10-Q 1 t26913mfe10-q.txt MANULIFE FINANCIAL N/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 --------------------- Securities and Exchange Commission File No. 812-06037 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 22-2265014 (I.R.S. Employer Identification No.) 500 Boylston Street Boston, Massachusetts 02116 (Address of principal executive offices) (617) 663-3200 (Registrant's telephone number, including area code) --------------------- Indicated by check mark whether the registrant (1) has filed 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. [ X ] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of the issuer's sole class of common stock, as of March 31, 2001 was 2,602. 2 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA Quarterly Report on Form 10-Q For the period ended March 31, 2001 Table of Contents --------------------------------------------------------------------------------

2 3 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA CONSOLIDATED BALANCE SHEETS

See accompanying notes. 3 4 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes. 4 5 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)

See accompanying notes. 5 6 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes. 6 7 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 1. ORGANIZATION The Manufacturers Life Insurance Company of North America (hereinafter referred to as "MNA"), is a wholly-owned subsidiary of Manulife-Wood Logan Holding Co., Inc. (hereinafter referred to as "MWLH"). MWLH is an indirect wholly-owned subsidiary of The Manufacturers Life Insurance Company ("MLI"). MLI is a wholly-owned subsidiary of Manulife Financial Corporation ("MFC"), a publicly traded company. MFC and its subsidiaries are known collectively as "Manulife Financial." MNA owns 100% of The Manufacturers Life Insurance Company of New York (hereinafter referred to as "MNY") and is the managing member with a 90% interest in Manufacturers Securities Services, LLC ("MSS"). MNY owns a 10% interest in MSS. MNA, MNY and MSS are hereinafter referred to collectively as "the Company." MNA issues individual and group annuity contracts in forty-eight states, excluding New York and New Hampshire. MNY issues individual and group annuity contracts and individual life insurance contracts in New York. Amounts invested in the fixed portion of the contracts are allocated to the general accounts of the Company or noninsulated separate accounts of the Company. Amounts invested in the variable portion of the contracts are allocated to the separate accounts of the Company. Each of these separate accounts invest in shares of the various portfolios of the Manufacturers Investment Trust (hereinafter referred to as "MIT"), a no-load, open-end investment management company organized as a Massachusetts business trust, or in open-end investment management companies offered and managed by unaffiliated third parties. MSS is the investment adviser to MIT and the principal underwriter of all variable contracts issued by MNA. MSS also acts as the principal underwriter for the variable contracts and is the exclusive distributor for all contracts issued by MNY. 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), except that they do not contain complete notes. However, in the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the results. These financial statements should be read in conjunction with the financial statements and the related notes included in the Company's annual report on Form 10-K for the year ended December 31, 2000. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2001. 7 8 3. DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001 with the adoption of SFAS No. 133 - "Accounting for Derivative Instrument and Hedging Activities", and SFAS No. 138 "Accounting for Certain Derivatives and Certain Hedging Activities," all derivative instruments are reported on the Consolidated Balance Sheets at their fair value, with changes in fair value recorded in income or equity, depending on the nature of the derivative instrument. Changes in the fair value of derivatives that are not designated as hedges are recognized in current period earnings. The Company has entered into a reinsurance agreement with an unaffiliated reinsurer to reinsure the risk associated with the "Guaranteed Retirement Income Program". As a result, there is an embedded derivative within this agreement that has an estimated fair market value of $100 million as at March 31, 2001. The fair value is reflected in the Consolidated Balance Sheets as part of "Due from reinsurers". The $100 million estimated fair value of the obligation to the policyholder has been reflected in the Consolidated Balance Sheets as part of "Policyholder liabilities and accruals". There was no cumulative effect to the consolidated financial statements of the company upon the adoption of these accounting statements. 4. COMPREHENSIVE (LOSS) INCOME Total comprehensive (loss) income was as follows: FOR THE THREE MONTHS ENDED MARCH 31

