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PROSPECTUS DATED MAY 3, 1999
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ACCOMMODATOR VARIABLE ANNUITY
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individual deferred or immediate variable annuity contracts issued by
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
("JOHN HANCOCK")
JOHN HANCOCK ANNUITY SERVICING OFFICE
------------------------------------------------
EXPRESS DELIVERY U.S. MAIL
---------------- P.O. Box 111
529 Main Street (X-4) Boston, MA 02117
Charlestown, MA 02129
Phone: 1-800-732-5543
Fax: 1-800-886-3048
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The contract enables you to earn a return in the following variable
investment options:
VARIABLE INVESTMENT OPTION MANAGED BY
-------------------------- ----------
Managed. . . . . . . . . . . . Independence Investment Associates, Inc.
Growth & Income . . . . . . . Independence Investment Associates, Inc.
Equity Index . . . . . . . . . State Street Global Advisors
Large Cap Value . . . . . . . T. Rowe Price Associates, Inc.
Large Cap Growth . . . . . . . Independence Investment Associates, Inc.
Mid Cap Value . . . . . . . . Neuberger Berman, LLC
Mid Cap Growth . . . . . . . . Janus Capital Corporation
Real Estate Equity . . . . . . Independence Investment Associates, Inc.
Small/Mid Cap Growth . . . . . Wellington Management Company, LLP
Small/Mid Cap CORE . . . . . . Goldman Sachs Asset Management
Small Cap Value . . . . . . . INVESCO Management & Research, Inc.
Small Cap Growth . . . . . . . John Hancock Advisers, Inc.
Global Equity . . . . . . . . Scudder Kemper Investments, Inc.
International Balanced . . . . Brinson Partners, Inc.
International Equity Index . . Independence International Associates, Inc.
International Opportunities. . Rowe Price-Fleming International, Inc.
Emerging Markets Equity . . . Montgomery Asset Management, LLC
Short-Term Bond . . . . . . . Independence Investment Associates, Inc.
Bond Index . . . . . . . . . . Mellon Bond Associates, LLP
Sovereign Bond . . . . . . . . John Hancock Advisers, Inc.
Global Bond . . . . . . . . . J.P. Morgan Investment Management, Inc.
High Yield Bond . . . . . . . Wellington Management Company, LLP
Money Market . . . . . . . . . John Hancock Mutual Life Insurance Company
We may offer additional variable investment options in the future. If your
contract is a single premium immediate annuity contract, you may use up to four
variable investment options. For other contracts, you may use up to ten.
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For each variable investment option you select, we invest your money in a
corresponding "Fund" of the John Hancock Variable Series Trust I (the "Trust").
The Trust is a so-called "series" type mutual fund registered with the
Securities and Exchange Commission ("SEC"). Each of the Trust's "Funds" is a
separately managed investment portfolio that has its own investment objective
and strategies. Attached at the end of this prospectus is a prospectus for the
Trust that contains detailed information about each Fund. Be sure to read the
prospectus for the Trust before selecting any variable investment option.
************************************************************************
The SEC has not approved or disapproved the contracts, or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Contracts are not deposits or obligations of, or insured, endorsed, or
guaranteed by the U.S. Government, any bank, the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency, entity or person,
other than John Hancock. They involve investment risks including the possible
loss of principal.
The contracts are not available in all states. This prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, securities in
any state to any person to whom it is unlawful to make or solicit an offer in
that state.
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GUIDE TO THIS PROSPECTUS
This prospectus contains information that you should know before you buy a
contract or exercise any of your rights under the contract. We have arranged
the prospectus in the following way:
. The first section contains an "INDEX OF KEY WORDS."
. Behind the index is the "FEE TABLE." This section highlights the
various fees and expenses you will pay directly or indirectly, if you
purchase a contract.
. The next section is called "BASIC INFORMATION." It contains basic
information about the contract presented in a question and answer
format. You should read the Basic Information before reading any
other section of the prospectus.
. Behind the Basic Information is "ADDITIONAL INFORMATION." This
section gives more details about the contract. It generally does not
repeat information contained in the Basic Information.
. "CONDENSED FINANCIAL INFORMATION" follows the "Additional
Information." This gives some basic information about the size and
past performance of the variable investment options.
The Trust's prospectus is attached at the end of this prospectus. You should
save these prospectuses for future reference.
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IMPORTANT NOTICES
This is the prospectus - it is not the contract. The prospectus simplifies
many contract provisions to better communicate the contract's essential
features. Your rights and obligations under the contract will be determined by
the language of the contract itself. On request, we will provide the form of
contract for you to review. In any event, when you receive your contract, we
suggest you read it promptly.
We've also filed with the SEC a "Statement of Additional Information," dated
May 3, 1999. This Statement contains detailed information not included in the
prospectus. Although a separate document from this prospectus, the Statement
of Additional Information has the same legal effect as if it were a part of
this prospectus. We will provide you with a free copy of the Statement upon
your request. To give you an idea what's in the Statement, we have included a
copy of the Statement's table of contents on page 32.
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3
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INDEX OF KEY WORDS
We define or explain each of the following key words used in this prospectus
on the pages shown below:
KEY WORD PAGE
Accumulation units......................................20
Annuitant...............................................10
Annuity payments........................................21
Annuity period..........................................12
Contract year...........................................11
Date of issue...........................................11
Date of maturity........................................10
Funds....................................................2
Premium payments........................................10
Surrender value.........................................16
Surrender...............................................16
Variable investment options..........................cover
Withdrawal..............................................16
4
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FEE TABLE
The following fee table shows the various fees and expenses that you will pay,
either directly or indirectly, if you purchase a contract. The table does not
include charges for premium taxes (which may vary by state) or fees for any
optional benefit riders that you select.
SALES CHARGE DEDUCTED FROM PREMIUM PAYMENTS
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Periodic premium deferred contracts* 8% of first $10,000 paid
7% of next $15,000 paid
3% of all amounts over $25,000
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Single premium immediate contracts 4% first $10,000 paid
3% of next $15,000 paid
2% of next $75,000 paid
1% of all amounts over $75,000
plus
a $50 administrative expense deduction
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Single premium deferred contracts* 4.5% of the first $10,000 paid
3.5% of the next $15,000 paid
2.5% of the next $75,000 paid
1.5% of all amounts over $100,000
plus
a $50 administrative expense deduction
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The minimum death benefit charge included in the above sales loads is 0.50%.
Because no minimum death benefit is provided on or after the "contract
anniversary" nearest the annuitant's 65th birthday, no deduction is made
for this benefit from payments made on or after this date. See
"Guaranteed minimum death benefit," beginning on page 17.
ANNUAL CONTRACT FEE
<TABLE>
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<S> <C>
Periodic premium deferred contracts $10 (or, if less, 2% of contracts's total value)
(deducted only prior to maturity)
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Single premium immediate contracts $0
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Single premium deferred contracts $0
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</TABLE>
ANNUAL CONTRACT EXPENSES (AS A % OF THE AVERAGE TOTAL VALUE OF YOUR VARIABLE
INVESTMENT OPTION)
Mortality and Expense Risk Charge 0.75%
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Administrative Services Charge 0.25%
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Total Annual Contract Charge 1.00%
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5
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ANNUAL FUND EXPENSES (BASED ON % OF AVERAGE NET ASSETS)
Each Fund pays an investment management fee and other operating expenses.
These fees and expenses reduce the investment return of the Fund, and therefore,
indirectly reduce the return you will earn on any amounts you allocate to the
variable investment options that corresponds to that Fund. The figures in the
following chart are expressed as percentages of each Fund's average daily net
assets for 1998 (rounded to two decimal places). The percentages reflect the
investment management fees that were payable in 1998 and the 1998 other
operating expenses that would have been allocated to the Funds under the
allocation rules currently in effect:
<TABLE>
<CAPTION>
OTHER FUND TOTAL FUND OTHER FUND EXPENSES
FUND NAME MANAGEMENT FEES EXPENSES* EXPENSES AFTER REIMBURSEMENT
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<S> <C> <C> <C> <C>
Managed 0.32% 0.05% 0.37% 0.05%
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Growth & Income 0.25% 0.05% 0.30% 0.05%
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Equity Index 0.14% 0.08% 0.22% 0.08%
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Large Cap Value 0.74% 0.07% 0.81% 0.07%
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Large Cap Growth 0.37% 0.05% 0.42% 0.05%
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Mid Cap Value 0.80% 0.05% 0.85% 0.05%
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Mid Cap Growth 0.85% 0.08% 0.93% 0.08%
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Real Estate Equity 0.60% 0.05% 0.65% 0.05%
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Small/Mid Cap Growth** 0.75% 0.05% 0.80% 0.05%
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Small/Mid Cap Core 0.80% 0.10% 0.90% 0.23%
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Small Cap Value 0.80% 0.07% 0.87% 0.07%
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Small Cap Growth 0.75% 0.08% 0.83% 0.08%
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Global Equity 0.90% 0.10% 1.00% 0.50%
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International Balanced 0.85% 0.10% 0.95% 0.64%
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International Equity Index 0.17% 0.10% 0.27% 0.23%
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International Opportunities 0.87% 0.10% 0.97% 0.32%
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Emerging Markets Equity 1.30% 0.10% 1.40% 0.68%
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Short-Term Bond 0.30% 0.05% 0.35% 0.05%
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Bond Index 0.15% 0.05% 0.20% 0.05%
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Sovereign Bond 0.25% 0.05% 0.30% 0.05%
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Global Bond** 0.69% 0.06% 0.75% 0.06%
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High Yield Bond 0.65% 0.07% 0.72% 0.07%
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Money Market 0.25% 0.05% 0.30% 0.05%
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</TABLE>
* John Hancock reimburses a Fund when the Fund's other operating expenses
exceed 0.10% of the Fund's average daily net assets.
** Small/Mid Cap Growth was formerly "Diversified Mid Cap Growth" and Global
Bond was formerly "Strategic Bond."
EXAMPLES***
Whether or not you "surrender" (turn in) a periodic premium deferred contract
or a single premium deferred contract (or commence receiving annuity payments
under one of our annuity payment options) at the end of the applicable time
period, you would pay, directly or indirectly,
6
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the expenses shown in the applicable table below on a $1,000 investment
allocated to one of the variable investment options, assuming a 5% annual return
on assets:
<TABLE>
<CAPTION>
PERIODIC PREMIUM DEFERRED CONTRACT ****
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Managed $ 93 $120 $149 $231
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Growth & Income $ 92 $117 $145 $222
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Equity Index $ 93 $119 $148 $229
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Large Cap Value $ 98 $136 $176 $287
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Large Cap Growth $ 93 $121 $151 $237
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Mid Cap Value $ 98 $137 $178 $291
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Mid Cap Growth $100 $141 $184 $305
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Real Estate Equity $ 96 $129 $165 $265
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Small/Mid Cap Growth $ 98 $135 $174 $284
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Small/Mid Cap CORE $ 99 $139 $182 $300
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Small Cap Value $ 99 $139 $182 $300
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Small Cap Growth $ 99 $138 $180 $295
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Global Equity $100 $142 $187 $309
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International Balanced $100 $141 $184 $305
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International Equity Index $ 95 $126 $159 $252
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International Opportunities $100 $142 $187 $309
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Emerging Markets Equity $104 $153 $205 $346
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Short-Term Bond $ 94 $125 $157 $249
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Bond Index $ 93 $121 $151 $236
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Sovereign Bond $ 92 $118 $146 $224
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Global Bond $ 98 $137 $177 $290
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High Yield Bond $ 98 $135 $175 $285
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Money Market $ 92 $118 $147 $226
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<CAPTION>
SINGLE PREMIUM DEFERRED CONTRACT
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Managed $68 $ 96 $125 $210
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Growth & Income $67 $ 93 $121 $200
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Equity Index $68 $ 95 $124 $207
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Large Cap Value $73 $112 $153 $267
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Large Cap Growth $69 $ 97 $128 $215
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Mid Cap Value $74 $113 $155 $271
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Mid Cap Growth $75 $117 $162 $285
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Real Estate Equity $71 $105 $142 $244
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Small/Mid Cap Growth $73 $111 $152 $264
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Small/Mid Cap CORE $75 $116 $159 $280
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Small Cap Value $75 $116 $159 $280
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Small Cap Growth $74 $114 $157 $275
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Global Equity $76 $119 $164 $290
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International Balanced $75 $117 $162 $285
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International Equity Index $70 $102 $135 $230
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International Opportunities $76 $119 $164 $290
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</TABLE>
7
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<TABLE>
<CAPTION>
SINGLE PREMIUM DEFERRED CONTRACT
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Emerging Markets Equity $79 $130 $183 $328
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Short-Term Bond $70 $101 $134 $227
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Bond Index $68 $ 97 $127 $214
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Sovereign Bond $67 $ 94 $122 $202
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Global Bond $74 $113 $154 $270
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High Yield Bond $73 $111 $152 $265
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Money Market $68 $ 94 $123 $204
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</TABLE>
Single premium immediate annuity contracts cannot be surrendered and must
commence an annuity payment option in not more than one year. You would pay the
following current expenses, directly or indirectly, on a $1,000 investment
allocated to one of the variable investment options, assuming 5% annual return
on assets and assuming that annuity payments commence at the earliest possible
date.
<TABLE>
<CAPTION>
SINGLE PREMIUM IMMEDIATE CONTRACT ****
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Managed $63 $ 91 $121 $205
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Growth & Income $62 $ 88 $116 $196
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Equity Index $63 $ 90 $120 $203
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Large Cap Value $69 $107 $148 $263
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Large Cap Growth $64 $ 92 $123 $211
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Mid Cap Value $69 $108 $150 $267
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Mid Cap Growth $70 $112 $157 $281
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Real Estate Equity $66 $101 $137 $240
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Small/Mid Cap Growth $68 $106 $147 $260
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Small/Mid Cap CORE $70 $111 $155 $276
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Small Cap Value $70 $111 $155 $276
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Small Cap Growth $69 $110 $152 $271
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Global Equity $71 $114 $160 $286
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International Balanced $70 $112 $157 $281
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International Equity Index $65 $ 97 $131 $226
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International Opportunities $71 $114 $160 $286
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Emerging Markets Equity $75 $125 $179 $324
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Short-Term Bond $65 $ 96 $129 $223
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Bond Index $64 $ 92 $123 $210
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Sovereign Bond $62 $ 89 $117 $198
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Global Bond $69 $108 $150 $266
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High Yield Bond $68 $107 $148 $261
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Money Market $63 $ 89 $118 $200
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</TABLE>
*** These examples do not include any applicable premium taxes. The examples
should not be considered representations of past or future expenses;
actual charges may be greater or less than those shown above. The
examples assume fund expenses at rates set forth above for 1998, after
reimbursements. The annual contract fee has been included as an annual
percentage of assets.
**** The annual contract fe has been reflected as a percentage of average
daily net assets.
8
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BASIC INFORMATION
This "Basic Information" section provides answers to commonly asked questions
about the contract. Here are the page numbers where the questions and answers
appear:
<TABLE>
<CAPTION>
QUESTION PAGES TO SEE
-------- ------------
<S> <C>
What is the contract?..................................................... 10
Who owns the contract?.................................................... 10
Is the owner also the annuitant?.......................................... 10
How can I invest money in a contract?.....................................10-12
How will the value of my investment in the contract change over time?..... 12
What annuity benefits does the contract provide?..........................12-13
What are the tax consequences of owning a contract?....................... 13
Can I change my contract's investment options?............................14-15
What fees and charges will be deducted from my contract?..................15-16
How can I withdraw money from my contract?................................ 16
What happens if the annuitant dies before my contract's date of maturity?. 17
Can I return my contract?................................................. 17
</TABLE>
9
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WHAT IS THE CONTRACT?
The contract is a "variable annuity contract." An annuity contract provides a
person (known as the "annuitant" or "payee") with a series of periodic payments.
Under a variable annuity contract, the amount you have invested can increase or
decrease in value daily based upon the value of the variable investment options
chosen.
This prospectus offers three versions of the contract. One version is a
"periodic premium deferred" variable annuity contract. "Deferred" means that we
will not begin to make annuity payments under the contract until a future date
(called the "date of maturity"). Until then you may make additional premium
payments into your contract. This is what we mean by "periodic payment"
contract.
The second version of the contract is a "single premium immediate" variable
annuity contract. By "single premium" we mean that only one lump sum premium
payment is made. By "immediate" annuity, we mean that we start making annuity
payments not more than one year after you pay your premium.
The third form of contract is a "single premium deferred" variable annuity
contract. Under this contract, an initial lump sum premium is made, but we
don't start making annuity payments until a future date of maturity. You are
permitted to make one additional premium payment after your initial lump sum
premium.
WHO OWNS THE CONTRACT?
That's up to you. Unless the contract provides otherwise, the owner of the
contract is the person who can exercise the rights under the contract, such as
the right to choose the investment options or the right to surrender the
contract. In many cases, the person buying the contract will be the owner.
However, you are free to name another person or entity (such as a trust) as
owner. In writing this prospectus, we've assumed that you, the reader, are the
person or persons entitled to exercise the rights and obligations under
discussion. If a contract has joint owners, both must join in any written notice
or request.
IS THE OWNER ALSO THE ANNUITANT?
Again, that's up to you. The annuitant is the person upon whose death the
contract's death benefit becomes payable. Also, the annuitant receives payments
from us under any annuity option that commences during the annuitant's lifetime.
In many cases, the same person is both the annuitant and the owner of a
contract. However, you are free to name another person as annuitant.
HOW CAN I INVEST MONEY IN A CONTRACT?
PREMIUM PAYMENTS
We call the investments you make in your contract "premiums" or "premium
payments." You need at least an initial premium payment of $1,000 to purchase a
periodic premium contract
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and at least $5,000 to purchase a single premium contract. There is an
exception, however, if you purchase a single premium deferred contract with the
proceeds of fixed benefit insurance policies and annuity contracts issued by
John Hancock. In that case, the initial single premium need only be $2,000. You
can make one additional payment of at least $2,500 into a single premium
deferred contract. If you choose to contribute more money into a periodic
premium contract, each subsequent premium payment must be at least $50.
APPLYING FOR A CONTRACT
An authorized representative of the broker-dealer through whom you purchase
your contract will assist you in (1) completing an application for a contract
and (2) transmitting it, along with your initial premium payment, to the John
Hancock Annuity Servicing Office.
Once we receive your initial premium payment and all necessary information, we
will issue your contract and invest your initial premium payment within two
business days. If the information is not in good order, we will contact you to
get the necessary information. If for some reason, we are unable to complete
this process within 5 business days, we will either send back your money or get
your permission to keep it until we get all of the necessary information.
We measure the years and anniversaries of your contract from its date of
issue. We use the term "contract year" to refer to each period of time between
anniversaries of your contract's date of issue.
LIMITS ON PREMIUM PAYMENTS
While the annuitant is alive and the contract is in force, you can make
premium payments to a periodic premium contract at any time before the contract
date of maturity. However, your premium payments for the first contract year
may not, unless we consent in writing, exceed twice the specified annual premium
amount in your contract. (Payment of such specified premiums is not mandatory,
however.) In subsequent contract years, you may not pay more than twice the
largest amount of premiums you paid in any previous contract year.
We will not issue a contract if the proposed annuitant is age 85 or older. We
may waive any of these limits, however.
WAYS TO MAKE PREMIUM PAYMENTS
Premium payments made by check or money order must be:
. drawn on a U.S. bank,
. drawn in U.S. dollars, and
. made payable to "John Hancock."
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Premium payments after the initial premium payment should be sent to the John
Hancock Annuity Servicing Office at one of the addresses shown on page 1 of this
prospectus. We will accept your initial premium payment by exchange from another
insurance company. You can find information about other methods of premium
payment by contacting your John Hancock representative or by contacting the John
Hancock Annuity Servicing Office.
Once we have issued your contract and it becomes effective, we credit you with
any additional premiums you pay as of the day we receive them at the John
Hancock Annuity Servicing Office.
HOW WILL THE VALUE OF MY INVESTMENT IN THE CONTRACT CHANGE OVER TIME?
Prior to a contract's date of maturity, the amount you've invested in any
variable investment option will increase or decrease based upon the investment
experience of the corresponding Fund. Except for certain charges we deduct,
your investment experience will be the same as if you had invested in the Fund
directly and reinvested all Fund dividends and distributions in additional
shares. We describe the calculations under "The accumulation period," beginning
on page 20.
Like a regular mutual fund, each Fund deducts investment management fees and
other operating expenses. These expenses are shown in the fee table on page 6.
However, unlike a mutual fund, we will also deduct charges relating to the
annuity guarantees and other features provided by the contract. These charges
reduce your investment performance and the amount we have credited to your
contract in any variable investment option. We describe these charges under
"What fees and charges will be deducted from my contract?" beginning on page 15.
At any time before the date of maturity, your "TOTAL VALUE OF YOUR CONTRACT"
equals
. the total amount you invested,
. minus all charges we deduct,
. minus all withdrawals you have made, and
. plus or minus each variable investment option's positive or negative
investment return that we credit daily to any of your contract's
value daily while it is in that option.
WHAT ANNUITY BENEFITS DOES A CONTRACT PROVIDE?
If you have a deferred variable annuity contract that is still in effect on
its date of maturity, it enters what is called the "annuity period." An
immediate annuity contract enters the annuity period immediately.
During the annuity period, we make a series of variable payments to you as
provided under one of our several annuity options. Under a deferred variable
annuity contract, the form in which
12
<PAGE>
we will make the annuity payments and the proportion of such payments that will
be based on each variable investment option depend on the elections that you
have in effect on the date of maturity. Therefore you should exercise care in
selecting your date of maturity and your choices that are in effect on that
date.
If you purchase an immediate annuity contract, your annuity payment option and
the variable investment option or options on which it is based, are as you elect
in your purchase application.
You should carefully review the discussion under "The annuity period,"
beginning on page 20, for information about all of these choices you can make.
WHAT ARE THE TAX CONSEQUENCES OF OWNING A CONTRACT?
In most cases, no income tax will have to be paid on amounts you earn under a
contract until these earnings are paid out. All or part of the following
distributions from a contract may constitute a taxable payout of earnings:
. partial withdrawal
. full withdrawal ("surrender")
. payment of death benefit proceeds as a single sum upon the
annuitant's death
. periodic payments under one of our annuity payment options
How much you will be taxed on a distribution is based upon complex tax rules
and depends on matters such as
. the type of the distribution
. when the distribution is made
. the nature of any tax-qualified retirement plan for which the
contract is being used
. the circumstances under which the payments are made
If your contract is issued in connection with a tax-qualified retirement plan,
all or part of your premium payments may be tax-deductible.
Special 10% tax penalties apply in many cases to the taxable portion of any
distributions from a contract before you reach age 59 1/2. Also, most
tax-qualified plans require that distributions from a contract commence and/or
be completed by a certain period of time. This effectively limits the period of
time during which you can continue to derive tax deferral benefits from any
tax-deductible premiums you paid or on any earnings under the contract.
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<PAGE>
CAN I CHANGE MY CONTRACT'S INVESTMENT OPTIONS?
ALLOCATION OF PREMIUM PAYMENTS
When you apply for your contract, you specify the variable investment options
in which your premium payments will be allocated. You may change this
investment allocation for future premium payments at any time. Any change in
allocation will be effective as of receipt of your request at the John Hancock
Annuity Servicing Office.
At any one time prior to the annuity period, you may invest in up to 10 of the
23 investment options. Currently, you may use a maximum of 18 investment
options over the life of your contract. For purposes of this limit, each
contribution or transfer of assets into an investment option that you are not
then using counts as one "use" of an investment option, even if you had used
that option at an earlier time.
TRANSFERRING YOUR ASSETS
Up to 4 times during each year of your contract, you may transfer, free of
charge, all or part of the assets held in one investment option to any other
investment option.
You may NOT
. make any transfer that would cause you to exceed the above-mentioned
maximum of 18 investment options, or
. make any transfer during the annuity period that would result in more
than four investment options being used at once.
PROCEDURE FOR TRANSFERRING YOUR ASSETS
You may request a transfer in writing or, if you have authorized telephone
transfers, by telephone or fax. All transfer requests should be directed to the
John Hancock Annuity Servicing Office at the one of the locations shown on page
1. Your request should include
. your name,
. daytime telephone number,
. contract number,
. the names of the investment options being transferred to and from
each, and
. the amount of each transfer.
The request becomes effective on the day we receive your request, in proper
form, at the John Hancock Annuity Servicing Office.
14
<PAGE>
TELEPHONE TRANSFERS
Once you have completed a written authorization, you may request a transfer by
telephone or by fax. If the fax request option becomes unavailable, another
means of telecommunication will be substituted.
If you authorize telephone transactions, you will be liable for any loss,
expense or cost arising out of any unauthorized or fraudulent telephone
instructions which we reasonably believe to be genuine, unless such loss,
expense or cost is the result of our mistake or negligence. We employ procedures
which provide safeguards against the execution of unauthorized transactions, and
which are reasonably designed to confirm that instructions received by telephone
are genuine. These procedures include requiring personal identification, tape
recording calls, and providing written confirmation to the owner. If we do not
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, we may be liable for any loss due to unauthorized or
fraudulent instructions.
WHAT FEES AND CHARGES WILL BE DEDUCTED FROM MY CONTRACT?
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge that compensates us primarily for mortality and
expense risks that we assume under the contracts. On an annual basis, this
charge equals 0.75% of the value of the assets you have allocated to the
variable investment options.
In return for mortality risk charge, we assume the risk that annuitants as a
class will live longer than expected, requiring us to a pay greater number of
annuity payments. In return for the expense risk charge, we assume the risk
that our expenses relating to the contracts may be higher than we expected when
we set the level of the contracts' other fees and charges, or that our revenues
from such other sources will be less.
ADMINISTRATIVE SERVICES CHARGE
We deduct a daily charge for administrative and clerical services that the
contracts require us to provide. On an annual basis, this charge equals 0.25%
of the value of the assets you have allocated to the variable investment
options.
ANNUAL CONTRACT FEE
Each year prior to the date of maturity of a periodic premium contract, we
will deduct an annual contract fee of $10 or, if less, 2% of the total value of
your contract. We deduct this annual contract fee at the beginning of each
contract year after the first. We take the deduction proportionally from each
investment option you are then using. We reserve the right to increase the
annual contract fee to $50.
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<PAGE>
PREMIUM TAXES
We make deductions for any applicable premium or similar taxes based on the
amount of a premium payment. Currently, certain states assess a tax of up to 5%
of each premium payment.
In most cases, we deduct a charge in the amount tax from the total value of
the contract only at the time of annuitization, death, surrender, or withdrawal.
