<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999 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 (I.R.S. Employer incorporation
of organization) or Identification No.)
200 Clarendon Street, Boston, Massachusetts 02117
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617)572-8050
-------------
None
----
(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>
<S> <C>
Class Shares Outstanding at June 30, 1999
- ----- ------------------------------------
common stock, $50 par value 50,000
</TABLE>
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
--------------------------------------------
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Page
Item 1. Unaudited Financial Statements
Statements of Financial Position as of June 30,
1999 and December 31, 1998. . . . . . . . . . 1
Statements of Operations and Unassigned Deficit
for the Three Months and for the Six Months
Ended June 30, 1999 and 1998. . . . . . . . . 2
Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998. . . . . . . . . 3
Statements of Stockholder's Equity for the
Six Months Ended June 30, 1999 and 1998. . . 4
Condensed Notes to Financial Statements. . . 5
Item 2. Management's Discussion and Analysis. . 6
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . 14
</TABLE>
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
1999 1998
--------- --------------
(In millions)
<S> <C> <C>
ASSETS
Bonds . . . . . . . . . . . . . . . . . . . . . $1,241.8 $1,185.8
Preferred stocks . . . . . . . . . . . . . . . 33.2 36.5
Common stocks . . . . . . . . . . . . . . . . . 2.9 3.1
Investment in affiliates . . . . . . . . . . . 80.7 81.7
Mortgage loans on real estate . . . . . . . . . 415.9 388.1
Real estate . . . . . . . . . . . . . . . . . . 24.8 41.0
Policy loans . . . . . . . . . . . . . . . . . 155.0 137.7
Cash items:
Cash in banks . . . . . . . . . . . . . . . . (9.2) 11.4
Temporary cash investments . . . . . . . . . 1.8 8.5
-------------------------
(7.4) 19.9
Premiums due and deferred . . . . . . . . . . . 30.5 32.7
Investment income due and accrued . . . . . . . 34.6 29.8
Other general account assets . . . . . . . . . 22.0 47.5
Assets held in separate accounts . . . . . . . 7,421.3 6,595.2
-------- --------
TOTAL ASSETS . . . . . . . . $9,455.3 $8,599.0
======== ========
OBLIGATIONS AND STOCKHOLDER'S EQUITY
OBLIGATIONS
Policy reserves . . . . . . . . . . . . . . . . . $1,764.4 $1,652.0
Federal income and other taxes payable . . . . . 18.6 44.3
Other general account obligations . . . . . . . . 236.4 150.9
Transfers from separate account, net. . . . . . . (331.4) (190.3)
Asset valuation reserve . . . . . . . . . . . . . 24.4 21.9
Obligations related to separate accounts . . . . 7,415.1 6,589.4
-------- --------
TOTAL OBLIGATIONS . . . . . . 9,127.5 8,268.2
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 . . . . . . . . . . . . . . . (52.2) (49.2)
-------- --------
TOTAL STOCKHOLDER'S EQUITY . . 327.8 330.8
-------- --------
TOTAL OBLIGATIONS AND STOCKHOLDER'S EQUITY. $9,455.3 $8,599.0
======== ========
</TABLE>
See condensed notes to the financial statements (unaudited).