Other comprehensive income is reported net of income tax expense of $289 (2000 - $289). 5. CONTINGENCIES Over the normal course of its business, the Company may become subject to various lawsuits. Contingent liabilities arising from litigation, income taxes and other matters are not considered material. 8 9 Item 2. Management's Discussion And Analysis Of Results Of Operations And Financial Condition OVERVIEW The Manufacturers Life Insurance Company of North America (hereinafter referred to as "MNA" or the "Company") reported a net loss of $10.5 million for the first quarter ended March 31, 2001 in comparison to net income of $15.0 million for the same period last year. This change was the result of the impact from a continued downturn in the equity market environment for the first 3 months of 2001 as compared to favorable market performance in the same time period of last year. REVIEW OF OPERATING RESULTS The Company has two segments, wealth management and insurance. The insurance operations are considered by management to be in a developmental stage. The following analysis of the consolidated results of operations and financial condition of MNA should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements for the quarter ended March 31, 2001. The discussion will focus solely on the wealth management operations of the Company due to the limited assets and revenues associated with the insurance operations. The Company's primary source of earnings in its wealth management operations are from the sale of annuities and are comprised of fees assessed against policyholder account balances held in the Company's separate accounts. Such fees include mortality and expense risk charges, surrender charges, and an annual administrative charge. In addition, the Company earns a spread between the advisory fees charged to manage the separate account assets invested in the Manufacturers Investment Trust, a no-load, open-end management investment company, and the sub-advisory fees paid to external managers of those same assets. A key factor in the Company's profitability is sustained growth in the underlying assets through market performance coupled with the ability to acquire and retain new variable annuity and life deposits. The Company began to sell pension products in 1998. No significant revenues were generated from the sales of such products since then. Revenues Total revenues for the first quarter of 2001 increased by 6.3% to $114.8 million, up from the $107.9 million comparative of 2000. Fees associated with the management of the separate accounts and policyholder general accounts increased by 6.1% to $111.4 million, up from $105.0 million in 2000. The underlying average asset base against which such fees are calculated has remained relatively constant in comparing the two quarters. However, the 2001 results reflect additional fees pertaining to the sale of new and existing products that generate additional asset based revenue. Benefits and Expenses Total benefits and expenses for the first quarter of 2001 increased by $48.5 million to $133.2 million compared to $84.7 million in 2000. Included in this increase is $47.3 million pertaining to the amortization of Deferred Acquisition Costs ("DAC"). The continued downturn in the equity markets resulted in investment return experience being poorer than expected and well below experience recorded in the first quarter of 2000. The majority of the increase in DAC amortization is related to this variance. Other matters of note include a reduction in selling expenses resulting from 2001 deposits being lower than that of the first quarter of 2000, an increase in borrowing costs due mainly to a larger notes payable to affiliates balance existing at the beginning of 2001, and an increase in subadvisory fees which is consistent with the increase in advisory fees. Financial Position Total assets decreased by 9.0% to $17.0 billion as at March 31, 2001, down from $18.7 billion as at December 31, 2000. Separate account assets account for 88.2% of total assets and decreased by 10.7% to 9 10 $15.0 billion as at March 31, 2001, down from $16.8 billion as at December 31, 2000. This decrease is mainly the result of the fall in equity market values and is the primary cause of the reduction in total assets. Due from reinsurers increased by 10.9% to $819.2 million as at March 31, 2001, up from $738.9 million as at December 31, 2000. The $819.2 million figure includes $100 million representing the estimated fair value of an embedded derivative in a ceded reinsurance agreement and is the result of implementing SFAS No. 133 - "Accounting for Derivative Instrument and Hedging Activities", and SFAS No. 138 "Accounting for Certain Derivatives and Certain Hedging Activities", both of which became effective January 1, 2001. There was no cumulative effect to the Consolidated Financial Statements of the Company upon the adoption of these pronouncements. The reinsurance agreement hedges the equity market risk exposure associated with the Guaranteed Retirement Income Program ("GRIP"). Total liabilities have decreased proportionately with the change in the related assets. Separate account liabilities account for 90.9% of total liabilities and decreased by 10.7% to $15.0 billion as at March 31, 2001, down from $16.8 billion as at December 31, 2000. The decrease is consistent with that pertaining to the separate account assets. Policyholder liabilities and accruals increased by 11.1% to $973.5 million as at March 31, 2001, up from $876.2 million as at December 31, 2000. This increase includes $100 million representing the policyholder liability for benefits provided under the "Guaranteed Retirement Income Program" as at March 31, 2001. Notes payable to affiliates decreased by $17.4 million to $424.7 million as at March 31, 2001, down from $442.0 million as at December 31, 2000. The decrease resulted from a net repayment during the first quarter of 2001. Included in total shareholder's equity is an increase in additional paid-in capital of $50.0 million to $310.1 million as at March 31, 2001, up from $260.1 million as at December 31, 2000. MARKET RISK Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. The primary market risk exposure for the Company is the impact of lower than expected equity market performance on its asset-related fee revenue. The Company also has certain exposures to changes in interest rates. The Company earns asset based fees calculated on the asset levels invested in the separate accounts. As a result, the Company is subject to equity risk and the effect changes in equity market levels will have on the amounts invested in the separate accounts. Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates. This risk arises from the issuance of certain interest sensitive annuity products and the investing of those proceeds in fixed rate investments. The Company manages its interest rate risk through an asset-liability management program and has established a target portfolio mix which takes into account the risk attributes of the liabilities supported by the assets, expectations of market performance, and a generally conservative investment philosophy. In addition, the Company has diversified its product portfolio offerings to include products that contain features that will protect it against fluctuations in interest rates. Based on the Company's overall exposure to equity price and interest rate risks, the Company believes that changes in market rates would not materially affect the consolidated near-term financial position, results of operations, or cashflows of the Company as of March 31, 2001. Refer to the Company's Annual Report on form 10-K for a more detailed discussion of market risks. RATINGS Financial strength is a key factor in generating new business, maintaining and expanding distribution relationships, and providing a base for expansion, acquisitions, and growth. The Company is part of a group of companies collectively known as Manulife Financial. Manulife Financial is a leading Canadian-based financial services company operating in 15 countries and territories worldwide. Through its extensive network of employees, agents and distribution partners, Manulife Financial offers clients a diverse range of financial protection products and wealth management services. Funds under management by Manulife Financial were in excess of $124.1 billion (Cdn) as of March 31, 2001 with a consolidated capital position of $9.7 billion (Cdn). 10 11 Along with its ultimate parent, Manulife Financial Corporation, the Company enjoys the following financial strength and claims paying ratings that are among the strongest in the life insurance industry. A.M. Best A++ (1st of 16 categories) Fitch AAA (1st of 22 categories) Standard & Poor's AA+ (2nd of 21 categories) Moody's Investor Services Aa2 (3rd of 21 categories)