We reserve the right, however, to deduct the charge from each premium payment at
the time it is made. We compute the amount of the charge by multiplying the
applicable premium tax percentage times the amount you are withdrawing,
surrendering, annuitizing or applying to a death benefit.
HOW CAN I WITHDRAW MONEY FROM MY CONTRACT?
SURRENDERS AND PARTIAL WITHDRAWALS
Prior to your deferred contract's date of maturity, if the annuitant is
living, you may:
. surrender your contract for a cash payment of its "surrender value,"
or
. make a partial withdrawal of its surrender value.
The "surrender value" of a contract is the total value of a contract, MINUS
any applicable premium tax charges. We will determine the amount surrendered or
withdrawn as of the date we receive your request at the John Hancock Annuity
Servicing Office.
Certain surrenders and withdrawals may result in taxable income to you or
other tax consequences as described under "Tax information," beginning on page
24. Among other things, if you make a full surrender or partial withdrawal from
your contract before you reach age 59 1/2, an additional federal penalty of 10%
generally applies to any taxable portion of the withdrawal.
We will deduct any partial withdrawal proportionally from each of your
investment options based on the value in each, unless you direct otherwise.
Without our prior approval, you may not make a partial withdrawal
. for an amount less than $100, or
. if the remaining total value of your contract would be less than
$500.
A partial withdrawal is not a loan and cannot be repaid.
You may not make any surrenders or partial withdrawals under an immediate
annuity contract or once we begin making payments under an annuity option for a
deferred annuity contract.
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<PAGE>
WHAT HAPPENS IF THE ANNUITANT DIES BEFORE MY CONTRACT'S DATE OF MATURITY?
GUARANTEED MINIMUM DEATH BENEFIT
If the annuitant under a deferred contract dies before the contract's date of
maturity, we will pay a death benefit. If the death occurs before the contract
anniversary nearest the annuitant's 65th birthday, we will pay the greater of:
. the total value of your contract, or
. the total amount of premium payments made, minus any partial
withdrawals you have made.
If the death occurs on or after the contract anniversary nearest the
annuitant's 65th birthday, we will pay an amount equal to the total value of
your contract.
We calculate the death benefit as of the day we receive, at the John Hancock
Annuity Servicing Office:
. proof of the annuitant's death, and
. any required instructions as to method of settlement.
Unless you have elected an optional method of settlement, we will pay the
death benefit in a single sum to the beneficiary you chose prior to the
annuitant's death. If you have not elected an optional method of settlement,
the beneficiary may do so. However, if the death benefit is less than $2,000,
we will pay it in a lump sum, regardless of any election. You can find more
information about optional methods of settlement under "Annuity options,"
beginning on page 22.
CAN I RETURN MY CONTRACT?
In most cases, you may return your contract for any reason within 10 days
after you receive it. If you do, we will return the total amount of premiums
you have paid. However, there are some exceptions to this general rule. For
example, a purchaser of a periodic contract in Illinois, Minnesota, New York,
Pennsylvania, Arizona, or South Dakota will receive the contract's total value,
plus all deductions we took from any premium payments.
17
<PAGE>
ADDITIONAL INFORMATION
This section of the prospectus provides additional information that is not
contained in the Basic Information section on pages 9 through 17.
CONTENTS OF THIS SECTION PAGES TO SEE
Description of John Hancock........................... 19
Who should purchase a contract........................ 19
How we support the variable investment options........ 20
The accumulation period............................... 20
The annuity period.................................... 20-22
Variable investment option valuation procedures....... 22
Distribution requirements following death of owner.... 23
Miscellaneous provisions.............................. 23-24
Tax information....................................... 24-29
Performance information............................... 29-30
Reports............................................... 30
Voting privileges..................................... 30
Certain changes....................................... 30-31
Distribution of contracts............................. 31
Impact of the Year 2000 issue......................... 31
Registration statement................................ 31-32
Experts and financial statements...................... 32
Appendix - Illustrative values and annuity payment tables.33
18
<PAGE>
DESCRIPTION OF JOHN HANCOCK
We are John Hancock, a mutual life insurance company organized, in 1862, under
the laws of the Commonwealth of Massachusetts. Our home office is located at
200 Clarendon Street, Boston, Massachusetts 02117. We have authority to
transact business in all 50 states. As of December 31, 1998, we had more than
$67.0 billion of assets.
WHO SHOULD PURCHASE A CONTRACT?
We designed these contracts for individuals doing their own retirement
planning, including purchases under plans and trusts that do not qualify for
special tax treatment under the Internal Revenue Code of 1986 (the "Code"). We
also designed the contracts for purchase under:
. pension and profit-sharing plans qualified under Section 401(c) of
the Code, known as H.R. 10 Plans;
. pension or profit-sharing plans qualified under sections 401(a) or
403(a) of the Code, known as "corporate plans";
. annuity purchase plans adopted under Section 403(b) of the Code by
public school systems and certain other tax-exempt organizations;
. individual retirement annuity ("IRA") plans satisfying the
requirements of Section 408 of the Code; and
. deferred compensation plans maintained by a state or political
subdivision under Section 457 of the Code.
Earnings under insurance company annuity contracts, including the variable
annuity contracts we offer, are not subject to federal income tax until the
earnings are withdrawn or distributed. A comparable tax-deferral benefit is
already available under provisions of the Code for tax-favored retirement plans
and programs, such as are listed above. Accordingly, if you purchase one of our
contracts to fund a tax favored program, you should do so because of the other
features and benefits our contracts provide.
When a contract forms part of a tax-qualified plan it becomes subject to
special tax law requirements, as well as the terms of the plan documents
themselves, if any. Also, in some cases, certain requirements under "ERISA"
(the Employee Retirement Income Security Act of 1974) may apply. Requirements
from any of these sources may, in effect, take precedence over (and in that
sense modify) the rights and privileges that an owner otherwise would have under
a contract. Some such requirements may also apply to certain retirement plans
that are not tax-qualified.
We may include certain requirements from the above sources in endorsements or
riders to the affected contracts. In no event, however, do we undertake to
assure a contract's compliance with all plan, tax law, and ERISA requirements
applicable to a tax-qualified or non tax-qualified retirement plan. Therefore,
if you use or plan to use a contract in connection with such a plan, you must
consult with competent legal and tax advisers to ensure that you know of (and
comply with) all such requirements that apply in your circumstances.
To accommodate "employer-related" plans, we provide "unisex" purchase rates.
That means the annuity purchase rates are the same for males and females. Any
questions you have as to whether you are participating in an "employer-related"
plan should be directed to your employer. Any question you or your employer have
about unisex rates may be directed to the John Hancock Annuity Servicing Office.
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<PAGE>
HOW WE SUPPORT THE VARIABLE INVESTMENT OPTIONS
We hold the Fund shares that support our variable investment options in John
Hancock Variable Annuity Account U (the "Account"), a separate account
established by John Hancock under Massachusetts law. The Account is registered
as a unit investment trust under the Investment Company Act of 1940 ("1940
Act").
The Account's assets, including the Trust's shares, belong to John Hancock.
Each contract provides that amounts we hold in the Account pursuant to the
policies cannot be reached by any other persons who may have claims against us.
All of John Hancock's general assets also support John Hancock's obligations
under the contracts, as well as all of its other obligations and liabilities.
These general assets consist of all John Hancock's assets that are not held in
the Account (or in another separate account) under variable annuity or variable
life insurance contracts that give their owners a preferred claim on those
assets.
THE ACCUMULATION PERIOD
YOUR VALUE IN OUR VARIABLE INVESTMENT OPTIONS
Each premium payment or transfer that you allocate to a variable investment
option purchases "accumulation units" of that variable investment option.
Similarly, each withdrawal or transfer that you take from a variable investment
option (as well as certain charges that may be allocated to that option) result
in a cancellation of such accumulation units.
VALUATION OF ACCUMULATION UNITS
To determine the number of accumulation units that a specific transaction will
purchase or cancel, we use the following formula:
- -------------------------------------------------
dollar amount of transaction
DIVIDED BY
value of one accumulation unit for the applicable
variable investment option at the time of such
transaction
- -------------------------------------------------
The value of each accumulation unit will change daily depending upon the
investment performance of the Fund that corresponds to that variable investment
option and certain charges we deduct from such investment option.
Therefore, at any time prior to the date of maturity, the total value of your
contract in a variable investment option can be computed according to the
following formula:
- -------------------------------------------
number of accumulation units in the
variable investment options
TIMES
value of one accumulation unit for the
applicable variable investment option at
that time
- -------------------------------------------
THE ANNUITY PERIOD
DATE OF MATURITY FOR DEFERRED ANNUITY CONTRACTS
If your contract is a deferred contract, it will specify the date of maturity,
when payments from one of our annuity options are scheduled to begin. You
initially choose a date of maturity when you complete your application for a
contract.
You may subsequently select an earlier date of maturity or a later date, so
long as it is not more than 5 years after the original date of maturity. The
John Hancock Annuity Servicing Office must receive your new selection at least
31 days prior to the new date of
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<PAGE>
maturity, however. Also, if you are selecting or changing your date of maturity
for a contract issued under a tax-qualified plan, special limits apply. (See
"Contracts purchased for a tax-qualified plan," beginning on page 25.)
IMMEDIATE VARIABLE ANNUITY CONTRACTS
If your contract is an immediate contract, variable annuity payments will
begin on a date mutually agreed upon between you and us. Normally, payments
begin one month after the issue date of the contract, but must begin within one
year. Immediate contracts may not be surrendered.
SELECTING AN ANNUITY OPTION
Each contract provides, at the time of its issuance, for annuity payments to
commence on the date of maturity.
Prior to the date of maturity, you may select a different annuity option by
written notice to the John Hancock Annuity Servicing Office. If no option is
selected, then "Option A: life annuity with payments for 10 years guaranteed"
will be used. The types of annuity options are described under "Annuity
options," beginning on page 22.
For immediate annuities, you select the annuity option at the time you
purchase the contract.
If the initial monthly payment under an annuity option would be less than $20,
we may make a single sum payment equal to the total surrender value of your
contract on the date the initial payment would be payable. Such single payment
would replace all other benefits. Alternatively, if you agree, we will make
payments at quarterly, semi-annual, or annual intervals in place of monthly
payments.
Subject to that $20 minimum limitation, your beneficiary may elect an annuity
option if
. you have not made an election prior to the annuitant's death;
. the beneficiary is entitled to payment of a death benefit of at least
$2,000 in a single sum; and
. the beneficiary notifies us of the election prior to the date the
proceeds become payable.
If the total value of your contract, at death or surrender, is less than
$2,000, no annuity option will be available.
VARIABLE MONTHLY ANNUITY PAYMENTS
During the annuity period, the total value of your contract must be allocated
to no more than four investment options. During the annuity period, we offer
annuity payments on a fixed basis as one investment option, and annuity
payments on a variable basis for EACH variable investment option. If you are
using more than four investment options on the date of maturity, under a
deferred contract, we will divide your contract's value (after deducting any
premium tax charge that was not deducted from premium payments) among the four
investment options with the largest values, pro-rata based on the amount of the
total value of your contract that you have in each.
We determine the amount of the first variable monthly payment under any
variable investment option by using the applicable annuity purchase rate for the
annuity option under which the payment will be made. The contract sets forth
these annuity purchase rates. In most cases they vary by the age and gender of
the annuitant or other payee.
The amount of each subsequent variable annuity payment under that variable
investment option depends upon the investment performance of that variable
investment option. Here's how it works:
. we calculate the actual net investment return of the variable
investment option (after deducting all charges) during the period
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<PAGE>
between the dates for determining the current and immediately
previous monthly payments.
. if that actual net investment return exceeds the "assumed investment
rate" (explained below), the current monthly payment will be larger
than the previous one.
. if the actual net investment return is less than the assumed investment
rate, the current monthly payment will be smaller than the previous one.
ASSUMED INVESTMENT RATE
-----------------------
The assumed investment rate for any variable portion of your annuity payments
will be 3 1/2 % per year, except as follows.
You may elect an assumed investment rate of 5%, provided such a rate is
available in your state. If you elect a higher assumed investment rate, your
initial variable annuity payment will also be higher. Eventually, however, the
monthly variable annuity payments may be smaller than if you had elected a lower
assumed investment rate.
ANNUITY OPTIONS
Two basic annuity options are available:
OPTION A: LIFE ANNUITY WITH PAYMENTS FOR A GUARANTEED PERIOD - We will make
monthly payments for a guaranteed period of 5, 10, or 20 years, as selected by
you or your beneficiary, and after such period for as long as the payee lives.
(The five-year guarantee period is not available for an immediate annuity
contract, however.) If the payee dies prior to the end of such guaranteed
period, we will determine the present value of the payments remaining in the
guaranteed period. We will compute the present value using the same actuarial
assumptions as we used in determining the amount of the initial annuity payment
and using the variable investment option values next computed after we receive
due proof of death. Ordinarily, we will make the payment within 7 days
thereafter.
Federal income tax requirements currently applicable to contracts used with
H.R. 10 plans and individual retirement annuities provide that the period of
years guaranteed under Option A cannot be any greater than the joint life
expectancies of the payee and his or her designated beneficiary.
OPTION B: LIFE ANNUITY WITHOUT FURTHER PAYMENT ON DEATH OF PAYEE - We will
make monthly payments to the payee as long as he or she lives. We guarantee no
minimum number of payments.
ADDITIONAL OPTION FOR IMMEDIATE ANNUITIES - If your contract is an immediate
annuity contract, we also make available a joint and last survivor life annuity.
Under this annuity payment option, we make payments until both of two persons
you name have died, but no minimum number of payments is guaranteed.
VARIABLE INVESTMENT OPTION VALUATION PROCEDURES
We compute the net investment return and accumulation unit values for each
variable investment option as of the end of each business day. A business day is
any date on which the New York Stock Exchange is open for regular trading. Each
business day ends at the close of regular trading for the day on that exchange.
Usually this is 4:00 p.m., Eastern time. On any date other than a business day,
the accumulation unit value or annuity unit value will be the same as the value
at the close of the next following business day.
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<PAGE>
DISTRIBUTION REQUIREMENTS FOLLOWING DEATH OF OWNER
If you did not purchase your contract under a tax-qualified plan (as that term
is used below), the Code requires that the following distribution provisions
apply if you die. We summarize these provisions in the box below. (If your
contract has joint owner, these provision apply upon the death of the first to
die.)
In most cases, these provisions do not cause a problem if you are also the
annuitant under your policy. If you have designated someone other than yourself
as the annuitant, however, your heirs will have less discretion than you would
have had in determining when and how the contract's value would be paid out.
IF YOU OWN A DEFERRED CONTRACT AND DIE BEFORE ANNUITY PAYMENTS
HAVE BEGUN:
. if the contract's designated beneficiary is your
surviving spouse, your spouse may continue the
contract in force as the owner.
. if the beneficiary is not your surviving spouse OR if
the beneficiary is your surviving spouse but chooses
not to continue the contract, the entire interest (as
discussed below) in the contract on the date of your
death must be:
(1) paid out in full within five years of your death or
(2) applied in full towards the purchase of a life
annuity on the beneficiary with payments commencing
within one year of your death
If you are the annuitant, as well as the owner, the entire
interest in the contract on the date of your death equals the
death benefit that then becomes payable. If you are the owner
but not the annuitant, the entire interest equals
. the surrender value if paid out in full within five
years of your death, or
. the total value of your contract applied in full
towards the purchase of a life annuity on the
beneficiary with payments commencing within one year
of your death.
IF YOU DIE ON OR AFTER ANNUITY PAYMENTS HAVE BEGUN
. any remaining amount that we owe must be paid out at
least as rapidly as under the method of making
annuity payments that is then in use.
The Code imposes very similar distribution requirements on contracts used to
fund tax-qualified plans. We provide the required provisions for tax-qualified
plans in separate disclosures and endorsements.
Notice of the death of an owner or annuitant should be furnished promptly to
the John Hancock Annuity Servicing Office.
MISCELLANEOUS PROVISIONS
ASSIGNMENT; CHANGE OF OWNER OR BENEFICIARY
To qualify for favorable tax treatment, certain contracts can't be sold;
assigned; discounted; or pledged as collateral for a loan, as security for the
performance of an obligation, or for any other purpose, unless the owner is a
trustee under section 401(a) of the Internal Revenue Code.
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<PAGE>
Subject to these limits, while the annuitant is alive, you may designate
someone else as the owner by written notice to the John Hancock Annuity
Servicing Office. The contract designates the person you choose as beneficiary.
You may change the beneficiary by written notice no later than receipt of due
proof of the death of the annuitant. Changes of owner or beneficiary will take
effect when we receive them, whether or not you or the annuitant is then alive.
However, these changes are subject to:
. the rights of any assignees of record, and
. certain other conditions
An assignment, pledge, or other transfer may be a taxable event. See "Tax
information" below. Therefore, you should consult a competent tax adviser before
taking any such action.
TAX INFORMATION
OUR INCOME TAXES
We are taxed as a life insurance company under the Internal Revenue Code (the
"Code"). The Account is taxed as part of our operations and is not taxed
separately.
The contracts permit us to deduct a charge for any taxes we incur that are
attributable to the operation or existence of the contracts or the Account.
Currently, we do not anticipate making a charge for such taxes. If the level of
the current taxes increases, however, or is expected to increase in the future,
we reserve the right to make a charge in the future.
CONTRACTS NOT PURCHASED TO FUND A TAX-QUALIFIED PLAN
UNDISTRIBUTED GAINS
-------------------
We believe the contracts will be considered annuity contracts under Section 72
of the Code. This means that, ordinarily, you pay no federal income tax on any
gains in your contract until we actually distribute assets to you.
However, a contract owned other than by a natural person does not generally
qualify as an annuity for tax purposes. Any increase in value therefore would
constitute ordinary taxable income to such an owner in the year earned.
ANNUITY PAYMENTS
----------------
When we make payments under a contract in the form of an annuity, each payment
will result in taxable ordinary income to the payee, to the extent that each
such payment exceeds an allocable portion of your "investment in the contract"
(as defined in the Code). In general, your "investment in the contract" equals
the aggregate amount of premium payments you have made over the life of the
contract, reduced by any amounts previously distributed from the contract that
were not subject to tax.
The Code prescribes the allocable portion of each such annuity payment to be
excluded from income according to a formula. The formula seeks to allocate an
appropriate amount of the investment in the contract to each payment. After the
entire "investment in the contract" has been distributed, any remaining payment
is fully taxable.
SURRENDERS AND WITHDRAWALS BEFORE DATE OF MATURITY
--------------------------------------------------
When we make a single sum payment from a contract, you have ordinary taxable
income, to the extent the payment exceeds your "investment in the contract"
(discussed above). Such a single sum payment can occur, for example, if you
surrender your contract or if no annuity payment option is selected for a death
benefit payment.
When you take a partial withdrawal from a contract, all or part of the payment
may constitute taxable ordinary income to you. The taxable portion generally
equals the amount, if any, by which the
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<PAGE>
payment exceeds your then investment in the contract. If you assign or pledge
any part your contract's value, the value so pledged or assigned is taxed the
same way as if it were a partial withdrawal.
For purposes of determining the amount of taxable income resulting from a
single sum payment or a partial withdrawal, all annuity contracts issued by John
Hancock or its affiliates to the owner within the same calendar year will be
treated as if they were a single contract.
PENALTY FOR PREMATURE WITHDRAWALS
---------------------------------
The taxable portion of any withdrawal or single sum payment may also trigger
an additional 10% penalty tax. The penalty tax does not apply to payments made
to you after age 59 1/2, or on account of your death or disability. Nor will it
apply to withdrawals in substantially equal periodic payments over the life of
the payee (or over the joint lives of the payee and the payee's beneficiary).
DIVERSIFICATION REQUIREMENTS
Each of the Funds of the Trust intends to qualify as a regulated investment
company under Subchapter M of the Code and meet the investment diversification
tests of Section 817(h) of the Code and the underlying regulations. Failure to
do so could result in current taxation to you on gains in your contract for the
year in which such failure occurred and thereafter.
The Treasury Department or the Internal Revenue Service may, at some future
time, issue a ruling or regulation presenting situations in which it will deem
contract owners to exercise "investor control" over the Fund shares that are
attributable to their contracts. The Treasury Department has said informally
that this could limit the number or frequency of transfers among variable
investment options. This could cause you to be taxed as if you were the direct
owner of your allocable portion of Fund shares. We reserve the right to amend
the contracts or the choice of investment options to avoid, if possible, current
taxation to the owners.
CONTRACTS PURCHASED FOR A TAX-QUALIFIED PLAN
We have no responsibility for determining whether a particular retirement plan
satisfies the applicable requirements of the Code or whether a particular
employee is eligible for inclusion under a plan.
CONTRACTS PURCHASED AS INDIVIDUAL RETIREMENT ANNUITIES (IRAS)
-------------------------------------------------------------
An individual retirement annuity (as defined in Section 408 of the Code)
generally permits an eligible purchaser to take a federal income tax deduction
of up to $2,000 per year for contributions to the IRA. (You can never, however,
deduct more than 100% of your compensation includable in your gross income for
the year.) You may also purchase an IRA contract for the benefit of your spouse
(regardless of whether your spouse has a paying job). You can generally deduct
up to $2,000 for each of you and your spouse (or, if less, your combined
compensation).
If you or your spouse is an active participant in an employer-sponsored
retirement plan, you may make deductible premium payments only if your adjusted
gross incomes do not exceed certain amounts. You can still contribute the full
$2,000 for each of you and your spouse, however, even though the contributions
are not deductible. Nor can you take a deduction for premium payments made in
or after the taxable year in which you attain age 70 1/2 or for a "rollover
contribution" as defined in the Code.
If you have made any non-deductible contributions to an IRA contract, all or
part of any withdrawal or surrender proceeds, single sum death benefit or any
annuity payment, may be excluded from your taxable income when you receive the
proceeds. In general, all other amounts paid out from an IRA contract (in the
form of an annuity, a single sum, or partial withdrawal), are taxable to the
payee
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<PAGE>
as ordinary income. As in the case of a contract not purchased under a tax-
qualified plan, you may incur additional adverse tax consequences, if you make a
surrender or withdrawal before you reach age 59 1/2 (unless certain exceptions
apply similar to those described above for such non-qualified contracts).
The tax law requires that annuity payments under an IRA contract begin no
later than April 1 of the year following the year in which the owner attains age
70 1/2.
CONTRACTS PURCHASED UNDER SIMPLE RETIREMENT ACCOUNTS (SIMPLE IRAS)
------------------------------------------------------------------
In general, a small business employer may establish a SIMPLE IRA retirement
plan, if the employer employed no more than 100 employees (whom the employer
paid at least $5,000) on any day during the preceding calendar year. As an
employee of such small business employer, you may make premium payments to the
SIMPLE IRA. You may specify the percentage of compensation that you will
contribute to the SIMPLE IRA, provided the amount of contribution does not
exceed $6,000 a year. Your employer must make a matching contribution of up to
3% of your compensation or a contribution equal to 2% of your compensation (if
your employer paid you at least $5,000 in the preceding calendar year).
CONTRACTS PURCHASED UNDER CERTAIN NON-DEDUCTIBLE IRAS (ROTH IRAS)
-----------------------------------------------------------------
In general, you may make purchase payments of up to $2,000 each year for a new
type of non-deductible IRA contract, known as a Roth IRA. Any contributions
made during the year for any other IRA you have will reduce the amount you
otherwise could contribution to a Roth IRA. Also, the $2000 maximum for a Roth
IRA phases out for single taxpayers with adjusted gross incomes between $95,000
and $110,000, for married taxpayers filing jointly with adjusted gross incomes
between $150,000 and $160,000, and for a married taxpayer filing separately with
adjusted gross income between $0 and $15,000.
If you hold your Roth IRA for at least five years the payee will not owe any
federal income taxes or early withdrawal penalties on amounts paid out from the
contract
. after you reach age 591/2,
. on your death or disability, or
. to one of the following qualified first-time home purchasers, subject
to a $10,000 lifetime maximum: you or your spouse, or the child,
grandchild, or ancestor of either of you.
The Code treats payments you receive from a Roth IRA that do not qualify for
the above tax free treatment as a return of the contributions you made first.
However, any amount of such non-qualifying payments or distributions that exceed
the amount of your contributions is taxable to you as ordinary income and
possibly subject to the 10% penalty tax.
You may make a tax-free rollover contribution from a non-Roth IRA, unless
. you have adjusted gross income over $100,000 or
. you are a married taxpayer filing a separate return.
The $2,000 Roth IRA contribution limit does not apply to tax-free rollover
contributions.
You must, however, pay tax on any portion of the non-Roth IRA being rolled
over that represents income or a previously deductible IRA contribution. No
similar limitations apply to rollovers from one Roth IRA to another Roth IRA.
CONTRACTS PURCHASED UNDER SECTION 403(B) PLANS (TSA)
----------------------------------------------------
Under these tax-sheltered annuity ("TSA") arrangements, public school systems
and certain tax-
26
<PAGE>
exempt organizations can make premium payments into a contracts owned by their
employees that are not taxable currently to the employee.
The amount of such non-taxable contributions each year
. is limited by a maximum (called the "exclusion allowance") that is
computed in accordance with a formula prescribed under the Code;
. may not, together with all other deferrals the employee elects under
other tax-qualified plans, exceed $10,000; and
. is subject to certain other limits (described in Section 415 of the
Code).
When we make annuity payments from the contract, such payments are taxed to
the employee or other payee under the same rules that apply to such payments
under corporate plans (discussed below), except that five-year averaging and
capital gain phase-out are not available.
When we make payments from a TSA contract on surrender of the contract,
partial withdrawal, death of the annuitant, or commencement of an annuity
option, the payee ordinarily must treat the entire payment as ordinary taxable
income.
Moreover, the Code prohibits distributions from a TSA contract before the
employee reaches age 59 1/2, except
. on the employee's separation from service, death, or disability,
. with respect to distributions of assets held under a TSA contract as
of December 31, 1988,
. transfers and exchanges to other products that qualify under Section
403(b).
CONTRACTS PURCHASED FOR "CORPORATE" PLANS
-----------------------------------------
In general, an employer may deduct from its taxable income premium payments it
makes under
. a qualified pension or profit-sharing plan described in Section
401(a) of the Code or
. a qualified annuity plan described in Section 403(a) of the Code.
Nor do the employees participating in the plan have to pay tax on such
contributions when made.