1
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND UNASSIGNED DEFICIT
<TABLE>
<CAPTION>
(Unaudited)
Three months ended Six months ended
June 30 June 30
-------------------- ---------------
1999 1998 1999 1998
--------- --------- ------ -------
(In millions)
<S> <C> <C> <C> <C>
INCOME
Premiums . . . . . . . . . . . . . . . . . . . . . . $ 228.6 $ 427.5 $452.2 $ 772.6
Net investment income. . . . . . . . . . . . . . . . 31.9 28.2 64.4 57.9
Other, net . . . . . . . . . . . . . . . . . . . . . 116.6 152.4 261.9 277.7
------- ------- ------ -------
377.1 608.1 778.5 1,108.2
BENEFITS AND EXPENSES
Payments to policyholders and beneficiaries . . . . 94.1 78.4 174.4 150.2
Additions to reserves to provide for future payments
to policyholders and beneficiaries . . . . . . . . 198.6 455.4 436.8 790.9
Expenses of providing service to policyholders and
obtaining new insurance. . . . . . . . . . . . . . 77.8 73.3 153.5 141.3
State and miscellaneous taxes . . . . . . . . . . . 8.1 9.3 10.9 17.5
------- ------- ------ -------
378.6 616.4 775.6 1,099.9
------- ------- ------ ------
GAIN FROM OPERATIONS BEFORE
FEDERAL INCOME TAXES AND NET
REALIZED CAPITAL LOSSES . . . (1.5) (8.3) 2.9 8.3
Federal income taxes. . . . . . . . . . . . . . . . . (1.4) (1.8) (0.4) 6.0
------- ------- ------- ------
GAIN FROM OPERATIONS BEFORE NET
REALIZED CAPITAL GAINS (LOSSES). (0.1) (6.5) 3.3 2.3
Net realized capital gains (losses) . . . . . . . . . 0.5 (0.4) (1.0) (0.9)
------- ------- ------ ------
NET INCOME. . 0.4 (6.9) 2.3 1.4
Unassigned deficit at beginning of year . . . . . . . (51.2) (48.1) (49.2) (58.3)
Net unrealized capital (losses) gains and other
adjustments . . . . . . . . . . . . . . . . . . . . (3.4) (0.3) (3.1) 2.5
Other reserves and adjustments . . . . . . . . . . . . 2.0 0.1 (2.2) (0.8)
------- ------- ------- -------
UNASSIGNED DEFICIT AT END OF YEAR . . $(52.2) $(55.2) $(52.2) $(55.2)
======= ======= ======= =======
</TABLE>
See condensed notes to the financial statements (unaudited).
2
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six months ended June 30
------------------------------
1999 1998
-------------- ----------------
(In millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Insurance premiums . . . . . . . . . . . . $ 452.0 $ 772.4
Net investment income . . . . . . . . . . 60.5 59.0
Benefits to policyholders and beneficiaries (274.6) (140.7)
Dividends paid to policyholders . . . . . (12.6) (10.9)
Insurance expenses and taxes . . . . . . . (195.0) (180.7)
Net transfers to separate accounts . . . . (343.7) (427.8)
Other, net . . . . . . . . . . . . . . . . 289.9 291.0
------- -------
NET CASH PROVIDED FROM OPERATIONS . . . (23.5) 362.3
------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Bond purchases . . . . . . . . . . . . . . (143.7) (352.2)
Bond sales . . . . . . . . . . . . . . . . 41.3 159.5
Bond maturities and scheduled redemptions 38.9 106.5
Bond prepayments . . . . . . . . . . . . . 8.0 0.0
Stock purchases . . . . . . . . . . . . . (0.2) (20.5)
Proceeds from stock sales . . . . . . . . 3.6 1.4
Real estate purchases . . . . . . . . . . (1.5) (1.6)
Real estate sales . . . . . . . . . . . . 17.9 1.3
Other invested assets purchases . . . . . (4.5) 0.0
Proceeds from the sale of other invested
assets . . . . . . . . . . . . . . . . . 0.0 0.2
Mortgage loans issued . . . . . . . . . . (39.4) (48.3)
Mortgage loan repayments . . . . . . . . . 11.4 14.8
Other, net . . . . . . . . . . . . . . . . 75.1 (359.6)
------- -------
NET CASH USED IN INVESTING ACTIVITIES . 6.9 (498.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term note payable . (10.7) 0.0
------- -------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES . . . . . . . . . . . . . . (10.7) 0.0
------- -------
(DECREASE) INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . (27.3) (136.2)
Cash and temporary cash investments at
beginning of year . . . . . . . . . . . . . 19.9 143.2
------- -------
CASH AND TEMPORARY CASH INVESTMENTS
AT END OF YEAR . . . . . . $ (7.4) $ 7.0
======= =======
</TABLE>
See condensed notes to the financial statements (unaudited).
