareholders as of December 31, 2004 have the option to convert their Series 1 Preferred Shares to Non-Cumulative Redeemable Second Preferred Shares, Series 2 (Series 2 Preferred Shares). The Series 2 Preferred Shares will have a dividend rate of not less than 95% of the yield of certain bonds of the Government of Canada. The investors' preferred stock interests have been reported as minority interest in the accompanying consolidated balance sheets. In conjunction with the transaction discussed above, Signature Tomato, a subsidiary of Signature Fruit, issued $2.1 million of 14.24% cumulative, voting preferred stock in exchange for debt. In addition, Signature Fruit sold 3.0% of its Class A membership shares to outside third parties with put options exercisable in a period from one to three years from acquisition. All amounts arising from these transactions have been included in minority interest in the accompanying consolidated balance sheets. The minority interest in the equity of consolidated partnerships reflect the original investment by minority shareholders in various consolidated partnerships, along with their proportional share of the earnings or losses of these partnerships. Note 8 -- Reinsurance The effect of reinsurance on premiums written and earned was as follows:
2001 2000 1999 Premiums Premiums Premiums -------- -------- -------- Written Earned Written Earned Written Earned --------------------------------------------------------------------------------- (in millions) Life, Health and Annuity: Direct.................... $4,086.5 $4,090.4 $4,084.3 $4,083.6 $3,437.1 $3,435.2 Assumed................... 429.9 429.9 466.8 466.8 312.5 312.5 Ceded..................... (669.0) (669.0) (1,098.3) (1,098.3) (1,030.5) (1,030.5) --------------------------------------------------------------------------------- Net life, health and annuity premiums........ 3,847.4 3,851.3 3,452.8 3,452.1 2,719.1 2,717.2 --------------------------------------------------------------------------------- Property and Casualty: Direct.................... -- -- -- -- -- -- Assumed................... -- -- -- -- 0.3 0.3 Ceded..................... -- -- -- -- -- -- --------------------------------------------------------------------------------- Net property and casualty premiums....... -- -- -- -- 0.3 0.3 --------------------------------------------------------------------------------- Net premiums............ $3,847.4 $3,851.3 $3,452.8 $3,452.1 $2,719.4 $2,717.5 =================================================================================
36 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 8 -- Reinsurance (continued) For the years ended December 31, 2001, 2000 and 1999, benefits to policyholders under life, health and annuity ceded reinsurance contracts were $527.0 million, $684.5 million, and $556.3 million, respectively. On February 28, 1997, the Company sold a major portion of its group insurance business to UNICARE Life & Health Insurance Company (UNICARE), a wholly owned subsidiary of WellPoint Health Networks, Inc. The business sold included the Company's group accident and health business and related group life business and Cost Care, Inc., Hancock Association Services Group and Tri-State, Inc., all of which were indirect wholly-owned subsidiaries of the Company. The Company retained its group long-term care operations. The insurance business sold was transferred to UNICARE through a 100% coinsurance agreement. The Company remains liable to its policyholders to the extent that UNICARE does not meet its contractual obligations under the coinsurance agreement. Through the Company's group health insurance operations, the Company entered into a number of reinsurance arrangements in respect of personal accident insurance and the occupational accident component of workers compensation insurance, a portion of which was originated through a pool managed by Unicover Managers, Inc. Under these arrangements, the Company both assumed risks as a reinsurer, and 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. The disputes concern the placement of the business with reinsurers and recovery of the reinsurance. The Company is engaged in disputes, including a number of legal proceedings, in respect of this business. The risk to the Company is that other companies that reinsured the business from the Company may seek to avoid their reinsurance obligations. However, the Company believes that it has a reasonable legal position in this matter. During the fourth quarter of 1999 and early 2000, the Company received additional information about its exposure to losses under the various reinsurance programs. As a result of this additional information and in connection with global settlement discussions initiated in late 1999 with other parties involved in the reinsurance programs, during the fourth quarter of 1999 the Company recognized a charge for uncollectible reinsurance of $133.7 million, after tax, as its best estimate of its remaining loss exposure. The Company believes that any exposure to loss from this issue, in addition to amounts already provided for as of December 31, 2001, would not be material. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under the reinsurance agreements. Failure of the reinsurers to honor their obligations could result in losses to the Company; consequently, estimates are established for amounts deemed or estimated to be uncollectible. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar characteristics of the reinsurers. Note 9 -- Pension Benefit Plans and Other Postretirement Benefit Plans The Company provides pension benefits to substantially all employees and general agency personnel. These benefits are provided through both qualified defined benefit and defined contribution pension plans. In addition, through nonqualified plans, the Company provides supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan limits imposed by federal tax law. Pension benefits under the defined benefit plans had been based on years of service and average compensation generally during the three years prior to retirement. In 2001, the defined benefit pension plans were amended to a cash balance basis under which benefits are based on career average compensation. Under grandfathering rules, employees over a certain age and with at least a certain number of years of service will receive pension benefits based on the greater of the benefit from the cash balance basis or the prior final average salary basis. This amendment became effective on January 1, 2002. Benefits related to the Company's defined benefit pension plans paid to employees and retirees covered by annuity contracts issued by the Company amounted to $115.9 million in 2001, $102.2 million in 2000, and $97.6 million in 1999. Plan assets consist principally of listed equity securities, corporate obligations and U.S. government securities. The Company's funding policy for qualified defined benefit plans is to contribute annually an amount in excess of the minimum annual contribution required under the Employee Retirement Income Security Act (ERISA). This amount is limited by the maximum amount that can be deducted for federal income tax purposes. Because the qualified defined benefit plans are overfunded, no amounts were contributed to these plans in 2001 or 2000. The 37 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Pension Benefit Plans and Other Postretirement Benefit Plans (continued) funding policy for nonqualified defined benefit plans is to contribute the amount of the benefit payments made during the year. The projected benefit obligation and accumulated benefit obligation for the non-qualified defined benefit pension plans, which are underfunded, for which accumulated benefit obligations are in excess of plan assets were $258.7 million, and $236.2 million, respectively, at December 31, 2001, and $256.3 million and $244.3 million, respectively, at December 31, 2000. Non-qualified plan assets, at fair value, were $4.6 million and $0.8 million at December 31, 2001 and 2000, respectively. Defined contribution plans include The Investment Incentive Plan and the Savings and Investment Plan. The expense for defined contribution plans was $13.2 million, $10.2 million, and $9.4 million, in 2001, 2000 and 1999, respectively. In addition to the Company's defined benefit pension plans, the Company has employee welfare plans for medical, dental, 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 and dental coverages are contributory based on service 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 service. The Company's policy is to fund postretirement benefits in amounts at or below the annual tax qualified limits. As of December 31, 2001 and 2000, plan assets related to non-union employees were comprised of an irrevocable health insurance contract to provide future health benefits to retirees. Plan assets related to union employees were comprised of approximately 60% equity securities and 40% fixed income investments. 38 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Pension Benefit Plans and Other Postretirement Benefit Plans (continued) The changes in benefit obligation and plan assets related to the Company's qualified and nonqualified benefit plans are summarized as follows:
Years Ended December 31 Other Postretirement Pension Benefits Benefits -------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------- (in millions) Change in benefit obligation: Benefit obligation at beginning of year.............. $1,876.3 $1,967.6 $ 493.3 $ 443.2 Service cost......................................... 32.7 36.8 8.5 7.8 Interest cost........................................ 134.1 134.1 32.2 31.4 Amendments........................................... 50.1 (10.3) (48.3) -- Actuarial (gain) loss................................ 46.7 (136.8) (3.9) 36.4 Translation (gain) loss.............................. (4.4) (1.5) (0.4) -- Benefits paid........................................ (129.8) (113.6) (29.8) (32.0) Acquisition of subsidiary............................ 4.0 -- 1.0 6.5 Curtailment.......................................... -- -- (3.9) -- -------------------------------------------------- Benefit obligation at end of year.................... 2,009.7 1,876.3 448.7 493.3 -------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year............................................ 2,505.8 2,476.5 261.4 232.9 Actual return on plan assets......................... (101.5) 132.6 (6.7) 0.3 Employer contribution................................ 19.7 12.6 -- 35.5 Benefits paid........................................ (129.8) (113.6) (9.0) (7.3) Translation (loss) gain.............................. (5.6) (2.3) -- -- Acquisition of subsidiary............................ 4.2 -- -- -- -------------------------------------------------- Fair value of plan assets at end of year............. 2,292.8 2,505.8 245.7 261.4 -------------------------------------------------- Funded status............................................. 283.1 629.5 (203.0) (231.9) Unrecognized actuarial (gain) loss........................ 26.0 (400.6) (95.5) (139.7) Unrecognized prior service cost........................... 67.9 24.2 (47.5) (1.4) Unrecognized net transition asset......................... (5.8) (6.3) -- -- -------------------------------------------------- Prepaid (accrued) benefit cost, net....................... $ 371.2 $ 246.8 $(346.0) $(373.0) ================================================== Amounts recognized in balance sheet consist of: Prepaid benefit cost................................. $ 539.0 $ 396.4 Accrued benefit liability............................ (231.6) (243.5) Intangible asset..................................... 0.5 6.0 Accumulated other comprehensive income............... 63.3 87.9 -------------------------- Prepaid benefit cost, net................................. $ 371.2 $ 246.8 ==========================
