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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number: 33-57020
THE MANUFACTURERS LIFE
INSURANCE COMPANY OF AMERICA
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of incorporation or organization)
23-2030787
(I.R.S. Employer Identification No.)
500 N. Woodward Avenue
Bloomfield Hills, Michigan 48304
(Address of principal executive offices)
(416) 926-6700
(Registrant's telephone number, including area code)
Indicate 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 June 1, 1998 is 4,501,860.
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THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
Quarterly Report on Form 10-Q
For the period ended June 30, 1998
Table of Contents
Page
Part I Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as at June 30, 1998 and December
31, 1997 3
Consolidated Statements of Income for the three and six month
periods ended June 30, 1998 and 1997 4
Statements of Cash Flows for the six months ended June 30, 1998
and 1997 5
Notes to Financial Statements 6
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II Other Information 11
Item 1 Legal Proceedings 11
Item 2 Change in Securities 11
Item 3 Default upon Senior Securities 11
Item 4 Submission of Matters to a vote of Security Holders 11
Item 5 Other Information 11
Item 6A Exhibits 11
Item 6B Reports on Form 8-K 15
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The Manufacturers Life Insurance Company of America
Consolidated Balance Sheets (Unaudited)
As at As at
June 30 December 31
ASSETS ($ thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
INVESTMENTS: (UNAUDITED)
Securities available-for-sale, at fair value:
Fixed maturity (amortized cost: 1998 $48,248; 1997 $66,565) $ 50,421 $ 67,893
Equity (cost: 1998 $20,419; 1997 $20,153) 20,642 19,460
Mortgage loans 85 131
Policy loans 16,978 14,673
Cash and short-term investments 22,106 22,012
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 110,232 $ 124,169
- ---------------------------------------------------------------------------------------------------
Deferred acquisition costs 149,112 130,355
Income taxes recoverable 3,488 5,679
Other assets 9,205 9,364
Separate account assets 1,014,979 897,044
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,287,016 $ 1,166,611
===================================================================================================
LIABILITIES, CAPITAL AND SURPLUS ($ thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
Policyholder liabilities and accruals $ 96,625 $ 94,477
Notes payable 8,500 41,500
Due to affiliates 10,195 13,943
Deferred income taxes 2,762 1,174
Other liabilities 14,330 11,704
Separate account liabilities 1,014,979 897,044
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 1,147,391 $ 1,059,842
===================================================================================================
CAPITAL AND SURPLUS:
Common shares 4,502 4,502
Preferred shares 10,500 10,500
Contributed surplus 132,887 98,569
Retained earnings (deficit) (3,573) (1,910)
Foreign currency translation adjustment (6,061) (5,272)
Net unrealized gain on securities
available-for-sale 1,370 380
- ---------------------------------------------------------------------------------------------------
TOTAL CAPITAL AND SURPLUS 139,625 106,769
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, CAPITAL AND SURPLUS $ 1,287,016 $ 1,166,611
===================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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The Manufacturers Life Insurance Company of America
Consolidated Statements of Income (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
($ thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
REVENUE:
Premiums $ 2,208 $ 1,687 $ 4,158 $ 3,642
Fee income 13,344 11,674 26,011 22,405
Net investment income 985 3,406 2,619 6,688
Realized investment gains (losses) 74 (371) (8) (205)
Other 47 48 104 143
- --------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 16,658 $ 16,444 $ 32,884 $ 32,673
==================================================================================================
BENEFITS AND EXPENSES:
Policyholder benefits and claims $ 2,406 $ (1,054) $ 7,582 $ 1,693
Operating costs and expenses 9,117 7,538 19,473 16,064
Commissions 743 1,013 1,296 2,346
Amortization of deferred acquisition costs 3,158 3,724 4,486 7,324
Interest expense 976 -- 1,884 2,156
Policyholder dividends 138 411 794 1,233
- --------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES $ 16,538 $ 11,632 $ 35,515 $ 30,816
- --------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 120 4,812 (2,631) 1,857
- --------------------------------------------------------------------------------------------------
INCOME TAX BENEFIT (EXPENSE) (22) (2,096) 968 (1,060)
- --------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 98 $ 2,716 $ (1,663) $ 797
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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The Manufacturers Life Insurance Company of America
Consolidated Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED
JUNE 30
($ thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ (1,663) $ 797
