Proposed Questions for Hancock’s Witnesses

This document is submitted on behalf of the Named Policyholders we represent and the David Trust with whom we are coordinating the presentation of our case in opposition to Hancock’s plan of reorganization.

We urge you to consider and ask the following questions which we believe are crucially important to a full and proper consideration of Hancock’s Plan, and the development of a complete record on this matter.

We are submitting these questions since the Presiding Officers ruled that we did not have full intervenor status in these proceedings and could not conduct cross examination of Hancock’s witnesses ourselves. We have been instructed to provide the questions in writing by witness and do so accordingly for Stephen Brown, John DeCiccio, Godfrey Perrott, and Derek Kirkland.

We request and reserve the right to amend this list of questions in writing or orally, as appropriate, particularly based on the actual testimony (rather than the pre-filed testimony) of the witnesses at the hearing.

Questions for Stephen Brown

Membership Interests:

9. Who owns John Hancock today? Do you agree or disagree with the definition of a mutual contained in the 13^th edition of Black & Skipper’s Life & Heath Insurance college-level textbook (attached). It defines a mutual life insurance company as: "A corporation authorized to sell life and (usually) health insurance, which is owned by and operated for the benefit of its policyholders." A similar definition appears in other such text books and on the National Association of Mutual Insurance Companies (NAMIC) Web Site. If you disagree, please explain.
10. Why does Hancock not describe the mutual is being owned by its policyholders?
11. Isn’t it true that the "membership interests" of Hancock’s par policyholders include more than the right to vote and the right to share in the liquidation of the company? Would you please describe and explain what your understanding – as an actuary and Chairman of Hancock – is of those other rights? Would you please also explain who the extinguishing of these rights in the demutualization may affect the policyholders interests (beyond voting and liquidation rights)?
12. What was the basis for the decision to default consideration to cash instead of stock as in all other demutualizations, including State Mutual? Why did you not disclose to the voting policyholders that approximately 80% of the policyholders were being cashed out (or through policy credits)? Why is this not a material fact?
13. How do you respond to the criticism that the Plan is prejudicial to policyholders because it cashes out 80% of the policyholders who were not informed of their "equity" interests in Hancock which include the right to non-contractual dividends. Please respond to this argument as articulated in David Schiff’s pre-filed testimony at, e.g., page 6-7.
14. Did you select stock or cash as your form of consideration? What were the financial reasons?

 

Allocation of Consideration:

15. Please respond to the questions posed to Godfrey Perrott concerning the variable allocation.

Closed Block:

1. Please answer those questions above not addressed by Stephen Brown.

Closed Block:

2. After the reorganization, Hancock’s board of directors will retain discretion over dividend payments to policyholders in the Closed Block. Does this discretion over payment of dividends comprise a fiduciary duty to policyholders in the Closed Block, or an obligation of some different nature?
3. According to the Plan at Section 8.2(b)(xv), if for various stated reasons "the Closed Block assets no longer meet the requirements set forth in this Section 8.2(b), [Hancock] shall take such action consistent with market conditions and prudent management practices as may be necessary to bring the closed Block into compliance with this Section 8.2(b)." How and by whom will such a determination be made that Closed Block assets are no longer in compliance with the Plan, and that Hancock is therefore liable for any shortfall? Is there any provision for notice to Closed Block policyholders when and if the Closed Block assets become non-compliant?
4. Has any plan been formulated for reporting on the performance of the Closed Block directly to Closed Block policyholders? If so, would you please describe this plan, including the frequency of such contemplated reporting, intended substance of such reports, and who is to prepare them? If not, why not?
5. Has any provision been made for notice to the Closed Block policyholders prior to application by the reorganized Hancock to the Massachusetts Commissioner of Insurance for discontinuation of the Closed Block? If so, would you please describe the contemplated content and timing of any such notice, including whether policyholders will be notified of any right to participate or comment on such an application in any administrative proceedings, formal or informal, to consider the application?
6. Would you please comment on whether Hancock has disclosed the difference between the contractual dividends the Closed Block was designed to protect, and the dividends policyholders received as members of the mutual, which included a distribution from the profits of the enterprise as recognized by Congress when it enacted section 809 of the Internal Revenue Code?
7. During the period around 1989 through 1997, the number of individual life insurance policies written by John Hancock Mutual Life Insurance Company declined approximately 40%. Why does this reduction in individual life insurance policies, which substantially outpaced the industry during the same time period, comprise a "de facto demutualization" and a violation of the prohibitions of M.G.L. Chapter 175, Section 19E, regarding prohibitions against reducing the number of policyholders? What is the number of policyholders in John Hancock Variable Life Insurance Company over the same time period? What is the number of policies from 1989 to the present for both Mutual and Variable Life, an the percentage of Hancock’s life insurance business in both for each year over that period?

 

Questions for Godfrey Perrott

1. Please explain why, in your view, the Massachusetts demutualization law permits the use of Historic Plus Perspective methodology? Why does the statute’s prohibition on the consideration of "in force business" not preclude the use of Historic Plus? Please feel free to answer as an actuary. How do you explain the different conclusion Milliman & Robertson reached in the State Mutual matter, which you acknowledge you supervised, in its May 4, 1994 memorandum on the subject?