FORWARD-LOOKING STATEMENTS Certain information included herein is forward-looking with respect to the Company, including its business operations and strategy, and financial performance and condition. These statements generally can be identified by the use of forward-looking words such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe" or "continue" or the negative thereof or similar variations. Although management believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties and actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the Company's expectations include among other things, general economic and market factors such as interest rates, business competition and changes in government regulations or in tax laws. 11 12 PART II--OTHER INFORMATION Item 1 - Legal Proceedings No reportable events Item 2 - Changes In Securities (a) and (b) No reportable events (c) The Company currently sells Venture Group Annuity, a flexible premium payment deferred variable unallocated group annuity, to retirement plans that qualify for special tax treatment under Section 401(a) of the Internal Revenue Code. Sales of these securities are not required to be registered under the Securities Act of 1933 (Section 3(a)(2) of this Act). Manufacturers Securities Services, LLC, a majority owned subsidiary of the Company is the principal underwriter of the contracts and Manulife-Wood Logan Co., Inc., an affiliate of the Company, is the promotional agent. There are no maximum or minimum purchase payments required to establish a contract. The value of a contract will vary according to the investment performance, charges and expenses of the subaccounts in which the contract is invested. As of March 31, 2001, the total variable assets in the Venture Group Annuity was $ 34,087,522. Items 3 - Defaults Upon Senior Securities No reportable events Item 4 - Submission Of Matters To A Vote Of Security Holders No reportable events Item 5 - Other Information No reportable events Item 6A - Exhibits (3) Exhibits (the Registrant is also referred to as the "Company")

12 13

13 14

14 15

ITEM 6B - REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter. 15 16 SIGNATURES Pursuant to the requirements 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. THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA (Registrant) By: /s/ DAVID W. LIBBEY ----------------------------------- David W. Libbey Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) Date: May 15, 2001

MANUFACTURERS LIFE INSURANCE CO OF NORTH AMERICA 10-Q