3
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Paid-In Unassigned Total
Stock Capital Deficit
------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
For the three months ended June 30, 1998
(unaudited)
Balance at January 1, 1998 $2.5 $377.5 $(58.3) $321.7
1998 Transactions:
Net gain 1.4 1.4
Net unrealized capital gains and other
adjustments 2.5 2.5
Other reserves and adjustments (0.8) (0.8)
------------------------------------------------
Balance at June 30, 1998 $2.5 $377.5 $(55.2) $324.8
================================================
For the three months ended June 30, 1999
(unaudited)
Balance at January 1, 1999 $2.5 $377.5 $(49.2) $330.8
1999 Transactions:
Net gain 2.3 2.3
Net unrealized capital gains and other
adjustments (3.1) (3.1)
Other reserves and adjustments (2.2) (2.2)
-------------------------------------------------
Balance at June 30, 1999 $2.5 $377.5 $(52.2) $327.8
=================================================
</TABLE>
See condensed notes to the financial statements (unaudited).
4
<PAGE>
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 six months period ended June 30,1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
5
<PAGE>
ITEM 2. Management's Discussion and Analysis
MANAGEMENT DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
During the past six months, JHVLICO's total assets grew primarily due to
the growth in the total assets of the JHVLICO's separate accounts. Likewise,
its total obligations grew. Total shareholder's equity slightly decreased during
this period. The following chart shows a percentage growth in both total assets
and obligations, and a percentage decrease in total shareholder equity for the
six-month period ending June 30, 1999:
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(IN MILLIONS) % CHANGE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total assets - JHVLICO $ 9,455.3 $ 8,599.0 10.0%
- -------------------------------------------------------------------------------
Total assets - JHVLICO separate accounts $ 7,421.3 $ 6,595.2 12.5%
- -------------------------------------------------------------------------------
Total obligations - JHVLICO $ 9,127.5 $ 8,268.2 10.4%
- -------------------------------------------------------------------------------
Total obligations - JHVLICO separate accounts $ 7,415.1 $ 6,589.4 12.5%
- -------------------------------------------------------------------------------
Total shareholder's equity $ 327.8 $ 330.8 (0.9%)
- -------------------------------------------------------------------------------
</TABLE>
Separate account assets and liabilities consist primarily of the fund balances
associated with JHVLICO's variable life and annuity business. The asset
holdings include fixed income, equity growth, total return real estate, global,
and international mutual funds with liabilities representing amounts due to
policyholders.
INVESTMENTS
JHVLICO's bond portfolio remains highly diversified. It maintains the
diversity of its bond portfolio by
(1) investing in a wide variety of geographic regions and industry groups,
and
(2) limiting the size of individual investment relative to the total
portfolio.
JHVLICO invests new money predominantly in long-term investment grade corporate
bonds. As a result, 86.0% of JHVLICO's general account bonds were investment
grade bonds, and 10.2% were medium grade bonds as of June 30, 1999. The
corresponding percentages as of December 31, 1998, were 86.1% and 10.8%,
respectively. For medium grade bonds, JHVLICO invests mostly in private
placements that provide long-term financing for medium size companies. These
bonds typically are protected by individually negotiated financial covenants
and/or collateral. As of June 30, 1999, the remaining 3.8% of JHVLICO's total
general account bonds consisted of
6
<PAGE>
lower grade bonds and bonds in default. Bonds in default represent 0.5% of
JHVLICO's general account bonds.
Management believes JHVLICO's commercial mortgage lending practices
continue to be strong. JHVLICO generally makes mortgage loans against
properties with proven track records and high occupancy levels. Typically,
JHVLICO does not make construction or condominium loans nor lend more than 75%
of the property's value at the time of the loan. JHVLICO uses a computer based
mortgage risk analysis system in managing the credit risk related to its
mortgage loans.