Adjustments to reconcile net income to net cash used in operating activities:
Additions (decreases) to policy liabilities 304 (835)
Deferred acquisition costs (24,055) (15,209)
Amortization of deferred acquisition costs 4,486 7,324
Realized losses on investments 8 205
Decreases to deferred income taxes 1,110 77
Other 2,674 (6,086)
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (17,136) $ (13,727)
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Fixed maturity securities sold $ 23,438 $ 60,461
Fixed maturity securities purchased (5,538) (46,244)
Equities sold 4,922 4,359
Equities purchased (5,177) (4,555)
Mortgage loans repaid 46 (43)
Policy loans advanced, net (2,305) (2,868)
Guaranteed annuity contracts -- 171,691
- --------------------------------------------------------------------------------------------------------
Cash provided by investing activities $ 15,386 $ 182,801
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Receipts from variable life and annuity policies
credited to policyholder account balances $ 4,080 $ 4,048
Withdrawals of policyholder account balances on
variable life and annuity policies (2,236) (1,219)
Repayment of bonds payable -- (158,760)
Reduction of notes payable (34,318) --
Conversion of notes payable to contributed surplus 34,318 --
- --------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities $ 1,844 $(155,931)
- --------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS:
Increase during the period $ 94 $ 13,143
Balance, beginning of year 22,012 17,493
- --------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 22,106 $ 30,636
========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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The Manufacturers Life Insurance Company of America
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The
Manufacturers Life Insurance Company of America and its wholly-owned
subsidiaries have been prepared in accordance with generally accepted
accounting principles ("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 ManAmerica's annual report on Form 10-K for the year ended
December 31, 1997. Operating results for the six months ended June 30,
1998 are not necessarily indicative of the results that may be expected
for the full year ending December 31, 1998.
2. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS)
130, "Reporting Comprehensive Income". SFAS 130 establishes standards
for reporting and displaying comprehensive income and its components in
a full set of general-purpose annual financial statements.
Comprehensive income includes all changes in capital and surplus during
a period except those resulting from investments by, and distributions
to shareholders. The adoption of SFAS 130 resulted in revised and
additional disclosures but had no effect on the financial position,
results of operations, or liquidity of the Company.
Total comprehensive income for the six months ended June 30, 1998 and
1997 was as follows:
SIX MONTHS ENDED
JUNE 30
COMPREHENSIVE INCOME: 1998 1997
- -------------------------------------------------------------------------------
NET INCOME (LOSS) $(1,663) $ 797
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains
on available-for-sale securities 990 1,068
Foreign currency translation (789) -
- -------------------------------------------------------------------------------
Other comprehensive income $ 201 $1,068
- -------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(1,462) $1,865
- -------------------------------------------------------------------------------
Other comprehensive income is reported net of taxes of $533 and $575
respectively for the six months ended June 30, 1998 and 1997.
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3. CAPITAL CONTRIBUTION
On June 30, 1998 an outstanding promissory note issued by the Company
on December 5, 1997 to ManUSA in the amount of $34.3 million ($33
million principal plus $1.3 million accrued interest) was converted to
capital and reported as contributed surplus.
4. COMPARATIVE FIGURES
Certain amounts in the 1997 financial statements have been reclassified
to conform to the 1998 financial statement presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following analysis of the consolidated results of operations and financial
condition of the Manufacturers Life Insurance Company of America, (hereafter
referred to as "ManAmerica" or the "Company") should be read in conjunction with
the Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements.
CORPORATE STRUCTURE
The Company is a direct wholly-owned U.S. subsidiary of The Manufacturers Life
Insurance Company (U.S.A.) ("ManUSA"), which in turn is a direct wholly-owned
subsidiary of the Manulife Reinsurance Corporation (U.S.A.) ("MRC"). MRC is an
indirectly wholly-owned subsidiary of The Manufacturers Life Insurance Company
("Manulife Financial"), a Canadian mutual insurance company. Manulife Financial,
with consolidated assets under management at December 31, 1997 of $79.7 billion
($Can), actively operates in thirteen countries worldwide. Manulife Financial
has been doing business in the United States since 1903. The Company markets
variable annuity and variable life products in the United States and traditional
insurance products in Taiwan.
