<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 5(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997 Commission File No. 33-62895
- -------------------------------------------------------------------------
John Hancock Variable Life Insurance Company
--------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2664016
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
200 Clarendon Street, Boston, Massachusetts 02117
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(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (617)572-9196
-------------
None
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(Former name, former address, and former fiscal year if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes X No
- -
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Shares Outstanding
Class at September 30, 1997
----- ---------------------
<S> <C>
common stock, 50,000
$50 par value
</TABLE>
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
--------------------------------------------
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Statements of Financial
Position as of September 30, 1997
and December 31, 1996 . . . . . . . . 2
Statements of Operations and
Unassigned Deficit for the
Three and Nine Months Ended
September 30, 1997 and 1996 . . . . . . . . 3
Statements of Cash Flows
for the Nine Months Ended
September 30, 1997 and 1996 . . . . . . . . 4
Statements of Stockholder's Equity
for the Nine Months Ended
September 30, 1997 and 1996 . . . . . . . . 5
Condensed Notes to Financial
Statements . . . . . . . . 6
Item 2. Management's Discussion
and Analysis . . . . . . . . 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 10
</TABLE>
SIGNATURES
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
1997 1996
------------------------
(In millions)
<S> <C> <C>
ASSETS
Bonds $ 899.9 $ 753.5
Preferred stocks 17.4 9.6
Common stocks 4.3 1.4
Investment in affiliates 78.7 72.0
Mortgage loans on real
estate 245.5 212.1
Real estate 40.0 38.8
Policy loans 101.5 80.8
Cash and temporary cash
investments 0.0 31.9
Premiums due and deferred 33.2 36.8
Investment income due and
accrued 25.7 22.6
Other general account assets 13.5 17.8
Assets held in separate
accounts 4,430.7 3,290.5
-----------------------
TOTAL ASSETS $5,890.4 $4,567.8
=======================
OBLIGATIONS AND STOCKHOLDER'S EQUITY
OBLIGATIONS
Policy reserves $ 932.2 $ 877.8
Federal income and other
taxes payable 29.9 29.4
Other accrued expenses 164.7 75.1
Asset valuation reserve 18.1 16.6
Obligations related to
separate accounts 4,425.4 3,285.8
------------------------
TOTAL OBLIGATIONS 5,570.3 4,284.7
STOCKHOLDER'S EQUITY
Common Stock, $50 par
value; authorized 50,000
shares; issued and
outstanding 50,000 shares 2.5 2.5
Paid-in capital 377.5 377.5
Unassigned deficit (59.9) (96.9)
------------------------
TOTAL STOCKHOLDER'S EQUITY 320.1 283.1
------------------------
TOTAL OBLIGATIONS AND
STOCKHOLDER'S EQUITY $5,890.4 $4,567.8
========================
</TABLE>
See condensed notes to the financial statements (unaudited).
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND UNASSIGNED DEFICIT
<TABLE>
<CAPTION>
(Unaudited)
Three months ended Nine months ended
September 30 September 30
------------------------------------------
1997 1996 1997 1996
---------- -------- -------- --------
(In millions)
<S> <C> <C> <C> <C>
INCOME
Premiums $224.8 $ 198.1 $644.8 $ 683.5
Net investment income 22.5 20.7 64.1 56.6
Other, net 96.9 26.8 267.3 100.8
-----------------------------------------
344.2 245.6 976.2 840.9
BENEFITS AND EXPENSES
Payments to policyholders and
beneficiaries 64.3 57.3 181.3 175.4
Additions to reserves to provide for
future payments to policyholders and
beneficiaries 214.4 141.2 578.7 483.3
Expenses of providing service to
policyholders and obtaining new
insurance 46.8 32.4 148.2 127.2
State and miscellaneous taxes 4.0 2.9 13.8 11.0
-----------------------------------------
329.5 233.8 922.0 796.9
-----------------------------------------
GAIN FROM OPERATIONS
BEFORE FEDERAL INCOME TAXES
AND NET REALIZED CAPITAL GAINS (LOSSES) 14.7 11.8 54.2 44.0
Federal income taxes 10.2 8.0 27.2 24.6
-----------------------------------------
GAIN FROM OPERATIONS
BEFORE NET REALIZED CAPITAL
GAINS (LOSSES) 4.5 3.8 27.0 19.4
Net realized capital gains (losses) (0.2) 0.8 (0.2) (0.2)
-----------------------------------------
NET GAIN 4.3 4.6 26.8 19.2
Unassigned deficit at beginning of
period (70.5) (114.8) (96.9) (131.3)
Net unrealized capital gains (losses)
and other adjustments (0.2) 0.8 4.3 2.0
Change in reserves on account of change
in valuation basis 6.7 0.0 6.7 0.0
Other reserves and adjustments (0.2) (2.0) (0.8) (1.3)
-----------------------------------------
UNASSIGNED DEFICIT AT END OF PERIOD $(59.9) $(111.4) $(59.9) $(111.4)
=========================================
</TABLE>
See condensed notes to the financial statements (unaudited).