JHVLICO has outstanding commitments to purchase long-term bonds and issue
real estate mortgages totaling $21.2 million and $13.2 million, respectively, at
June 30, 1999. The corresponding amounts at December 31, 1998 were $5.9 million
and $24.8 million, respectively. JHVLICO monitors the creditworthiness of
borrowers under long-term bond commitments and requires collateral as deemed
necessary. If funded, loans related to real estate mortgages would be fully
collateralized by the related properties. Most of the commitments at June 30,
1999 expire in 1999.
RESERVES AND OBLIGATIONS
JHVLICO's obligations consist primarily of aggregate reserves for life and
annuity policies and contracts. As of June 30, 1999, JHVLICO's general account
reserves totaled $1,764.4 million and its separate account obligations totaled
$7,415.1 million. As of December 31, 1998, the corresponding amounts were
$1,652.0 million and $6,589.4 million, respectively. JHVLICO computes these
liabilities in accordance with commonly accepted actuarial standards. Its
actuarial assumptions are in accordance with, or more conservative than, those
called for in state regulations. All reserves meet the requirements of
Massachusetts insurance laws.
Every year, JHVLICO performs reserve adequacy testing, usually during the
fourth quarter. Intensive asset adequacy testing was performed in 1998 for the
vast majority of reserves. During 1999 and 1998, JHVLICO made no refinements to
reserves.
JHVLICO's investment reserves include the asset valuation reserve ("AVR"),
and interest maintenance reserve ("IMR") required by the NAIC and state
insurance regulatory authorities. The AVR stabilizes 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 interest rate changes.
Each year, the amount of an insurer's AVR will fluctuate as the non-interest
related capital gains and/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 AVR reserve objective (as determined annually
according to the type and quality of an insurer's assets) and the actual AVR.
7
<PAGE>
JHVLICO includes the AVR in its obligations. Its AVR was $24.4 million at June
30, 1999, and $21.9 million as of December 31, 1998. During 1998, JHVLICO made
a voluntary contribution of $0.7 million to the AVR. Such contributions may
result in a slower rate of growth of, or a reduction to, shareholder's equity.
During 1999 there have been no voluntary contributions to the AVR. Changes in
the AVR are accounted for as direct increases or decreases in shareholder
equity. The impact of the AVR on JHVLICO's shareholder's equity position will
depend, in part, on JHVLICO's investment portfolio.
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. JHVLICO does not reflect these amounts in its
shareholder equity account but amortizes them into net investment income over
the estimated remaining lives of the investments disposed. At June 30, 1999 and
December 31, 1998, JHVLICO's IMR balance was $9.4 million and $10.7 million,
respectively. The impact of the IMR on JHVLICO's shareholder equity depends
upon the amount of future interest related capital gains and losses on fixed
income investments.
RESULTS OF OPERATIONS
For the six months ending June 30, 1999, net gain from operations, before
net realized capital gains/losses, totaled $3.3 million, $1.0 million higher
than the same period during 1998. For the quarter ending June 30, 1999, net gain
from operations, before net realized capital gains/ losses, totaled $(0.1)
million, $6.4 million higher than the same period during 1998. Even with the
surplus strain from sales of variable annuity business during 1999, operating
results have remained fairly stable compared to 1998. Decreased federal taxes
have also added to the increased operating gain.
For the six months ending June 30, 1999, total revenues decreased by 29.8%
(or $329.7 million) to $778.5 million as compared to the same period in 1998.