The assumptions used in accounting for the Company's qualified and nonqualified benefit plans were as follows:
Years Ended December 31 Other Postretirement Pension Benefits Benefits ---------------------------------------------------- 2001 2000 2001 2000 ---------------------------------------------------- Discount rate............................................. 7.25% 7.25% 7.25% 7.25% Expected return on plan assets............................ 9.50% 9.00% 9.50% 9.00% Rate of compensation increase............................. 4.20% 4.77% 4.20% 4.77%
39 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 9 -- Pension Benefit Plans and Other Postretirement Benefit Plans (continued) For measurement purposes, an 8.75% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 5.25% in 2006 and remain at that level thereafter. For the prior valuation, a 5.50% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5.25% in 2001 and remain at that level thereafter. The net periodic benefit (credit) cost related to the Company's qualified and nonqualified benefit plans includes the following components:
Years Ended December 31 Other Postretirement Pension Benefits Benefits ------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 ------------------------------------------------------------------- (in millions) Service cost............................ $ 32.7 $ 36.8 $ 35.7 $ 8.5 $ 7.8 $ 7.5 Interest cost........................... 134.1 134.1 121.2 32.2 31.4 28.7 Expected return on plan assets.......... (230.5) (217.4) (186.6) (24.3) (24.1) (18.3) Amortization of transition asset........ (0.5) (12.7) (12.1) -- -- -- Amortization of prior service cost...... 6.5 4.6 3.9 (2.2) (0.2) (0.2) Recognized actuarial gain............... (18.3) (10.9) (8.1) (6.8) (8.8) (8.5) Other................................... -- -- (3.8) (3.9) -- -- ------------------------------------------------------------------- Net periodic benefit (credit) cost. $ (76.0) $ (65.5) $ (49.8) $ 3.5 $ 6.1 $ 9.2 ===================================================================
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:
1-Percentage 1-Percentage Point Increase Point Decrease ------------------------------------ (in millions) Effect on total of service and interest costs in 2001.................. $ 4.0 $ (3.7) Effect on postretirement benefit obligations as of December 31, 2001... 42.2 (38.8)
Note 10 -- Commitments and Contingencies The Company has extended commitments to purchase fixed maturity investments, preferred and common stock, and other invested assets and issue mortgage loans on real estate totaling $549.7 million, $0.3 million, $491.2 million and $280.3 million, respectively, at December 31, 2001. If funded, loans related to real estate mortgages would be fully collateralized by related properties. The Company monitors the creditworthiness of borrowers under long-term bond commitments and requires collateral as deemed necessary. The estimated fair values of the commitments described above aggregate $1.3 billion at December 31, 2001. The majority of these commitments expire in 2002. In the normal course of its business operations, the Company is involved with litigation from time to time with claimants, beneficiaries and others, and a number of litigation matters were pending as of December 31, 2001. It is the opinion of management, after consultation with counsel, that the ultimate liability with respect to these claims, if any, will not materially affect the financial position or results of operations of the Company. Class Action During 1997, the Company entered into a court-approved settlement relating to a class action lawsuit involving certain individual life insurance policies sold from 1979 through 1996. In entering into the settlement, the Company specifically denied any wrongdoing. The total 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 $52.7 million and $224.0 million at December 31, 2001 and 2000, respectively. Costs incurred related to the settlement were $30.0 million and $140.2 million in 2001 and 1999, respectively. No such costs were incurred in 2000. The estimated reserve is based on a number of factors, including the estimated cost per claim and the estimated costs to administer the claims. During 1996, management determined that it was probable that a settlement would occur and that a minimum loss amount could be reasonably estimated. Accordingly, the Company recorded its best estimate based on the 40 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 10 -- Commitments and Contingencies (continued) information available at the time. The terms of the settlement agreement were negotiated throughout 1997 and approved by the court on December 31, 1997. In accordance with the terms of the settlement agreement, the Company contacted class members during 1998 to determine the actual type of relief to be sought by class members. The majority of the responses from class members were received by the fourth quarter of 1998. The type of relief sought by class members differed from the Company's initial estimates. In 1999, the Company updated its estimate of the cost of claims subject to alternative dispute resolution relief and revised its reserve estimate accordingly. The reserve estimate was further evaluated quarterly, and was adjusted as noted above, in 2001. The adjustment to the reserve in the fourth quarter of 2001 was the result of the Company being able to better estimate the cost of settling the remaining claims, which on average tend to be larger, more complicated claims. The better estimate comes from experience with actual settlements on similar claims. Administration of the ADR component of the settlement continues to date. Although some uncertainty remains as to the cost of claims in the final phase (i.e., arbitration) of the ADR process, it is expected that the final cost of the settlement will not differ materially from the amounts presently provided for by the Company. Harris Trust Since 1983, the Company has been involved in complex litigation known as Harris Trust and Savings Bank, as Trustee of Sperry Master Retirement Trust No. 2 v. John Hancock Mutual Life Insurance Company (S.D.N.Y. Civ. 83-5491). After successive appeals to the Second Circuit and to the U.S. Supreme Court, the case was remanded to the District Court and tried to a Federal District Court judge in 1997.The judge issued an opinion in November 2000. In that opinion the Court found against the Company and awarded the Trust approximately $13.8 million in relation to this claim together with unspecified additional pre-judgment interest on this amount from October 1988. The Court also found against the Company on issues of liability valuation and ERISA law. Damages in the amount of approximately $5.7 million, together with unspecified pre-judgment interest from December 1996, were awarded on these issues. As part of the relief, the judge ordered the removal of Hancock as a fiduciary to the plan. On April 11, 2001, the Court entered a judgment against the Company for approximately $84.9 million, which includes damages to the plaintiff, pre-judgment interest, attorney's fees and other costs. The Company believes that the underlying case was incorrectly decided and there are promising grounds for challenging the District Court's decision. Therefore, the Company has filed an appeal and believes that it is probable that the Appeals Court will reverse the lower court's decision. Notwithstanding what the Company believes to be the merits of the Company's position in this case, if unsuccessful, its ultimate liability, including fees, costs and interest could have a material adverse impact on net income. However, the Company does not believe that any such liability would be material in relation to its financial position or liquidity. 41 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 11 -- Shareholders' Equity (a) Common Stock As result of the demutualization and initial public offering as described in Note 1, the Company has one class of capital stock, common stock ($.01 par value, 2.0 billion shares authorized). At December 31, 2001, approximately 26.4 million and 0.8 million shares of common stock were reserved for issuance related to the issuance of stock under the 1999 Long-term Stock Incentive Plan (as amended, the Long-Term Stock Incentive Plan and the Non-Employee Directors' Long-Term Stock Incentive Plan, respectively). The Company's Board of Directors has adopted a Shareholder Rights Plan, pursuant to which one Right (as defined below) accompanies each outstanding share of Common Stock issued. Each right (a "Right") entitles the holder to purchase from the Company one one-thousandth of a share of the Company's Series A Junior Participating Preferred Stock ("Series A Preferred") at a price of $170 (the "Purchase Price"). Under certain circumstances set forth in the Rights Plan, in lieu of purchasing shares of Series A Preferred the holders of Rights (other than a person who has acquired 10% or more of the Company's Common Stock) will be entitled to purchase additional shares of Common Stock of the Company or its successor in the event of a merger or business combination, at a per share price equal to half of the market price of such shares. The Rights will expire at the close of business on January 26, 2010, unless earlier redeemed or exchanged by the Company. Until the Right is exercised, the holder of a Right, as such, does not have any rights as a shareholder with respect to the Rights. On October 26, 2000, the Company announced that its Board of Directors approved a repurchase program beginning in the fourth quarter of 2000, with no termination date, under which the Company was authorized to purchase up to $500 million of its outstanding common stock. On August 6, 2001 that the Board of Directors approved a $500 million increase to the repurchase program, bringing the total amount approved to be used