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
September 30
------------------
1997 1996
-------- --------
(In millions)
<S> <C> <C>
Cash flows from operating activities:
Insurance premiums $ 650.0 $ 688.7
Net investment income 61.9 55.4
Benefits to policyholders and
beneficiaries (169.2) (162.1)
Dividends paid to policyholders (13.7) (11.6)
Insurance expenses and taxes (189.4) (137.2)
Net transfers to separate accounts (513.9) (369.3)
Other, net 262.0 62.8
-------------------
NET CASH PROVIDED FROM OPERATIONS 87.7 126.7
-------------------
Cash flows used in investing activities:
Bond purchases (297.8) (420.3)
Bond sales 76.7 168.8
Bond maturities and scheduled
redemptions 36.7 20.8
Bond prepayments 45.2 18.7
Stock purchases (15.7) (1.5)
Proceeds from stock sales 6.2 0.3
Real estate purchases (0.9) (6.5)
Real estate sales 0.1 0.2
Other invested assets purchases 0.0 (0.2)
Proceeds from the sale of other
invested assets 0.0 1.0
Mortgage loans issued (59.3) (17.5)
Mortgage loan repayments 25.0 10.1
Other, net 64.2 22.8
-------------------
NET CASH USED IN INVESTING ACTIVITIES (119.6) (203.3)
-------------------
DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS (31.9) (76.6)
Cash and temporary cash investments at
beginning of year 31.9 76.6
-------------------
CASH AND TEMPORARY CASH INVESTMENTS
AT THE END OF PERIOD $ 0.0 $ 0.0
===================
</TABLE>
See condensed notes to the financial statements (unaudited).
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Paid-in Unassigned
Stock Capital Deficit Total
--------------------------------------
(In millions)
<S> <C> <C> <C> <C>
For the nine months ended
September 30, 1996 (unaudited)
Balance at January 1, 1996 $2.5 $377.5 $(131.3) $248.7
1996 Transactions:
Net gain 19.2 19.2
Net unrealized capital gains and
other adjustments 2.0 2.0
Other reserves and adjustments (1.3) (1.3)
--------------------------------------
Balance at September 30, 1996 $2.5 $377.5 $(111.4) $268.6
======================================
For the nine months ended
September 30, 1997 (unaudited)
Balance at January 1, 1997 $2.5 $377.5 $ (96.9) $283.1
1997 Transactions:
Net gain 26.8 26.8
Net unrealized capital gains and
other adjustments 4.3 4.3
Change in reserves on account of
changes in valuation basis 6.7 6.7
Other reserves and adjustments (0.8) (0.8)
--------------------------------------
Balance at September 30, 1997 $2.5 $377.5 $ (59.9) $320.1
======================================
</TABLE>
See condensed notes to the financial statements (unaudited).
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared on
the basis of 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, which practices differ from
generally accepted accounting principles (GAAP). Pursuant to Financial
Accounting Standard Board Interpretation 40, "Applicability of General Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises" (FIN 40),
as amended which was effective for 1996 financial statements, financial
statements based on statutory accounting practices can no longer be described as
prepared in conformity with GAAP.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
As of September 30, 1997, total assets grew by 29.0% to $5,890.4 million,
from $4,567.8 million at December 31, 1996. This increase is principally due to
the growth in the separate accounts where assets increased by 34.7% during 1997
from $3,290.5 million at December 31, 1996, to $4,430.7 million at September 30,
1997. Total obligations grew by 30.0% to $5,570.3 million from $4,284.7 million
at December 31, 1996. As with assets, most of this growth was in the separate
accounts, which grew by 34.7% during 1997, from $3,285.8 million at December 31,
1996, to $4,425.4 million at September 30, 1997. Separate account assets and
liabilities consist primarily of the fund balances associated with variable life
and annuity business. The asset holdings include fixed income, equity growth,
total return real estate, and global mutual funds, with liabilities representing
amounts due to policyholders. Total stockholder's equity grew by 13.1% from
$283.1 million at December 31, 1996, to $320.1 million at September 30, 1997.
Investments
The Company continues to address industry wide issues of asset quality and
liquidity that have emerged in recent years. JHVLICO's bond portfolio is highly
diversified. It maintains diversity by geographic region, industry group, and
limiting the size of individual investments relative to the total portfolio.