Annuity payments (or other payments, such as upon withdrawal, death or
surrender) generally constitute taxable income to the payee; and the payee must
pay income tax on the amount by which a payment exceeds its allocable share of
the employee's "investment in the contract" (as defined in the Code), if any. In
general, an employee's "investment in the contract" equals the aggregate amount
of premium payments made by the employee.
The non-taxable portion of each annuity payment is determined, under the Code,
according to a formula. Speaking generally, the formula seeks to allocate an
appropriate amount of the investment in the contract to each payment.
Certain special five-year income tax averaging provisions are available for
total distributions made in 1999, but not after that. Other favorable
procedures may also be available to taxpayers who had attained age 50 prior to
January 1, 1986.
IRS required minimum distributions to the employee must begin no later than
April 1 of the year following the year in which the employee reaches age 70 1/2
or, if later, retires.
27
<PAGE>
CONTRACTS PURCHASED FOR H.R. 10 (SELF-EMPLOYED) PLANS
-----------------------------------------------------
Self-employed persons, including partnerships, purchase contracts for
tax-qualified pension and profit-sharing plans that they establish for
themselves and for their employees. The Code limits the maximum amount of
premium payments that the self-employed person may deduct for federal income tax
purposes each year. With respect to variable annuity contracts issued on the
life of self-employed persons under such plans, the maximum generally is the
lesser of
. $30,000, or
. 25% of "earned income" (as defined in the Code).
Self-employed persons must also make premium payments for their employees (who
have met certain eligibility requirements) at least at the same rate as they do
for themselves.
tax-qualified plans may permit self-employed persons and their employees to
make additional premium payments themselves (which are not deductible) of up to
10% of earned income or compensation.
When we make annuity payments under an H.R. 10 contract, the payee must pay
federal income taxes under the same rules that apply to such payments under
corporate plans (discussed above).
The tax treatment of annuity payments is also the same as under corporate
plans (discussed above); as, in most respects, is the tax treatment of single
sum payments.
The same rules discussed above that determine for corporate plans (a) when
annuity payments must commence and (b) the 10% penalty tax on certain early
distributions also apply to H.R. 10 plans.
CONTRACTS PURCHASED UNDER GOVERNMENT DEFERRED COMPENSATION PLANS
-----------------------------------------------------------------
You can exclude a portion of your compensation from gross income if you
participate in a deferred compensation plan maintained by
. a state,
. a political subdivision of a state,
. an agency or instrumentality of a state or political subdivision of a
state, or
. a tax-exempt organization.
As a "participant" in such a deferred compensation plan, any amounts you
exclude (and any income on such amounts) will be includible in gross income only
for the taxable year in which such amounts are paid or otherwise made available
to the annuitant or other payee.
In general, the maximum amount of compensation you can defer under such
tax-favored plans equals the lesser of
. $8,000 or
. 33 1/3 % of your "includible income" (as defined in the Code).
The deferred compensation plan must satisfy several conditions, including the
following:
. the plan must not permit distributions prior to the earliest of (a)
the calendar year in which you attain age 70 1/2 , (b) your
separation from service, or (c) an unforeseeable emergency, and
. all compensation deferred under the plan shall remain solely the
employer's property and may be subject to the claims of its
creditors.
28
<PAGE>
If we make a payment under your contract in the form of an annuity, or in a
single sum such as on surrender or withdrawal, the payment is taxed as ordinary
income.
CONTRACTS PURCHASED FOR "TOP-HEAVY" PLANS
-----------------------------------------
Certain corporate and H.R. 10 plans may fall within Section 416 of the Code's
definition of "top-heavy plans." This can happen if the plan holds a
significant amount of its assets for the benefit of "key employees" (as defined
in the Code). You should consider whether your plan meets the definition. If
so, you should take care to consider the special limitations applicable to
top-heavy plans and the potentially adverse tax consequences to key employees.
TAX-FREE ROLLOVERS
------------------
The discussion above covers certain fully or partially tax-free "rollovers"
from a regular IRA to a Roth IRA. You may also make a tax-free rollover from
. a regular IRA to another regular IRA,
. a Roth IRA to another Roth IRA,
. any tax-qualified plan to a regular IRA,
. any tax-qualified plan to another tax-qualified plan of the same type
(i.e. TSA to TSA, corporate plan to corporate plan, etc.)
We do not have to withhold tax if you roll over your entire distribution and
you request us to pay it directly to the successor plan. Otherwise, 20%
mandatory withholding will apply, with the amount treated as a taxable
distribution. Mandatory withholding will reduce the amount you can roll over to
the new plan, unless you add funds to the rollover from other sources. The
mandatory withholding does not apply, however, to a rollover from one Roth IRA
to another. Consult a qualified tax adviser before making a rollover.
SEE YOUR OWN TAX ADVISER
------------------------
The above description of Federal income tax consequences to owners of and
payees under contracts, and of the different kinds of tax-qualified plans which
may be funded by the contracts, is only a brief summary and is not intended as
tax advice. It does not include a discussion of Federal estate and gift tax or
state tax consequences. The rules under the Code governing tax-qualified plans
are extremely complex and often difficult to understand. Changes to the tax
laws may be enforced retroactively. Anything less than full compliance with the
applicable rules, all of which are subject to change from time to time, can have
adverse tax consequences. The taxation of an Annuitant or other payee has
become so complex and confusing that great care must be taken to avoid pitfalls.
For further information, you should consult a qualified tax adviser.
PERFORMANCE INFORMATION
We may advertise total return information about investments made in the
variable investment options. We refer to this information as "Account level"
performance. In our Account level advertisements, we usually calculate total
return for 1, 5, and 10 year periods or since the beginning of the applicable
variable investment option. Total return at the Account level is the percentage
change between
. the value of a hypothetical investment in a variable investment
option at the beginning of the relevant period, and
. the value at the end of such period.
29
<PAGE>
At Account level, total return reflects adjustments for
. any sales charges deducted from premiums
. the mortality and expense risk charges,
. any administrative charge, and
. any annual contract fee.
Total return at the Account level does not, however, reflect any premium tax
charges. Total return at the Account level will be lower than that at the Trust
level where comparable charges are not deducted.
We may also advertise total return in a non-standard format in conjunction
with the standard format described above. The non-standard format is the same
as the standard format except that it will not reflect any sales charges or
annual fees.
We may advertise "current yield" and "effective yield" for investments in the
Money Market investment option. CURRENT YIELD refers to the income earned on
your investment in the Money Market investment option over a 7-day period and
then annualized. In other words, the income earned in the period is assumed to
be earned every 7 days over a 52-week period and stated as a percentage of the
investment.
EFFECTIVE YIELD is calculated in a similar manner but, when annualized, the
income earned by your investment is assumed to be reinvested and thus compounded
over the 52-week period. Effective yield will be slightly higher than current
yield because of this compounding effect of reinvestment.
We also advertise current yield for investments in the other variable
investment options. For investments in these options, we calculate current
yield by the following formula:
- ----------------------------------------------
the annualization of the income earned by a
investment in the variable investment option
during a recent 30-day period
DIVIDED BY
the maximum offering price per unit of the
variable investment option at the end of such
30-day period
- ----------------------------------------------
In all cases, current yield and effective yield reflect all the recurring
charges at the Account level, but will not reflect any premium tax or any sales
charge.
REPORTS
At least annually, we will send you (1) a report showing the number and value
of the accumulation units in your contract and (2) the financial statements of
the Trust.
VOTING PRIVILEGES
At meetings of the Trust's shareholders, we will generally vote all the shares
of each Fund that we hold in the Account in accordance with instructions we
receive from the owners of contracts that participate in the corresponding
variable investment option.
CERTAIN CHANGES
We reserve the right, subject to applicable law, including any required
shareholder approval,
. to transfer assets that we determine to be your assets from the
Account to another separate account or investment option by
withdrawing the same percentage of each investment in the Account
with proper adjustments to avoid odd lots and fractions,
30
<PAGE>
. to add or delete variable investment options,
. to change the underlying investment vehicles,
. to operate the Account in any form permitted by law, and
. to terminate the Account's registration under the 1940 Act, if such
registration should no longer be legally required.
Unless otherwise required under applicable laws and regulations, notice to or
approval of owners will not be necessary for us to make such changes.
DISTRIBUTION OF CONTRACTS
Signator Investors, Inc. ("Signator"), formerly John Hancock Distributors,
Inc., acts as principal distributor of the contracts sold through this
prospectus. Signator is registered as a broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. Its address is John Hancock Place, Boston, Massachusetts 02117.
Signator is a subsidiary of John Hancock.
You can purchase a contract either through Signator's registered
representatives or through other broker-dealers whose representatives are
authorized by applicable law to sell variable annuity products. We do not
expect the compensation to such broker-dealers to exceed 3.0% of premium
payments. Signator compensates its registered representatives for sales of the
contracts on a commission and fee service basis. We, in turn, reimburse
Signator for direct and indirect expenses actually incurred in connection with
the marketing and sales of these contracts. We offer these contracts on a
continuous basis, but neither John Hancock or Signator is obligated to sell any
particular amount of contracts.
IMPACT OF THE YEAR 2000 ISSUE
The advent of the Year 2000 presents us with a technological challenge:
making our systems function properly with respect to dates in the year 2000 and
after. In response to that challenge, we have developed and are executing a
plan to modify or replace significant portions of our computer informations
systems and automated technologies. The plan involves coordination and testing
with business partners in an effort to minimize the possibility that external
factors will adversely impact our systems. We believe that, with modifications
to existing systems and conversions to new technologies, the Year 2000 will not
pose significant operational problems for our computer systems. However, if
certain modifications and conversions are not made, or are not completed on
time, the Year 2000 issue could have an adverse impact on our operations.
We have substantially completed the process of remediating our systems and
expect the compliance testing component of the project to be completed by June,
1999. This completion target was derived utilizing numerous assumptions of
future events, including availability of certain resources and other factors.
However, there can be no guarantee that this estimate will be achieved, that
these steps will be sufficient or that actual results may not differ materially
from those anticipated. For more information about the impact of the Year 2000
issue, refer to Note 15 to the Notes to the Financial Statements of John Hancock
Mutual Life Insurance Company included in the Statement of Additional
Information to this prospectus.
REGISTRATION STATEMENT
This prospectus omits certain information contained in the registration
statement that we filed with the SEC. You can get more details from the SEC
upon payment of prescribed fees or through the SEC's internet web site
(www.sec.gov).
31
<PAGE>
Among other things, the registration statement contains a "Statement of
Additional Information" that we will send you without charge upon request. The
Table of Contents of the Statement of Additional Information lists the following
subjects that it covers:
page of SAI
VARIATIONS IN CHARGES.......................... 2
DISTRIBUTION................................... 2
CALCULATION OF PERFORMANCE DATA................ 2
OTHER PERFORMANCE INFORMATION.................. 4
CALCULATION OF ANNUITY PAYMENTS................ 4
ADDITIONAL INFORMATION ABOUT DETERMINING
UNIT VALUES................................... 6
PURCHASES AND REDEMPTIONS OF FUND SHARES....... 7
THE ACCOUNT.................................... 8
DELAY OF CERTAIN PAYMENTS...................... 8
LIABILITY FOR TELEPHONE TRANSFERS.............. 8
VOTING PRIVILEGES.............................. 8
JOHN HANCOCK FINANCIAL STATEMENTS..............10
SEPARATE ACCOUNT FINANCIAL STATEMENTS..........35
EXPERTS
Ernst & Young LLP, independent auditors, have audited the financial statements
of John Hancock Mutual Life Insurance Company and the Account that appear in the
Statement of Additional Information, which also is a part of the registration
statement that contains this prospectus. Those financial statements are included
in the registration statement in reliance upon Ernst & Young's reports given
upon the firm's authority as experts in accounting and auditing.
32
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U CONDENSED FINANCIAL INFORMATION
The following table provides selected data for each accumulation share
throughout the period as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH & INCOME
Accumulation share value:
Beginning of period . . . $143.25 $111.44 $93.72 $70.53 $71.64 $63.84 $59.22
End of period . . . . . $184.73 $143.25 $111.44 $93.72 $70.53 $71.64 $63.84
Number of Accumulation
Shares outstanding at end
of period . . . . . . . . 1,716,718 1,901,446 2,065,540 2,225,393 2,417,577 2,566,107 2,736,951
SOVEREIGN BOND
Accumulation share value:
Beginning of period . . . $48.53 $44.51 $43.19 $36.49 $37.83 $34.49 $32.36
End of period . . . . . $52.00 $48.53 $44.51 $43.19 $36.49 $37.83 $34.49
Number of Accumulation
Shares outstanding at end
of period . . . . . . . . 1,594,988 1,749,513 1,980,126 2,205,467 2,486,013 2,730,735 2,953,463
MONEY MARKET
Accumulation share value:
Beginning of period . . . $23.55 $22.55 $21.63 $20.65 $20.04 $19.64 $19.14
End of period . . . . . $24.58 $23.55 $22.55 $21.63 $20.65 $20.04 $19.64
Number of Accumulation
Shares outstanding at end
of period . . . . . . . . 754,395 743,856 857,514 972,149 1,068,017 1,171,917 1,598,576
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1991 1990 1989
------------ ------------ ------------
<S> <C> <C> <C>
GROWTH & INCOME
Accumulation share value:
Beginning of period . . . $47.48 $46.04 $36.71
End of period . . . . . $59.22 $47.48 $46.04
Number of Accumulation 2,924,816 3,193,137 3,523,823
Shares outstanding at end
of period . . . . . . . .
SOVEREIGN BOND
Accumulation share value:
Beginning of period . . . $28.02 $26.35 $23.67
End of period . . . . . $32.36 $28.02 $26.35
Number of Accumulation 3,166,240 3,455,875 3,913,241
Shares outstanding at end
of period . . . . . . . .
MONEY MARKET
Accumulation share value:
Beginning of period . . . $18.24 $17.02 $15.72
End of period . . . . . $19.14 $18.24 $17.02
Number of Accumulation 2,013,162 2,357,840 2,653,748
Shares outstanding at end
of period . . . . . . . .
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LARGE CAP GROWTH
Accumulation Share
Value:
Beginning of Period $32.33 $24.93 $21.29 $16.34 $16.67 $14.79 $13.59
End of Period . . . $44.65 $32.33 $24.93 $21.29 $16.34 $16.67 $14.79
Number of Accumulation
Shares outstanding at
end of period . . . 169,917 160,590 159,241 159,494 141,064 110,712 86,619
INTERNATIONAL EQUITY INDEX
Accumulation Share
Value:
Beginning of Period $15.28 $16.25 $15.03 $14.05 $15.12 $11.56 $11.87
End of Period . . . $18.28 $15.28 $16.25 $15.03 $14.05 $15.12 $11.56
Number of Accumulation
Shares outstanding at
end of period . . . 85,615 102,698 131,774 133,791 156,006 89,934 33,160
REAL ESTATE EQUITY
Accumulation Share
Value:
Beginning of Period $25.42 $21.91 $16.63 $14.95 $14.68 $12.64 $11.01
End of Period . . . $20.97 $25.42 $21.91 $16.63 $14.95 $14.68 $12.64
Number of Accumulation
Shares outstanding at
end of period . . . 69,796 99,634 103,394 92,870 130,412 131,016 25,136
MANAGED
Accumulation Share
Value:
Beginning of Period $24.04 $20.45 $18.65 $14.83 $15.32 $13.86 $11.96
End of Period . . . $28.66 $24.04 $20.45 $18.65 $14.83 $15.32 $13.86
Number of Accumulation
Shares outstanding at
end of period . . . 852,132 984,740 1,053,821 1,072,417 1,100,811 1,115,432 806,671
<CAPTION>
Period from
*May 1,
Year Ended 1990 to
December 31, December 31,
1991 1990
------------ ------------
<S> <C> <C>
LARGE CAP GROWTH
Accumulation Share
Value:
Beginning of Period $10.94 $10.00
End of Period . . . $13.59 $10.94
Number of Accumulation 58,121 36,358
Shares outstanding at
end of period . . .
INTERNATIONAL EQUITY INDEX
Accumulation Share
Value:
Beginning of Period $09.72 $10.00
End of Period . . . $11.87 $09.72
Number of Accumulation 27,855 28,024
Shares outstanding at
end of period . . .
REAL ESTATE EQUITY
Accumulation Share
Value:
Beginning of Period $08.33 $10.00
End of Period . . . $11.01 $08.33
Number of Accumulation 8,004 7,621
Shares outstanding at
end of period . . .
MANAGED
Accumulation Share
Value:
Beginning of Period $10.77 $10.00
End of Period . . . $11.96 $10.77
Number of Accumulation 451,945 262,273
Shares outstanding at
end of period . . .
</TABLE>
- ---------
*Date of initial public offering of Accumulation Shares.
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
SMALL/MID CAP GROWTH
Accumulation Share Value
Beginning of Period . . . . . . $ 11.33 $ 11.05 $ 10.00
End of Period . . . . . . . . . $ 11.85 $ 11.33 $ 11.05
Number of Accumulation Shares
outstanding at end of period . . 69,766 84,779 75,662
SHORT-TERM BOND
Accumulation Share Value
Beginning of Period . . . . . . $ 10.90 $ 10.35 $ 10.00
End of Period . . . . . . . . . $ 11.42 $ 10.90 $ 10.35
Number of Accumulation Shares
outstanding at end of period. . . 28,394 21,481 16,015
</TABLE>
<TABLE>
<CAPTION>
Period from
May 1, 1996
Year Ended Year Ended to
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
EQUITY INDEX
Accumulation Share Value
Beginning of Period . . . . . . $ 14.92 $ 11.35 $ 10.00
End of Period . . . . . . . . . $ 18.97 $ 14.92 $ 11.35
Number of Accumulation Shares
outstanding at end of period . . 71,549 54,198 3,749
LARGE CAP VALUE
Accumulation Share Value
Beginning of Period . . . . . . $ 14.40 $ 11.31 $ 10.00
End of Period . . . . . . . . . $ 15.58 $ 14.40 $ 11.31
Number of Accumulation Shares
outstanding at end of period. . . 38,080 23,612 11,411
MID CAP GROWTH
Accumulation Share Value
Beginning of Period . . . . . . $ 11.78 $ 10.20 $10.000
End of Period . . . . . . . . . $ 16.23 $ 11.78 $10.200
Number of Accumulation Shares
outstanding at end of period . . 29,520 16,957 14.603
MID CAP VALUE
Accumulation Share Value
Beginning of Period . . . . . . $ 15.11 $ 11.54 $ 10.00
End of Period . . . . . . . . . $ 13.27 $ 15.11 $ 11.54
Number of Accumulation Shares
outstanding at end of period . . 33,641 37,067 5,764
SMALL CAP GROWTH
Accumulation Share Value
Beginning of Period . . . . . . $ 11.18 $ 9.88 $ 10.00
End of Period . . . . . . . . . $ 12.67 $ 11.18 $ 9.88
Number of Accumulation Shares
outstanding at end of period . . 31,804 35,818 15,438
SMALL CAP VALUE
Accumulation Share Value
Beginning of Period . . . . . . $ 13.63 $ 10.96 $ 10.00
End of Period . . . . . . . . . $ 12.69 $ 13.63 $ 10.96
Number of Accumulation Shares
outstanding at end of period . . 23,741 17,720 2,982
GLOBAL BOND
Accumulation Share Value
Beginning of Period . . . . . . $ 11.44 $ 10.60 $ 10.00
End of Period . . . . . . . . . $ 12.37 $ 11.44 $ 10.60
Number of Accumulation Shares
outstanding at end of period . . 38,188 23,759 7,670
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Period from
May 1, 1996
Year Ended Year Ended to
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INTERNATIONAL OPPORTUNITIES
Accumulation Share Value
Beginning of Period . . . . . . $ 10.70 $ 10.60 $ 10.00
End of Period . . . . . . . . . $ 12.28 $ 10.70 $ 10.60
Number of Accumulation Shares
outstanding at end of period . . 9,264 8,683 6,637
INTERNATIONAL BALANCED
Accumulation Share Value
Beginning of Period . . . . . . $ 10.77 $ 10.60 $ 10.00
End of Period . . . . . . . . . $ 12.58 $ 10.77 $ 10.60
Number of Accumulation Shares
outstanding at end of period . . 6,703 7,961 3,139
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 30, 1998
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1998
-----------------
<S> <C>
SMALL /MID CAP CORE
Accumulation Share Value
Beginning of Period . . . . . . . . . . . . . . . . . . $10.00
End of Period . . . . . . . . . . . . . . . . . . . . . $10.70
Number of Accumulation Shares outstanding at end of period 0
GLOBAL EQUITY
Accumulation Share Value
Beginning of Period . . . . . . . . . . . . . . . . . . $10.00
End of Period . . . . . . . . . . . . . . . . . . . . . $10.30
Number of Accumulation Shares outstanding at end of period 0
EMERGING MARKETS EQUITY
Accumulation Share Value
Beginning of Period . . . . . . . . . . . . . . . . . . $10.00
End of Period . . . . . . . . . . . . . . . . . . . . . $ 9.27
Number of Accumulation Shares outstanding at end of period 0
BOND INDEX
Accumulation Share Value
Beginning of Period . . . . . . . . . . . . . . . . . . $10.00
End of Period . . . . . . . . . . . . . . . . . . . . . $10.01
Number of Accumulation Shares outstanding at end of period 0
HIGH YIELD BOND
Accumulation Share Value
Beginning of Period . . . . . . . . . . . . . . . . . . $10.00
End of Period . . . . . . . . . . . . . . . . . . . . . $ 9.89
Number of Accumulation Shares outstanding at end of period 0
</TABLE>
35
<PAGE>
APPENDIX - ILLUSTRATIVE CONTRACT VALUE AND ANNUITY PAYMENT TABLES
The following tables present illustrative periodic contract values and annuity
payments that would have resulted under a contract described in this prospectus
had such values and payments been based exclusively upon the investment
experience of the nine specified variable investment options, assuming
investment by each of those investment options in the corresponding Fund of the
Trust and its predecessors during the periods shown. We have not illustrated the
other investment options because of the limited time that they have been
available. The contracts described in this prospectus were first offered in
1990.
For the years ended December 31, 1986 (and prior thereto), we have calculated
the values based upon the actual investment results of the three corresponding
variable life insurance managed separate accounts which were the predecessors to
the Growth & Income, Sovereign Bond, and Money Market Portfolios, as if the Fund
had been in existence prior to March 28, 1986, the date of its reorganization.
In the tables, we assume
. the owner made a single purchase payment of $10,000, net of any
deductions from purchase payments,
. charges have been assessed at annual rate of 1.40% for mortality and
expense risks and administrative services, and
. actual investment management fees and other fund expenses for the
periods illustrated have also been assessed.
Absent expense reimbursements by John Hancock to certain of the Funds for some
periods, the values illustrated would have been lower.
WHAT THE TABLES ILLUSTRATE
Subject to the foregoing, each Table I presents, at yearly intervals, the
illustrative periodic contract values for each variable investment option which
would have resulted under a contract, if the owner had made a net single
purchase payment of $10,000. The contract values are based upon the investment
performance of the corresponding Fund.
Subject to the foregoing, each Table II indicates, at annual intervals,
illustrative monthly variable annuity payments for each variable investment
option which would have been received by an annuitant or other payee, assuming
that an initial annuity payment of $100 was received in the month and year
indicated. The form of annuity illustrated is a life annuity with payments
guaranteed for 10 years.
The results shown should not be considered a representation of the future. A
program of the type illustrated in the tables does not assure a profit or
protect against depreciation in declining markets.
36
<PAGE>
GROWTH & INCOME
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT CONTRACT HAD BEEN ISSUED JANUARY 2,
1975
<TABLE>
<CAPTION>
Contract value
on December 31
Contract Year Commencing of the same year
- ------------------------ ------------------
<S> <C>
January 1975. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,819.53
January 1976. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,966.77
January 1977. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,228.08
January 1978. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,894.65
January 1979. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,986.35
January 1980. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,643.34
January 1981. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,623.76
January 1982. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,146.28
January 1983. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,543.15
January 1984. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,710.95
January 1985. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,647.01
January 1986. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,007.66
January 1987. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,447.97
January 1988. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,612.93
January 1989. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,444.82
January 1990. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,614.59
January 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,797.31
January 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,360.17
January 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,099.32
January 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,292.09
January 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,196.34
January 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,154.80
January 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,162.54
January 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301,957.33
</TABLE>
37
<PAGE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
JANUARY 1975.
<TABLE>
<CAPTION>
Payment
Month For Month
----- ---------
<S> <C>
January 1975 . . . . . . . . . . . 100.00
January 1976 . . . . . . . . . . . 126.56
January 1977 . . . . . . . . . . . 141.12
January 1978 . . . . . . . . . . . 123.05
January 1979 . . . . . . . . . . . 125.58
January 1980 . . . . . . . . . . . 139.22
January 1981 . . . . . . . . . . . 172.58
January 1982 . . . . . . . . . . . 167.75
January 1983 . . . . . . . . . . . 204.49
January 1984 . . . . . . . . . . . 235.65
January 1985 . . . . . . . . . . . 237.41
January 1986 . . . . . . . . . . . 307.45
January 1987 . . . . . . . . . . . 348.17
January 1988 . . . . . . . . . . . 347.67
January 1989 . . . . . . . . . . . 384.54
January 1990 . . . . . . . . . . . 456.19
January 1991 . . . . . . . . . . . 462.96
January 1992 . . . . . . . . . . . 530.83
January 1993 . . . . . . . . . . . 583.54
January 1994 . . . . . . . . . . . 631.13
January 1995 . . . . . . . . . . . 602.56
January 1996 . . . . . . . . . . . 768.39
January 1997 . . . . . . . . . . . 888.58
January 1998 . . . . . . . . . . . 1,057.91
January 1999 . . . . . . . . . . . 1,363.39
</TABLE>
The amounts shown are based on the investment performance of the Growth &
Income Fund, and its predecessors. All amounts reflect the provisions of the
contracts described in this prospectus, including annuity tables based on the
standard assumed investment rate of3 1/2% per annum. The amounts shown do not
reflect the deduction for any applicable premium tax. See text preceding these
tables.