IMPACT OF YEAR 2000
Preparing computer systems to deal with the Year 2000 risk has become a major
issue for businesses throughout the world. Within the Manulife Financial group,
a group-wide program has been underway since 1996 to make all critical systems
compliant by the end of 1998 and other systems compliant by the end of 1999.
Included in this program are all systems applicable to and shared by the Company
with Manulife Financial. Based on a detailed assessment, Manulife Financial
determined that a portion of its software needs to be modified or replaced so
that its computer systems will function properly into the Year 2000 and beyond.
Like most companies, the Year 2000 issue represents a significant challenge for
Manulife Financial and extensive resources have been dedicated to modifying
existing software and to converting to new software. However, there can be no
assurances that Manulife Financial's systems, nor those of other companies on
which Manulife Financial relies, will be fully converted on a timely basis and
therefore that all adverse effect on the Company due to the Year 2000 risk will
be avoided. Manulife Financial is presently consulting with vendors, customers,
subsidiaries, third-parties and other businesses with which it deals to ensure
that no material aspect of its, or the Company's, operations will be hindered by
the Year 2000 risk.
FORWARD-LOOKING STATEMENTS
Certain information included herein is forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995, including, but not limited to,
statements concerning anticipated operating results, financial resources, growth
in existing markets and the impact of the year 2000. Such forward-looking
information involves important risks and uncertainties that could significantly
affect actual results and cause them to differ materially from expectations
expressed herein. These risks and uncertainties include changes in general
economic conditions, the effect of regulatory, tax and competitive changes in
the environment in which the Company operates, fluctuations in interest rates,
performance of financial markets and the Company's ability to achieve
anticipated levels of earnings.
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REVIEW OF CONSOLIDATED OPERATING RESULTS AND CONSOLIDATED FINANCIAL CONDITION
The discussion that follows focuses on the results for the six months ended June
30, 1998 compared to the results for the six months ended June 30, 1997.
DEPOSITS AND PREMIUMS
The strong growth in variable insurance sales experienced during the first
quarter of 1998 leveled off during the second quarter. Variable universal life
(VUL) deposits of $103.1 million for the first half of 1998 were 23% higher than
the VUL deposits of $83.7 million for the same period in 1997. VUL deposits for
the three months ended June 30, 1998 increased by $45.6 million compared to an
increase of $40.5 million for the same period in 1997. Sales of the
corporate-owned (COLI) Variable Universal Life contract, which was introduced in
1997, continued to increase in the second quarter of 1998 compared to 1997,
though at a slower pace than in the first quarter of 1998. The growth in the
COLI business in the first half of 1998 has contributed to the increase in
separate account assets which have grown from $897 million at the end of 1997 to
$1,015 million at the end of the first half of 1998.
Overall premium income for the first half of 1998 was $4.2 million compared to
$3.6 million for the same period of 1997. U.S. premiums assumed from ManUSA have
decreased $0.2 million and Taiwan premiums have increased by $0.8 million for
the six months ended June 30, 1998 compared to the same period of 1997.
FEE INCOME
Fee income increased to $26.0 million in the first half of 1998, compared to
$22.4 million for the same period in 1997. The majority of the increase in fee
income is attributable to cost of insurance charges on a larger inforce block of
business in 1998 compared to 1997, and management fees earned on separate
account assets which have increased significantly in 1998 compared to 1997 as
explained by the growth in deposits above.
NET INVESTMENT INCOME
Net investment income was $2.6 million in the first half of 1998, compared to
$6.7 million in the same period of 1997. Included in the 1997 net investment
income amount is approximately $2.5 million of interest earned on the
Manufacturers Life Mortgage Securities Corporation ("MLMSC") bonds which were
repaid on March 1, 1997. Excluding this item, net investment income in the first
half of 1998 decreased by approximately $1.6 million compared to the same period
of 1997. This decrease is due to a decrease in bond holdings during the first
half of 1998 compared to the first half of 1997.