The Company's holdings in investment (NAIC SVO classes 1 and 2) and medium (NAIC
SVO class 3) grade bonds are 89.6% and 7.9%, respectively, of total general
account bonds at September 30, 1997. The corresponding percentages at December
31, 1996 were 90.5% and 7.2%, respectively. Most of the medium grade bonds are
private placements that provide long-term financing for medium size companies.
These bonds typically are protected by individually negotiated financial
covenants and/or collateral. At September 30, 1997, the balance (NAIC SVO
classes 4, 5, and 6) of 2.5% of total general account bonds consists of lower
grade bonds and bonds in default. Bonds in default represent 0.8% of total
general account bonds.
Management believes the Company's commercial mortgage lending philosophy and
practices are sound. The Company generally makes mortgage loans against
properties with proven track records and high occupancy levels, and typically
does not make construction or condominium loans nor lend more than 75% of the
property's value at the time of the loan. To assist in the management of its
mortgage loans, the Company uses a computer-based mortgage risk analysis system.
The Company has outstanding commitments to purchase long-term bonds, and
issue real estate mortgages totaling $46.8 million, $20.1 million, respectively
at September 30, 1997. The corresponding amounts at December 31, 1996 were
$42.1 million, and $33.5 million, respectively. The Company monitors the
creditworthiness of borrowers under long-term bond commitments and requires
collateral as deemed necessary. The majority of these commitments expire in
1997 and 1998.
Reserves and Obligations
The Company's obligations principally consist of aggregate reserves for life
policies and contracts of $932.2 million in the general account and obligations
of $4,425.4 million in the separate accounts at September 30, 1997. The
corresponding amounts at December 31, 1996 were $877.8 million and $3,285.8
million, respectively. These liabilities are computed in accordance with
commonly accepted actuarial standards and are based on actuarial assumptions
which are in accordance with, or more conservative than, those called for in
state regulations. All reserves meet the requirements of the insurance laws of
the Commonwealth of Massachusetts. Intensive asset adequacy testing was
performed in 1996 for the vast majority of reserves. As a result of that
testing, no additional reserves were established. Adequacy testing is done
annually and generally performed in the fourth quarter.
<PAGE>
The Company's investment reserves include the Asset Valuation Reserve ("AVR")
required by the NAIC and state insurance regulatory authorities. The AVR is
included in the Company's obligations. At September 30, 1997, and December 31,
1996, the AVR was $18.1 million and $16.6 million, respectively. Since 1995,
there have been no voluntary contributions made to the AVR. Management believes
the Company's level of reserve is adequate.
The AVR was established to stabilize statutory surplus from non-interest
related fluctuations in the market value of bonds, stocks, mortgage loans, real
estate and other invested assets. The AVR generally captures realized and
unrealized capital gains or losses on such assets, other than those resulting
from changes in interest rates. Each year, the amount of an insurer's AVR will
fluctuate as capital gains or losses are absorbed by the reserve. To adjust for
such changes over time, an annual contribution must be made to the AVR equal to
20% of the difference between the maximum AVR (as determined annually according
to the type and quality of an insurer's assets) and the actual AVR. The AVR
provisions permitted a phase-in period whereby the required contribution was 10%
in 1992, 15% in 1993, and the full 20% factor thereafter.
Such contributions may result in a slower rate of growth of, or a reduction
to, surplus. Changes in the AVR are accounted for as direct increases or
decreases in surplus. The impact of the AVR on the surplus position of John
Hancock in the future will depend in part on the composition of the Company's
investment portfolio.
The Interest Maintenance Reserve ("IMR") captures realized capital gains and
losses (net of taxes) on fixed income investments (primarily bonds and mortgage
loans) resulting from changes in interest rate levels. These amounts are not
reflected in the Company's capital account and are amortized into net investment
income over the estimated remaining lives of the investments disposed. At
September 30, 1997 and December 31, 1996 the balance of the IMR was $7.3
million and $5.9 million, respectively. The impact of the IMR on the surplus of
the Company depends upon the amount of future interest related capital gains and
losses on fixed income investments.
Results of Operations
For the nine months ending September 30, 1997, the net gain from operations
was $26.8 million, $7.6 million higher than the same period during 1996. For the
quarter ending September 30, 1997, the net gain from operations was $4.3
million, $0.3 million lower than the same period during 1996.