38
<PAGE>
SOVEREIGN BOND
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT CONTRACT HAD BEEN ISSUED JUNE 2, 1980
<TABLE>
<CAPTION>
Contract value
on December 31
Contract year Commencing of the same year
- ------------------------ ------------------
<S> <C>
June 1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,253.83
June 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,562.69
June 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,469.69
June 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,149.83
June 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,041.33
June 1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,306.75
June 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,698.31
June 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,052.03
June 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,615.71
June 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,354.41
June 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,015.98
June 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,360.46
June 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,492.94
June 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,828.50
June 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,490.86
June 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,187.99
June 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,514.03
June 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,526.20
June 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,999.07
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN JUNE
1980:
<TABLE>
<CAPTION>
Payment
Month For Month
- ----- -----------
<S> <C>
June 1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00
June 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96.41
June 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.17
June 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126.21
June 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120.98
June 1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145.80
June 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165.31
June 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166.02
June 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172.28
June 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181.81
June 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187.02
June 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200.83
June 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215.21
June 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230.96
June 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224.68
June 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238.43
June 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243.64
June 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251.72
June 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.27
</TABLE>
The amounts shown are based on the investment performance of the Sovereign
Bond Fund, and its predecessors. All amounts reflect the provisions of the
contracts described in this prospectus, including annuity tables based on the
standard assumed investment rate of3 1/2% per annum. The amounts shown do not
reflect the deduction for any applicable premium tax. See text preceding these
tables.
39
<PAGE>
MONEY MARKET
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT CONTRACT HAD BEEN ISSUED MAY 13, 1982
<TABLE>
<CAPTION>
Contract value
on December 31
Contract Year Commencing of the same year
- ------------------------ ------------------
<S> <C>
May 1982. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,482.07
May 1983. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,284.20
May 1984. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,347.06
May 1985. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,220.56
May 1986. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,966.07
May 1987. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,753.06
May 1988. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,728.09
May 1989. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,018.29
May 1990. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,236.49
May 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,134.06
May 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,633.91
May 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,033.99
May 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,646.91
May 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,624.80
May 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,551.18
May 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,545.36
May 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,579.76
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN MAY
1982.
<TABLE>
<CAPTION>
Payment
Month For Month
- ----- -----------
<S> <C>
May 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00
May 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.76
May 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108.45
May 1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114.21
May 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117.81
May 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119.65
May 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122.42
May 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127.07
May 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132.40
May 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136.49
May 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137.10
May 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.53
May 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133.62
May 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134.22
May 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.58
May 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136.62
May 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137.90
</TABLE>
The amounts shown are based on the investment performance of the Money Market
Fund, and its predecessors. All amounts reflect the provisions of the contracts
described in this prospectus, including annuity tables based on the standard
assumed investment rate of3 1/2% per annum. The amounts shown do not reflect the
deduction for any applicable premium tax. See text preceding these tables.
40
<PAGE>
LARGE CAP GROWTH
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED NOVEMBER 24, 1987
<TABLE>
<CAPTION>
Contract value
on December 31
Contract Year Commencing of the same year
- ------------------------ ------------------
<S> <C>
November 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,243.86
November 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,672.16
November 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,984.57
November 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,863.60
November 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,703.88
November 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,447.52
November 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,167.30
November 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,693.18
November 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,879.50
November 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,157.66
November 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,879.34
November 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,751.95
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
NOVEMBER 1987.
<TABLE>
<CAPTION>
Payment
Month For Month
----- -----------
<S> <C>
November 1987. . . . . . . . . . . 100.00
November 1988. . . . . . . . . . . 110.03
November 1989. . . . . . . . . . . 136.28
November 1990. . . . . . . . . . . 137.37
November 1991. . . . . . . . . . . 142.37
November 1992. . . . . . . . . . . 172.31
November 1993. . . . . . . . . . . 194.04
November 1994. . . . . . . . . . . 187.98
November 1995. . . . . . . . . . . 225.72
November 1996. . . . . . . . . . . 262.63
November 1997. . . . . . . . . . . 322.95
November 1998 . . . . . . . . . . 387.15
</TABLE>
The amounts shown are based on the investment performance of the Large Cap
Growth Fund. All amounts reflect the provisions of the contracts described in
this prospectus, including annuity tables based on the standard assumed
investment rate of3 1/2% per annum. The amounts shown do not reflect the
deduction for any applicable premium tax. See text preceding the tables.
41
<PAGE>
MANAGED
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED NOVEMBER 9, 1987
<TABLE>
<CAPTION>
Contract value
on December 31
Contract Year Commencing of the same year
- ------------------------ ------------------
<S> <C>
November 1987. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,232.70
November 1988. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,334.40
November 1989. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,393.61
November 1990. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,801.73
November 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,668.31
November 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,775.86
November 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,642.61
November 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,013.90
November 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,925.00
November 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,225.50
November 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,829.41
November 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,754.85
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
NOVEMBER 1987.
<TABLE>
<CAPTION>
Payment
Month For Month
----- -----------
<S> <C>
November 1987. . . . . . . . . . . 100.00
November 1988. . . . . . . . . . . 110.31
November 1989. . . . . . . . . . . 122.50
November 1990. . . . . . . . . . . 116.05
November 1991. . . . . . . . . . . 138.17
November 1992. . . . . . . . . . . 144.89
November 1993. . . . . . . . . . . 159.95
November 1994. . . . . . . . . . . 150.56
November 1995. . . . . . . . . . . 174.25
November 1996. . . . . . . . . . . 187.53
November 1997. . . . . . . . . . . 210.06
November 1998 . . . . . . . . . . 230.11
</TABLE>
.The amounts shown are based on the investment performance of the Managed
Fund. All amounts reflect the provisions of the contracts described in this
prospectus, including annuity tables based on the standard assumed investment
rate of3 1/2% per annum. The amounts shown do not reflect the deduction for any
applicable premium tax. See text preceding the tables.
42
<PAGE>
REAL ESTATE EQUITY
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED FEBRUARY 14, 1989
<TABLE>
<CAPTION>
Contract value
on December 31
Contract Year Commencing of the same year
------------------------ ------------------
<S> <C>
February 1989 . . . . . . . . . 10,411.79
February 1990 . . . . . . . . . 8,096.26
February 1991 . . . . . . . . . 10,702.17
February 1992 . . . . . . . . . 12,292.77
February 1993 . . . . . . . . . 14,276.57
February 1994 . . . . . . . . . 14,539.51
February 1995 . . . . . . . . . 16,166.74
February 1996 . . . . . . . . . 21,298.75
February 1997 . . . . . . . . . 24,717.57
February 1998 . . . . . . . . . 20,383.04
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
FEBRUARY 1989.
<TABLE>
<CAPTION>
Payment
Month For Month
----- -----------
<S> <C>
February 1989. . . . . . . . . . . 100.00
February 1990. . . . . . . . . . . 96.30
February 1991. . . . . . . . . . . 86.16
February 1992. . . . . . . . . . . 101.00
February 1993. . . . . . . . . . . 117.29
February 1994. . . . . . . . . . . 121.19
February 1995. . . . . . . . . . . 115.20
February 1996. . . . . . . . . . . 128.27
February 1997. . . . . . . . . . . 163.25
February 1998. . . . . . . . . . . 175.99
February 1999 . . . . . . . . . . 141.14
</TABLE>
The amounts shown are based on the investment performance of the Real Estate
Equity Fund. All amounts reflect the provisions of the contracts described in
this prospectus, including annuity tables based on the standard assumed
investment rate of3 1/2% per annum. The amounts shown do not reflect the
deduction for any applicable premium tax. See text preceding the tables.
43
<PAGE>
INTERNATIONAL EQUITY INDEX
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED FEBRUARY 10, 1989
<TABLE>
<CAPTION>
Contract value
on December 31
Contract Year Commencing of the same year
------------------------ ------------------
<S> <C>
February 1989 . . . . . . . . 11,110.62
February 1990 . . . . . . . . 10,127.48
February 1991 . . . . . . . . 12,370.78
February 1992 . . . . . . . . 12,046.28
February 1993 . . . . . . . . 15,754.61
February 1994 . . . . . . . . 14,645.35
February 1995 . . . . . . . . 15,661.96
February 1996 . . . . . . . . 16,931.02
February 1997 . . . . . . . . 15,921.47
February 1998 . . . . . . . . 19,045.02
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
FEBRUARY 1989.
<TABLE>
<CAPTION>
Payment
Month For Month
----- -----------
<S> <C>
February 1989 . . . . . . . . . . 100.00
February 1990 . . . . . . . . . . 97.16
February 1991 . . . . . . . . . . 90.62
February 1992 . . . . . . . . . . 105.09
February 1993 . . . . . . . . . . 99.92
February 1994 . . . . . . . . . . 126.30
February 1995 . . . . . . . . . . 106.20
February 1996 . . . . . . . . . . 118.06
February 1997 . . . . . . . . . . 119.29
February 1998 . . . . . . . . . . 112.74
February 1999 . . . . . . . . . . 127.77
</TABLE>
The amounts shown are based on the investment performance of the International
Equity Index Fund. All amounts reflect the provisions of the contracts described
in this prospectus, including annuity tables based on the standard assumed
investment rate of3 1/2% per annum. The amounts shown do not reflect the
deduction for any applicable premium tax. See text preceding the tables.
44
<PAGE>
SHORT-TERM BOND (FORMERLY, SHORT-TERM U.S. GOVERNMENT)
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED SEPTEMBER 23, 1994
<TABLE>
<CAPTION>
Contract value
on December 31
Contract Year Commencing of the same year
------------------------ ------------------
<S> <C>
September 1994. . . . . . . . . 9,923.81
September 1995 . . . . . . . . 10,955.04
September 1996 . . . . . . . . 11,237.26
September 1997 . . . . . . . . 11,779.75
September 1998 . . . . . . . . 12,340.88
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
SEPTEMBER 1994
<TABLE>
<CAPTION>
Payment
Month For Month
----- -----------
<S> <C>
September 1994 . . . . . . . . . . 100.00
September 1995 . . . . . . . . . . 103.33
September 1996 . . . . . . . . . . 103.12
September 1997 . . . . . . . . . . 104.45
September 1998 . . . . . . . . . . 106.75
</TABLE>
The amounts shown are based on the investment performance of the Short-Term
Bond Fund. All amounts reflect the provisions of the contracts described in this
prospectus, including annuity tables based on the standard assumed investment
rate of3 1/2% per annum. The amounts shown do not reflect the deduction for any
applicable premium tax. See text preceding the tables.
45
<PAGE>
SMALL/MID CAP GROWTH (FORMERLY, DIVERSIFIED MID CAP GROWTH)
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE CONTRACT VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED SEPTEMBER 23, 1994
<TABLE>
<CAPTION>
Contract value
on December 31
Contract Year Commencing of the same year
------------------------ ------------------
<S> <C>
September 1994. . . . . . . . . 9,922.70
September 1995 . . . . . . . . 13,338.96
September 1996 . . . . . . . . 17,212.83
September 1997 . . . . . . . . 17,552.52
September 1998 . . . . . . . . 18,352.54
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
SEPTEMBER 1994
<TABLE>
<CAPTION>
Payment
Month For Month
----- -----------
<S> <C>
September 1994 . . . . . . . . . . 100.00
September 1995 . . . . . . . . . . 125.93
September 1996 . . . . . . . . . . 100.11
September 1997 . . . . . . . . . . 106.20
September 1998 . . . . . . . . . . 106.74
</TABLE>
The amounts shown are based on the investment performance of the Small/Mid Cap
Growth Fund. All amounts reflect the provisions of the contracts described in
this prospectus, including annuity tables based on the standard assumed
investment rate of3 1/2% per annum. The amounts shown do not reflect the
deduction for any applicable premium tax. See text preceding the tables.
46
<PAGE>
/s/ John Hancock
JOHN HANCOCK
MUTUAL LIFE INSURANCE COMPANY
ANNUITY TRANSFERLINE
AUTHORIZATION FORM
-------------------------------------------------------------------------------
INSTRUCTIONS: Please complete and sign where indicated. If your Contract will
be jointly owned, each Owner must sign. An acknowledgment letter will be sent
as soon as your Contract is issued.
THIS COMPLETED FORM MUST BE SUBMITTED WITH THE APPLICATION.
- -------------------------------------------------------------------------------
( ) Yes! I want TRANSFERLINE, John Hancock's telephone transfer program that
permits fast and toll-free transfers of funds within my Contract, as
conditions dictate.
As the applicant for a Contract funded by John Hancock Variable Series Trust I
(the "Fund"), I hereby authorize John Hancock, on behalf of the Fund, to act
upon my telephone instructions to:
(1) reallocate my then current value held in any one or more Subaccounts, and
(2) to change the allocation of future purchase payments to the Subaccounts.
I understand that John Hancock employs the following procedures reasonably
designed to confirm that the instructions received by telephone are genuine:
requiring disclosure of personal identification; tape recording calls; and
providing the Owner with a confirmation of the transfer. As long as John Hancock
follows such procedures, I will not hold John Hancock or the Fund (or any of
their successors) liable for any loss, expense, or cost resulting from any
unauthorized or fraudulent telephone instructions.
I further understand that this authorization is limited by the conditions and
procedures for telephone account transfers and investment option changes set
forth in the prospectus describing my contract.
I further understand that this authorization will continue in force unless and
until the earlier of (a) written revocation received by John Hancock at its
Annuity Servicing Office or (b) John Hancock discontinues this service.
Signature(s) of Prospective
Contract Owner(s)
Date: /s/
------------------------- -------------------------
Date: /s/
------------------------- -------------------------
Questions call: 1-800-732-5543
Mail to: John Hancock Annuity Servicing Office
529 Main Street (X-4)
Charlestown, MA 02129
<PAGE>
/s/ John Hancock
Contracts issued by John Hancock Mutual Life Insurance Company
John Hancock Place, Boston, Massachusetts 02117
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
SINGLE AND PERIODIC PREMIUM
DEFERRED AND IMMEDIATE VARIABLE ANNUITY CONTRACTS
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF ADDITIONAL INFORMATION
------------------
This statement of additional information ("SAI"), dated May 3, 1999 is not a
prospectus. It is intended that this SAI be read in conjunction with the
prospectus of John Hancock Variable Annuity Account U (the "Account") dated May
3, 1999, for the contracts being offered. Terms used in this SAI that are not
otherwise defined herein have the same meanings given to them in the prospectus,
unless the context requires otherwise. A copy of the prospectus may be obtained
from the John Hancock Annuity Servicing Office, 529 Main Street (X-4),
Charlestown, Massachusetts 02129, telephone number 1-800-732-5543.
TABLE OF CONTENTS
-----------------
PAGE OF SAI
-----------
Variations in Charges................................. 2
Distribution.......................................... 2
Calculation of Performance Data....................... 2
Other Performance Information......................... 4
Calculation of Annuity Payments....................... 4
Additional Information About Determining Unit Values.. 6
Purchases and Redemptions of Fund Shares.............. 7
The Account........................................... 8
Delay of Certain Payments............................. 8
Liability for Telephone Transfers..................... 8
Voting Privileges..................................... 8
John Hancock Financial Statements..................... 10
Separate Account Financial Statements................. 35
<PAGE>
VARIATIONS IN CHARGES
In the case of a purchase payment for a single premium contract which is
derived from proceeds (maturity benefit, cash surrender values, sums due under
optional methods of settlement and the like) of fixed dollar insurance policies
and annuity contracts issued by John Hancock, the $50 administrative expense
deduction will be waived and all other sales charges will be at one-half the
rate otherwise applicable. No sales charges will be made from purchase payments
received from any officer or member of the Board of Trustees of the Trust or
from any sales representative of John Hancock who has acted as such for not less
than 90 days.
DISTRIBUTION
The distribution of the variable annuity contracts through Signator
Investors, Inc. ("Signator") is continuous. Pursuant to a marketing and
distribution agreement between John Hancock and Signator, the amounts we paid
under that agreement for such services were as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT PAID TO SIGNATOR
---- -----------------------
<S> <C>
1998 $32,817,115
1997 $25,035,420
</TABLE>
CALCULATION OF PERFORMANCE DATA
The Account may, from time to time, include in advertisements, sales
literature and reports to owners or prospective investors information relating
to the performance of its variable investment options. The performance
information that may be presented is not an estimate or a guarantee of future
investment performance, and does not represent the actual experience of amounts
invested by a particular owner. Set out below is a description of the methods
used in calculating the performance information for the variable investment
options.
The Account will calculate the average annual total return for each
variable investment option (other than the Money Market option), according to
the following formula prescribed by the SEC:
P x (1 + T)n = ERV
<TABLE>
<CAPTION>
<S> <C>
where P = a hypothetical initial premium payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
premium payment, made at the beginning of such period (or
fractional portion thereof)
</TABLE>
2
<PAGE>
Average annual total return is the annual compounded rate of return for a
variable investment option that would have produced the ending redeemable value
over the stated period if the performance remained constant throughout. The
calculation assumes a single $1,000 premium payment made into the variable
investment option at the beginning of the period and full redemption at the end
of the period. It reflects adjustments for all Trust and contract level charges
except any premium tax charge described in the prospectus. The annual contract
fee under the periodic premium contracts has been included as an annual
percentage of assets.
On the basis, the following table shows the average total return for each
variable investment option under the periodic premium contracts for the periods
ended December 31, 1998:
<TABLE>
<CAPTION>
AVERAGE ANNUALIZED TOTAL RETURNS
--------------------------------
Variable Investment Option* Year to Date 1 Year** 5 Year** 10 Year** Date of Inception***
- --------------------------- ------------ ------ ------ ------- -----------------
<S> <C> <C> <C> <C> <C>
Managed................. 13.3% 13.3% 12.2% 11.9% 11/09/87
Growth & Income......... 22.5% 22.5% 19.6% 16.9% 4/03/72
Equity Index............ 21.1% 21.1% 25.0% N/A 4/30/96
Large Cap Value......... 3.0% 3.0% 16.1% N/A 4/30/96
Large Cap Growth........ 31.2% 31.2% 20.5% 18.1% 11/24/87
Mid Cap Value........... -16.4% -16.4% 9.3% N/A 4/30/96
Mid Cap Growth.......... 31.1% 31.1% 17.9% N/A 4/30/96
Real Estate Equity...... -21.7% -21.7% 6.3% 6.9% 2/01/89
Small/Mid Cap Growth.... -0.7% -0.7% 14.1% N/A 9/23/94
Small/Mid Cap CORE...... -1.9% N/A N/A N/A 11/30/98
Small Cap Value......... -11.3% -11.3% 7.5% N/A 4/30/96
Small Cap Growth........ 8.0% 8.0% 7.5% N/A 4/30/96
Global Equity .......... -1.9% N/A N/A N/A 11/30/98
International Balanced.. 11.2% 11.2% 7.2% N/A 4/30/96
International Equity
Index.................. 13.6% 13.6% 2.8% 6.2% 2/01/89
International
Opportunities.......... 9.3% 9.3% 6.2% N/A 4/30/96
Emerging Markets
Equity................. -11.7% N/A N/A N/A 11/30/98
Short-Term Bond......... -0.2% -0.2% 4.1% N/A 9/23/94
Bond Index.............. -4.7% N/A N/A N/A 11/30/98
Sovereign Bond.......... 1.8% 1.8% 5.5% 7.6% 6/02/80
Global Bond............. 2.9% 2.9% 6.5% N/A 4/30/96
High Yield Bond......... -5.8% N/A N/A N/A 11/30/98
Money Market............ -0.8% -0.8% 3.1% 4.0% 5/13/82
</TABLE>
* Absent expense reimbursements to certain Funds, total return figures for the
related variable investment options would have been lower.
** or since inception of the applicable Fund or its predecessor.
*** of the Fund or its predecessor.
3
<PAGE>
The Account will calculate current yield for each variable investment
option (other than the Money Market option) according to the following formula
prescribed by the SEC:
a - b /6/
Yield = 2[(------ +1) - 1]
cd
where: a = net investment income earned during the period by the Fund whose
shares are owned by the variable investment option
b = expenses accrued for the period (net of any reimbursements)
c = the average daily number of accumulation units outstanding during
the period
d = the offering price per accumulation unit on the last day
of the period
According to this formula, yield is determined by dividing the net
investment income per accumulation unit earned during the period (minus the
deduction for mortality and expense risk charge, administrative sales charge and
annual contract fee) by the accumulation unit value on the last day of the
period and annualizing the resulting figure. The calculation is based on
specified 30-day periods identified in the advertisement. Neither the sales
charge nor any charges for premium taxes are reflected in the calculation.
The Account may calculate current yield and effective yield figures for the
Money Market option. The current yield of the Money Market option for a
seven-day period ("base period") will be computed by determining the "net change
in value" (calculated as set forth below) of a hypothetical owner account having
a balance of one unit at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by 365/7,
with the resulting yield figure carried to the nearest hundredth of one percent.
Net changes in value of the hypothetical owner account will include net
investment income of that account (accrued daily dividends as declared by the
Money Market Fund, less daily expenses of the Account) for the period, but will
not include realized gains or losses or unrealized appreciation or depreciation
on the underlying Money Market Fund shares. The mortality and expense risk
charges, administrative services charge and annual contract fee are reflected,
but the sales charge is not.
The effective yield reflects the effects of compounding and represents an
annualization of the current return. The formula for effective yield, as
prescribed by the SEC, is:
Effective yield = (Base period return + 1)/(365/7)/ - 1
For the 7-day period ending December 31, 1998, the Money Market option's
current yield was 4.1% and its effective yield was 4.2%.
OTHER PERFORMANCE INFORMATION
You can compare performance information at the Account level to other
variable annuity separate accounts or other investment products surveyed by
Lipper Analytical Services, Inc., an independent service that monitors and ranks
the performance of investment companies, or tracked by other rating services,
companies, publications, or persons who independently monitor and rank
investment company performance. Such performance figures are calculated in
accordance with standardized methods established by each reporting service.
CALCULATION OF ANNUITY PAYMENTS
CALCULATION OF ANNUITY UNITS
We use a measuring device called an "annuity unit" to help us compute the
amount of each monthly payment that is based on a variable investment option.
Each variable investment option has its own annuity unit with its own annuity
unit value.
4
<PAGE>
The number of the contract's annuity units for each variable investment
option normally doesn't change while the payee continues to receive payments,
unless the payee makes a transfer from one variable investment option to
another. The amount of each monthly annuity payment based on a variable
investment option equals the number of the contract's annuity units in that
option times the value of one such unit as of the tenth day preceding the
payment's due date.
To compute the amount of the first annuity payment that is based on any
variable investment option, we first determine the amount of your contract's
value that we will apply to that variable option. For a deferred annuity
contract, we do this as of 10 calendar days prior to the date the initial
monthly annuity payment is due, in the manner described under "The annuity
period." For an immediate annuity contract, we do this as of the date of
issuance, which will be the later of (a) the date of approval by John Hancock of
the application for the contract and (b) the date of receipt of the premium
payment at the John Hancock Annuity Servicing Office.
For each variable investment option, we THEN divide:
-----------------------------------
the resulting value (minus any
premium tax charge)
by
$1,000
-----------------------------------
and multiply the result by
------------------------------------
the applicable annuity purchase rate
set forth in the contract and
reflecting
(1) the age and, possibly, sex of
the payee and
(2) the assumed investment rate
(discussed below)
-------------------------------------
This computation determines the amount of initial monthly variable annuity
payment to the annuitant from each variable investment option.
We then determine the number of annuity units to be credited to the contract
from each of such variable investment options by dividing:
-------------------------------
the amount of the initial
monthly variable annuity
payment from that variable
annuity option
BY
the annuity unit value of
that variable investment
option as of 10 calendar
days prior to the date the
initial payment is due (or,
in the case of an immediate
annuity contract, as of the
date of issuance).
-------------------------------
For example, assume that 10 days before the date of maturity, a contract
has credited to it 4000.000 accumulation units, each having a value of
$12.000000. Assume, further, that the appropriate annuity purchase rate
5
<PAGE>
in the contract for an assumed investment rate of 3 1/2% is $6.35 per $1000 of
proceeds for the annuity option elected. The first monthly annuity payment
would be $304.80.
4000.000 x 12.000000 x 6.35
---------------------------
1,000
If the value of an annuity unit 10 days before the date of maturity was
$1.4000000, the number of annuity units represented by the first and subsequent
payments would be 217.714 ($304.80/$1.4000000). If the annuity unit value 10
days before the due date of the second monthly payment was $1.405000, the amount
of the second payment would be $305.89 (217.714 x $1.405000).
Annuity unit values
The value of the annuity units varies from day to day, depending on the
investment performance of the variable investment option, the deductions made
against the variable investment option, and the assumed investment rate used in
computing annuity unit values. Thus, the variable monthly annuity payments vary
in amount from month to month.
We calculate annuity unit value separately for each variable investment
option. As of the close of each business day, we calculate the value of one
annuity unit by
(1) multiplying the immediately preceding annuity unit value by the sum of one
plus the applicable net investment rate for the period subsequent to such
preceding value and then
(2) multiplying this product by an adjustment factor to neutralize the assumed
investment rate used in determining the amounts of annuity payable. If your
contract has an assumed investment rate of 3 1/2% per year, the adjustment
factor for a valuation period of one day would be 0.99990575. We neutralize
the assumed investment rate by applying the adjustment factor so that the
variable annuity payments will increase only if the actual net investment
rate of the variable investment option exceeds 3 1/2% per year and will
decrease only if is less than 3 1/2% per year.
The amount of the initial variable monthly payment is determined on the
assumption that the actual net investment rate of each variable investment
option used in calculating the "net investment factor" (described below) will be
equal on an annual basis to the "assumed investment rate" (described under "The
annuity period - variable monthly annuity payments" in the prospectus). If the
actual net investment rate between the dates for determining two monthly annuity
payments is greater than the assumed investment rate, the latter monthly payment
will be larger in amount than the former. On the other hand, if the actual net
investment rate between the dates for determining two monthly annuity payments
is less than the assumed investment rate, the latter monthly payment will be
smaller in amount than the former.
Mortality tables
The mortality table used as a basis for annuity purchase rates is the 1971
and 1983 a Individual Annuity Mortality Table, with five-year set back for
females and with certain age adjustments based on the calendar year of birth.
The mortality rate used in a contract purchased in connection with certain
employer-related plans and used in all contracts issued in Montana will be the
female rate. The impact of this change will be lower benefits (5% to 15%) from a
male's viewpoint than would otherwise be the case.
ADDITIONAL INFORMATION ABOUT DETERMINING UNIT VALUES
The general manner in which we compute annuity unit values is discussed
above. Like annuity unit values, we calculate accumulation unit values
separately for each variable investment option. As of the close of each business
day, we calculate the value of one accumulation unit of a variable investment
option by multiplying the
6
<PAGE>
immediately preceding accumulation unit value by the sum of one plus the
applicable "net investment rate" for the period subsequent to such preceding
value. See "Net investment rate" below.