For the quarter ending June 30, 1999, total revenues decreased by 38.0% (or
$231.0 million) to $377.1 million as compared to the same period in 1998. For
the six months ending June 30, 1999, premium, net of premium ceded to
reinsurers, decreased by 41.5% (or $320.4 million) to $452.2 million as compared
to the same period during 1998. This decrease in premium is primarily due to
large ($310.0 million) single premium bank owned life insurance sales occurring
during the six months ending June 30, 1998, which have not recurred during the
six months ending June 30, 1999. For the quarter ending June 30, 1999, premium,
net of premium ceded to reinsurers, decreased by 46.5% (or $198.9 million) to
$228.6 million as compared to the same period during 1998. This decrease can
also be attributable to $180.0 million of bank owned life insurance sales
occurring during the quarter ending June 30, 1998 which have not recurred during
the quarter ending June 30, 1999. For the six months ending June 30, 1999 net
investment income increased by 11.2% (or $6.5 million) to $64.4 million as
compared to the same period during 1998. For the quarter ending June 30, 1999
net investment income increased by 13.1% (or $3.7 million) to $31.9 million as
compared to the same period during 1998. These increases can be attributed to an
increase in gross income on long-term bonds of $8.0 million and $5.9 million,
and real estate mortgages of $3.7 million and $1.8 million for the six and three
month periods ended June 30, 1999, respectively. The increases can both be
attributed to an increased asset base. For the six months ending June 30, 1999,
8
<PAGE>
and for the quarter ending June 30, 1999, other income decreased by $15.8
million and $35.8 million respectively compared to the same periods in 1998.
These decreases were primarily attributable to the decrease in reserve
adjustments on reinsurance ceded and lower separate account fee income.
For the six months ending June 30, 1999, total benefits and expenses
decreased by 29.5% (or $324.3 million) to $775.6 million as compared the same
period during 1998. For the quarter ending June 30, 1999, total benefits and
expenses decreased by 38.6% (or $237.8 million) to $378.6 million as compared
the same period during 1998. For the six months ending June 30, 1999, benefit
payments and additions to reserves decreased by 35.1% (or $329.9 million) to
$611.2 million as compared to same period during 1998. For the quarter ending
June 30, 1999, benefit payments and additions to reserves decreased by 45.2% (or
$241.1 million) to $292.7 million as compared to same period during 1998. These
decreases were primarily the result of a bank owned life insurance reserve
increase in the first half of 1998 of $310.9 million that did not recur in 1999.
For the six months ending June 30, 1999, insurance expenses increased by 8.6%
(or $12.2 million) to $153.5 million as compared to the same period during 1998.
For the quarter ending June 30, 1999, insurance expenses increased by 6.1% (or
$4.5 million) to $77.8 million as compared to the same period during 1998. This
consists of a $2.4 million decrease in commission expenses resulting from lower
sales, and a $6.9 million increase in the expenses of providing services to
policyholders.
LIQUIDITY AND CAPITAL RESOURCES
JHVLICO's liquidity resources for the period ending June 30, 1999 and
December 31, 1998 were as follows:
June 30, December 31,
1999 1998
---- ----
Type of investment (in millions)
<TABLE>
<CAPTION>
<S> <C> <C>
Cash and short-term investments $ (7.4) $ 19.9
-----------------------------------------------------------------
Public bonds $624.4 $461.9
-----------------------------------------------------------------
Investment grade private placement bonds $522.7 $619.9
-----------------------------------------------------------------
</TABLE>
In addition, JHVLICO's separate accounts are highly liquid and available to meet
most outflow needs for variable life insurance.
JHVLICO's management believes the liquidity resources above of $1,139.7
million as of June 30, 1999, strongly position JHVLICO to meet all its
obligations to policyholders and others. Funds provided by normal operations
generally satisfy JHVLICO's financing needs. As of June 30, 1999, JHVLICO has
$51.2 million note payable to an affiliate. The interest is paid on a variable
rate, and the principal is expected to be repaid by the end of the third quarter
of 1999. As of December 31, 1998, JHVLICO had $61.9 million in outstanding
borrowings from an affiliate.
9
<PAGE>
Total surplus, also known as stockholder's equity, plus the AVR, amounted
to $352.2 million as of June 30, 1999, and $352.7 million as of December 31,
1998. The current statutory accounting treatment of taxes for deferred
acquisition costs ("DAC taxes") currently results in a reduction to JHVLICO's
surplus. This reduction will persist during periods of growth in new business.