For the nine months ending September 30, 1997, total revenues increased by
16.1%, or $135.3 million to $976.2 million as compared to the same period during
1996. For the quarter ending September 30, 1997, total revenues increased by
40.1%, or $98.6 million as compared to the same period in 1996. For the nine
months ending September 30, 1997, premiums, net of premium ceded to reinsurers,
decreased by 5.7%, or $38.7 million to $644.8 million as compared to the same
period during 1996. For the quarter ending September 30, 1997 premiums, net of
premium ceded to reinsurers, increased by 13.5% or $26.7 million as compared to
the same period during 1996. The nine months decrease in premium income is
primarily due to the reinsurance of 50% of the 1997 annuity deposits with the
parent company. The reinsurance agreement was put in place in the fourth quarter
of 1996 and covers annuity deposits from January 1, 1995 forward. For the nine
months ending September 30, 1997, net investment income increased by 13.3% or
$7.5 million to $64.1 million as compared to the same period during 1996. For
the quarter ending September 30, 1997, net investment income increased by 8.7%
or $1.8 million as compared to the same period during 1996. These increases can
be primarily attributed to an increased asset base. For the nine months ending
September 30, 1997, and for the quarter ending September 30, 1997, other income
increased by $166.5 million and $70.1 million respectively compared to the same
periods in 1996. These increases were primarily attributable to the increase in
commission and expense allowances and reserve adjustments on reinsurance ceded.
<PAGE>
For the nine months ending September 30, 1997, total benefits and expenses
increased by 15.7% or $125.1 million to $922.0 million as compared to the same
period during 1996. For the quarter ending September 30, 1997 total benefits and
expenses increased by 40.9% or $95.7 million as compared to the same period
during 1996. For the nine months ending September 30, 1997, benefit payments and
additions to reserves increased by 15.4% or $101.3 million to $760.0 million as
compared to the same period during 1996. For the quarter ending September 30,
1997, benefit payments and additions to reserves increased by 40.4% or $80.2
million as compared to the same period during 1996. For the nine months ending
September 30, 1997, insurance expenses increased by 16.5% or $21.0 million to
$148.2 million as compared to the same period during 1996. For the quarter
ending September 30, 1997, insurance expenses increased by 44.4% or $14.4
million as compared to the same period during 1996. These increases in insurance
expenses were attributable largely to commission expense resulting from the sale
of new business.
Liquidity and Capital Resources
The Company's liquidity resources at September 30, 1997, include cash and
short-term investments of $0.0 million, public bonds of $375.2 million, and
investment grade private placement bonds of $462.1 million. The corresponding
amounts at December 31, 1996 were $31.9 million, $263.2 million, and $439.7
million, respectively. In addition, the Company's separate accounts are highly
liquid and are available to meet most outflow needs for variable life insurance.
Management believes the liquidity resources above of $837.3 million as of
September 30, 1997, strongly position the Company to meet all its obligations to
policyholders and others. Generally, the Company's financing needs are met by
means of funds provided by normal operations. As of September 30, 1997 and year
end 1996, the Company had no outstanding borrowings from sources outside its
affiliated group.
Total surplus, or stockholder's equity, including the AVR, is $338.2 million
as of September 30, 1997 compared to $299.7 million as of December 31, 1996. The
current statutory accounting treatment of deferred acquisition cost ("DAC")
taxes results in an understatement of the Company's surplus, which will persist
during periods of growth in new business written. These taxes result from
federal income tax law that approximates acquisition expenses and then spreads
the corresponding tax deduction over a period of years. The result is a DAC tax
which is collected immediately and subsequently returned through tax deduction
in later years.
Since it began its operations, the Company has received a total of $381.8
million in capital contributions from John Hancock, of which $377.5 million is
credited to paid-in capital and $2.5 million is credited to capital stock as of
September 30, 1997. In 1993, $1.8 million of capital was returned to John
Hancock. To support the Company's operations, for the indefinite future, John
Hancock is committed to make additional capital contributions if necessary to
ensure that the Company maintains a positive net worth. The Company's
stockholder's equity, net of unassigned deficit, was $320.1 million at September
30, 1997 and $283.1 million at December 31, 1996.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Sheet
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
John Hancock Variable
Life Insurance Company
----------------------------
(Registrant)
Date: November 12, 1997 /s/ Thomas J. Lee
----------------- ----------------------------
Vice President
Date: November 12, 1997 /s/ Paula M. Pashko
----------------- ----------------------------
Assistant Controller
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
FINANCIAL POSITION, STATEMENT OF OPERATIONS AND UNASSIGNED DEFICIT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 899,868,327
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 100,323,352
<MORTGAGE> 245,462,996
<REAL-ESTATE> 40,012,365
<TOTAL-INVEST> 1,285,667,040
<CASH> 0
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 5,890,394,515
<POLICY-LOSSES> 1,075,902,987
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 22,459,243
<NOTES-PAYABLE> 11,371,257
0
0
<COMMON> 2,500,000
<OTHER-SE> 317,625,127
<TOTAL-LIABILITY-AND-EQUITY> 5,890,394,515
644,848,831
<INVESTMENT-INCOME> 64,095,187
<INVESTMENT-GAINS> (219,208)
<OTHER-INCOME> 267,340,506
<BENEFITS> 760,022,831
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 54,030,759
<INCOME-TAX> 27,201,703
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,829,056
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