POLICYHOLDER BENEFITS
Policyholder benefits were $7.6 million in the first half of 1998, compared to
$1.7 million in the first half of 1997. This increase is primarily due to
increased reserves for the Taiwan business due to new business and a slower
run-off of reserves in the first half of 1998 as lower surrender levels were
experienced compared to the first half of 1997.
EXPENSES AND DEFERRED ACQUISITION COSTS (DAC) AMORTIZATION
Operating costs and expenses, including commissions, were $44.4 million for the
first half of 1998 compared to $32.7 million for the first half of 1997 before
deferral of acquisition expenses ($20.8 million and $18.4 million respectively
net of deferred acquisition expenses). The increase in expenses in the first
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half of 1998 is primarily attributable to costs incurred in the development and
sale of the COLI variable universal life product introduced in 1997. A
significant portion of these expenses have been deferred in the first half of
1998 resulting in an increase in the DAC asset as explained below. The DAC
amortization expense for the first half of 1998 was $4.5 million compared to
$7.3 million for the same period in 1997. This decrease is due primarily to a
lower DAC amortization rate used in 1998 compared to 1997 because of assumption
changes.
NET INCOME
The net loss in the first half of 1998 was $1.7 million, compared to net income
of $0.8 million in the same period of 1997. Increased fee income and lower DAC
amortization expense in the first half of 1998 were more than offset by
significantly higher policyholder benefits and operating costs and expenses and
lower investment income.
ASSETS
Separate account assets were $1,015 million at the end of the first half of
1998, compared to $897 million at the end of 1997. This growth reflects net cash
transfers to the separate accounts of $47.2 million, and $70.8 million of gains
due primarily to strong investment performance in the first quarter of 1998 of
the underlying investment funds and growth in the COLI business. For the three
months ended June 30, 1998, net transfers totalled $15.4 million compared to
$19.0 million for the same period in 1997, and investment losses of $6.0 million
were recorded in the three months ended June 30, 1998 compared to investment
gains of $75.8 million in 1997. The poor investment performance in the three
months ended June 30, 1998 is due to unfavorable stock market performance during
this period.
DAC increased from $130.4 million at the end of 1997 to $149.1 million as at the
end of the first half of 1998. This increase is primarily due to deferrable
acquisition costs associated with the development of the COLI product introduced
in 1997.
LIABILITIES
The Company's separate account liabilities increased $117.9 million. Separate
Account liabilities move in tandem with changes in Separate Account assets.
General account liabilities decreased from $162.8 million at the end of 1997 to
$132.4 million at June 30, 1998 due to the conversion of a note payable of
approximately $34 million to capital in the second quarter. See note 4 for
additional details.
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PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings
Nothing to report.
Item 2 - Changes in Securities
Nothing to report.
Item 3 - Defaults upon Senior Securities
Nothing to report.
Item 4 - Submission of Matters to a Vote of Security Holders
Nothing to report.
Item 5 - Other Information
Nothing to report.
Item 6A - Exhibits
Page in Sequential
Numbering System
Where Exhibit
Exhibit No. Description Located
- ----------- ----------- -------
(1) Not Applicable
(2) None
(3)(a)(i) Restated Articles of Incorporated by reference
Redomestication of The to Exhibit 3 (A)(i) to Post-
Manufacturers Life Effective Amendment No. 6
Insurance Company of on Form S-1 filed by The
America Manufacturers Life Insurance
Company of America on
December 9, 1996 (File No.
33-57020)
(3)(b)(i) By-Laws of The Incorporated by reference to
Manufacturers Life Exhibit 3 (b)(i) to Post-
Insurance Company of Effective Amendment No. 6
America on Form S-1 filed by The
Manufacturers Life Insurance
Company of America on
December 9, 1996 (File No.
33-57020)
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(4)(a) Form of Multi-Account Incorporated reference to
Flexible Variable Exhibit (4)(a) to Pre-
Effective Amendment No.1 on
Form S-1 filed by The
Manufacturers Life Insurance
Company of America on
February 10, 1994 (File No.