Net investment rate
For any period, the net investment rate for a variable investment option
equals
(1) the percentage total investment return of the corresponding Fund for that
period (assuming reinvestment of all dividends and other distributions from
the Fund), less
(2) for each calendar day in the period, a deduction of 0.002740% (the charges
for mortality and expense risks and administrative services) of the value
of the variable investment option at the beginning of the period, and less
(3) a further adjustment in an appropriate amount if we ever elect to impose a
charge for our income taxes.
Adjustment of units and values
We reserve the right to change the number and value of the accumulation
units and/or annuity units credited to your contract, without notice, provided
that strict equity is preserved and the change does not otherwise affect the
benefits, provisions, or investment return of your contract.
Hypothetical example illustrating the calculation of accumulation unit values
and annuity unit values
Assume at the beginning of the period being considered, the value of a
particular variable investment option was $4,000,000. Investment income during
the period totaled $2000, while capital gains were $3000 and capital losses were
$1000. Assume also that we are not imposing any tax charge. Charges against the
beginning value of the variable investment option amount to $109.60 assuming a
one day period. The $109.60 was computed by multiplying the beginning value of
$4,000,000 by the factor 0.00002740. By substituting in the first formula above,
the net investment rate is equal to $3890.40 ($2000 + $3000 - $1000 -$109.60)
divided by $4,000,000 or 0.0009726.
Assume further that each accumulation unit had a value of $11.250000 on the
previous business day, and the value of an annuity unit on such previous date
was $1.0850000. Based upon the experience of the variable investment option
during the period, the value of an accumulation unit at the end of the period
would be [$11.250000 x (1 + .0009726)] or $11.260942. The value of an annuity
unit at the end of the period would be [$1.0850000 x (1 + .00096726) x
.99990575] or $1.0859529. The final figure, .99990575, neutralizes the effect of
a 3 1/2% assumed investment rate so that the annuity unit's change in value
reflects only the actual investment experience of the variable investment
option.
PURCHASES AND REDEMPTIONS OF FUND SHARES
John Hancock purchases and redeems Fund shares for the Account at their net
asset value without any sales or redemption charges. Each available Fund issues
its own separate series of Fund shares. Each such series represents an interest
in one of the Funds of the Trust, which corresponds to one of our variable
investment options. Any dividend or capital gains distributions received by the
Account will be reinvested in shares of that same Fund at their net asset value
as of the dates paid.
On each business day, the account purchases and redeems shares of each fund
for each variable investment option based on, among other things, the amount of
premium payments allocated to that option, dividends reinvested, and transfers
to, from and among investment options, all to be effected as of that date. Such
purchases and redemptions are effective at the net asset value per Trust share
for each fund determined on that same date.
7
<PAGE>
THE ACCOUNT
In addition to the assets attributable to contracts, the Account includes
assets derived from charges made by and, possibly, funds contributed by John
Hancock to commence operations of the variable investment option. From time to
time these additional amounts may be transferred in cash by us to our general
account. Before any such transfer, we will consider any possible adverse impact
transfer might have on any variable investment option. The assets of one
variable investment option are not necessarily legally insulated from
liabilities associated with another variable investment option.
DELAY OF CERTAIN PAYMENTS
Ordinarily, upon a surrender or partial withdrawal, we will pay the value
of any accumulation units in a single sum within 7 days after receipt of a
written request at our Annuity Servicing Office. However, redemption may be
suspended and payment may be postponed under the following conditions:
(1) when the New York Stock Exchange is closed, other than customary weekend
and holiday closings;
(2) when trading on that Exchange is restricted;
(3) when an emergency exists as a result of which (a) disposal of securities in
a variable investment option is not reasonably practicable or (b) it is not
reasonably practicable to determine the value of the net assets of a
variable investment option; or
(4) when a governmental body having jurisdiction over the Account by order
permits such suspension.
Rules and regulations of the SEC, if any are applicable, will govern as to
whether conditions in (2) or (3) exist.
We may defer for up to 15 days the payment of any amount attributable to a
premium payment made by check to allow the check reasonable time to clear.
We may also defer payment of surrender proceeds payable out of any
guarantee period for a period of up to 6 months.
LIABILITY FOR TELEPHONE TRANSFERS
If you authorize telephone transfers, you will be liable for any loss,
expense or cost arising out of any unauthorized or fraudulent telephone or fax
instructions which we reasonably believe to be genuine, unless such loss,
expense or cost is the result of our mistake or negligence. We employ procedures
which provide safeguards against unauthorized transactions, and which are
reasonably designed to confirm that instructions received by telephone are
genuine. These procedures include
. requiring personal identification,
. tape recording calls, and
. providing written confirmation to the owner.
If we do not employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, we may be liable for any loss due to
unauthorized or fraudulent instructions.
VOTING PRIVILEGES
Here's the formula we use to determine the number of Fund shares as to
which you may give instructions:
8
<PAGE>
--------------------------------------
the total value of your accumulation
units value in a variable investment
option
divided by
the net asset value of 1 share of the
corresponding Fund
--------------------------------------
At a shareholders' meeting, you may give instructions regarding:
. the election of the Board of Trustees,
. the ratification of the selection of independent auditors,
. the approval of the Trust's investment management agreements,
. and other matters requiring a vote under the 1940 Act.
The annuitant or other payee will also be entitled to give voting
instructions with respect to the Fund shares corresponding to any variable
investment option under which variable annuity payments are then being made. We
determine the number of Fund shares for which the payee can give instructions by
dividing the actuarially determined present value of the payee's annuity units
that correspond to that Fund by the net asset value of one share of that Fund.
We will furnish you information and forms so that you may give voting
instructions.
We may own Fund shares that we do not hold in any separate account whose
participants are entitled to give voting instructions. We will vote such shares
in proportion to the instructions we receive from all variable annuity contract
and variable life insurance policy owners who give us instructions for that
Fund's shares (including owners who participate in separate accounts other than
the Account).
We have designed your voting privileges based upon our understanding of the
requirements of the federal securities laws. If the applicable laws,
regulations, or interpretations change to eliminate or restrict the need for
such voting privileges, we reserve the right to proceed in accordance with any
such revised requirements.
9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Directors and Policyholders
John Hancock Mutual Life Insurance Company
We have audited the accompanying statutory-basis statements of financial
position of John Hancock Mutual Life Insurance Company as of December 31, 1998
and 1997, and the related statutory-basis statements of operations and changes
in policyholders' contingency reserves and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Commonwealth of Massachusetts Division of Insurance, which
practices differ from generally accepted accounting principles. The variances
between such practices and generally accepted accounting principles also are
described in Note 1. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of John Hancock Mutual Life Insurance Company at December 31,
1998 and 1997, or the results of its operations or its cash flows for the years
then ended.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of John Hancock Mutual
Life Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the Commonwealth of
Massachusetts Division of Insurance.
ERNST & YOUNG LLP
Boston, Massachusetts
February 19, 1999
10
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31
-----------------------
1998 1997
----------- ----------
(In millions)
<S> <C> <C>
ASSETS
Bonds--Note 6 . . . . . . . . . . . . . . . . . . $23,353.0 $22,986.0
Stocks:
Preferred . . . . . . . . . . . . . . . . . . 844.7 640.6
Common . . . . . . . . . . . . . . . . . . . . 269.3 256.9
Investments in affiliates . . . . . . . . . . 1,520.3 1,442.0
----------- ----------
2,634.3 2,339.5
Mortgage loans on real estate--Note 6 . . . . . . 8,223.7 7,851.2
Real estate:
Company occupied . . . . . . . . . . . . . . . 372.2 375.1
Investment properties . . . . . . . . . . . . 1,472.1 1,893.4
----------- ----------
1,844.3 2,268.5
Policy loans . . . . . . . . . . . . . . . . . . 1,573.8 1,577.3
Cash items:
Cash in banks and offices . . . . . . . . . . 241.5 176.0
Temporary cash investments . . . . . . . . . . 1,107.4 548.8
----------- ----------
1,348.9 724.8
Premiums due and deferred . . . . . . . . . . . . 253.4 222.3
Investment income due and accrued . . . . . . . . 527.5 505.8
Other general account assets . . . . . . . . . . 1,156.6 948.6
Assets held in separate accounts . . . . . . . . 17,447.0 16,021.7
----------- ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . $58,362.5 $55,445.7
=========== ==========
OBLIGATIONS AND POLICYHOLDERS' CONTINGENCY
RESERVES
OBLIGATIONS
Policy reserves . . . . . . . . . . . . . . . . $19,804.8 $19,206.6
Policyholders' and beneficiaries' funds . . . . 14,216.9 13,985.1
Dividends payable to policyholders . . . . . . 449.1 399.7
Policy benefits in process of payment . . . . . 111.4 115.5
Other policy obligations . . . . . . . . . . . 322.6 214.8
Asset valuation reserve--Note 1 . . . . . . . . 1,289.6 1,165.7
Federal income and other accrued taxes--Note 1 211.5 96.9
Other general account obligations . . . . . . . 1,109.3 1,084.5
Obligations related to separate accounts . . . 17,458.6 16,019.1
----------- ----------
TOTAL OBLIGATIONS . . . . . . . . . . . . . . . . 54,973.8 52,287.9
POLICYHOLDERS' CONTINGENCY RESERVES
Surplus notes--Note 2 . . . . . . . . . . . . . 450.0 450.0
Special contingency reserve for group insurance 160.0 151.8
General contingency reserve . . . . . . . . . . 2,778.7 2,556.0
----------- ----------
TOTAL POLICYHOLDERS' CONTINGENCY RESERVES . . . 3,388.7 3,157.8
----------- ----------
TOTAL OBLIGATIONS AND POLICYHOLDERS'CONTINGENCY
RESERVES . . . . . . . . . . . . . . . . . . . . $58,362.5 $55,445.7
=========== ==========
</TABLE>
The accompanying notes are an integral part of the statutory-basis financial
statements.
11
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF OPERATIONS AND CHANGES IN POLICYHOLDERS'
CONTINGENCY RESERVES
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1998 1997
----------- ----------
(In millions)
<S> <C> <C>
INCOME
Premiums, annuity considerations and pension fund
contributions. . . . . . . . . . . . . . . . . $ 8,844.0 $ 7,371.6
Net investment income--Note 4 . . . . . . . . . 2,956.2 2,856.1
Other, net . . . . . . . . . . . . . . . . . . . 233.8 196.4
--------- ----------
12,034.0 10,424.1
BENEFITS AND EXPENSES
Payments to policyholders and beneficiaries:
Death benefits . . . . . . . . . . . . . . . 582.9 737.4
Accident and health benefits . . . . . . . . 76.9 121.4
Annuity benefits . . . . . . . . . . . . . . 1,612.4 1,668.2
Surrender benefits and annuity fund
withdrawals. . . . . . . . . . . . . . . . . 6,712.4 6,293.1
Matured endowments . . . . . . . . . . . . . 20.7 21.0
--------- ----------
9,005.3 8,841.1
Additions to reserves to provide for future
payments to policyholders and beneficiaries . 1,106.7 (122.6)
Expenses of providing service to policyholders
and obtaining new insurance:
Field sales compensation and expenses . . . . 290.7 278.3
Home office and general expenses . . . . . . 529.0 493.0
Payroll, state premium and miscellaneous taxes . 52.0 49.9
--------- ----------
10,983.7 9,539.7
--------- ----------
GAIN FROM OPERATIONS BEFORE DIVIDENDS TO
POLICYHOLDERS, FEDERAL INCOME TAXES AND
NET REALIZED CAPITAL GAINS (LOSSES) . . . 1,050.3 884.4
Dividends to policyholders . . . . . . . . . . . . 446.0 398.2
Federal income tax (credit) expense--Note 1 . . . (2.8) 18.9
--------- ----------
448.8 417.1
--------- ----------
GAIN FROM OPERATIONS BEFORE NET REALIZED
CAPITAL GAINS (LOSSES) . . . . . . . . . 607.1 467.3
Net realized capital gains (losses)--Note 5 . . . 0.7 (89.8)
--------- ----------
NET INCOME . . . . . . . . . . . . . . . . 607.8 377.5
Other increases (decreases) in policyholders'
contingency reserves:
Net unrealized capital (losses) gains and other
adjustments--Note 5 . . . . . . . . . . . . . $ (214.5) $ 58.6
Valuation reserve changes--Note 1 . . . . . . . 0.0 1.4
Prior years' federal income taxes . . . . . . . (25.5) (35.6)
Other reserves and adjustments, net . . . . . . (136.9) (100.2)
--------- ----------
NET INCREASE IN POLICYHOLDERS' CONTINGENCY
RESERVES. . . . . . . . . . . . . . . . . 230.9 301.7
Policyholders' contingency reserves at beginning of
year. . . . . . . . . . . . . . . . . . . . . . . 3,157.8 2,856.1
--------- ----------
POLICYHOLDERS' CONTINGENCY RESERVES AT END OF YEAR $ 3,388.7 $ 3,157.8
========= ==========
</TABLE>
The accompanying notes are an integral part of the statutory-basis financial
statements.
12
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
------------------------
1998 1997
----------- -----------
(In millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Insurance premiums, annuity considerations and
deposits . . . . . . . . . . . . . . . . . . . $ 8,945.5 $ 7,518.8
Net investment income . . . . . . . . . . . . . 2,952.8 2,988.7
Benefits to policyholders and beneficiaries . . (9,190.4) (9,030.3)
Dividends paid to policyholders . . . . . . . . (396.6) (394.0)
Insurance expenses and taxes . . . . . . . . . . (874.4) (828.6)
Net transfers from separate accounts . . . . . . 131.1 832.7
Other, net . . . . . . . . . . . . . . . . . . . (181.7) (720.9)
---------- -----------
NET CASH PROVIDED FROM OPERATIONS . . . . . . 1,386.3 366.4
---------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Bond purchases . . . . . . . . . . . . . . . . . (12,403.6) (18,003.6)
Bond sales . . . . . . . . . . . . . . . . . . . 8,447.8 13,541.1
Bond maturities and scheduled redemptions . . . 2,537.7 2,927.6
Bond prepayments . . . . . . . . . . . . . . . . 1,202.7 1,096.3
Stock purchases . . . . . . . . . . . . . . . . (623.2) (1,125.7)
Proceeds from stock sales . . . . . . . . . . . 378.4 921.7
Real estate purchases . . . . . . . . . . . . . (147.6) (243.0)
Real estate sales . . . . . . . . . . . . . . . 630.5 444.5
Other invested assets purchases . . . . . . . . (185.3) (171.1)
Proceeds from the sale of other invested assets 120.5 109.3
Mortgage loans issued . . . . . . . . . . . . . (1,978.5) (1,165.8)
Mortgage loan repayments . . . . . . . . . . . . 1,575.6 1,176.9
Other, net . . . . . . . . . . . . . . . . . . . (38.6) (333.8)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES . . . . (483.6) (825.6)
---------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net decrease in short-term note payable . . . . (75.0) (16.4)
Repayment of REMIC notes payable . . . . . . . . (203.6) (216.3)
---------- -----------
NET CASH USED IN FINANCING ACTIVITIES . . . . (278.6) (232.7)
---------- -----------
INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS . . . . . . . . . . . . . . . . . . . 624.1 (691.9)
Cash and temporary cash investments at beginning of
year. . . . . . . . . . . . . . . . . . . . . . . 724.8 1,416.7
---------- -----------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR $ 1,348.9 $ 724.8
========== ===========
</TABLE>
The accompanying notes are an integral part of the statutory-basis financial
statements.
13
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING PRACTICES
John Hancock Mutual Life Insurance Company (the Company) provides a broad range
of financial services and insurance products. The Company's insurance operations
focus principally in three business units: the Retail Sector, which encompasses
the Company's individual life, annuity, and long-term care operations; Group
Pension, which offers single premium annuity and guaranteed investment contracts
through both the general and separate accounts; and Business Insurance, its
group life, health, and long-term care operations including administrative
services provided to group customers. In addition, through its subsidiaries and
affiliates, the Company also offers a wide range of investment management and
advisory services and other related products including life insurance products
for the Canadian market, sponsorship and distribution of mutual funds, real
estate financing and management, and various other financial services.
Investments in these subsidiaries and other affiliates are recorded on the
statutory equity method.
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 includes 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
indirect wholly-owned subsidiaries of the Company. The Company retained its
group long-term care operations. Assets equal to liabilities of approximately
$562.4 million at February 28, 1997, subject to the completion of a closing
audit, were transferred to UNICARE in connection with the sale. The gain from
operations was not significant. 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.
The Company has secured a $397.0 million letter of credit facility with a group
of banks. The banks have agreed to issue a letter of credit to the Company
pursuant to which the Company may draw up to $397.0 million for any claims not
satisfied by UNICARE under the coinsurance agreement after the Company has
incurred the first $113.0 million of losses from such claims. The amount
available pursuant to the letter of credit agreement and any letter of credit
issued thereunder will be automatically reduced on a scheduled basis consistent
with the anticipated runoff of liabilities related to the business reinsured
under the coinsurance agreement. The letter of credit and any letter of credit
issued thereunder are scheduled to expire on March 1, 2002.
The Company is domiciled in the Commonwealth of Massachusetts and licensed in
all fifty of the United States, the District of Columbia, Puerto Rico, Guam, the
US Virgin Islands, and Canada. The Company distributes its individual products
in North America primarily through a career agency system. The career agency
system is composed of company-owned, unionized branch offices and independent
general agencies. The Company also distributes its individual products through
several alternative distribution channels, including banks, brokers/dealers and
direct marketing efforts.
The Company markets pension and other investment-related products primarily to
sponsors of retirement and savings plans covering employees of private sector
companies, and plans covering public employees and collective bargaining unions
and non-profit organizations. Products are marketed and sold through a
combination of group pension field employee representatives, as well as
marketing personnel and investment professionals employed by the Company.
The Company distributes its group benefit products through group
representatives, who are John Hancock employees or through intermediaries, in
key markets nationwide.
14
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING PRACTICES--CONTINUED
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
Basis of Presentation: The financial statements have been prepared using
accounting practices prescribed or permitted by the Commonwealth of
Massachusetts Division of Insurance and in conformity with the practices of the
National Association of Insurance Commissioners (NAIC), which practices differ
from generally accepted accounting principles (GAAP).
The significant differences from GAAP include: (1) policy acquisition costs are
charged to expense as incurred rather than deferred and amortized over the
related premium-paying period; (2) policy reserves are based on statutory
mortality, morbidity, and interest requirements without consideration of
withdrawals and Company experience; (3) certain assets designated as
"nonadmitted assets" are excluded from the balance sheet by direct charges to
surplus; (4) reinsurance recoverables are netted against reserves and claim
liabilities rather than reflected as an asset; (5) bonds held as available for
sale are recorded at amortized cost or market value as determined by the NAIC
rather than at fair value; (6) an Asset Valuation Reserve and Interest
Maintenance Reserve as prescribed by the NAIC are not calculated under GAAP.
Under GAAP, realized capital gains and losses are reported in the income
statement on a pretax basis as incurred and investment valuation allowances are
provided when there has been a decline in value deemed other than temporary; (7)
investments in affiliates are carried at their net equity value with changes in
value being recorded directly to policyholders' contingency reserves rather than
consolidated in the financial statements; (8) no provision is made for the
deferred income tax effects of temporary differences between book and tax basis
reporting; (9) certain items, including modifications to required policy
reserves resulting from changes in actuarial assumptions are recorded directly
to policyholders' contingency reserves rather than being reflected in income;
and (10) surplus notes are reported as surplus rather than as liabilities. The
effects of the foregoing variances from GAAP have not been determined, but are
presumed to be material.
The significant accounting practices of the Company are as follows:
Pending Statutory Standards: During March 1998, the NAIC adopted the
codification of statutory accounting practices, which is effective in 2001.
Codification will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the Company
uses to prepare its statutory-basis financial statements. Codification will
require adoption by the various states before it becomes the prescribed
statutory basis of accounting for insurance companies domesticated within those
states. Accordingly, before codification becomes effective for the Company, the
Massachusetts Division of Insurance must adopt codification as the prescribed
basis of accounting on which domestic insurers must report their statutory-basis
results to the Division of Insurance. The impact of any such changes on the
Company's statutory surplus is not expected to be material.
Revenues and Expenses: Premium revenues are recognized over the premium-paying
period of the policies whereas expenses, including the acquisition costs of new
business, are charged to operations as incurred and policyholder dividends are
provided as paid or accrued.
Cash and Temporary Cash Investments: Cash includes currency on hand and demand
deposits with financial institutions. Temporary cash investments are short-term,
highly-liquid investments both readily convertible to known amounts of cash and
so near maturity that there is insignificant risk of changes in value because of
changes in interest rates.
15
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING PRACTICES--CONTINUED
Valuation of Assets: General account investments are carried at amounts
determined on the following bases:
Bond and stock values are carried as prescribed by the NAIC; bonds generally
at amortized amounts or cost, preferred stocks generally at cost and common
stocks at fair value. The discount or premium on bonds is amortized using the
interest method.
Investments in affiliates are included on the statutory equity method.
Loan-backed bonds and structured securities are valued at amortized cost using
the interest method including anticipated prepayments. Prepayment assumptions
are obtained from broker dealer surveys or internal estimates and are based on
the current interest rate and economic environment. The retrospective
adjustment method is used to value all such securities except for
interest-only securities, which are valued using the prospective method.
The net interest effect of interest rate and currency rate swap transactions
is recorded as an adjustment of interest income as incurred. The initial cost
of interest rate cap and floor agreements is amortized to net investment
income over the life of the related agreement. Gains and losses on financial
futures contracts used as hedges against interest rate fluctuations are
deferred and recognized in income over the period being hedged. Net premiums
related to equity collar positions are amortized into income on a
straight-line basis over the term of the collars. The collars are carried at
fair value, with changes in fair value reflected directly in policyholders'
contingency reserves.
Mortgage loans are carried at outstanding principal balance or amortized cost.
Investment and company-occupied real estate is carried at depreciated cost,
less encumbrances. Depreciation on investment and company-occupied real estate
is recorded on a straight-line basis. During 1998, the Company made a
strategic decision to sell the majority of its commercial real estate
portfolio. Properties with a book value of $533.8 million were sold in 1998,
and an additional $1.1 billion of real estate is expected to be sold in 1999.
Net gains on the properties sold in 1998 amounted to $64.3 million. Those
properties to be sold subsequent to December 31, 1998 are carried at the lower
of depreciated cost at the date a determination to sell was made or fair
value. Accumulated depreciation amounted to $370.0 million and $470.5 million
at December 31, 1998 and 1997, respectively.
Real estate acquired in satisfaction of debt and real estate held for sale,
which are classified with investment properties, are carried at the lower of
cost or fair value.
Policy loans are carried at outstanding principal balance, not in excess of
policy cash surrender value.
Other invested assets, which are classified with other general account assets,
include real estate and energy joint ventures and limited partnerships and
generally are valued based on the Company's equity in the underlying net
assets.
Asset Valuation and Interest Maintenance Reserves: The Asset Valuation Reserve
(AVR) is computed in accordance with the prescribed NAIC formula and represents
a provision for possible fluctuations in the value of bonds, equity securities,
mortgage loans, real estate and other invested assets. The Company historically
makes additional contributions to the AVR in excess of the required amounts to
account for potential losses and risks in the investment portfolio when the
Company believes such provisions are prudent. During 1998, in connection with
the Company's plans to dispose of certain real estate holdings, additional
contributions were recorded that resulted in the AVR exceeding the prescribed
maximum reserve level by $111.3 million. The Company received permission from
the Massachusetts Division of Insurance to record its AVR in excess of the
prescribed maximum reserve level. Changes to the AVR are charged or credited
directly to policyholders' contingency reserves.
16
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING PRACTICES--CONTINUED
The Company also records the NAIC prescribed Interest Maintenance Reserve (IMR)
that represents that portion of the after tax net accumulated unamortized
realized capital gains and losses on sales of fixed income securities,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates. Such gains and losses are deferred and amortized into
income over the remaining expected lives of the investments sold. At December
31, 1998, the IMR, net of 1998 amortization of $34.9 million, amounted to $261.6
million which is included in other policy obligations. The corresponding 1997
amounts were $25.2 million and $165.6 million, respectively.
Property and Equipment: Data processing equipment, which amounted to $31.4
million in 1998 and $30.0 million in 1997 and is included in other general
account assets, is reported at depreciated cost, with depreciation recorded on a
straight-line basis. Non-admitted furniture and equipment also is depreciated on
a straight-line basis. The useful lives of these assets range from three to
twenty years. Depreciation expense was $20.1 million in 1998 and $21.8 million
in 1997.
Separate Accounts: Separate account assets and liabilities reported in the
accompanying statements of financial position represent funds that are
separately administered, principally for annuity contracts and variable life
insurance policies, and for which the contractholder, rather than the Company,
generally bears the investment risk. Separate account obligations are intended
to be satisfied from separate account assets and not from assets of the general
account. Separate accounts generally are reported at fair value. The operations
of the separate accounts are not included in the statement of operations;
however, income earned on amounts initially invested by the Company in the
formation of new separate accounts is included in other income.
Fair Value Disclosure of Financial Instruments: Statement of Financial
Accounting Standards (SFAS) No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of fair value information about certain
financial instruments, whether or not recognized in the statement of financial
position, for which it is practicable to estimate the value. In situations where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Therefore, the aggregate fair value amounts presented do not
represent the underlying value of the Company. See Note 14.
The methods and assumptions utilized by the Company in estimating its fair value
disclosures for financial instruments are as follows:
The carrying amounts reported in the statement of financial position for cash
and temporary cash investments approximate their fair values.
Fair values for public bonds are obtained from an independent pricing service.
Fair values for private placement securities and publicly traded bonds not
provided by the independent pricing service are estimated by the Company by
discounting expected future cash flows using current market rates applicable
to the yield, credit quality and maturity of the investments.
The fair values for common and preferred stocks, other than subsidiary
investments which are carried at equity values, are based on quoted market
prices.
The fair value for mortgage loans is estimated using discounted cash flow
analyses using interest rates adjusted to reflect the credit characteristics
of the underlying loans. Mortgage loans with similar characteristics and
credit risks are aggregated into qualitative categories for purposes of the
fair value calculations.
The carrying amounts in the statement of financial position for policy loans
approximate their fair values.
17
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING PRACTICES--CONTINUED
Fair values for futures contracts are based on quoted market prices. Fair
values for interest rate swap, cap and floor agreements, swaptions, and
currency swap agreements and equity collar agreements are based on current
settlement values. The current settlement values are based on brokerage quotes
that utilize pricing models or formulas using current assumptions.