to repurchase Company stock to $1.0 billion. The stock repurchase program was implemented as a mechanism for the Company to deploy excess capital and increase shareholder value, and to offset the dilutive effect of JHFS' stock incentive plan. Stock repurchased under the program is accounted for as treasury stock, carried at cost and reflected as a reduction to shareholders' equity. Under the repurchase program, purchases have been and will be made from time to time, depending on market conditions, business opportunities and other factors, in the open market or through privately negotiated transactions. As of December 31, 2001 and 2000, the Company had repurchased approximately 18.5 million and 3.0 million shares of its common stock in the open market at a total cost of $671.6 million and $91.8 million, respectively, under this repurchase authorization. Also included in the treasury stock balance on the consolidated balance sheets are 16,768 shares of forfeited non-vested stock previously acquired on the open market by the company for grant to key employees under the Long-Term Stock Incentive Plan at a cost of $0.6 million and 804 shares received as consideration for the option exercises under the Long-Term Stock Incentive Plan of $0.03 million. On June 8, 2001, the Company, using a "shelf registration," registered $1.0 billion in debt securities, preferred stock, common stock, warrants, stock purchase contracts and stock purchase units. The net proceeds from the sale of the securities offered will be used for working capital and general account purposes. On November 29, 2001 the 42 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 11 -- Shareholders' Equity (continued) Company sold, under the $1.0 billion shelf, $500.0 million in 7-year senior unsecured notes at a coupon of 5.625% with the proceeds used for general corporate purposes. (b) Other Comprehensive Income The components of accumulated other comprehensive income are as follows:
Net Accumulated Gain (loss) Foreign Accumulated Net on Currency Minimum Other Unrealized Cash Flow Translation Pension Comprehensive (Losses) Hedges Adjustment Liability Income ---------------------------------------------------------------------- (in millions) Balance at December 31, 1998..................... $ 371.8 -- $(50.1) $(38.3) $283.4 Gross unrealized gains (losses) (net of deferred income tax benefit of $277.9 million)............ (528.2) -- -- -- (528.2) Reclassification adjustment for gains (losses), realized in net income (net of tax expense of $5.4 million)............................. 10.0 -- -- -- 10.0 Adjustment for participating group annuity contracts (net of deferred income tax expense of $40.1 million) 74.6 -- -- -- 74.6 Adjustment for deferred policy acquisition costs and present value of future profits (net of deferred income tax expense of $71.3 million)..................................... 132.3 -- -- -- 132.3 --------------------------------------------------------------------- Net unrealized gains (losses).................... (311.3) -- -- -- (311.3) Foreign currency translation adjustment.......... -- -- 16.9 -- 16.9 Minimum pension liability (net of deferred income tax benefit of $12.3 million)................ -- -- -- (22.9) (22.9) --------------------------------------------------------------------- Balance at December 31, 1999..................... $ 60.5 -- $(33.2) $(61.2) $(33.9) =====================================================================
43 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 11 -- Shareholders' Equity (continued)
Net Accumulated Gain (loss) Foreign Accumulated Net on Currency Minimum Other Unrealized Cash Flow Translation Pension Comprehensive (Losses) Hedges Adjustment Liability Income ---------------------------------------------------------------------- (in millions) Balance at December 31, 1999..................... $ 60.5 -- $(33.2) $(61.2) $(33.9) Gross unrealized gains (losses) (net of deferred income tax expense of $39.0 million)......... 49.8 -- -- -- 49.8 Reclassification adjustment for gains (losses), realized in net income (net of tax benefit of $62.0 million)............................ 115.2 -- -- -- 115.2 Adjustment for participating group annuity contracts (net of deferred income tax benefit of $3.6 million). (6.8) -- -- -- (6.8) Adjustment for deferred policy acquisition costs and present value of future profits (net of deferred income tax benefit of $14.6 million)............................... (27.3) -- -- -- (27.3) Adjustment for policyholder dividend obligation (net of deferred income tax benefit of $4.7 million)................................ (8.8) (8.8) --------------------------------------------------------------------- Net unrealized gains (losses).................... 122.1 -- -- -- 122.1 Foreign currency translation adjustment.......... -- (19.1) -- (19.1) Minimum pension liability (net of deferred income tax expense of $4.4 million)................. -- -- -- 8.2 8.2 --------------------------------------------------------------------- Balance at December 31, 2000..................... $182.6 $ -- $(52.3) $(53.0) $ 77.3 ===================================================================== Gross unrealized gains (losses) (net of deferred income tax benefit of $67.2 million)......... $(64.4) -- -- -- $(64.4) Reclassification adjustment for gains (losses), realized in net income (net of tax benefit of $80.3 million)............................ 149.1 -- -- -- 149.1 Adjustment for participating group annuity contracts (net of deferred income tax benefit of $5.1 million)............................. (9.5) -- -- -- (9.5) Adjustment for deferred policy acquisition costs and present value of future profits (net of deferred income tax benefit of $26.8 million)............................... (49.5) -- -- -- (49.5) Adjustment for policyholder dividend obligation (net of income tax benefit of $46.1 million). (85.6) -- -- -- (85.6) Change in accounting principles (net of income tax expense of $122.6 million)............... 204.7 22.9 -- -- 227.6 --------------------------------------------------------------------- Net unrealized gains (losses).................... 144.8 22.9 -- -- 167.7 Net accumulated gains (losses) on cash flow hedges (net of income tax benefit of $2.1 million) . -- (3.8) -- -- (3.8) Foreign currency translation adjustment.......... -- -- (28.4) -- (28.4) Minimum pension liability (net of deferred income tax expense of $8.2 million)................. -- -- -- 15.2 15.2 --------------------------------------------------------------------- ===================================================================== Balance at December 31, 2001..................... $327.4 $19.1 $(80.7) $(37.8) $228.0 =====================================================================
44 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 11 -- Shareholders' Equity (continued) Net unrealized investment gains (losses), included in the consolidated balance sheets as a component of shareholders' equity, are summarized as follows:
For the Years Ended December 31 --------------------------------------- 2001 2000 1999 --------------------------------------- (in millions) Balance, end of year comprises: Unrealized investment gains (losses) on: Fixed maturities......................................................... $ 418.3 $ 206.5 $(198.1) Equity investments....................................................... 134.5 264.8 144.0 Derivatives and other.................................................... 196.9 (146.7) 110.8 --------------------------------------- Total........................................................................... 749.7 324.6 56.7 Amounts of unrealized investment (gains) losses attributable to: Participating group annuity contracts...................................... (49.0) (34.4) (24.0) Deferred policy acquisition cost and present value of future profits....... (58.1) 18.2 60.1 Policyholder dividend obligation........................................... (145.2) (13.5) -- Deferred federal income taxes.............................................. (170.0) (112.3) (32.3) --------------------------------------- Total........................................................................... (422.3) (142.0) 3.8 --------------------------------------- Net unrealized investment gains................................................. $ 327.4 $ 182.6 $ 60.5 =======================================
(c) Statutory Results The Company adopted the new codified statutory accounting principles (Codification) effective January 1, 2001. Codification changes prescribe statutory accounting practices and results in changes to the accounting practices that the Company and its domestic life insurance subsidiaries use to prepare their statutory-basis financial statements. 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. Prior to 2001, the Commissioner had provided the Company approval to recognize as an admitted asset the pension plan prepaid expense in accordance with the requirements of SFAS No. 87, "Employers' Accounting for Pensions." Beginning in 2001, the Commissioner has provided the Company with approval to phase-in over a three-year period the impact of implementing the material provisions of statutory SSAP No. 8, "Pensions." As a result of this permitted practice, the Company's reported statutory surplus as of December 31, 2001 is increased by $319.5 million over what it would be under NAIC SAP. Statutory net income is not impacted by this permitted practice. In addition, during 2000 and 1999, the Company received permission from the Commonwealth of Massachusetts Division of Insurance to record its Asset Valuation Reserve in excess of the prescribed maximum reserve level by $36.7 million and $48.0 million at December 31, 2000 and 1999, respectively. There are no other material permitted practices. Statutory net income and surplus include the accounts of the Life Company and its variable life insurance subsidiary, John Hancock Variable Life Insurance Company, including its wholly-owned subsidiary and Investors Partner Life Insurance Company. 2001 2000 1999 ---------------------------------------- (in millions) Statutory net income........... $ 631.4 $ 617.6 $ 573.2 Statutory surplus.............. 