According to your pre-filed testimony, at page 16, the "estimated experience factors for the future [for the variable component of consideration], except for Closed Block business, by using assumptions underlying Hancock’s business plan projections, and by projecting these factors farther into the future based on a continuation of the assumptions underlying the latter years of the business plan projections." You further stated that you believed this was an "appropriate basis from which to derive and extend the estimated experience factors for the future." Id at 17. Please answer the following questions:

2. Is this information contained in the Division’s public record in this matter for my clients to review? If not, why not? How important was this information to your calculations on the variable component? Is it possible, based on the public record, to make an accurate assessment of the variable component assumptions? Of how these assumptions affect different types of policies?
3. What is the date of the business plan on which you relied and how many years did the business plan cover? (Five years? Ten years? More?)
4. On what final year of the business plan, then, did you rely on the future assumptions going forward?
5. How many years did you extend those assumptions out for the purposes of projecting the variable component?
6. Do you acknowledge that the future business plan projections are subjective and may vary considerably from actual future performance?
7. To what extent might different assumptions about the future change the variable component allocation among different types of policies (e.g., Closed Block versus non-Closed Block policies)? Could the variation range from five, ten, fifteen, fifty or even 100 percent or more depending upon the accuracy of the assumptions about the future? Did you run different numbers and assumptions? If so, did they produce different variable allocations among different types of policies or policyholders? If so, please explain what the different results were.

 

According to your pre-filed testimony, at page 17, you state that the "estimated experience factors for the future were determined for the Closed Block business by using the assumptions underlying the Closed Block funding, with appropriate adjustment for expenses (which are not funded for in the Closed Block), because the future profit that will actually inure to John Hancock will be determined by the assumptions used at the time of funding."

8. What is the basis for using the business plan for determining the variable component, but not the Closed Block? To what extent do your assumptions concerning the Closed Block policies differ from those used in the variable component? Why?
9. When will the amount of the Closed Block funding be determined?
10. Do you agree that the amount of funding is crucial to a properly working Closed Block? (I believe this approximates the testimony of your colleague Daniel McCarthy in the State Mutual matter.) Do you agree that if the Closed Block funding is not adequate, then the policies in the Closed Block will be affected adversely, that is they will perform less well than intended?

Additional Questions:

1. What do you estimate to be the economic impact on the Closed Block of the guarantee fund assessment on the Closed Block permitted by the Plan? Don’t the potential guarantee fund assessments represent an enormous potential liability of the Closed Block, the magnitude of which has not been disclosed to Hancock’s policyholders nor fully described in the public record?
2. According to the Plan at Section 8.2(b)(xv), if for various stated reasons "the Closed Block assets no longer meet the requirements set forth in this Section 8.2(b), [Hancock] shall take such action consistent with market conditions and prudent management practices as may be necessary to bring the closed Block into compliance with this Section 8.2(b)." How and by whom will such a determination be made that Closed Block assets are no longer in compliance with the Plan, and that Hancock is therefore liable for any shortfall? Is there any provision for notice to Closed Block policyholders when and if the Closed Block assets become non-compliant?
3. In your opinion, is there enough information in the public record in this matter to permit policyholders or the public generally to adequately and substantively examine the Closed Block assumptions and funding?
4. The final review of Hancock’s proposed Closed Block by Tillinghast-Towers Perrin, an actuarial consultant to the Division of Insurance in this matter, was not complete as of November 10, 1999, or if complete, was not made publicly available in time for Tillinghast’s findings to be examined and discussed in pre-filed testimony. In your opinion, given that as of November 10, 1999, Tillinghast had not completed testing or reporting on the projected cash flow for the large Premium Notice Ordinary line as well as the Monthly Debit Ordinary line, is there enough information in the public record in this matter to permit policyholders or the public generally to adequately and substantively examine the Closed Block assumptions and funding?
5. Would you please comment upon the difference between the assets which fund the closed block, which are described at p. 25 of your written statement of November 1, 1999 as "a selected portion of John Hancock’s investment segments which support individual life insurance," and the entire company’s assets, which would support policyholder dividends in the former mutual? In your development of the proposed Closed Block, did you ever study or determine whether there was any prejudice to the Closed Block policyholders in using only investment selected segments to support dividends to the Closed Block policyholders? Were you ever directed by Hancock’s board of directors to examine this possibility?

Questions for Derek Kirkland

1. Would you please describe the nature of your engagements related to Hancock’s proposed Plan of Reorganization, and your agreed-upon compensation for each of those engagements? As lead underwriter in the initial public offering in conjunction with the Plan, what kind of financial and other compensation does Morgan Stanley Dean Witter expect to receive from Hancock or its affiliates, and in what amount (please provide your best estimate)?
2. Why was there no disclosure made in your fairness opinion to Hancock, or otherwise to Hancock’s policyholders or the public, of the totality of your agreements or engagements with Hancock and your expected compensation for the same?
3. Your opinion on the fairness of the proposed reorganization to John Hancock’s policyholders relates only to fairness to policyholders in the aggregate. Were you ever asked by Hancock’s board of directors or management to examine or opine upon the fairness, or relative fairness, of the proposed reorganization to the various lines of policies and policyholders?
4. In a $2 billion initial public offering, if Hancock’s policyholders were to be given preemptive rights to acquire 25% of the offering, or $500 million in stock, wouldn’t a 20% increase in the value of the stock mean additional value to policyholders of approximately $100 million?
5. If it is at all feasible to give policyholders preemptive rights to acquire 25%, or some other significant amount, of the stock to offered in Hancock’s initial public offering, isn’t it fairer to policyholders than the current plan to make such preemptive rights available?
6. Were you ever asked by Hancock’s board of directors to develop a subscription rights program for Hancock’s policyholders? Would you describe precisely the nature of your engagement by Hancock regarding provision of subscription rights to policyholders?
7. Would you please fully describe the nature of the assumptions and limitations under which you developed your opinion on the fairness of the proposed reorganization to Hancock’s policyholders, specifically, whether you were or were not asked by Hancock’s board of directors and or management to compare the proposed demutualization with other alternatives for achieving Hancock’s stated ends, and whether there were certain matters you were not to inquire into or examine?

Submitted by

Adkins & Kelston on behalf of their clients and the Davis Trust