The fair value for outstanding commitments to purchase long-term bonds and
issue real estate mortgages is estimated using a discounted cash flow method
incorporating adjustments for the difference in the level of interest rates
between the dates the commitments were made and December 31, 1998. The fair
value for commitments to purchase other invested assets approximates the
amount of the initial commitment.
Fair values for the Company's guaranteed investment contracts 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.
Capital Gains and Losses: Realized capital gains and losses are determined using
the specific identification method. Realized capital gains and losses, net of
taxes and amounts transferred to the IMR, are included in net income. Unrealized
gains and losses, which consist of market value and book value adjustments, are
shown as adjustments to policyholders' contingency reserves.
Foreign Exchange Gains and Losses: Foreign exchange gains and losses are
reflected as direct credits or charges to policyholders' contingency reserves
through unrealized capital gains and losses.
Policy Reserves: Life, annuity, and accident and health benefit reserves are
developed by actuarial methods and are determined based on published tables
using statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Commonwealth of Massachusetts Division of Insurance. Reserves for traditional
individual life insurance policies are maintained using the 1941, 1958 and 1980
Commissioner's Standard Ordinary and American Experience Mortality Tables, with
assumed interest rates ranging from 2 1/2% to 6%, and using principally the net
level premium method for policies issued prior to 1978 and a modified
preliminary term method for policies issued in 1979 and later. Annuity and
supplementary contracts with life contingency reserves are based principally on
modifications of the 1937 Standard Annuity Table, the Group Annuity Mortality
Tables for 1951, 1971 and 1983, the 1971 Individual Annuity Mortality Table and
the a-1983 Individual Annuity Mortality Table, with interest rates generally
ranging from 2% to 8 3/4%.
Reserves for deposit administration funds and immediate participation guarantee
funds are based on accepted actuarial methods at various interest rates.
Accident and health policy reserves generally are calculated using either the
two-year preliminary term or the net level premium method based on various
morbidity tables.
18
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING PRACTICES--CONTINUED
The statement value and fair value for investment-type insurance contracts are
as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------- ----------------------
Statement Fair Statement Fair
Value Value Value Value
--------- --------- --------- -----------
(In millions)
<S> <C> <C> <C> <C>
Guaranteed investment contracts. . $12,666.9 $12,599.7 $11,499.4 $11,516.8
Fixed-rate deferred and immediate
annuities . . . . . . . . . . . . 4,375.0 4,412.2 4,289.1 4,290.4
Supplementary contracts without
life contingencies . . . . . . . 42.7 44.7 40.9 42.1
--------- --------- --------- ----------
$17,084.6 $17,056.6 $15,829.4 $15,849.3
========= ========= ========= ==========
</TABLE>
Federal Income Taxes: Federal income taxes are reported in the financial
statements based on amounts determined to be payable as a result of operations
within the current accounting period. The operations of the Company and its
subsidiaries and affiliates are combined in filing a consolidated federal income
tax return for the group. The federal income taxes of the Company are determined
on a separate return basis with certain adjustments.
Income before taxes differs from taxable income principally due to tax-exempt
investment income, dividends-received tax deductions, the limitation placed on
the tax deductibility of mutual companies' policyholder dividends, accelerated
depreciation, differences in policy and contract liabilities for tax return and
financial statement purposes, capitalization of policy acquisition expenses for
tax purposes and other adjustments prescribed by the Internal Revenue Code.
When determining its consolidated federal income tax expense, the Company uses a
number of estimated amounts that may change when the actual tax return is
completed. In addition, the Company must also use an estimated differential
earnings rate (DER) to compute the equity tax portion of its federal income tax
expense. Because the DER is set by the Internal Revenue Service after completion
of the financial statements, a true-up adjustment (i.e., effect of the
difference between the estimated and final DER) is necessary.
Amounts for disputed tax issues relating to prior years are charged or credited
directly to policyholders' contingency reserves.
The Company made federal tax payments of $74.9 million in 1998 and $146.4
million in 1997.
Adjustments to Policy Reserves and Policyholders' and Beneficiaries' Funds: From
time to time, the Company finds it appropriate to modify certain required policy
reserves because of changes in actuarial assumptions. Reserve modifications
resulting from such determinations are recorded directly to policyholders'
contingency reserves. During 1997, the Company refined certain actuarial
assumptions inherent in the calculation of reserves related to guaranteed
investment contracts and AIDS claims under individual insurance policies
resulting in a net $1.4 million increase in policyholders' contingency reserves
at December 31, 1997. No additional refinements were made during 1998.
Reinsurance: Premiums, commissions, expense reimbursements, benefits and
reserves related to reinsured business are accounted for on basis consistent
with those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Premiums ceded to other companies have been reported
as a reduction of premium income. Amounts applicable to reinsurance ceded for
future policy benefits, unearned premium reserves and claim liabilities have
been reported as reductions of these items.
19
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING PRACTICES--CONTINUED
Guaranty Fund Assessments: Guaranty fund assessments are accrued when the
Company receives notice that an amount is payable to a guaranty fund.
Reclassification: Certain 1997 amounts have been reclassified to conform to the
1998 presentation.
NOTE 2--SURPLUS NOTES
On February 25, 1994, the Company issued $450 million of surplus notes that bear
interest at 7 3/8% and are scheduled to mature on February 15, 2024. The
issuance of the surplus notes was approved by the Commonwealth of Massachusetts
Division of Insurance and any payment of interest on and principal of the notes
may be made only with the prior approval of the Commissioner of the Commonwealth
of Massachusetts Division of Insurance. Surplus notes are reported as part of
policyholders' contingency reserves rather than liabilities. Interest of $33.2
million was paid on the notes during 1998 and 1997.
NOTE 3--BORROWED MONEY
At December 31, 1998, the Company had a $500 million syndicated line of credit.
There are 26 banks that are part of the syndicate which is under the leadership
of Morgan Guaranty Trust Company of New York. The banks will commit, when
requested, to loan funds at prevailing interest rates as determined in
accordance with the line of credit agreement, which terminates on June 30, 2001.
The agreement does not contain a material adverse change clause. Under the terms
of the agreement, the Company is required to maintain certain minimum levels of
net worth and comply with certain other covenants. As of December 31, 1998,
these covenants were met; however, no amounts had been borrowed under this
agreement.
In 1995, the Company issued $213.1 million of debt through a Real Estate
Mortgage Investment Conduit (REMIC). As collateral to the debt, the Company
pledged $1,065.8 million of commercial mortgages to the REMIC Trust. In
addition, the Company guaranteed the timely payment of principal and interest on
the debt. The debt was issued in two notes of equal amounts. The interest rates
on the class A1 and A2 notes are calculated on a floating basis, based on the
monthly LIBOR rates plus 22 and 27 basis points, respectively. The LIBOR rates
were 5.06% and 5.72%, respectively, at December 31, 1998 and 1997. The class A1
notes were fully repaid on March 25, 1997 and the class A2 notes were fully
repaid on June 25, 1998. The outstanding balances of the notes totaled $42.6
million at December 31, 1997 and are included in other general account
obligations.
In 1996, the Company issued $292.0 million of additional debt through a REMIC
(REMIC II). As collateral to the debt, the Company pledged $1,455.4 million of
commercial mortgages to the REMIC II Trust. The debt was issued in two notes.
The interest rates on the class A1 and A2 notes are calculated on a floating
basis, based on the monthly LIBOR rate plus 5 and 19 basis points, respectively.
The class A1 notes were fully repaid on December 26, 1997 and the class A2 notes
were fully repaid on December 28, 1998. The outstanding balances of the notes
totaled $161.0 million at December 31, 1997 and are included in other general
account obligations.
At December 31, 1997, the Company had a short-term note of $75.0 million payable
to an affiliate at a variable rate of interest. The note, which is included in
other general account obligations, was repaid on January 5, 1998.
Interest paid on borrowed money was $6.6 million and $21.2 million during 1998
and 1997, respectively.
20
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 4--NET INVESTMENT INCOME
Investment income has been reduced by the following amounts:
<TABLE>
<CAPTION>
1998 1997
------ --------
(In millions)
<S> <C> <C>
Investment expenses . . . . . . . . . . . . . . . . . . . . $317.5 $339.6
Interest expense . . . . . . . . . . . . . . . . . . . . . . 44.3 57.9
Depreciation on real estate and other invested assets . . . 41.6 76.6
Real estate and other investment taxes . . . . . . . . . . . 60.1 61.5
------ -------
$463.5 $535.6
====== =======
</TABLE>
NOTE 5--NET CAPITAL GAINS (LOSSES) AND OTHER ADJUSTMENTS
Net realized capital gains (losses) consist of the following items:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In millions)
<S> <C> <C>
Net gains from asset sales and foreclosures . . . . . . . $ 303.3 $ 63.4
Capital gains tax . . . . . . . . . . . . . . . . . . . . (171.7) (84.1)
Net capital gains transferred to the IMR . . . . . . . . (130.9) (69.1)
------- -------
Net Realized Capital Gains (Losses) . . . . . . . . . . $ 0.7 $(89.8)
======= =======
</TABLE>
Net unrealized capital (losses) gains and other adjustments consist of the
following items:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In millions)
<S> <C> <C>
Net (losses) gains from changes in security values and
book value adjustments . . . . . . . . . . . . . . . . $ (90.6) $ 159.5
Increase in asset valuation reserve . . . . . . . . . . (123.9) (100.9)
------- -------
Net Unrealized Capital (Losses) Gains and Other
Adjustments. . . . . . . . . . . . . . . . . . . . . $(214.5) $ 58.6
======= =======
</TABLE>
21
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 6--INVESTMENTS
The statement value and fair value of bonds are shown below:
<TABLE>
<CAPTION>
Gross Gross
Statement Unrealized Unrealized
December 31, 1998 Value Gains Losses Fair Value
----------------- --------- ---------- ---------- ------------
(In millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies........................ $ 123.3 $ 5.9 $ 0.0 $ 129.2
Obligations of states and
political subdivisions.......... 86.4 9.9 0.0 96.3
Debt securities issued by
foreign governments............. 264.5 29.4 8.2 285.7
Corporate securities............. 18,155.4 1,567.7 294.4 19,428.7
Mortgage-backed securities....... 4,723.4 181.2 5.2 4,899.4
--------- --------- ------ ----------
Total bonds.................... $23,353.0 $1,794.1 $307.8 $24,839.3
========= ========= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $ 258.9 $ 9.3 $ 0.0 $ 268.2
Obligations of states and
political subdivisions.......... 149.6 16.3 0.0 165.9
Debt securities issued by
foreign governments............. 259.7 53.2 0.1 312.8
Corporate securities............. 17,336.1 1,485.9 113.4 18,708.6
Mortgage-backed securities....... 4,981.7 115.9 28.3 5,069.3
--------- -------- ------ ----------
Total bonds.................... $22,986.0 $1,680.6 $141.8 $24,524.8
========= ======== ====== ==========
</TABLE>
The statement value and fair value of bonds at December 31, 1998, by contractual
maturity, are shown below. Maturities will differ from contractual maturities
because eligible borrowers may exercise their right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Statement Fair
Value Value
--------- -----------
(In millions)
<S> <C> <C>
Due in one year or less . . . . . . . . . . . . . . . . $ 1,569.1 $ 1,622.2
Due after one year through five years . . . . . . . . . 5,597.3 5,922.5
Due after five years through ten years . . . . . . . . 5,335.6 5,666.5
Due after ten years . . . . . . . . . . . . . . . . . . 6,127.6 6,728.7
--------- ----------
18,629.6 19,939.9
Mortgage-backed securities . . . . . . . . . . . . . . 4,723.4 4,899.4
--------- ----------
$23,353.0 $24,839.3
========= ==========
</TABLE>
Gross gains of $126.4 million in 1998 and $61.5 million in 1997 and gross losses
of $62.3 million in 1998 and $86.6 million in 1997 were realized from the sale
of bonds.
At December 31, 1998, bonds with an admitted asset value of $18.9 million were
on deposit with state insurance departments to satisfy regulatory requirements.
22
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 6--INVESTMENTS--CONTINUED
The cost of common stocks was $258.4 million and $148.0 million at December 31,
1998 and 1997, respectively. At December 31, 1998, gross unrealized appreciation
on common stocks totaled $64.9 million, and gross unrealized depreciation
totaled $54.0 million. The fair value of preferred stock totaled $832.4 million
at December 31, 1998 and $695.8 million at December 31, 1997.
The Company participates in a security lending program for the purpose of
enhancing income on securities held. At December 31, 1998 and 1997, $421.5
million and $217.0 million, respectively, of the Company's bonds and stocks were
on loan to various brokers/dealers, but were fully collateralized by cash and
U.S. government securities in an account held in trust for the Company. Such
assets reflect the extent of the Company's involvement in securities lending,
not the Company's risk of loss.
Mortgage loans with outstanding principal balances of $56.4 million, bonds with
amortized cost of $105.1 million and real estate with depreciated cost of $14.6
million were non-income producing for the twelve months ended December 31, 1998.
Restructured commercial mortgage loans aggregated $230.5 million and $314.3
million as of December 31, 1998 and 1997, 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:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1998 1997
-------- --------
(In millions)
<S> <C> <C>
Expected . . . . . . . . . . . . . . . . . . $22.5 $33.8
Actual . . . . . . . . . . . . . . . . . . . 11.6 24.9
</TABLE>
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.
At December 31, 1998, the mortgage loan portfolio was diversified by geographic
region and specific collateral property type as displayed below. The Company
controls credit risk through credit approvals, limits and monitoring procedures.
<TABLE>
<CAPTION>
Statement Geographic Statement
Property Type Value Concentration Value
-------------- ------------- ------------- ---------------
(In millions) (In millions)
<S> <C> <C> <C>
Apartments . . . . . . $1,722.7 East North Central . $1,164.3
Hotels . . . . . . . . 283.2 East South Central . 137.1
Industrial . . . . . . 894.9 Middle Atlantic . . . 1,408.5
Office buildings . . . 2,094.0 Mountain . . . . . . 345.0
Retail . . . . . . . . 1,589.6 New England . . . . . 791.1
1-4 Family . . . . . . 6.4 Pacific . . . . . . . 1,848.7
Agricultural . . . . . 1,298.3 South Atlantic . . . 1,531.3
Other . . . . . . . . 334.6 West North Central . 287.5
West South Central . 602.2
Other . . . . . . . . 108.0
-------- --------
$8,223.7 $8,223.7
======== ========
</TABLE>
23
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 6--INVESTMENTS--CONTINUED
At December 31, 1998, the fair values of the commercial and agricultural
mortgage loan portfolios were $7.3 billion and $1.3 billion, respectively. The
corresponding amounts as of December 31, 1997 were approximately $6.7 billion
and $1.5 billion, respectively.
The maximum and minimum lending rates for mortgage loans during 1998 were 9.68%
and 6.82% for agricultural loans, 9.25% and 6.73% for other properties, and 7.5%
and 6.65% for purchase money mortgages. Generally, the percentage of any loan to
the value of security at the time of the loan, exclusive of insured, guaranteed
or purchase money mortgages, is 75%. For city mortgages, fire insurance is
carried on all commercial and residential properties at least equal to the
excess of the loan over the maximum loan which would be permitted by law on the
land without the building, except as permitted by regulations of the Federal
Housing Commission on loans fully insured under the provisions of the National
Housing Act. For agricultural mortgage loans, fire insurance is not normally
required on land based loans except in those instances where a building is
critical to the farming operation. Fire insurance is required on all
agri-business facilities in an aggregate amount equal to the loan balance.
NOTE 7--REINSURANCE
Premiums, benefits and reserves associated with reinsurance assumed in 1998 were
$784.0 million, $310.0 million, and $7.7 million, respectively. The
corresponding amounts in 1997 were $787.1 million, $386.6 million, and $7.5
million, respectively.
The Company cedes business to reinsurers to share risks under life, health and
annuity contracts for the purpose of reducing exposure to large losses.
Premiums, benefits and reserves ceded to reinsurers in 1998 were $873.9 million,
$772.5 million and $712.2 million, respectively. The corresponding amounts in
1997 were $801.8 million, $767.9 million and $594.9 million, respectively.
Premiums, benefits, and reserves ceded related to the group accident and health
and related group life business sold in 1997, included in the amounts above,
were $458.2 million, $481.2 million, and $238.6 million, respectively, at
December 31, 1998. The corresponding amounts in 1997 were $487.4 million, $503.3
million, and $247.9 million, respectively.
Amounts recoverable on paid claims and funds withheld from reinsurers were as
follows:
<TABLE>
<CAPTION>
December 31
--------------
1998 1997
------ ------
(In millions)
<S> <C> <C>
Reinsurance recoverables . . . . . . . . . . . . . . $18.6 $12.5
Funds withheld from reinsurers . . . . . . . . . . . 49.5 35.1
</TABLE>
The Company has a coinsurance agreement with another insurer to cede 100% of its
individual disability business. Reserves ceded under this agreement, included in
the amount shown above, were $251.1 million at December 31, 1998 and $236.3
million at December 31, 1997.
John Hancock Variable Life Insurance Company (Variable Life, a wholly-owned
affiliate) has a modified coinsurance agreement with the Company to reinsure 50%
of Variable Life's 1994 through 1998 issues of flexible premium variable life
insurance and scheduled premium variable life insurance policies. In connection
with this agreement, the Company transferred $4.9 million and $22.0 million of
cash for tax, commission, and expense allowances to Variable Life, which
decreased the Company's net gain from operations by $22.2 million and $10.1
million in 1998 and 1997, respectively.
24
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 7--REINSURANCE--CONTINUED
Variable Life also has a modified coinsurance agreement with the Company to
reinsure 50% of Variable Life's 1995 through 1998 issues of certain retail
annuity contracts (Independence Preferred and Declaration). In connection with
this agreement, the Company made a net cash payment of $12.7 million in 1998 and
received a net cash payment of $1.1 million in 1997 of cash for surrender
benefits, tax, reserve increase, commission, expense allowances and premium.
This agreement decreased the Company's net gain from operations by $8.4 million
and $9.8 million in 1998 and 1997, respectively.
Effective January 1, 1997, Variable Life entered into a stop-loss agreement with
the Company to reinsure mortality claims in excess of 110% of expected mortality
claims in 1998 and 1997 for all policies that are not reinsured under any other
indemnity agreement. In connection with the agreement, the Company received $1.0
million and transferred $2.4 million of cash for mortality claims to Variable
Life, which increased by $0.5 million and decreased by $1.3 million the
Company's net gain from operations in 1998 and 1997, respectively.
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 insurer.
Neither the Company, nor any of its related parties, control, either directly or
indirectly, any external reinsurers with which the Company conducts business. No
policies issued by the Company have been reinsured with a foreign company which
is controlled, either directly or indirectly, by a party not primarily engaged
in the business of insurance.
The Company has not entered into any reinsurance agreements in which the
reinsurer may unilaterally cancel any reinsurance for reasons other than
nonpayment of premiums or other similar credits. The Company does not have any
reinsurance agreements in effect in which the amount of losses paid or accrued
through December 31, 1998 would result in a payment to the reinsurer of amounts
which, in the aggregate and allowing for offset of mutual credits from other
reinsurance agreements with the same reinsurer, exceed the total direct premiums
collected under the reinsured policies.
NOTE 8--BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company provides retirement benefits to substantially all employees and
general agency personnel. These benefits are provided through both defined
benefit and defined contribution pension plans. Pension benefits under the
defined benefit plans are based on years of service and average compensation
generally during the five years prior to retirement. 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 $92.6 million in 1998 and
$89.7 million in 1997.
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. The funding policy for nonqualified defined benefit plans is to
contribute the amount of the benefit payments made during the year. Plan assets
consist principally of listed equity securities, corporate obligations and U.S.
government securities.
25
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 8--BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS--CONTINUED
Defined contribution plans include The Investment Incentive Plan (TIP) and the
Savings and Investment Plan (SIP). Employees are eligible to participate in TIP
after one year of service and may contribute up to the lesser of 15% of their
salary or $10,000 annually to the plan. The Company matches the first 2% of
pre-tax contributions and makes an additional annual profit sharing contribution
for employees who have completed at least two years of service. Through SIP,
marketing representatives, sales managers and agency managers are eligible to
contribute up to the lesser of 13% of their salary or $10,000. The Company
matches the first 3% of pretax contributions for marketing representatives and
the first 2% of pre-tax contributions for sales managers and agency managers.
The Company makes an annual profit sharing contribution of up to 1% for sales
managers and agency managers who have completed at least two years of service.
The expense for defined contribution plans was $8.1 million and $6.2 million in
1998 and 1997, respectively.
Since 1988, the Massachusetts Division of Insurance has provided the Company
with approval to recognize the pension plan prepaid expense, if any, in
accordance with the requirements of SFAS No. 87, "Employers' Accounting for
Pensions." The Company furnishes the Division of Insurance with an actuarial
certification of the prepaid expense computation on an annual basis.
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 retirement age 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.
In 1993, the Company changed its method of accounting for the costs of its
retiree benefit plans to the accrual method and elected to amortize its
transition liability for retirees and fully eligible or vested employees over
twenty years.
Since 1993, the Company has funded a portion of the postretirement obligation.
The Company's policy is to fund postretirement benefits for non-union employees
to the maximum amount that can be deducted for federal income tax purposes and
to fund the benefits for union employees, which are fully tax qualified, at
sufficient amounts so that the total accrued liability related to postretirement
benefits is approximately zero. As of December 31, 1998, plan assets related to
non-union employees were comprised of an irrevocable health insurance contract
to provide future health benefits to retirees while plan assets related to union
employees were comprised of approximately 70% equity securities and 30% fixed
income investments.
The Company provides additional compensation to employees based on achievement
of annual and long-term corporate financial objectives.
26
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 8--BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS--CONTINUED
The changes in benefit obligation and plan assets are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------
Pension Benefits Other Benefits
----------------------- -----------------
1998 1997 1998 1997
----------- ---------- -------- -------
(In millions)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at
beginning of year . . . $1,704.0 $1,582.3 $ 381.0 $ 400.5
Service cost . . . . . . 32.8 30.7 6.8 8.5
Interest cost . . . . . . 115.5 109.3 24.4 25.5
Actuarial loss/(gain) . . 55.5 77.5 (16.8) (22.2)
Benefits paid . . . . . . (99.4) (95.8) (28.5) (31.3)
Benefit obligation at end
of year . . . . . . . . 1,808.4 1,704.0 366.9 381.0
Change in plan assets:
Fair value of plan assets
at beginning of year . . 1,995.5 1,787.6 172.7 132.4
Actual return of plan
assets . . . . . . . . . 296.1 295.5 39.9 31.0
Employer contribution . . 10.0 8.2 2.6 9.3
Benefits paid . . . . . . (99.4) (95.8) 0.0 0.0
Fair value of plan assets
at end of year . . . . . 2,202.2 1,995.5 215.2 172.7
Funded status . . . . . . 393.8 291.5 (151.7) (208.3)
Unrecognized actuarial
loss . . . . . . . . . . (292.0) (219.6) (163.0) (127.1)
Unrecognized prior service
cost . . . . . . . . . . 23.1 29.6 17.8 19.7
Unrecognized net
transition (asset)
obligation . . . . . . . (23.9) (35.5) 294.3 315.2
--------- --------- ------- -------
Net amount recognized . . $ 101.0 $ 66.0 $ (2.6) $ (0.5)
========= ========= ======= =======
</TABLE>
The assumptions used in accounting for the benefit plans were as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
Pension Benefits Other Benefits
----------------------- ---------------
1998 1997 1998 1997
----------- ---------- ------- ------
<S> <C> <C> <C> <C>
Discount rate . . . . . . . 6.75% 7.00% 6.75% 7.00%
Expected return on plan
assets . . . . . . . . . . 8.50% 8.50% 8.50% 8.50%
Rate of compensation
increase . . . . . . . . . 4.56% 4.77% 4.00% 4.00%
</TABLE>
For measurement purposes, a 5.75 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.00 percent in 2001 and remain at that level
thereafter.
27
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 8--BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS--CONTINUED
Net periodic benefit (credit) cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
Pension Benefits Other Benefits
------------------------ -----------------
1998 1997 1998 1997
----------- ----------- ------- --------
(in millions)
<S> <C> <C> <C> <C>
Service cost . . . . . . . . . . $ 32.7 $ 30.7 $ 6.8 $ 8.5
Interest cost . . . . . . . . . 115.5 109.3 24.4 25.5
Expected return on plan assets . (165.5) (147.9) (39.9) (31.0)
Amortization of transition
(asset) obligation . . . . . . (11.6) (11.7) 20.9 20.9
Amortization of prior service
cost. . . . . . . . . . . . . . 6.5 6.6 1.9 1.9
Recognized actuarial (gain) loss (2.6) (1.0) 19.0 15.0
-------- -------- ------ -------
Net periodic benefit (credit)
cost . . . . . . . . . . . . $ (25.0) $ (14.0) $ 33.1 $ 40.8
======== ======== ====== =======
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage Point 1-Percentage Point
Increase Decrease
------------------ ------------------
(In millions)
<S> <C> <C>
Effect on total of service and
interest costs . . . . . . . . $ 2.9 $ (2.5)
Effect on postretirement benefit
obligations. . . . . . . . . . 28.7 (25.9)
</TABLE>
NOTE 9--AFFILIATES
The Company has subsidiaries and affiliates in a variety of industries including
domestic and foreign life insurance and domestic property casualty insurance,
real estate, mutual funds, investment brokerage and various other financial
services entities.
Total assets of unconsolidated majority-owned affiliates amounted to $13.8
billion at December 31, 1998 and $12.4 billion at December 31, 1997; total
liabilities amounted to $12.5 billion at December 31, 1998 and $11.1 billion at
December 31, 1997; and total net income was $148.5 million in 1998 and $184.8
million in 1997.
The Company customarily engages in transactions with its unconsolidated
affiliates, including the cession and assumption of certain insurance business
under the terms of established reinsurance agreements (See Note 7). Various
services are performed by the Company for certain affiliates for which the
Company is reimbursed on the basis of cost. Certain affiliates have entered into
various financial arrangements relating to borrowings and capital maintenance
under which agreements the Company would be obligated in the event of
nonperformance by an affiliate (see Note 13).
The Company received dividends of $62.2 million and $65.9 million in 1998 and
1997, respectively, from unconsolidated affiliates.