3,513.6 3,700.5 3,456.7 45 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 11 -- Shareholders' Equity (continued) Massachusetts has enacted laws governing the payment of dividends by insurers. Under Massachusetts insurance law, no insurer may pay any shareholder dividends from any source other than statutory unassigned funds without the prior approval of the Massachusetts Division of Insurance. Massachusetts law also limits the dividends an insurer may pay in any twelve month period, without the prior permission of the Massachusetts Division of Insurance, to the greater of (i) 10% of its statutory policyholders' surplus as of the preceding December 31 or (ii) the individual company's statutory net gain from operations for the preceding calendar year, if such insurer is a life company. Note 12 -- Segment Information The Company's reportable segments are strategic business units offering different products and services. The reportable segments are managed separately, as they focus on different products, markets or distribution channels. Protection Segment. Offers a variety of individual life insurance and individual and group long-term care insurance products, including participating whole life, term life, universal life, variable life, and retail and group long-term care insurance. Products are distributed through multiple distribution channels, including insurance agents and brokers and alternative distribution channels that include banks, financial planners, direct marketing and the Internet. Asset Gathering Segment. Offers individual annuities and mutual fund products and services. Individual annuities consist of fixed deferred annuities, fixed immediate annuities, single premium immediate annuities, and variable annuities. Mutual fund products and services primarily consist of open-end mutual funds and closed-end funds. This segment distributes its products through distribution channels including insurance agents and brokers affiliated with the Company, securities brokerage firms, financial planners, and banks. Guaranteed and Structured Financial Products (G&SFP) Segment. Offers a variety of retirement products to qualified defined benefit plans, defined contribution plans and non-qualified buyers. The Company's products include guaranteed investment contracts, funding agreements, single premium annuities, and general account participating annuities and fund type products. These contracts provide non-guaranteed, partially guaranteed, and fully guaranteed investment options through general and separate account products. The segment distributes its products through a combination of dedicated regional representatives, pension consultants and investment professionals. Investment Management Segment. Offers a wide range of investment management products and services to investors covering a variety of private and publicly traded asset classes including fixed income, equity, mortgage loans, and real estate. This segment distributes its products through a combination of dedicated sales and marketing professionals, independent marketing specialists, and investment professionals. Corporate and Other Segment. Primarily consists of the Company's international insurance operations, certain corporate operations, 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 the 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. Management of the Company evaluates performance based on segment after-tax operating income, which excludes the effect of net realized investment and other gains (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 and other gains (losses), including gains and losses on disposals of businesses and certain other items which management believes are not indicative of overall operating trends. While these items may be significant components in understanding and assessing the Company's financial performance, management believes that the presentation of after-tax operating income enhances its understanding of the Company's results of operations by highlighting net income attributable to the normal, recurring operations of the business. Amounts reported as segment adjustments in the tables below primarily relate to: (i) certain net realized investment 46 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 12 -- Segment Information (continued) and other gains (losses), net of related amortization adjustment for deferred policy acquisition costs, amounts credited to participating pension contractholder accounts and policyholder dividend obligation (the adjustment for net realized investment and other gains (losses) excludes gains and losses from mortgage securitizations and investments backing short-term funding agreements because management views the related gains and losses as an integral part of the core business of those operations ); (ii) benefits to policyholders and expenses incurred relating to the settlement of a class action lawsuit against the Company involving certain individual life insurance policies sold from 1979 through 1996; (iii) restructuring costs related to our distribution systems, retail operations and mutual fund operations; (iv) the surplus tax on mutual life insurance companies which as a stock company is no longer applicable to the Company; (v) a fourth quarter 1999 charge for uncollectible reinsurance related to certain assumed reinsurance business; (vi) a fourth quarter 1999 charge for a group pension dividend resulting from demutualization related asset transfers and the formation of a corporate account; (vii) a charge for one time costs associated with the demutualization process; and (viii) cumulative effect of accounting changes. 47 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 12 -- Segment Information (continued) The following table summarizes selected financial information by segment for the year ended or as of December 31 and reconciles segment revenues and segment after-tax operating income to amounts reported in the consolidated statements of income (in millions):
Asset Investment Corporate 2001 Protection Gathering G&SFP Management and Other Consolidated ---------------------------------------------------------------------------- Revenues: Segment revenues............................ $ 3,385.1 $ 1,155.0 $ 2,793.1 $ 143.2 $ 1,884.9 $ 9,361.3 Net realized investment and other gains (losses)..................... (98.1) (54.8) (121.0) (0.2) 21.8 (252.3) ---------------------------------------------------------------------------- Revenues............................... $ 3,287.0 $ 1,100.2 $ 2,672.1 $ 143.0 $ 1,906.7 $ 9,109.0 ============================================================================ Net investment income.................. $ 1,264.7 $ 498.5 $ 1,835.6 $ 28.7 317.4 $3,944.9 Net Income: Segment after-tax operating income.......... 298.7 148.3 244.2 29.8 84.7 805.7 Net realized investment and other gains (losses)..................... (62.2) (34.7) (76.9) (0.2) 13.3 (160.7) Class action lawsuit................... -- -- -- -- (19.5) (19.5) Restructuring charges.................. (4.4) (17.6) (1.2) (0.9) (3.3) (27.4) Surplus tax............................ 9.6 0.2 2.6 0.1 0.9 13.4 Cumulative effect of accounting changes, net of tax ............... 11.7 (0.5) (1.2) (0.2) (2.6) 7.2 ---------------------------------------------------------------------------- Net income............................. $ 253.4 $ 95.7 $ 167.5 $ 28.6 $ 73.5 $ 618.7 ============================================================================ Supplemental Information: Inter-segment revenues...................... -- -- -- $ 28.0 $ (28.0) -- Equity in net income of investees accounted for by the equity method $ 12.9 $ 7.0 $ 24.8 6.9 4.8 $ 56.4 Amortization of deferred policy acquisition costs.................. 182.2 75.0 2.4 -- 47.2 306.8 Interest expense....................... 0.9 1.9 -- 12.4 55.1 70.3 Income tax expense..................... 116.6 35.0 74.3 16.2 (27.5) 214.6 Segment assets......................... 28,505.0 14,740.5 31,636.1 2,049.8 14,212.8 91,144.2 Net Realized Investment and Other Gains (Losses) Data: Net realized investment and other gains (losses) .............................. (122.9) (76.4) (78.7) 3.0 24.8 (250.2) Less amortization of deferred policy acquisition costs related to net realized investment and other gains (losses)............................... 7.8 21.6 -- -- (3.0) 26.4 Less amounts credited to participating pension contractholder accounts........ -- -- (42.3) -- -- (42.3) Add amounts credited to the policyholder dividend obligation....... 17.0 -- -- -- -- 17.0 ---------------------------------------------------------------------------- Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders and amounts credited to the policyholder dividend obligation -- per consolidated financial statements...... (98.1) (54.8) (121.0) 3.0 21.8 (249.1) Less net realized investment and other gains (losses) attributable to mortgage securitizations............... -- -- -- (3.2) -- (3.2) ---------------------------------------------------------------------------- Net realized investment and other gains (losses), net-pre-tax adjustment made to calculate segment operating income.. (98.1) (54.8) (121.0) (0.2) 21.8 (252.3) Less income tax effect................... 35.9 20.1 44.1 -- (8.5) 91.6 ---------------------------------------------------------------------------- Net realized investment and other gains (losses), net-after-tax adjustment made to calculate segment operating income................................. $ (62.2) $ (34.7) $ (76.9) $ (0.2) $ 13.3 $ (160.7) ============================================================================
48 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 12 -- Segment Information (continued)
Asset Investment Corporate 2000 Protection Gathering G&SFP Management and Other Consolidated ---------------------------------------------------------------------------- Revenues: Segment revenues .............................. $ 3,148.2 $ 1,195.9 $ 2,574.3 $ 212.0 $ 1,721.4 $ 8,851.8 Net realized investment and other gains (losses) ....................... (25.1) 15.4 (64.7) 7.1 152.8 85.5 ---------------------------------------------------------------------------- Revenues ................................. $ 3,123.1 $ 1,211.3 $ 2,509.6 $ 219.1 $ 1,874.2 $ 8,937.3 ============================================================================ Net investment income .................... $ 1,203.6 $ 445.8 $ 1,743.2 $ 22.7 $ 449.5 $ 3,864.8 Net Income: Segment after-tax operating income ............ 248.6 128.8 212.1 46.8 102.5 738.8 Net realized investment and other gains (losses) ....................... (18.8) 18.6 (40.5) 4.4 93.5 57.2 Restructuring charges .................... (6.7) (1.4) (2.6) -- (1.3) (12.0) Surplus tax .............................. 20.8 0.6 6.5 -- 18.1 46.0 Demutualization expenses ................. 1.6 0.4 0.4 -- (9.4) (7.0) Other demutualization related costs ...... (6.8) (1.3) (1.7) -- (0.2) (10.0) Group pension dividend transfer .......... -- -- 5.7 -- -- 5.7 ---------------------------------------------------------------------------- Net income ............................... $ 238.7 $ 145.7 $ 179.9 $ 51.2 $ 203.2 $ 818.7 ============================================================================ Supplemental Information: Inter-segment revenues ........................ -- -- -- $ 39.1 $ (39.1) -- Equity in net income of investees accounted for by the equity method ............. $ 7.5 $ 3.5 $ 11.2 16.8 104.8 $ 143.8 Amortization of deferred policy acquisition costs .................... 113.8 78.8 2.6 -- 46.8 242.0 Interest expense ......................... 