33-57020)
(4)(b)(i) Individual Retirement Incorporated by reference to
Annuity Rider Exhibit (4)(b)(i) to Pre-
Effective Amendment No.1 on
Form S-1 filed by The
Manufacturers Life Insurance
Company of America on
February 10, 1994 (File No.
33-57020)
(4)(b)(i)(a) Trustee-Owned Policies Incorporated by reference to
Annuity Rider Exhibit (4)(b)(i)(a) to
Pre-Effective Amendment No.
1 on Form S-1 filed by The
Manufacturers Life Insurance
Company of America on
February 10, 1994 (File No.
33-57020)
(4)(b)(ii) Unisex Endorsement Incorporated by reference to
Exhibit (4)(b)(ii) to the
registration statement on
Form N-4 filed by The
Manufacturers Life Insurance
Company of America on January
13, 1993 (File No. 33-57018)
(4)(b)(iii) Endorsement 0646-END.001 Incorporated by reference to
Exhibit (4)(b)(ii) to Form
10Q by The Manufacturers Life
Insurance Company of America
on August 14, 1997 (File No.
33-57020)
(5) Not Applicable
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(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10)(a) Reinsurance Agreement Incorporated by reference to
Exhibit (10)(a) to
Pre-Effective Amendment No.1
on Form S-1 filed by The
Manufacturers Life Insurance
Company of America on
February 10, 1994 (File No.
33-57018)
(10)(b)(i) Service Agreement Incorporated by reference to
between Manufacturers Exhibit 8(a) to the
Life of America and registration statement on
The Manufacturers Form N-4 filed by The
Life Insurance Manufacturers Life Insurance
Company Company of America on
January 13, 1993 (File No.
33-57018)
(10)(b)(ii) Amendment to Service Incorporated by reference to
Agreement Exhibit (8)(b) to the
registration statement on
Form N-4 filed by The
Manufacturers Life Insurance
Company of America on January
13, 1993 (File No. 33-57018)
(10)(b)(iii) Second Amendment to Incorporated by reference to
Service Agreement Exhibit (10)(b) (iii) to
the registration statement on
Form N-4 filed by The
Manufacturers Life Insurance
Company of America on April
29, 1994 (File No. 33-57018)
(10)(b)(iv) Service Agreement between Incorporated by reference to
The Manufacturers Life Exhibit (8)(d) to Post-
Insurance Company and Effective Amendment No.1
ManEquity, Inc. dated statement on Form N-4 filed
January 2, 1991 as amended by
March 1, 1994
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The Manufacturers Life
Insurance Company of America
on May 2, 1994 (File No.
33-57018)
(10)(c) Specimen Agreement between Incorporated by reference to
ManEquity, Inc. and Exhibit (3)(b)(i) to the
registered representatives registration statement on
Form N-4 filed by The
Manufacturers Life Insurance
Company of America on January
13, 1993 (File No. 33-57018)
(10)(d) Specimen Agreement between Incorporated by reference to
Incorporated by ManEquity, Exhibit (3)(B)(ii) TO
and Dealers the registration statement on
Form N-4 filed by The
Manufacturers Life Insurance
Company of America on January
13, 1993 (File No. 33-57018)
(11) None
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) None
(16) Not Applicable
(17) Not Applicable
(18) None
(19) None
(20) Not Applicable
(21) Not Applicable
(22) None
(23) None
(24) Power of Attorney Incorporated by reference to
Exhibit (12) to Post-
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Effective Amendment No.10
on Form S-6 filed by The
Manufacturers Life Insurance
Company of America on
February 28, 1997 (File
No.33-52310)
(25) Not Applicable
(26) Not Applicable
(27) Financial Data Schedule Filed Herewith
(28) Not Applicable
Item 6B - Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of Securities and 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 AMERICA
(Registrant)
August 14, 1998 By: /s/ Douglas H. Myers
- -------------------- ----------------------------------
Date DOUGLAS H. MYERS
Vice-President, Finance
(Principal Financial Officer)
August 14, 1998 By: /s/ Donald A. Guloien
- -------------------- ----------------------------------
Date DONALD A. GULOIEN
President & Director
(Principal Executive Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial data schedule for quarter ended June 30, 1998
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