28
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 10--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The notional amounts, carrying values and estimated fair values of the Company's
derivative instruments are as follows at December 31:
<TABLE>
<CAPTION>
Number of Contracts/ Assets (Liabilities)
Notional Amounts 1998 1997
--------------------- --------------------- ----------------
Carrying Fair Carrying Fair
1998 1997 Value Value Value Value
---------- --------- ---------- --------- -------- ------
($ In millions)
<S> <C> <C> <C> <C> <C> <C>
Futures contracts to
sell securities . . . 11,286 3,733 $(3.1) $ (3.1) $ (2.5) $ (2.5)
Futures contracts to
acquire securities . . 1,464 1,359 (0.3) (0.3) 1.2 1.2
Interest rate swap
agreements . . . . . . $7,684.0 $7,254.7 -- (159.1) -- (58.3)
Interest rate cap
agreements . . . . . . 115.0 115.0 0.4 0.4 0.6 0.6
Interest rate floor
agreements . . . . . . 125.0 125.0 0.7 0.7 0.4 0.4
Interest rate
swaption agreements. . 0.0 34.2 -- 0.0 -- 0.0
Currency rate swap
agreements . . . . . . 2,881.5 221.5 -- 16.2 -- (9.7)
Equity collar
agreements . . . . . . -- -- 28.6 28.6 (14.1) (14.1)
</TABLE>
Financial futures contracts are used principally to hedge risks associated with
interest rate fluctuations on sales of guaranteed investment contracts. The
Company is subject to the risks associated with changes in the value of the
underlying securities; however, such changes in value generally are offset by
opposite changes in the value of the hedged items. The contracts or notional
amounts of the contracts represent the extent of the Company's involvement but
not the future cash requirements, as the Company intends to close the open
positions prior to settlement. The futures contracts expire in 1999.
The Company uses futures contracts, interest rate swap, cap and floor
agreements, swaptions, and currency rate swap agreements for other than trading
purposes to hedge and manage its exposure to changes in interest rate levels,
foreign exchange rate fluctuations and to manage duration mismatch of assets and
liabilities.
The Company invests in common stock that is subject to fluctuations from market
value changes in stock prices. The Company sometimes seeks to reduce its market
exposure to such holdings by entering into equity collar agreements. A collar
consists of a call that limits the Company's potential for gain from
appreciation in the stock price as well as a put that limits the Company's loss
potential from a decline in the stock price.
The interest rate swap agreements expire in 1999 to 2028. The interest rate cap
and floor agreements expire in 2000 to 2007. Interest rate swaption agreements
expire in 2025. The currency rate swap agreements expire in 1999 to 2018. The
equity collar agreements expire in 2003.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform to the terms of the contract. The Company continually
monitors its position and the credit ratings of the counterparties to these
derivative instruments. To limit exposure associated with counterparty
nonperformance on interest rate and currency swap agreements, the Company enters
into master netting agreements with its counterparties. The Company believes the
risk of incurring losses due to nonperformance by its counterparties is remote
and that such losses, if any, would be immaterial. Futures contracts trade on
organized exchanges and, therefore, have minimal credit risk.
29
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 11--LEASES
The Company leases office space and furniture and equipment under various
operating leases including furniture and equipment leased under a series of
sales-leaseback agreements with a nonaffiliated organization. Rental expense for
all operating leases totaled $26.2 million in 1998 and $27.4 million in 1997.
Future minimum rental commitments under noncancellable operating leases for
office space and furniture and equipment are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------
(In millions)
<S> <C>
1999. . . . . . . . . . . . . . . . . . . . . . . . . . . $19.0
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . 7.5
-----
Total minimum payments . . . . . . . . . . . . . . . . . $72.4
=====
</TABLE>
NOTE 12--POLICY RESERVES, POLICYHOLDERS' AND BENEFICIARIES' FUNDS AND
OBLIGATIONS RELATED TO SEPARATE ACCOUNTS
The Company's annuity reserves and deposit fund liabilities and related separate
account liabilities that are subject to discretionary withdrawal (with
adjustment), subject to discretionary withdrawal (without adjustment), and not
subject to discretionary withdrawal provisions are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 Percent
----------------- ---------
(In millions)
<S> <C> <C>
Subject to discretionary withdrawal (with
adjustment):
With market value adjustment . . . . . . . . $ 792.0 2.0%
At book value less surrender charge . . . . . 2,773.8 7.1
--------- -----
Total with adjustment . . . . . . . . . . 3,565.8 9.1
Subject to discretionary withdrawal (without
adjustment) at book value . . . . . . . . . 3,782.8 9.8
Subject to discretionary withdrawal--separate
accounts . . . . . . . . . . . . . . . . . . 14,809.7 38.1
Not subject to discretionary withdrawal:
General account . . . . . . . . . . . . . . . 15,375.2 39.6
Separate accounts . . . . . . . . . . . . . . 1,301.5 3.4
--------- -----
Total annuity reserves, deposit fund liabilities
and separate accounts--before reinsurance . . . 38,835.0 100.0%
=====
Less reinsurance ceded . . . . . . . . . . . . . (0.1)
---------
Net annuity reserves, deposit fund liabilities
and separate accounts . . . . . . . . . . . . . $38,834.9
=========
</TABLE>
Any liquidation costs associated with the $14.8 billion of separate accounts
subject to discretionary withdrawal are sustained by the separate account
contractholders and not by the general account.
30
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 13--COMMITMENTS AND CONTINGENCIES
The Company has extended commitments to purchase long-term bonds, preferred and
common stocks, and other invested assets and issue real estate mortgages
totaling $329.1 million, $72.0 million, $214.1 million and $471.4 million,
respectively, at December 31, 1998. If funded, loans related to real estate
mortgages would be fully collateralized by related properties. The Company
monitors the credit worthiness of borrowers under long-term bond commitments and
requires collateral as deemed necessary. The estimated fair value of the
commitments described above is $1.1 billion at December 31, 1998. The majority
of these commitments expire in 1999.
During 1996, the Company entered into a credit support and collateral pledge
agreement with the Federal National Mortgage Association (FNMA). Under the
agreement, the Company sold $532.8 million of commercial mortgage loans and
acquired an equivalent amount of FNMA securities. The Company completed similar
transactions with FNMA in 1991 for $1.042 billion and in 1993 for $71.9 million.
FNMA is guarantying the full face value of the bonds of the three transactions
to the bondholders. However, the Company has agreed to absorb the first 12.25%
of the principal and interest losses (less buy-backs) for the pools of loans
involved in the three transactions, based on the total outstanding principal
balance of $1.036 billion as of July 1, 1996, but is not required to commit
collateral to support this loss contingency. At December 31, 1998, the aggregate
outstanding principal balance of all the remaining pools of loans from 1991,
1993, and 1996 was $602.8 million.
Historically, the Company has experienced losses of less than one percent on its
multi-family mortgage portfolio. Mortgage loan buy-backs required by the FNMA in
1998 and 1997 amounted to $4.6 million and $4.1 million, respectively.
During 1996, the Company entered into a credit support and collateral pledge
agreement with the Federal Home Loan Mortgage Corporation (FHLMC). Under the
agreement, the Company sold $535.3 million of multi-family loans and acquired an
equivalent amount of FHLMC securities. FHLMC is guarantying the full face value
of the bonds to the bondholders. However, the Company has agreed to absorb the
first 10.5% of original principal and interest losses (less buy-backs) for the
pool of loans involved but is not required to commit collateral to support this
loss contingency. Historically, the Company has experienced total losses of less
than one percent on its multi-family loan portfolio. At December 31, 1998, the
aggregate outstanding principal balance of the pools of loans was $445.8
million. There were no mortgage loans buy-backs in 1998 and 1997.
The Company has a support agreement with Variable Life under which the Company
agrees to continue directly or indirectly to own all of Variable Life's common
stock and maintain Variable Life's net worth at not less than $1 million.
The Company has a support agreement with John Hancock Capital Corporation
(JHCC), a non-consolidated wholly-owned subsidiary, under which the Company
agrees to continue directly or indirectly to own all of JHCC's common stock and
maintain JHCC's net worth at not less than $1 million. JHCC's outstanding
borrowings as of December 31, 1998 were $411.7 million for short-term borrowings
and $173.4 million for notes payable.
The Company is subject to insurance guaranty fund laws in the states in which it
does business. These laws assess insurance companies amounts to be used to pay
benefits to policyholders and claimants of insolvent insurance companies. Many
states allow these assessments to be credited against future premium taxes. The
Company believes such assessments in excess of amounts accrued will not
materially affect its financial position.
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, 1998. 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.
31
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 13--COMMITMENTS AND CONTINGENCIES--CONTINUED
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 Company has established a litigation
reserve in connection with the settlement to provide for relief to class members
and for legal and administrative costs associated with the settlement. The
reserve has been charged, net of the related tax effect, directly to
policyholders' contingency reserves of the Company. Given the uncertainties
associated with estimating the reserve, it is possible that the final cost of
the settlement could be different from the amounts presently provided for by the
Company. However, the Company does not believe that the ultimate resolution of
the settlement will have a material adverse effect on the Company's financial
position.
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments:
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1998 1997
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- ---------
(In millions)
<S> <C> <C> <C> <C>
Assets
Bonds--Note 6............................ $23,353.0 $24,839.3 $22,986.0 $24,524.8
Preferred stocks--Note 6................. 844.7 832.4 640.6 695.8
Common stocks--Note 6.................... 269.3 269.3 256.9 256.9
Mortgage loans on real estate--Note 6.... 8,223.7 8,619.7 7,851.2 8,215.9
Policy loans--Note 1..................... 1,573.8 1,573.8 1,577.3 1,577.3
Cash and cash equivalents--Note 1........ 1,348.9 1,348.9 724.8 724.8
Liabilities
Guaranteed investment contracts--Note 1.. 12,666.9 12,599.7 11,499.4 11,516.8
Fixed rate deferred and immediate
annuities--Note 1....................... 4,375.0 4,412.2 4,289.1 4,290.4
Supplementary contracts without
life contingencies-- Note 1............. 42.7 44.7 40.9 42.1
Derivatives assets (liabilities) relating
to:--Note 10
Futures contracts........................... (3.4) (3.4) (1.3) (1.3)
Interest rate swaps......................... -- (159.1) -- (58.3)
Currency rate swaps......................... -- 16.2 -- (9.7)
Interest rate caps.......................... 0.4 0.4 0.6 0.6
Interest rate floors........................ 0.7 0.7 0.4 0.4
Equity collar agreements.................... 28.6 28.6 (14.1) (14.1)
Commitments--Note 13........................ -- 1,114.2 -- 1,332.3
</TABLE>
The carrying amounts in the table are included in the statutory-basis statements
of financial position. The methods and assumptions utilized by the Company in
estimating its fair value disclosures are described in Note 1.
NOTE 15--IMPACT OF YEAR 2000 (UNAUDITED)
The Company is executing its plan to address the impact of the Year 2000 issues
that result from computer programs being written using two digits to reflect the
year rather than four to define the applicable year and century. Historically,
the first two digits were hardcoded to save memory.
32
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 15--IMPACT OF YEAR 2000 (UNAUDITED)--CONTINUED
Many of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in an information technology (IT) system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. In addition, non-IT systems including, but not limited to,
security alarms, elevators and telephones are subject to malfunction due to
their dependence on embedded technology such as microcontrollers for proper
operation. As described, the Year 2000 project presents a number of challenges
for financial institutions since the correction of Year 2000 issues in IT and
non-IT systems will be complex and costly for the entire industry.
The Company began to address the Year 2000 project as early as 1994. The
Company's plan to address the Year 2000 Project includes an awareness campaign,
an assessment period, a renovation stage, validation work and an implementation
of Company solutions.
The continuous awareness campaign serves several purposes: defining the problem,
gaining executive level support and sponsorship, establishing a team and overall
strategy, and assessing existing information system management resources.
Additionally, the awareness campaign establishes an education process to ensure
that all employees are aware of the Year 2000 issue and knowledgeable of their
role in securing solutions.
The assessment phase, which was completed for both IT and non-IT systems as of
April 1998, included the identification, inventory, analysis, and prioritization
of IT and non-IT systems and processes to determine their conversion or
replacement.
The renovation stage reflects the conversion, validation, replacement, or
elimination of selected platforms, applications, databases and utilities,
including the modification of applicable interfaces. Additionally, the
renovation stage includes performance, functionality, and regression testing and
implementation. As of December 31, 1998, the renovation phase was substantially
complete for computer applications, systems and desktops. For all remaining
components, the renovation phase is underway and will be complete before the end
of the second quarter of 1999.
The validation phase consists of the compliance testing of renovated systems.
The validation phase is expected to be complete by mid 1999, after renovation is
accomplished. Testing facilities will be used through the remainder of 1999 to
perform special functional testing. Special functional testing includes testing,
as required, with material third parties and industry groups and performing
reviews of "dry runs" of year-end activities. Scheduled testing of material
relationships with third parties is underway. It is anticipated that testing
with material business partners will continue through much of 1999.
Finally, the implementation phase involves the actual implementation of
converted or replaced platforms, applications, databases, utilities, interfaces,
and contingency planning. Implementation is being performed concurrently during
the renovation phase and is expected to be completed before the end of the
second quarter of 1999.
33
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--CONTINUED
NOTE 15--IMPACT OF YEAR 2000 (UNAUDITED)--CONTINUED
The costs of the Year 2000 project consist of internal IT personnel and external
costs such as consultants, programmers, replacement software, and hardware. The
costs of the Year 2000 project are expensed as incurred. The project is funded
partially through a reallocation of resources from discretionary projects.
Through December 31, 1998, The Company has incurred and expensed approximately
$9.8 million in related payroll costs for its internal IT personnel on the
project. The estimated range of remaining internal IT personnel costs of the
project is approximately $8 to $9 million. Through December 31, 1998, the
Company has incurred and expensed approximately $36.4 million in external costs
for the project. The estimated range of remaining external costs of the project
is approximately $35 to $36 million. The total costs of the Year 2000 project to
the Company, based on management's best estimates, include approximately $18
million in internal IT personnel, $7.4 million in the external modification of
software, $34.2 million for external solution providers, $19.4 million in
replacement costs of non-compliant IT systems and $12.6 million in oversight,
test facilities and other expenses. Accordingly, the estimated range of total
costs of the Year 2000 project internal and external, is approximately $90 to
$95 million. However, there can be no guarantee that these estimates will be
achieved and actual results could materially differ from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
The Company's total Year 2000 project costs include the estimated impact of
external solution providers and are based on presently available information.
However, there is no guarantee that the systems of other companies that the
Company's systems rely on will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have material adverse effect on the Company. It is documented
in trade publications that companies in foreign countries are not acting as
intensively as domestic companies to remediate Year 2000 issues. Accordingly, it
is expected that Company facilities based outside the United States face higher
degrees of risks from data exchanges with material business partners. In
addition, the Company has thousands of individual and business customers that
hold insurance policies, annuities and other financial products of the company.
Nearly all products sold by the Company contain date sensitive data, examples of
which are policy expiration dates, birth dates and premium payment dates.
Finally, the regulated nature of the Company's industry exposes it to potential
supervisory or enforcement actions relating to Year 2000 issues.
The Company's contingency planning initiative related to the Year 2000 project
is underway. The plan is addressing the Company's readiness as well as that of
material business partners on whom the Company depends. The Company's
contingency plans are being designed to keep each subsidiary's operations
functioning in the event of a failure or delay due to the Year 2000 record
format and date calculation changes. Contingency plans are being constructed
based on the foundation of extensive business resumption plans that the Company
has maintained and updated periodically, which outline responses to situations
that may affect critical business functions. These plans also provide emergency
operations guidance, which defines a documented order of actions to respond to
problems. These extensive business resumption plans are being enhanced to cover
Year 2000 situations.
34
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Contractowners
John Hancock Variable Annuity Account U
of John Hancock Mutual Life Insurance Company
We have audited the accompanying statement of assets and liabilities of John
Hancock Variable Annuity Account U (the Account) (comprising, respectively,
Large Cap Growth, Sovereign Bond, International Equity Index (formerly,
International Equities), Small Cap Growth, International Balanced, Mid Cap
Growth, Large Cap Value, Money Market, Mid Cap Value, Diversified Mid Cap Growth
(formerly, Special Opportunities), Real Estate Equity, Growth & Income, Managed,
Short-Term Bond (formerly, Short-Term U.S. Government), Small Cap Value,
International Opportunities, Equity Index, Strategic Bond, Emerging Markets
Equity, Global Equity, Bond Index, Small/Mid Cap CORE, and High Yield Bond
Subaccounts) as of December 31, 1998, the related statement of operations for
the year then ended and statements of changes in net assets for each of the
periods indicated therein. These financial statements are the responsibility of
the Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of each of the respective
subaccounts constituting John Hancock Variable Annuity Account U at December 31,
1998, the results of their operations for the year then ended and the changes in
their net assets for each of the periods indicated, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 10, 1999
35
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LARGE CAP SOVEREIGN INTERNATIONAL SMALL CAP INTERNATIONAL
GROWTH BOND EQUITY INDEX GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ---------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares
of portfolios of John
HancockVariable
Series Trust I, at
value. . . . . . . . $316,315,770 $ 280,967,846 $ 55,019,009 $ 9,928,937 $ 1,579,447
Receivable from John
Hancock Variable
Series Trust I . . . 337,116 280,811 43,250 88,308 829
------------ ---------------- ---------------- ----------- -----------
Total assets . . . . 316,652,886 281,248,657 55,062,259 10,017,245 1,580,276
LIABILITIES
Payable to John
Hancock Mutual Life
Insurance Company . 325,112 270,971 41,170 87,944 770
Asset charges payable 12,005 9,840 2,080 364 59
------------ ---------------- ---------------- ----------- -----------
Total liabilities . . 337,117 280,811 43,250 88,308 829
------------ ---------------- ---------------- ----------- -----------
Net assets . . . . . $316,315,769 $ 280,967,846 $ 55,019,009 $ 9,928,937 $ 1,579,447
============ ================ ================ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED
MID CAP LARGE CAP MONEY MID CAP MID CAP
GROWTH VALUE MARKET VALUE GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares
of portfolios of John
Hancock Variable
Series Trust I, at
value. . . . . . . . $9,553,252 $9,894,762 $77,599,877 $8,794,232 $30,175,011
Receivable from John
Hancock Variable
Series Trust I . . . 44,103 11,405 211,747 7,153 28,055
---------- ---------- ----------- ---------- -----------
Total assets . . . . 9,597,355 9,906,167 77,811,624 8,801,385 30,203,066
LIABILITIES
Payable to John
Hancock Mutual Life
Insurance Company . 43,756 11,033 208,986 6,826 26,939
Asset charges payable 347 372 2,762 326 1,116
---------- ---------- ----------- ---------- -----------
Total liabilities . . 44,103 11,405 211,748 7,152 28,055
---------- ---------- ----------- ---------- -----------
Net assets . . . . . $9,553,252 $9,894,762 $77,599,876 $8,794,233 $30,175,011
========== ========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE GROWTH & SHORT-TERM SMALL CAP
EQUITY INCOME MANAGED BOND VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares
of portfolios of John
Hancock Variable
Series Trust I, at
value. . . . . . . . $64,504,987 $1,000,947,752 $1,356,962,808 $10,941,008 $7,548,220
Receivable from John
Hancock Variable
Series Trust I . . . 121,756 991,662 709,763 5,316 27,100
----------- -------------- -------------- ----------- ----------
Total assets . . . . 64,626,743 1,001,939,414 1,357,672,571 10,946,324 7,575,320
LIABILITIES
Payable to John
Hancock Mutual Life
Insurance Company . 119,326 956,857 658,013 4,900 26,821
Asset charges payable 2,430 34,805 51,750 416 279
----------- -------------- -------------- ----------- ----------
Total liabilities . . 121,756 991,662 709,763 5,316 27,100
----------- -------------- -------------- ----------- ----------
Net assets . . . . . $64,504,987 $1,000,947,752 $1,356,962,808 $10,941,008 $7,548,220
=========== ============== ============== =========== ==========
</TABLE>
See accompanying notes.
36
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY STRATEGIC EMERGING
OPPORTUNITIES INDEX BOND MARKETS EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Investment in shares
of portfolios of John
Hancock Variable
Series Trust I, at
value. . . . . . . . $4,141,368 $25,841,967 $7,750,187 $ 3,184
Receivable from John
Hancock Variable
Series Trust I . . . 3,074 14,982 65,385 307
---------- ----------- ---------- --------
Total assets . . . . 4,144,442 25,856,949 7,815,572 3,491
LIABILITIES
Payable to John
Hancock Mutual Life
Insurance Company . 2,917 14,003 65,095 307
Asset charges payable 157 978 290 --
---------- ----------- ---------- --------
Total liabilities . . 3,074 14,981 65,385 307
---------- ----------- ---------- --------
Net assets . . . . . $4,141,368 $25,841,968 $7,750,187 $ 3,184
========== =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
GLOBAL BOND SMALL/MID HIGH YIELD
EQUITY INDEX CAP CORE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investment in shares of
portfolios of John Hancock
Variable Series Trust I, at
value . . . . . . . . . . . $5,097 $1,135 $23,835 $209,818
Receivable from John Hancock
Variable Series Trust I . . 309 -- 3,816 8
------ ------ ------- --------
Total assets . . . . . . . . 5,406 1,135 27,651 209,826
LIABILITIES
Payable to John Hancock
Mutual Life Insurance
Company . . . . . . . . . . 309 -- 3,815 --
Asset charges payable . . . -- -- 1 8
------ ------ ------- --------
Total liabilities . . . . . 309 -- 3,816 8
------ ------ ------- --------
Net assets . . . . . . . . . $5,097 $1,135 $23,835 $209,818
====== ====== ======= ========
</TABLE>
See accompanying notes.
37
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
LARGE CAP SOVEREIGN INTERNATIONAL SMALL CAP INTERNATIONAL
GROWTH BOND EQUITY INDEX GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Investment income:
Distributions
received from the
portfolios of John
Hancock Variable
Series Trust I . . $ 30,986,217 $ 22,987,705 $ 8,511,897 $ -- $ 120,763
Expenses:
Mortality and expense
risks . . . . . . . 3,794,792 3,603,722 755,676 130,657 26,831
------------ ------------ ------------ ----------- ------------
Net investment income
(loss) . . . . . . . 27,191,425 19,383,983 7,756,221 (130,657) 93,932
Net realized and
unrealized gain
(loss) on
investments:
Net realized gain . 9,023,907 1,608,419 519,894 804,150 51,929
Net unrealized
appreciation
(depreciation)
during the period . 50,986,447 (2,353,679) 1,182,290 820,136 118,489
------------ ------------ ------------ ----------- ------------
Net realized and
unrealized gain
(loss) on investments 60,010,354 (745,260) 1,702,184 1,624,286 170,418
------------ ------------ ------------ ----------- ------------
Net increase in net
assets resulting from
operations . . . . . $ 87,201,779 $ 18,638,723 $ 9,458,405 $ 1,493,629 $ 264,350
============ ============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
MID CAP LARGE CAP MONEY MID CAP DIVERSIFIED MID
GROWTH VALUE MARKET VALUE CAP GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Investment income:
Distributions
received from the
portfolios of John
Hancock Variable
Series Trust I . . $ 842,504 $ 544,098 $3,359,178 $ 87,466 $ 573,081
Expenses:
Mortality and expense
risks . . . . . . . 97,122 135,968 813,962 153,057 455,388
---------- --------- ---------- ----------- ----------
Net investment income
(loss) . . . . . . . 745,382 408,130 2,545,216 (65,591) 117,693
Net realized and
unrealized gain
(loss) on
investments:
Net realized gain . 961,578 559,557 -- 105,604 944,965
Net unrealized
appreciation
(depreciation)
during the period . 745,129 (303,867) -- (1,627,787) 111,932
---------- --------- ---------- ----------- ----------
Net realized and
unrealized gain
(loss) on investments 1,706,707 255,690 -- (1,522,183) 1,056,897
---------- --------- ---------- ----------- ----------
Net increase
(decrease) in net
assets resulting from
operations . . . . . $2,452,089 $ 663,820 $2,545,216 $(1,587,774) $1,174,590
========== ========= ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE GROWTH & SHORT-TERM SMALL CAP
EQUITY INCOME MANAGED BOND VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Investment income:
Distributions
received from the
portfolios of John
Hancock Variable
Series Trust I . . $ 4,629,464 $ 98,832,730 $130,400,882 $553,750 $ 49,812
Expenses:
Mortality and expense
risks . . . . . . . 1,103,985 11,604,211 18,115,714 125,729 113,025
------------ ------------ ------------ -------- ---------
Net investment income
(loss) . . . . . . . 3,525,479 87,228,519 112,285,168 428,021 (63,213)
Net realized and
unrealized gain
(loss) on
investments:
Net realized gain . 2,853,085 40,149,891 27,895,126 31,379 122,977
Net unrealized
appreciation
(depreciation)
during the period . (22,556,848) 102,498,346 82,785,078 (81,976) (869,828)
------------ ------------ ------------ -------- ---------
Net realized and
unrealized gain
(loss) on investments (19,703,763) 142,648,237 110,680,204 (50,597) (746,851)
------------ ------------ ------------ -------- ---------
Net increase
(decrease) in net
assets resulting from
operations . . . . . $(16,178,284) $229,876,756 $222,965,372 $377,424 $(810,064)
============ ============ ============ ======== =========
</TABLE>
See accompanying notes.
38
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
EMERGING
INTERNATIONAL EQUITY STRATEGIC MARKETS
OPPORTUNITIES INDEX BOND EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT*
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Investment income:
Distributions received
from the portfolios of
John Hancock Variable
Series Trust I . . . . $ 35,645 $ 737,378 $321,315 $ 2
Expenses:
Mortality and expense
risks. . . . . . . . . 55,934 302,739 74,024 1
-------- ---------- -------- --------
Net investment income
(loss). . . . . . . . . (20,289) 434,639 247,291 1
Net realized and
unrealized gain (loss)
on investments:
Net realized gain . . . 179,802 2,604,544 116,276 --
Net unrealized
appreciation
(depreciation) during
the year . . . . . . . 335,531 2,092,450 (5,099) 27
-------- ---------- -------- --------
Net realized and
unrealized gain on
investments . . . . . . 515,333 4,696,994 111,177 27
-------- ---------- -------- --------
Net increase in net
assets resulting from
operations. . . . . . . $495,044 $5,131,633 $358,468 $ 28
======== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SMALL/
GLOBAL BOND MID CAP HIGH YIELD
EQUITY INDEX CORE BOND
SUBACCOUNT* SUBACCOUNT* SUBACCOUNT* SUBACCOUNT*
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Investment income:
Distributions received
from the portfolios of
John Hancock Variable
Series Trust I . . . . $ 5 $ 17 $ -- $1,441
Expenses:
Mortality and expense
risks. . . . . . . . . 2 1 8 134
---- ---- ---- ------
Net investment income . 3 16 (8) 1,307
Net realized and
unrealized gain (loss)
on investments:
Net realized gain (loss) -- -- -- (1)
Net unrealized
appreciation
(depreciation) during
the year . . . . . . . 114 (21) 906 (920)
---- ---- ---- ------
Net realized and
unrealized gain (loss)
on investments . . . . 114 (21) 906 (921)
---- ---- ---- ------
Net increase (decrease)
in net assets resulting
from operations . . . . $117 $ (5) $898 $ 386
==== ==== ==== ======
</TABLE>
- ---------
* From May 1, 1998 (commencement of operations).