1.1 3.5 -- 12.1 46.7 63.4 Income tax expense ....................... 87.1 57.9 78.5 35.2 80.9 339.6 Segment assets ........................... 26,788.0 14,067.2 30,908.4 3,124.5 12,506.8 87,394.9 Net Realized Investment and Other Gains (Losses) Data: Net realized investment and other gains (losses) ............................. (23.8) 18.9 (57.8) 10.3 152.8 100.4 Less amortization of deferred policy acquisition costs related to net realized investment and other gains (losses) ................................. 12.8 (3.5) -- -- -- 9.3 Less amounts credited to participating pension contractholder accounts .......... -- -- (6.9) -- -- (6.9) Less amounts credited to the policyholder dividend obligation ......... (14.1) -- -- -- -- (14.1) ---------------------------------------------------------------------------- Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders and amounts credited to the policyholder dividend obligation -- per consolidated financial statements ........ (25.1) 15.4 (64.7) 10.3 152.8 88.7 Less net realized investment and other gains (losses) attributable to mortgage securitizations ................. -- -- -- (3.2) -- (3.2) ---------------------------------------------------------------------------- Net realized investment and other gains (losses), net-pre-tax adjustment made to calculate segment operating income .... (25.1) 15.4 (64.7) 7.1 152.8 85.5 Less income tax effect ..................... 6.3 3.2 24.2 (2.7) (59.3) (28.3) ---------------------------------------------------------------------------- Net realized investment and other gains (losses), net-after-tax adjustment made to calculate segment operating income ................................... $ (18.8) $ 18.6 $ (40.5) $ 4.4 $ 93.5 $ 57.2 ============================================================================
49 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 12 -- Segment Information (continued)
Asset Investment Corporate Protection Gathering G&SFP Management and Other Consolidated ---------------------------------------------------------------------------- 1999 Revenues: Segment revenues ................................... $ 2,903.0 $ 1,057.3 $ 2,194.0 $ 189.9 $ 1,260.6 $ 7,604.8 Net realized investment and other gains (losses) .................................. 173.5 (11.0) 93.3 3.1 (56.1) 202.8 --------------------------------------------------------------------------- Revenues ...................................... $ 3,076.5 $ 1,046.3 $ 2,287.3 $ 193.0 $ 1,204.5 $ 7,807.6 =========================================================================== Net investment income ......................... $ 1,107.3 $ 388.6 $ 1,681.4 $ 45.9 $ 300.9 $ 3,524.1 Net Income: Segment after-tax operating income ................. 190.6 115.1 202.4 37.3 67.8 613.2 Realized investment gains (losses), net ............................... 108.5 (6.9) 58.4 2.0 (42.1) 119.9 Class action lawsuit .......................... -- -- -- -- (91.1) (91.1) Restructuring charges ......................... (8.6) (7.3) (0.6) -- (0.5) (17.0) Surplus tax ................................... (12.5) (1.0) (6.5) -- (2.2) (22.2) Workers' compensation reinsurance reserves .... -- -- -- -- (133.7) (133.7) Group pension dividend transfer ............... -- -- (205.8) -- -- (205.8) Demutualization expenses ...................... (61.3) (13.0) (16.1) -- (3.2) (93.6) Other demutualization related costs ........... (4.6) (0.9) (1.1) -- (0.2) (6.8) Cumulative effect of accounting change ........ -- (9.6) -- (0.1) -- (9.7) --------------------------------------------------------------------------- Net income .................................... $ 212.1 $ 76.4 30.7 $ 39.2 $ (205.2) $ 153.2 =========================================================================== Supplemental Information: Inter-segment revenues ............................. -- -- -- $ 43.6 $ (43.6) -- Equity in net income of investees accounted for by the equity method ........ $ 46.2 $ (0.3) $ 14.3 3.5 1.4 $ 65.1 Amortization of deferred policy acquisition costs ........................... 71.8 53.5 3.1 -- 38.4 166.8 Interest expense .............................. 0.7 6.2 -- 5.3 57.9 70.1 Income tax expense (credit) ................... 139.9 52.6 (7.8) 26.5 (111.9) 99.3 Segment assets ................................ 25,378.4 14,297.2 30,231.5 3,531.4 11,017.2 84,455.7 Net Realized Investment and Other Gains (Losses) Data: Net realized investment and other gains (losses) ........................................... 228.3 (16.1) 97.4 6.6 (55.3) 260.9 Less amortization of deferred policy acquisition costs related to net realized investment and other (losses) gains ....................................... (54.8) 5.1 -- -- (0.8) (50.5) Less amounts credited to participating pension contractholder accounts ............. -- -- (35.3) -- -- (35.3) --------------------------------------------------------------------------- Net realized investment and other gains ...... 173.5 (11.0) 62.1 6.6 (56.1) 175.1 (losses), net of related amortization of deferred policy acquisition costs and amounts credited to participating pension contractholders--per consolidated financial statements Less net realized investment and other gains (losses) attributable to mortgage securitizations and investments backing short-term funding agreements ............... -- -- (31.2) 3.5 -- (27.7) Less gain on sale of business ................. -- -- -- -- (33.0) (33.0) --------------------------------------------------------------------------- Net realized investment and other gains ....... 173.5 (11.0) 93.3 3.1 (89.1) 169.8 (losses), net-pre-tax adjustment made to calculate segment operating income Less income tax effect ........................ (65.0) 4.1 (34.9) (1.1) 47.0 (49.9) --------------------------------------------------------------------------- Net realized investment and other gains (losses), net-after-tax adjustment made to calculate segment operating income ....... $ 108.5 $ (6.9) $ 58.4 $ 2.0 $ (42.1) $ 119.9 ===========================================================================
50 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 12 -- Segment Information (continued) The Company operates primarily in the United States, Canada and the Pacific Rim (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:
Income Before Income Taxes and Cumulative Long-lived Effect of Location Revenues Assets Assets Accounting Changes - --------------------------------------------------------------------------------------------------------------- (in millions) 2001 United States..................... $7,666.6 $541.0 $80,022.8 $ 760.2 Canada............................ 1,076.4 48.0 10,506.8 61.0 Foreign -- other.................. 366.0 3.6 614.6 4.9 --------------------------------------------------------------------------- $9,109.0 $592.6 $91,144.2 $826.1 =========================================================================== 2000 United States..................... $7,612.2 $424.8 $77,691.1 $1,088.7 Canada............................ 1,080.4 30.4 9,259.7 63.7 Foreign -- other.................. 244.7 3.4 444.1 5.9 --------------------------------------------------------------------------- $8,937.3 $458.6 $87,394.9 $1,158.3 =========================================================================== 1999 United States..................... $6,878.9 $440.0 $75,644.9 $ 214.0 Canada............................ 692.0 28.8 8,461.7 41.8 Foreign -- other.................. 236.7 2.2 349.1 6.4 --------------------------------------------------------------------------- $7,807.6 $471.0 $84,455.7 $ 262.2 ===========================================================================
The Company has no reportable major customers and revenues are attributed to countries based on the location of customers. 51 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 13 -- Fair Value of Financial Instruments The following discussion outlines the methodologies and assumptions used to determine the fair value of the Company's financial instruments. The aggregate fair value amounts presented herein do not represent the underlying value of the Company and, accordingly, care should be exercised in drawing conclusions about the Company's business or financial condition based on the fair value information presented herein. The following methods and assumptions were used by the Company to determine the fair values of financial instruments: Fair values for publicly traded fixed maturities (including redeemable preferred stocks) are obtained from an independent pricing service. Fair values for private placement securities and fixed maturities not provided by the independent pricing service are estimated by the Company by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. The fair value for equity securities is based on quoted market prices. 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 carrying amount in the balance sheet for policy loans, short-term investments and cash and cash equivalents approximates their respective fair values. The fair value of the Company's long-term debt is estimated using discounted cash flows based on the Company's incremental borrowing rates for similar types of borrowing arrangements. Carrying amounts for commercial paper and short-term borrowings approximate fair value. Fair values for the Company's guaranteed investment contracts and funding agreements are estimated using discounted cash flow calculations based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. The fair value for fixed-rate deferred annuities is the cash surrender value, which represents the account value less applicable surrender charges. Fair values for immediate annuities without life contingencies and supplementary contracts without life contingencies are estimated based on discounted cash flow calculations using current market rates. 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 fair value for commitments approximates the amount of the initial commitment. 52 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 13 -- Fair Value of Financial Instruments (continued) The following table presents the carrying amounts and fair values of the Company's financial instruments:
December 31 ------------------------------------------------------ 2001 2000 ------------------------ -------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------ -------------------------- (in millions) Assets: Fixed maturities: Held-to-maturity ............................ $ 1,930.0 $ 1,914.1 $14,158.5 $13,978.6 Available-for-sale .......................... 39,160.3 39,160.3 18,414.9 18,414.9 Trading securities .......................... 16.5 16.5 -- -- Equity securities: Available-for-sale .......................... 886.8 886.8 1,140.7 1,140.7 Trading securities .......................... 304.1 304.1 231.6 231.6 Mortgage loans on real estate ................. 10,993.2 10,216.9 10,900.0 11,359.6 Policy loans .................................. 2,008.2 2,008.2 1,969.2 1,969.2 Short-term investments ........................ 153.5 153.5 214.0 214.0 Cash and cash equivalents ..................... 1,313.7 1,313.7 3,280.0 3,280.0 Derivatives: Futures contracts, net ........................ 0.2 0.2 (17.6) (17.6) Interest rate swap agreements ................. 26.8 26.8 (178.2) (290.4) Interest rate swap CMT ........................ 7.5 7.5 -- -- Interest rate cap agreements .................. 3.6 3.6 0.1 0.1 Interest rate floor agreements ................ 56.5 56.5 -- -- Interest rate swaption agreements ............. -- -- (1.3) (1.3) Currency rate swap agreements ................. 401.6 401.6 11.4 11.4 Equity collar agreements ...................... 16.7 16.7 11.7 11.7 Equity options ................................ 1.0 1.0 -- -- Liabilities: Debt .......................................... 1,440.1 1,471.1 779.3 771.5 Guaranteed investment contracts and funding agreements .......................... 16,142.7 15,947.0 14,333.9 13,953.8 Fixed rate deferred and immediate annuities ... 6,212.2 6,123.3 5,195.2 5,101.3 Supplementary contracts without life contingencies .................. 54.4 58.4 60.0 63.1 Derivatives: Futures contracts, net ........................ 0.9 0.9 1.4 1.4 Interest rate swap agreements ................. 420.3 420.3 -- 114.3 Interest rate swap CMT ........................ -- -- -- (5.2) Interest rate cap agreements .................. 0.0 0.0 2.1 2.1 Interest rate floor agreements ................ -- -- 59.0 59.0 Interest rate swaption agreements ............. 1.3 1.3 -- -- Currency rate swap agreements ................. 324.9 324.9 -- (473.0) Equity collar agreements ...................... 18.9 18.9 -- -- Equity swaps .................................. 0.1 0.1 -- -- Commitments ........................................ -- (1,340.0) -- (1,843.9)
53 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 14 -- Stock Compensation Plans On January 5, 2000, the Life Company, as sole shareholder of John Hancock Financial Services, Inc., approved and adopted the 1999 Long-Term Stock Incentive Plan (the Incentive Plan), which originally had been approved by the Board of Directors (the Board) of the Company on August 31, 1999. Under the Incentive Plan, which became effective on February 1, 2000, the effective date of the Plan of Reorganization of the Life Company, options granted may be either non-qualified options or incentive stock options qualifying under Section 422 of the Internal Revenue Code. The Incentive Plan objectives include attracting and retaining the best personnel, providing for additional performance incentives, and promoting the success of the Company by providing employees the opportunity to acquire the Company's common stock. In 2001, the Board adopted and the shareholders approved the amended and restated 1999 Long-Term Stock Incentive Plan (as amended, the Long-Term Stock Incentive Plan) and the Non-Employee Directors Long-Term Stock Incentive Plan (the Directors' Plan, collectively, the Incentive Plans). The maximum number of shares of common stock available under the Long-Term Stock Incentive Plan is 40,741,403. Of these, no more than 8,148,281 shares shall be available for stock awards, and the maximum number of shares that may be granted as incentive stock options is 32,593,122 shares. The aggregate number of shares that may be covered by awards for any one participant over the period that the Long-Term Stock Incentive Plan is in effect shall not exceed 8,148,281 shares. Subject to these overall limits, there is no annual limit on the number of stock options or stock awards that may be granted in any one year. The maximum number of shares available in the Non-Employee Directors' Long-Term Stock Incentive Plan is 1,000,000 shares of common stock. Pursuant to the Non-Employee Directors' Long-Term Stock Incentive Plan, each director receives 50% of the annual retainer paid to eligible directors in the form of stock awards. If a director elects to have the remaining 50% of their retainer invested in shares of the Company's common stock through purchases on the open market or from the Company at fair market value, the Company grants a partial matching stock award, which is forfeitable within three years prior to a change of control if his/her service as a director terminates (other than for death, disability or retirement). In addition, on shareholder approval of the Non-Employee Directors' Long-Term Stock Incentive Plan, each director received a non-qualified stock option award of 15,000 shares and annually thereafter will receive non-qualified stock option awards for 5,000 shares (except that each new director shall receive an option exercisable for 15,000 shares and will not be eligible for an annual grant in the same year). The Incentive Plans have options exercisable at the dates listed in the table below. The Company granted 11.2 million options during the year ended December 31, 2001. Options outstanding under the Long-Term Stock Incentive Plan were granted at a price equal to the fair market value of the stock on the date of grant, vest over a two-year period, and expire five years after the grant date. Options outstanding under the Non-Employee Director's Long Term Stock Incentive Plan were granted at a price equal to the fair market value of the stock on the date of grant, vest immediately, and expire five years after grant date. The status of stock options under both the Long-Term Stock Incentive Plan and the Non-Employee Directors' Long-Term Stock Incentive Plan are summarized below as of December 31:
Shares Weighted- subject to Number of average exercisable Weighted-average options exercise options exercise (in thousands) price per option (in thousands) price per option ------------------------------------------------------------------------------ Outstanding at February 1, 2000 -- -- Granted 4,618.4 $14.06 Exercised 0.2 13.94 Canceled 311.6 13.94 ------------------------------------------------------------------------------ Outstanding at December 31, 2000 4,306.6 $14.07 ------------------------------------------------------------------------------ Granted 11,185.2 35.96 Exercised 885.5 14.05 Canceled 1,017.4 29.61 ------------------------------------------------------------------------------ Outstanding at December 31, 2001 13,588.9 $30.92 2,521.5 $ 24.83 ------------------------------------------------------------------------------
54 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 14 -- Stock Compensation Plans (continued) The Company accounts for stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, under which no compensation cost for stock options is recognized for stock option awards granted at or above fair market value, with the exception of the Signator Stock Option Program. Had compensation expense for the remaining Company's stock-based compensation plan been determined based upon fair values at the grant dates for awards under the plan in accordance with SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below. Additional stock option awards are anticipated in future years. The effects of applying SFAS No. 123 on proforma disclosures of net income and earnings per share indicated below are not likely to be representative of the pro-forma effects on net income and earnings per share in future years for the following reasons: 1) the number of future shares to be issued under these plans is not known, 2) the effect of an additional year of vesting options granted in prior years is not considered in the assumptions and 3) the assumptions used to determine the fair value can vary significantly. The Black-Scholes option valuation model was developed for use in estimating fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The estimated weighted-average fair value per share using the Black-Scholes option valuation model is $9.24 and $3.66, respectively, for the years ending December 31, 2001 and 2000, using the following assumptions: 2001 2000 ------------------------------------------ Expected term 3-5 years 2-5 years Risk free rate (1) 4.6% - 6.0% 4.8% - 5.6% Dividend yield 1.0% 1.8% Expected volatility 32.0% 24.0% (1) Dependent on grant date. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
Year Ended December 31, For the Period Year Ended 2000 February 1 through December 31, 2001 Pro Forma (unaudited) December 31, 2000 ------------------------------------------------------------------------- (dollars in millions, except per share data) Net income: As reported $618.7 $818.7 $774.7 Pro forma (unaudited) 583.3 814.5 771.0 Earnings per share Basic: As reported 2.03 2.60 2.46 Pro forma (unaudited) 1.92 2.59 2.45 Diluted: As reported 2.01 2.59 2.45 Pro forma (unaudited) 1.90 2.58 2.44
55 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 14 -- Stock Compensation Plans (continued) The following table summarizes information about stock options outstanding at December 31, 2001:
Weighted-average Number of remaining Number of Weighted-average options contractual Weighted-average exercisable exercise price per Range of outstanding at life exercise price options at exercisable exercise price 12/31/01 (years) per option 12/31/01 option - -------------------------------------------------------------------------------------------------------------- (in thousands) (in thousands) $12.29 - $16.39 3,100.3 3.2 $13.94 1,264.9 $13.94 $20.49 - $24.58 35.2 3.6 23.59 16.6 23.59 $32.78 - $36.88 9,240.0 4.1 35.55 1,045.0 35.53 $36.88 - $40.98 1,213.4 4.4 39.31 195.0 38.18 - -------------------------------------------------------------------------------------------------------------- 13,588.9 3.9 $30.92 2,521.5 $24.83 ===========================================================================================