See accompanying notes.
39
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS AND PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
LARGE CAP GROWTH SOVEREIGN BOND INTERNATIONAL EQUITY INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------- --------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
------------- ------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Net investment income . . . . . . . . $ 27,191,425 $ 18,782,339 $ 19,383,983 $ 18,506,961 $ 7,756,221 $ 1,877,283
Net realized gain . . . . . . . . . . 9,023,907 4,209,410 1,608,419 1,989,278 519,894 710,358
Net unrealized appreciation
(depreciation) during the period . . 50,986,447 31,899,270 (2,353,679) 3,166,027 1,182,290 (6,373,131)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations . . . . . . 87,201,779 54,891,019 18,638,723 23,662,266 9,458,405 (3,785,490)
From contractowner transactions:
Net premiums from contractowners . . 25,254,201 19,578,896 23,446,904 11,697,439 2,985,355 5,183,180
Net benefits to contractowners . . . (36,707,482) (22,890,208) (45,255,823) (41,724,868) (11,327,940) (15,196,264)
------------ ------------ ------------ ------------ ------------ ------------
Net (decrease) in net assets from
contractowner transactions . . . . . (11,453,281) (3,311,312) (21,808,919) (30,027,429) (8,342,585) (10,013,084)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets 75,748,498 51,579,707 (3,170,196) (6,365,163) 1,115,820 (13,798,574)
Net assets at beginning of period . . 240,567,271 188,987,564 284,138,042 290,503,205 53,903,189 67,701,763
------------ ------------ ------------ ------------ ------------ ------------
Net assets at end of period . . . . . $316,315,769 $240,567,271 $280,967,846 $284,138,042 $ 55,019,009 $ 53,903,189
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP GROWTH INTERNATIONAL BALANCED MID CAP GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------- ----------------------- -------------------------
1998 1997 1998 1997 1998 1997
------------ ------------ ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Net investment income (loss) . . . . . . . $ (130,657) $ (103,221) $ 93,932 $ 68,163 $ 745,382 $ (55,403)
Net realized gain . . . . . . . . . . . . 804,150 416,721 51,929 15,353 961,578 85,944
Net unrealized appreciation (depreciation)
during the period . . . . . . . . . . . . 820,136 620,276 118,489 (69,707) 745,129 647,694
----------- ----------- ---------- ---------- ----------- -----------
Net increase in net assets resulting from
operations . . . . . . . . . . . . . . . . 1,493,629 933,776 264,350 13,809 2,452,089 678,235
From contractowner transactions:
Net premiums from contractowners . . . . . 6,138,291 9,176,028 382,914 1,237,961 6,205,946 3,001,006
Net benefits to contractowners . . . . . . (7,977,696) (4,223,919) (898,670) (218,031) (4,406,219) (1,237,471)
----------- ----------- ---------- ---------- ----------- -----------
Net increase (decrease) in net assets from
contractowner transactions . . . . . . . . (1,839,407) 4,952,109 (515,756) 1,019,930 1,799,727 1,763,535
----------- ----------- ---------- ---------- ----------- -----------
Net increase (decrease) in net assets . . . (345,778) 5,885,885 (251,406) 1,033,739 4,251,816 2,441,770
Net assets at beginning of period . . . . . 10,274,715 4,388,830 1,830,853 797,114 5,301,436 2,859,666
----------- ----------- ---------- ---------- ----------- -----------
Net assets at end of period . . . . . . . . $ 9,928,937 $10,274,715 $1,579,447 $1,830,853 $ 9,553,252 $ 5,301,436
=========== =========== ========== ========== =========== ===========
</TABLE>
See accompanying notes.
40
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS AND PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
LARGE CAP VALUE MONEY MARKET MID CAP VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------- --------------------------- -------------------------------
1998 1997 1998 1997 1998 1997
------------- ------------ ------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations:
Net investment income (loss)....... $ 408,130 $ 280,348 $ 2,545,216 $ 2,456,305 $ (65,591) $ 695,502
Net realized gain.................. 559,557 169,949 -- -- 105,604 263,646
Net unrealized appreciation
(depreciation) during the period.. (303,867) 935,367 -- -- (1,627,787) (78,941)
------------ ------------ ------------- ------------ ---------------- ------------
Net increase (decrease) in net
assets resulting from operations... 663,820 1,385,664 2,545,216 2,456,305 (1,587,774) 880,207
From contractowner transactions:
Net premiums from contractowners... 3,404,616 5,113,182 75,350,823 44,946,257 6,100,376 9,849,138
Net benefits to contractowners..... (2,750,453) (926,878) (59,496,549) (52,298,954) (5,976,485) (1,612,655)
------------ ------------ ------------- ------------ ---------------- ------------
Net increase (decrease) in net
assets from contractowner
transactions....................... 654,163 4,186,304 15,854,274 (7,352,697) 123,891 8,236,483
------------ ------------ ------------- ------------ ---------------- ------------
Net increase (decrease) in net
assets............................. 1,317,983 5,571,968 18,399,490 (4,896,392) (1,463,883) 9,116,690
Net assets at beginning of period... 8,576,779 3,004,811 59,200,386 64,096,778 10,258,116 1,141,426
------------ ------------ ------------- ------------ ---------------- ------------
Net assets at end of period......... $ 9,894,762 $ 8,576,779 $ 77,599,876 $ 59,200,386 $ 8,794,233 $ 10,258,116
============ ============ ============= ============ ================ ============
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED MID CAP GROWTH REAL ESTATE EQUITY GROWTH & INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------------------- ---------------------------- -----------------------------
1998 1997 1998 1997 1998 1997
------------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations:
Net investment income.............. $ 117,693 $ 3,196,843 $ 3,525,479 $ 5,737,062 $ 87,228,519 $ 97,907,934
Net realized gain.................. 944,965 2,847,237 2,853,085 2,540,134 40,149,891 15,083,611
Net unrealized appreciation
(depreciation) during the period.. 111,932 (5,553,611) (22,556,848) 5,019,854 102,498,346 77,168,094
------------- ------------ ------------- ------------ -------------- ------------
Net increase (decrease) in net
assets resulting from operations... 1,174,590 490,469 (16,178,284) 13,297,050 229,876,756 190,159,639
From contractowner transactions:
Net premiums from contractowners... 1,875,041 9,378,682 3,206,985 13,495,907 45,333,968 56,381,596
Net benefits to contractowners..... (10,699,139) (17,891,851) (20,086,827) (15,223,931) (119,639,452) (83,349,459)
------------- ------------ ------------- ------------ -------------- ------------
Net (decrease) in net assets from
contractowner transactions......... (8,824,098) (8,513,169) (16,879,842) (1,728,024) (74,305,484) (26,967,863)
------------- ------------ ------------- ------------ -------------- ------------
Net increase (decrease) in net
assets............................. (7,649,508) (8,022,700) (33,058,126) 11,569,026 155,571,272 163,191,776
Net assets at beginning of period... 37,824,519 45,847,219 97,563,113 85,994,087 845,376,480 682,184,704
------------- ------------ ------------- ------------ -------------- ------------
Net assets at end of period......... $ 30,175,011 $ 37,824,519 $ 64,504,987 $ 97,563,113 $1,000,947,752 $845,376,480
============= ============ ============= ============ ============== ============
</TABLE>
See accompanying notes
41
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS AND PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
MANAGED SHORT-TERM BOND SMALL CAP VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------------------------- ------------------------------ ------------------------------
1998 1997 1998 1997 1998 1997
--------------- --------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in
net assets from
operations:
Net investment income
(loss) ............. $ 112,285,168 $ 104,459,573 $ 428,021 $ 285,235 $ (63,213) $ 497,830
Net realized gain
(loss) ............. 27,895,126 16,803,491 31,379 (28,515) 122,977 217,881
Net unrealized
appreciation
(depreciation)
during the period .. 82,785,078 70,181,655 (81,976) 50,859 (869,828) 142,670
--------------- --------------- ------------- ------------- ------------- -------------
Net increase
(decrease) in net
assets resulting from
operations .......... 222,965,372 191,444,719 377,424 307,579 (810,064) 858,381
From contractowner
transactions:
Net premiums from
contractowners ..... 40,593,974 38,902,658 11,757,019 1,859,772 4,654,942 6,113,599
Net benefits to
contractowners ..... (167,062,420) (133,155,425) (7,702,159) (2,348,008) (3,535,299) (1,522,285)
--------------- --------------- ------------- ------------- ------------- -------------
Net increase
(decrease) in net
assets from
contractowner
transactions ........ (127,050,936) (94,252,767) 4,054,860 (488,236) 1,119,643 4,591,314
--------------- --------------- ------------- ------------- ------------- -------------
Net increase
(decrease) in net
assets .............. 95,914,436 97,191,952 4,432,284 (180,657) 309,579 5,449,695
Net assets at
beginning of period.. 1,261,048,372 1,163,856,420 6,508,724 6,689,381 7,238,641 1,788,946
--------------- --------------- ------------- ------------- ------------- -------------
Net assets at end of
period .............. $ 1,356,962,808 $ 1,261,048,372 $ 10,941,008 $ 6,508,724 $ 7,548,220 $ 7,238,641
=============== =============== ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL OPPORTUNITIES EQUITY INDEX STRATEGIC BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------------------- -------------------------- --------------------------
1998 1997 1998 1997 1998 1997
-------------- ------------ ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Net investment income (loss) . . . . . $ (20,289) $ 7,459 $ 434,639 $ 355,006 $ 247,291 $ 188,176
Net realized gain . . . . . . . . . . 179,802 150,970 2,604,544 326,109 116,276 26,836
Net unrealized appreciation
(depreciation) during the period . . 335,531 (185,289) 2,092,450 1,818,762 (5,099) (25,510)
------------ ----------- ------------- ----------- ------------ -----------
Net increase (decrease) in net assets
resulting from operations . . . . . . 495,044 (26,860) 5,131,633 2,499,877 358,468 189,502
From contractowner transactions:
Net premiums from contractowners . . . 2,500,004 3,587,133 15,404,918 12,934,274 9,259,189 2,335,426
Net benefits to contractowners . . . . (2,274,545) (2,524,506) (11,721,106) (2,877,735) (5,006,441) (2,001,205)
------------ ----------- ------------- ----------- ------------ -----------
Net increase in net assets from
contractowner transactions . . . . . . 225,459 1,062,627 3,683,812 10,056,539 4,252,748 334,221
------------ ----------- ------------- ----------- ------------ -----------
Net increase in net assets . . . . . . 720,503 1,035,767 8,815,445 12,556,416 4,611,216 523,723
Net assets at beginning of period . . . 3,420,865 2,385,098 17,026,523 4,470,107 3,138,971 2,615,248
------------ ----------- ------------- ----------- ------------ -----------
Net assets at end of period . . . . . . $ 4,141,368 $ 3,420,865 $ 25,841,968 $17,026,523 $ 7,750,187 $ 3,138,971
============ =========== ============= =========== ============ ===========
</TABLE>
See accompanying notes.
42
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS AND PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
EMERGING
MARKETS GLOBAL SMALL/MID HIGH YIELD
EQUITY EQUITY BOND INDEX CAP CORE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ------------
1998* 1998* 1998* 1998* 1998*
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in
net assets from
operations:
Net investment income
(loss)................. $ 1 $ 3 $ 16 $ (8) $ 1,307
Net realized gain
(loss)................. -- -- -- -- (1)
Net unrealized
appreciation
(depreciation)
during the period...... 27 114 (21) 906 (920)
------ ------ ------ ------- --------
Net increase
(decrease) in net
assets resulting from
operations.............. 28 117 (5) 898 386
From contractowner
transactions:
Net premiums from
contractowners......... 3,156 4,980 1,140 22,937 209,432
Net benefits to
contractowners......... -- -- -- -- --
------ ------ ------ ------- --------
Net increase in net
assets from
contractowner
transactions............ 3,156 4,980 1,140 22,937 209,432
------ ------ ------ ------- --------
Net increase in net
assets.................. 3,184 5,097 1,135 23,835 209,818
Net assets at
beginning of period..... 0 0 0 0 0
------ ------ ------ ------- --------
Net assets at end of
period.................. $3,184 $5,097 $1,135 $23,835 $209,818
====== ====== ====== ======= ========
</TABLE>
- ---------
* From May 1, 1998 (commencement of operations).
See accompanying notes.
43
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION
John Hancock Variable Annuity Account U (the Account) is a separate investment
account of John Hancock Mutual Life Insurance Company (JHMLICO or John Hancock).
The Account was formed to fund variable annuity contracts (Contracts) issued by
JHMLICO. Currently, the Account funds the Accommodator and Independence Annuity
Contracts. The Account is operated as a unit investment trust registered under
the Investment Company Act of 1940, as amended, and currently consists of
twenty-three subaccounts. The assets of each subaccount are invested exclusively
in shares of a corresponding Portfolio of John Hancock Variable Series Trust I
(the Fund). New subaccounts may be added as new Portfolios are added to the Fund
or as other investment options are developed and made available to
contractowners. The twenty-three Portfolios of the Fund which are currently
available are Large Cap Growth, Sovereign Bond, International Equity Index
(formerly, International Equities), Small Cap Growth, International Balanced,
Mid Cap Growth, Large Cap Value, Money Market, Mid Cap Value, Diversified Mid
Cap Growth (formerly, Special Opportunities), Real Estate Equity, Growth &
Income, Managed, Short-Term Bond (formerly, Short-Term U.S. Government), Small
Cap Value, International Opportunities, Equity Index, Strategic Bond, Emerging
Markets Equity, Global Equity, Bond Index, Small/Mid Cap CORE and High Yield
Bond Subaccounts). Each Portfolio has a different investment objective.
The assets of the Account are the property of JHMLICO. The portion of the
Account's assets applicable to the Contracts may not be charged with liabilities
arising out of any other business JHMLICO may conduct.
2. SIGNIFICANT ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Valuation of Investments
Investment in shares of the Fund are valued at the reported net asset value of
the respective Portfolios. Investment transactions are recorded on the trade
date. Dividend income is recognized on the ex-dividend date. Realized gains and
losses on sales of Fund shares are determined on the basis of identified cost.
Federal Income Taxes
The operations of the Account are included in the federal income tax return of
JHMLICO, which is taxed as a life insurance company under the Internal Revenue
Code. JHMLICO has the right to charge the Account any federal income taxes, or
provisions for federal income taxes, attributable to the operations of the
Account or to the Contracts funded in the Account. Currently, John Hancock does
not make a charge for income or other taxes. JHMLICO retains the right to charge
the Account for any federal income taxes arising from changes in the tax law.
Charges for state and local taxes, if any, attributable to the Account may also
be made.
Expenses
JHMLICO assumes mortality and expense risks of the Contracts and provides
administrative services to the Account for which asset charges are deducted at
an annual rate of 1.00% and 1.40% of net assets of the Accommodator and
Independence Contracts, respectively.
JHMLICO makes certain other deductions from contractowner payments for premium
taxes, guaranteed minimum death benefit, sales charges on purchases
(Accommodator only) and the surrender fee and annual contract fee (Independence
only), which are accounted for as a reduction of net assets resulting from
contractowner transactions.
44
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. DETAILS OF INVESTMENTS
The details of the shares owned and cost and value of investments in the
Portfolios of the Fund at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNT SHARES OWNED COST VALUE
---------- ------------ -------------- ----------------
<S> <C> <C> <C>
Large Cap Growth........... 12,075,789 $ 214,583,421 $ 316,315,770
Sovereign Bond............. 28,318,789 280,911,468 280,967,846
International Equity
Index..................... 3,535,799 54,868,137 55,019,009
Small Cap Growth........... 764,496 8,604,971 9,928,937
International Balanced..... 141,980 1,507,756 1,579,447
Mid Cap Growth............. 632,017 8,106,788 9,553,252
Large Cap Value............ 705,746 9,108,253 9,894,762
Money Market............... 7,759,988 77,599,877 77,599,877
Mid Cap Value.............. 721,675 10,424,999 8,794,232
Diversified Mid Cap
Growth.................... 1,893,083 29,706,719 30,175,011
Real Estate Equity......... 5,177,054 65,468,280 64,504,987
Growth & Income............ 51,350,840 716,784,844 1,000,947,752
Managed.................... 86,783,322 1,159,413,480 1,356,962,808
Short-Term Bond............ 1,088,827 11,027,168 10,941,008
Small Cap Value............ 651,336 8,186,127 7,548,220
International
Opportunities............. 339,050 3,891,330 4,141,368
Equity Index............... 1,459,773 21,641,393 25,841,967
Strategic Bond............. 731,190 7,764,773 7,750,187
Emerging Markets Equity.... 449 3,156 3,184
Global Equity.............. 516 4,984 5,097
Bond Index................. 111 1,156 1,135
Small/Mid Cap CORE......... 2,643 22,929 23,835
High Yield Bond............ 22,729 210,738 209,818
</TABLE>
45
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Purchases, including reinvestment of dividend distributions, and proceeds from
sales of shares in the Portfolios of the Fund during 1998, were as follows:
<TABLE>
<CAPTION>
SUBACCOUNT PURCHASES SALES
---------- ------------ --------------
<S> <C> <C>
Large Cap Growth . . . . . . . . . $ 39,317,930 $ 23,579,785
Sovereign Bond . . . . . . . . . . 31,413,169 33,838,105
International Equity Index . . . . 9,530,642 10,117,006
Small Cap Growth . . . . . . . . . 5,221,760 7,191,823
International Balanced . . . . . . 467,245 889,069
Mid Cap Growth . . . . . . . . . . 6,390,199 3,845,090
Large Cap Value . . . . . . . . . 3,379,137 2,316,844
Money Market . . . . . . . . . . . 51,268,392 32,868,901
Mid Cap Value . . . . . . . . . . 5,028,687 4,970,388
Diversified Mid Cap Growth . . . . 1,148,761 9,855,167
Real Estate Equity . . . . . . . . 5,362,931 18,717,295
Growth & Income . . . . . . . . . 105,243,966 92,320,930
Managed . . . . . . . . . . . . . 131,717,861 146,483,628
Short-Term Bond . . . . . . . . . 11,068,216 6,585,336
Small Cap Value . . . . . . . . . 3,916,282 2,859,852
International Opportunities . . . 2,332,815 2,127,645
Equity Index . . . . . . . . . . . 13,233,690 9,115,241
Strategic Bond . . . . . . . . . . 8,947,636 4,447,598
Emerging Markets Equity . . . . . 3,157 1
Global Equity . . . . . . . . . . 4,985 1
Bond Index . . . . . . . . . . . . 1,157 1
Small/Mid Cap CORE . . . . . . . . 22,935 6
High Yield Bond . . . . . . . . . 210,839 100
</TABLE>
46
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. NET ASSETS
Accumulation shares attributable to net assets of contractowners and
accumulation share values for each subaccount at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
ACCOMMODATOR INDEPENDENCE
-------------------------- --------------------------
ACCUMULATION ACCUMULATION ACCUMULATION ACCUMULATION
SUBACCOUNT SHARES SHARE VALUES SHARES SHARE VALUES
---------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Large Cap Growth........ 169,917 $ 44.65 7,738,477 $39.90
Sovereign Bond.......... 1,594,988 52.00 10,563,708 18.68
International Equity
Index.................. 85,615 18.28 3,325,675 16.07
Small Cap Growth........ 31,804 12.67 759,660 12.54
International Balanced.. 6,703 12.58 120,080 12.45
Mid Cap Growth.......... 29,520 16.23 565,369 16.05
Large Cap Value......... 38,080 15.58 603,506 15.41
Money Market............ 754,395 24.58 4,372,907 13.42
Mid Cap Value........... 33,641 13.27 635,996 13.13
Diversified Mid Cap
Growth................. 69,766 11.85 1,616,390 18.16
Real Estate Equity...... 69,796 20.97 3,050,997 20.66
Growth & Income......... 1,716,718 184.73 18,399,870 37.01
Managed................. 852,132 28.66 51,298,898 25.98
Short-Term Bond......... 28,394 11.42 870,737 12.19
Small Cap Value......... 23,741 12.69 577,049 12.56
International
Opportunities.......... 9,264 12.28 331,522 12.15
Equity Index............ 71,549 18.97 1,304,418 18.77
Strategic Bond.......... 38,188 12.37 601,162 12.24
Emerging Markets
Equity................. 0 9.27 344 9.27
Global Equity........... 0 10.30 495 10.30
Bond Index.............. 0 10.01 113 10.00
Small/Mid Cap CORE...... 0 10.70 2,228 10.70
High Yield Bond......... 0 9.89 21,222 9.89
</TABLE>
The net assets attributable to JHMLICO represent JHMLICO's funds deposited in
the Account. At its discretion, these amounts may be transferred by JHMLICO to
its general account.
5. TRANSACTIONS WITH AFFILIATES
John Hancock acts as the distributor, principal underwriter and investment
advisor for the Fund.
Certain officers of the Account are officers and directors of JHMLICO or the
Fund.
47
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. IMPACT OF YEAR 2000 (UNAUDITED)
The John Hancock Variable Annuity Account U, along with John Hancock Mutual
Life Insurance Company, its ultimate parent (together, John Hancock), is
executing its plan to address the impact of the Year 2000 issues that result
from computer programs being written using two digits to reflect the year rather
than four to define the applicable year and century. Historically, the first two
digits were hardcoded to save memory. Many of the John Hancock's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in an information
technology (IT) system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities. In
addition, non-IT systems including, but not limited to, security alarms,
elevators and telephones are subject to malfunction due to their dependence on
embedded technology such as microcontrollers for proper operation. As described,
the Year 2000 project presents a number of challenges for financial institutions
since the correction of Year 2000 issues in IT and non-IT systems will be
complex and costly for the entire industry.
John Hancock began to address the Year 2000 project as early as 1994. John
Hancock's plan to address the Year 2000 Project includes an awareness campaign,
an assessment period, a renovation stage, validation work and an implementation
of Company solutions.
The continuous awareness campaign serves several purposes: defining the
problem, gaining executive level support and sponsorship, establishing a team
and overall strategy, and assessing existing information system management
resources. Additionally, the awareness campaign establishes an education process
to ensure that all employees are aware of the Year 2000 issue and knowledgeable
of their role in securing solutions.
The assessment phase, which was completed for both IT and non-IT systems as of
April 1998, included the identification, inventory, analysis, and prioritization
of IT and non-IT systems and processes to determine their conversion or
replacement.
The renovation stage reflects the conversion, validation, replacement, or
elimination of selected platforms, applications, databases and utilities,
including the modification of applicable interfaces. Additionally, the
renovation stage includes performance, functionality, and regression testing and
implementation. As of December 31, 1998, the renovation phase was substantially
complete for computer applications, systems and desktops. For all remaining
components the renovation phase is underway and will be complete before the end
of the second quarter of 1999.
The validation phase consists of the compliance testing of renovated systems.
The validation phase is expected to be complete by mid 1999, after renovation
is accomplished. John Hancock will use its testing facilities through the
remainder of 1999 to perform special functional testing. Special functional
testing includes testing, as required, with material third parties and industry
groups and to perform reviews of "dry run" of year-end activities. Scheduled
testing of John Hancock's material relationships with third parties is underway.
It is anticipated that testing with material business partners will continue
through much of 1999.
Finally, the implementation phase involves the actual implementation of
converted or replaced platforms, applications, databases, utilities, interfaces,
and contingency planning. John Hancock is concurrently performing implementation
during the renovation phase and plans to complete this phase before the end of
the second quarter of 1999.
48
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The costs of the Year 2000 project consist of internal IT personnel, and
external costs such as consultants, programmers, replacement software, and
hardware. The costs of the Year 2000 project are expensed as incurred. The
project is funded partially through a reallocation of resources from
discretionary projects. Through December 31, 1998, John Hancock has incurred and
expensed approximately $9.8 million in related payroll costs for its internal IT
personnel on the project. The estimated range of remaining internal IT personnel
costs of the project is approximately $8 to $9 million. Through December 31,
1998, John Hancock has incurred and expensed approximately $36.4 million in
external costs for the project. The estimated range of remaining external costs
of the project is approximately $35 to $36 million. The total costs of the Year
2000 project, based on management's best estimates, include approximately $18
million in internal IT personnel, $7.4 million in the external modification of
software, $34.2 million for external solution providers, $19.4 million in
replacement costs of non-compliant IT systems and $12.6 million in oversight,
test facilities and other expenses. Accordingly, the estimated range of total
costs of the Year 2000 project, internal and external, is approximately $90 to
$95 million. However, there can be no guarantee that these estimates will be
achieved and actual results could materially differ from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
John Hancock's total Year 2000 project costs include the estimated impact of
external solution providers and are based on presently available information.
However, there is no guarantee that the systems of other companies that John
Hancock's systems rely on will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with John Hancock's
systems, would not have material adverse effect on John Hancock. It is
documented in trade publications that companies in foreign countries are not
acting as intensively as domestic companies to remediate Year 2000 issues.
Accordingly, it is expected that Company facilities based outside the United
States face higher degrees of risks from data exchanges with material business
partners. In addition, John Hancock has thousands of individual and business
customers that hold insurance policies, annuities and other financial products
of John Hancock. Nearly all products sold by John Hancock contain date sensitive
data, examples of which are policy expiration dates, birth dates, premium
payment dates. Finally, the regulated nature of John Hancock's industry exposes
it to potential supervisory or enforcement actions relating to Year 2000 issues.
John Hancock's contingency planning initiative related to the Year 2000
project is underway. The plan is addressing John Hancock's readiness as well as
that of material business partners on whom John Hancock depends. John Hancock's
contingency plans are being designed to keep each business unit's operations
functioning in the event of a failure or delay due to the Year 2000 record
format and date calculation changes. Contingency plans are being constructed
based on the foundation of extensive business resumption plans that John Hancock
has maintained and updated periodically, which outline responses to situations
that may affect critical business functions. These plans also provide emergency
operations guidance, which defines a documented order of actions to respond to
problems. These extensive business resumption plans are being enhanced to cover
Year 2000 situations.
49