In February 2001, the Company implemented the Signator Stock Options Grant Program, under the Long-Term Stock Incentive Plan. The program granted 339,307 stock options to non-employee general agents (agents) at the market price of $35.53 per share. The stock options vest over a two-year period, subject to continued participation in the JHFS sales program and attainment of established, individual sales goals. After one year of vesting, an agent is allowed to exercise 50% of the stock options granted. The Company amortizes compensation expense for the grant over a 24-month period commencing on grant date at a fair value of $9.24 per option determined by the Black-Scholes option valuation model. Total expense recognized for the year ended December 31, 2001, is $1.3 million. The total grant date fair value of the stock options granted under the program from January 1, 2001 through December 31, 2001, is $3.1 million. During 2001, 4,737 stock options were forfeited with a total grant date price of $0.01 million. The outstanding option balance in the Signator Grant Program is 334,570 at December 31, 2001. On March 13, 2000, the Company granted 291,028 shares of non-vested stock to key personnel at a weighted-average grant price of $14.34 per share. These grants of non-vested stock are forfeitable and vest at three or five years of service with the Company. The Company recognizes compensation expense immediately, as the grants are based on historical compensation. The total grant-date price of the non-vested stock granted from January 1, 2000 through December 31, 2000 is $4.2 million. During 2001 and 2000, 13,588 and 50,837 shares of this non-vested stock were forfeited with a total grant date price of $0.2 million and $0.7 million, respectively. The outstanding share balance in the 2000 plan is 226,603 as of December 31, 2001. On February 12, March 12 and March 15, 2001, the Company granted an aggregate 268,293 total shares of non-vested stock to key personnel. The program was funded with cash and the shares were purchased on the open market at the weighted-average grant price of $37.22 per share. These grants of non-vested stock are forfeitable and vest at three years of service with the Company. The Company recognizes compensation expense immediately, as the grants are based on historical compensation. The total grant-date price of the non-vested stock granted from January 1, 2001 through December 31, 2001 is $10.0 million. During 2001, 16,768 shares of non-vested stock were forfeited with a total grant-date price of $0.6 million. The outstanding share balance in the 2001 plan is 251,525. During 2001, the Company granted 75,749 shares of non-vested stock to executive officers at a weighted-average grant price of $35.72 per share. These grants of non-vested stock are forfeitable and vest at three or five years of service with the Company. The Company amortizes compensation expense for the grant over the vesting period. Total amortization for the period ending December 31, 2001, is $0.3 million. The total grant-date price of the non-vested stock granted from January 1, 2001 through December 31, 2001, is $2.7 million. During 2001, 14,000 shares of non-vested stock were forfeited with a total grant-date price of $0.5 million. The outstanding share balance in the Executive Restricted Stock Compensation Plan is 61,749 at December 31, 2001. In 2001, the Company issued 3,129 shares to Non-Employee Directors as payment of 50% of their quarterly retainer. These shares are not forfeitable and vest immediately. The total grant-date price of this stock issued to non-employee directors from January 1, 2001 through December 31, 2001 is $0.1 million. In addition, in July 2001, the Company implemented a plan that would allow directors, at their discretion, to invest one half of their quarterly retainer in the Company's common stock in lieu of receiving cash. The Company will match any investment at a rate of 50%. The restricted stock given as matching shares, is forfeitable and vests over three years, thus amortizes the balance to director compensation expense over the vesting period. At December 31, 2001, 256 56 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 14 -- Stock Compensation Plans (continued) shares were matched under the program at a weighted-average grant price per share of $39.07. Total amortization expense recognized for the period ending December 31, 2001 is $0.01 million. There were no forfeitures through December 31, 2001. On January 9, 2002, the Compensation Committee of the Board of Directors approved stock and stock option grants to the Policy Committee and certain key employees of the Company. The equity grants were made in compliance with the terms of the Long-Term Stock Incentive Plan. A total of 550.0 thousand shares of non-vested stock was granted, with a total grant date price of $22.9 million. A total of 6.2 million options were granted, with a grant date fair value of $12.57 per option as determined by the Black-Scholes option valuation model. On February 5, 2002, the Compensation Committee of the Board of Directors approved stock grants to executive officers and approved stock and stock option grants to certain key employees and agents of the Company. A total of 87.4 thousand shares of non-vested stock was issued by the Company to executive officers, for cash totaling $3.3 million or $38.22 per share. A total of 154.6 thousand shares of non-vested stock was granted to certain key personnel, with a total grant price of $5.9 million. This program was funded with cash and the shares were purchased on the open market at the weighted-average grant price of $38.22 per share. A total of 602.0 thousand options were granted, with a grant date fair value of $11.34 per option as determined by the Black-Scholes option valuation model. Stock Ownership and Loan Program In January 2000, the Company adopted a loan program whereby the Company may extend credit to key executives to facilitate compliance with the Company's mandatory stock ownership requirements. These full recourse loans bear interest at variable rates and principal and interest are payable no later than the death of the executive, termination of employment or five years. As of December 31, 2001 and 2000, these loans receivable were $2.9 million and $3.6 million, respectively and are recorded in other assets. 57 JOHN HANCOCK FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 15 -- Quarterly Results of Operations (unaudited) The following is a summary of unaudited quarterly results of operations for 2001 and 2000:
2001 2000 ---------------------------------------------------------------------------------------- March June September December March June September December - -------------------------------------------------------------------------------------------------------------------------------- (in millions, except per share data) Premiums and other considerations ...... $1,246.9 $ 931.6 $ 861.0 $1,414.7 $ 932.8 $1,145.8 $ 880.6 $1,257.7 Net investment income (a) .............. 988.1 988.8 992.8 975.2 933.5 959.0 951.8 1,020.5 Net realized investment and other gains (losses), net of related amortization of deferred policy acquisition costs, amounts credited to participating pension contractholders, and the policyholder dividend obligation ........................... (24.4) (15.6) (58.5) (150.6) 18.7 60.6 (1.9) 11.3 Total revenues ......................... 2,394.3 2,144.8 2,047.4 2,522.5 2,092.5 2,351.9 2,029.4 2,463.5 Benefits and expenses (a) .............. 2,164.4 1,888.5 1,820.7 2,409.3 1,804.7 2,012.0 1,775.4 2,186.9 Income before income taxes and cumulative effect of accounting changes ............................. 229.9 256.3 226.7 113.2 287.8 339.9 254.0 276.6 Cumulative effect of accounting changes, net of tax ................ 7.2 -- Net income (c) ......................... 168.0 183.2 165.2 102.3 186.1 230.1 176.1 226.4 - -------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting changes per common share Basic ............................. $ 0.52 $ 0.60 $ 0.55 $ 0.34 $ 0.59 $ 0.73 $ 0.56 $ 0.72 Diluted ........................... 0.51 0.59 0.54 0.34 0.59 0.73 0.56 0.72 - -------------------------------------------------------------------------------------------------------------------------------- Net income per common share Basic (b) ......................... $ 0.54 $ 0.60 $ 0.55 $ 0.34 $ 0.59 0.73 $ 0.56 $ 0.72 Diluted (b) (c) ................... 0.54 0.59 0.54 0.34 $ 0.59 0.73 0.56 0.72 - -------------------------------------------------------------------------------------------------------------------------------- Market price per common share High .............................. $ 40.00 $ 41.40 $ 41.70 $ 41.93 $ 18.81 $ 24.63 $ 28.13 $ 38.25 Low ............................... 31.50 33.86 33.15 33.34 13.44 16.38 20.63 25.63 Close ............................. 38.45 40.26 39.95 41.30 18.06 23.59 26.88 37.63 - --------------------------------------------------------------------------------------------------------------------------------
(a) Results prior to September 30, 2001 have been reclassified to conform to the current presentation due to a reclassification of investment returns related to equity indexed universal life insurance policies sold through Maritime to benefits to policyholders. Approximately $(7.2), $37.7 million, $37.1 million, $0.1 million, $(11.4) million and $(24.0) million was reclassified for each quarterly period ending June 30, 2001 through March 31, 2000, respectively. (b) First quarter 2000 earnings per share are on a pro forma basis as the Company's IPO did not close until February 1, 2000. See Note 1. Actual net income per common share for the period from February 1, 2000 through March 31, 2000 was $0.45 for basic and diluted computations, revised for the implementation of SOP 00-3 as outlined in Note 1 to the consolidated financial statements. (c) Balances reclassified for the adoption of the provisions of SOP 00-3, as outlined in Note 1 to the consolidated financial statements. The adoption impacted net income and diluted earnings per share by $(0.1) million, or $--, $2.4 million, or $0.01, and $(5.9) million, or $(0.02), for the three months ended March 31, June 30 and September 30, 2001, respectively, and $(5.4) million, or $(0.02), $(2.3) million, or $(0.01), $(8.2) million, or $(0.03), and $(4.3) million, or $(0.01), for the three months ended March 31, June 30, September 30, and December 31, 2001, respectively. 58 EX-21.1 8 ex21-1.txt Exhibit 21.1 Place of Subsidiary Name Organization - -------------------------------------------------------------------------------- Direct Subsidiary of John Hancock Financial Services, Inc. - -------------------------------------------------------------------------------- John Hancock Life Insurance Company MA John Hancock Insurance Company of Vermont VT Long Term Care Partners LLC DE John Hancock International Holdings, Inc. MA John Hancock Life Assurance Company, Ltd. Singapore John Hancock Life Insurance Corporation Philippines John Hancock Life Insurance (Malaysia) Berhad Malaysia Britama Credit Sdn Bhd Malaysia Britama Properties Sdn Bhd Malaysia British American Investments Pte Ltd. Singapore The E-Software House Sdn Bhd Malaysia John Hancock Nominees (Tempetan) Sdn Bhd Malaysia John Hancock International (Southeast Asia) Private Ltd. Singapore John Hancock Canadian Capital Limited Canada John Hancock Canadian Corporation Canada John Hancock Canadian Holdings Limited Canada The Maritime Life Assurance Company Canada Canadian Corporate Health Solutions Inc. Canada Churchill Office Park Limited Canada CIFAS Investment Corporation Canada Eclipse Claim Services Inc. Ontario, Canada Financial Life Assurance Company of Canada Canada Dutch Village Investments Limited Canada John Hancock International, Inc. MA John Hancock TianAn Life Insurance Company Shanghai, China - -------------------------------------------------------------------------------- Indirect Subsidiaries of John Hancock Financial Services, Inc. - -------------------------------------------------------------------------------- Brazilian Power Development, LLC DE Comox Timber Ltd. Prince Edward Island, Canada Hancock Farmland Australia Rural Management Company Pty New South Limited (FARM) Wales, Australia Hancock Agriculture FARM Pty Ltd (FARM II) New South Wales, Australia Hancock Agriculture FARM Trust (FARM Trust) New South Wales, Australia Hancock Agriculture FARM LLC (FARM I) Queensland, Australia Frigate, LLC DE Hancock Victorian Plantations Holdings Pty Ltd. Australia Hancock Victorian Plantations Pty Ltd. Australia HBHC LLC DE Horseshoe Bend Hydroelectric Company ID Equinox Financial Group Inc. Canada Equinox Investor Services, Inc. Canada EIS Insurance Services, Inc. Canada 2733854 Canada Ltd. Canada Landex Properties Ltd. Canada P.V.S. Preferred Vision Services Inc. Canada John Hancock Employees' Securities Company, LLC DE John Hancock Employees' Securities Company II, LLC DE John Hancock Employees' Securities Company III, LLC DE John Hancock International Services, S.A. Belgium John Hancock Receivables, Inc. MA John Hancock Servicos Internationais S/C Limitada Brazil - -------------------------------------------------------------------------------- 1 Place of Subsidiary Name Organization - -------------------------------------------------------------------------------- John Hancock Subsidiaries, LLC DE The Berkeley Financial Group LLC DE John Hancock Advisers LLC DE John Hancock Advisers International, Ltd. United Kingdom John Hancock Funds LLC DE John Hancock Advisers International, (Ireland) Ltd. Ireland Patriot Group, Inc. MA Patriot Advisers, Inc. MA Patriot Distributors, Inc. MA Transamerica Fund Management Company DE Transamerica Fund Distributors, Inc. MD NM Capital Management, Inc. NM Sovereign Asset Management Corporation DE Essex Corporation d/b/a Essex Corporation of Connecticut, NY Essex Corporation (NY), Essex Financial Services, Essex Financial Services, Inc., Essex Insurance Agency, Inc., Essex Insurance Services, Essex Insurance Services, Inc., First Annuity Corporation Essex Brokerage Services, Inc. OH Essex Holding Company, Inc. NY American Annuity Agency of Texas, Inc. d/b/a NBC TX Insurance Services Ameritex Insurance Services, Inc. d/b/a Ameritex TX Investment Services, Inc. Annuity Agency of Connecticut, Inc. d/b/a BNY CT Insurance Agency, Inc. Annuity Agency of New Jersey, Inc. d/b/a BNY NJ Insurance Agency Annuity Agency of New York, Inc. d/b/a BNY Insurance NY Agency Constellation Financial Services, Inc. d/b/a CCF NJ Cork Agency of Pennsylvania, Inc. d/b/a Midlantic PA Investment Services Essex Agency, Inc. d/b/a Essex Agency of New York NY Essex Agency of California CA Essex Agency of Ohio, Inc. OH Essex Agency of Texas, Inc. TX Essex Corporation of Illinois IL Essex National Insurance Agency, Inc. MA Essex Resources, Inc. NY Evergreen Agency, Inc. d/b/a Main Line Investment PA Services FSB Investment Services Corporation NY The Investment Center Agency, Inc. OH Loyal Financial Services, Inc. d/b/a Essex Agency of NJ New Jersey, loyal Financial Services of Pennsylvania, CCM Financial Services Marquette Insurance Agency, Inc. (f/k/a Commerce IL Insurance Services, Inc. Metro Agency, Inc. NY New Amsterdam Insurance Agency, Inc. NY Newpoint Insurance Agency, Inc. OH Performance Annuity Insurance Agency CA Provident Insurance Center, Inc. MD Riverside Agency, Inc. NY San Jacinto Insurance Agency, Inc. TX SNB Annuity Brokerage, Inc. d/b/a Correspondent NY Insurance Agency of New York UNB Financial Services, Inc. d/b/a HTI Agency NJ Essex National Insurance Agency, Inc. d/b/a Essex of NY the Pacific Insurance Agency Essex National Securities, Inc. d/b/a ENSI NY Fusion Clearing, Inc. NY First Signature Bank & Trust Company NH Hancock Mezzanine Advisors, LLC DE Hancock Mezzanine Investments, LLC DE Hancock Mezzanine Investments II, LLC DE Hancock Mezzanine Partners, L.P. DE Hancock Mezzanine Partners II, LLC DE HMI Inc. DE *Not including G.P.'s "Carried Interest" - -------------------------------------------------------------------------------- 2 Place of Subsidiary Name Organization - -------------------------------------------------------------------------------- SFG HCK Timber Partnership, L.P. DE Hancock New Forests Fund I (USA) L.P. DE Hancock New Forests Fund Australia Pty Ltd DE Hancock Natural Resource Group, Inc. DE Cahaba Forest Management, Inc. DE Cahaba Forests, LLC DE ForesTree Australia I, LLC DE Hancock Victorian Plantations Australia I Pty Ltd. Australia ForesTree Australia II, LLC DE Hancock Victorian Plantations Australia II Pty Ltd. Australia Great Eastern Timber Company LLC DE Hancock Natural Resource Group Australia Pty Limited Australia High Street Timber Partners, LLC DE John Hancock Timber Resource Corporation DE ForesTree A Limited Partnership MA ForesTree B Limited Partnership MA ForesTree 96 Limited Partnership MA ForesTree Washington Limited Partnership MA ForesTree VI L.P. DE Knightwood Holdings 1 LLC DE Knightwood Holdings 2 LLC DE Knightwood Holdings 3 LLC DE Knightwood Holdings 4 LLC DE Knightwood Holdings 5 LLC DE Knightwood Holdings 6 LLC DE Texas Municipal Plans Consortium, LLC Wilson River, LLC OR Hancock Realty Investors Incorporated DE John Hancock Property Investors Corp. DE John Hancock Value Added Apartment Fund, LLC MA Hancock Venture Partners, Inc. DE Back Bay Partners II, L.P. DE HarbourVest Partners II, L.P. DE Back Bay Partners III, L.P. DE Evergreen III Limited Partnership DE Back Bay Partners IV L.P. DE Mayflower Fund Limited Partnership DE Back Bay Partners V L.P. DE HarbourVest Partners III, L.P. DE Back Bay Partners VI L.P. DE Falcon Ventures L.P. DE Back Bay Partners VII L.P. DE Massraf Faisal Al-Islami (Jersey) Ventures Limited Fund L.P. DE Back Bay Partners VIII L.P. DE Harbour Vest International Private Equity Partners L.P. DE Back Bay Partners X L.P. DE Axis Mundi Fund L.P. DE Back Bay Partners XI L.P. DE Harbor Vest Partners IV - Partnership Fund L.P. DE Back Bay Partners XII L.P. DE Harbor Vest Partners IV - Direct Fund L.P. DE Back Bay Partners XIII L.P. DE Falcon Ventures II L.P. DE Back Bay Partners XVII L.P. DE - -------------------------------------------------------------------------------- 3 Place of Subsidiary Name Organization - -------------------------------------------------------------------------------- H.P. Russia L.P. DE HVP-Russia, Inc. DE HVP Special Purpose Sub I, Inc. DE HVP Special Purpose Sub II, Inc. DE John Hancock Capital Growth Management, Inc. DE Independence Investment LLC DE Independence Fixed Income LLC DE Independence Investment Funding Corp. DE Independence Investment Capital LLC DE Independence Investment Research Portfolio L.P. DE Independence Investment Capital II LLC DE Independence Investment Long/Short Fund L.P. DE Independence Investment Capital III LLC DE Independence Investment Health Care Sector Portfolio DE L.P. JH Networking Insurance Agency, Inc. MA Networking, Inc. TN John Hancock Assignment Company DE Texas Municipal Plans Consortium, LLC DE John Hancock Capital Corporation DE John Hancock Energy Resources Management Inc. DE EIF Equity Holdings LLC DE Energy Investors Partners, L.P. DE Energy Investors Partners II, L.P DE Project Finance Partners, L.P. DE John Hancock HealthPlans, Inc. MA Dikewood Computer Corp. NM H.D. Management Corporation GA Ameriplan Health Systems, Inc. GA Ameriplan Health Services, Ltd. GA Ameriplan of Georgia, Inc. GA John Hancock Leasing Corporation DE JHFS One Corp. MA JHLC Two Corp. NY John Hancock Property and Casualty Holding Company DE Signature Management Company, LTD Bermuda John Hancock Management Company DE John Hancock Reassurance Company, Ltd. Bermuda John Hancock Real Estate Finance, Inc. DE John Hancock Home Mortgage Corp. DE John Hancock Financial Acess, Inc. DE John Hancock Realty Advisors, Inc. DE John Hancock Corporate Tax Credit Fund I Limited MA Partnership John Hancock Corporate Tax Credit Fund II, LLC MA John Hancock Corporate Tax Credit Fund III Limited MA Partnership John Hancock Corporate Tax Credit Fund IV, LLC MA John Hancock Corporate Tax Credit Fund V, LLC MA John Hancock Realty Management Inc. DE John Hancock Corporate Tax Credit Fund VI, LLP MA John Hancock Realty Services Corp. DE John Hancock Realty Equities, Inc. DE John Hancock Income Fund II Assignor, Inc. DE John Hancock Income Fund III Assignor, Inc. DE John Hancock Realty Funding, Inc. DE - -------------------------------------------------------------------------------- 4 Place of Subsidiary Name Organization - -------------------------------------------------------------------------------- John Hancock Signature Services, Inc. DE Profesco Corporation NY Professional Economic Services, Inc. NY Signator Financial Network, Inc. MA Signator Insurance Agency, Inc. MA Signator Insurance Agency of Ohio, Inc. OH Signator Insurance Agency of Nevada, Inc. NV Signator Insurance Agency of Alabama, Inc. AL Signator Insurance Agency of Oklahoma, Inc. OK Signator Insurance Agency of Texas, Inc. TX Signator Investors, Inc. DE Hancock Partners Insurance Agency, Inc. MA John Hancock Variable Life Insurance Company MA Investors Partner Life Insurance Company DE LR Company, LLC DE LVI, LLC DE P.T. Asuransi Jiwa Bumiputera John Hancock Indonesia P.T. Indras Insan Jaya Utama Indonesia PTPC Investor LLC DE Redwood Holdings Company, LLC DE Redwood, LLC DE 2660 Woodley Road Joint Venture DC Signature Funding Company LLC DE Signature Fruit Company, LLC DE Woodley Road Associates, Inc. DE 5 EX-23.1 9 ex-23.txt Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the documents listed below of our report dated February 7, 2002 with respect to the consolidated financial statements and schedules of John Hancock Financial Services, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2001. o Registration Statement (Form S-8 No. 333-30782) pertaining to The Investment-Incentive Plan for John Hancock Employees and The John Hancock Savings and Investment Plan of John Hancock Financial Services, Inc., o Registration Statement (Form S-8 No. 333-30718) pertaining to the John Hancock Financial Services, Inc. Long-Term Stock Incentive Plan, o Registration Statement (Form S-8 No. 333-52034) pertaining to The Investment Incentive Plan for the Employees of the John Hancock Funds Companies, o Registration Statement (Form S-8 No. 333-55064) pertaining to the Incentive Compensation Plan for Employees, Long-Term Incentive Plan for Senior Executives and Deferred Compensation Plan for Executives of John Hancock Financial Services, Inc., o Registration Statement (Form S-8 No. 333-61206) pertaining to the 1999 Long-Term Stock Incentive Plan and the Non-Employee Directors' Long-Term Stock Incentive Plan of John Hancock Financial Services, Inc., and o Registration Statement (Form S-3 No. 333-62668) of John Hancock Financial Services, Inc. and in the related Prospectus. /s/ ERNST & YOUNG LLP Boston, Massachusetts March 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----