DAC taxes result from federal income tax law that approximates acquisition
expenses, and then spreads the corresponding tax deduction over a period of
years. As a result, the DAC tax is collected immediately and subsequently
returned through tax deductions in later years.
Since it began operations, JHVLICO 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 was credited to capital stock as of June 30,
1999. In 1993, JHVLICO returned $1.8 million of capital to John Hancock. To
support JHVLICO's operations, for the indefinite future, John Hancock will
continue to make capital contributions, if necessary, to ensure that JHVLICO
maintains a shareholder's equity of at least $1.0 million. JHVLICO's
stockholder's equity, net of unassigned deficit, amounted to $327.8 million at
June 30, 1999, and $330.8 million at December 31, 1998.
In December, 1992, the NAIC approved risk-based capital ("RBC") standards
for life insurance companies. It also approved a model act (the "RBC Model
Act") to apply such standards at the state level. The RBC Model Act requires
life insurers to submit an annual RBC report comparing JHVLICO's total adjusted
capital (statutory surplus plus AVR, voluntary investment reserves, and one-half
the apportioned dividend liability) with its risk-based capital as calculated by
an RBC formula. The formula takes into account the risk characteristics of the
company's investments and products. Insurance regulators use the formula as an
early warning tool to identify possible weakly capitalized companies for
purposes of initiating further regulatory action, not as a means to rank
insurers. As of June 30, 1999, JHVLICO's total adjusted capital as defined by
the NAIC was well in excess of the RBC standards.
YEAR 2000 IMPACT
JHVLICO relies on John Hancock Mutual Life Insurance Company (John
Hancock), its parent company, for information processing services. 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 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, cause settlements of trades to fail, lead to incomplete or
inaccurate accounting, recording or processing trades in securities, 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.
10
<PAGE>
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 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. Those systems which in the event of a Year 2000 failure would have
the greatest impact on John Hancock's operations were deemed to be mission
critical and prioritized accordingly. The systems which in the event of a Year
2000 failure would cause minimal disruption to John Hancock's operations were
classified as non-mission critical.
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. The renovation phase for mission critical systems has been
completed. Similarly, most of the non-mission critical systems have been
renovated and the remaining systems are expected to be renovated by the third
quarter of 1999.
The validation phase consists of the compliance testing of renovated systems.
The validation phase for mission critical systems has been completed.
Similarly, the majority of non-mission critical systems have been validated
and the remaining systems are expected to be validated by the third quarter of
1999. 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.
Finally, the implementation phase involves the actual implementation of
converted or replaced platforms, applications, databases, utilities, interfaces,
and contingency planning. Mission critical systems and most non-mission
critical systems have been implemented. The few remaining non-mission critical
systems are expected to be implemented by the third quarter of 1999.
John Hancock faces the risk that one or more of its business partners or
customers with whom it has a material relationship will not be able to interact
with its systems due to third party's failures to resolve its own Year 2000
issues, including those associated with its own external relationships. John
Hancock has completed an inventory of third party relationships and prioritized
each third party relationship based upon the potential business impact,
available alternatives and cost of substitution. In the case of
mission-critical business partners such as banks, financial intermediaries such
as stock exchanges, mutual fund companies and recordkeepers, IT vendors,
telecom-
11
<PAGE>
munications providers and other utilities, and financial market data providers,
trading counterparties, depositories, clearing agencies and clearing houses,
John Hancock is engaged in discussions with third parties and are obtaining
detailed information as to those parties' Year 2000 plans and state of
readiness. 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. However, there is no
guarantee that the systems of other companies, upon which John Hancock's systems
rely, 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
a material adverse effect on John Hancock.
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 June 30, 1999, John Hancock has incurred and expensed approximately
$15.3 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 $2.5 to $3.5 million. Through June 30, 1999, John
Hancock has incurred and expensed approximately $48 million in external costs
for the project. The estimated range of remaining external costs of the project
is approximately $23.5 to $24.8 million. The total costs of the Year 2000
project to John Hancock, 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 to John Hancock, 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 based on presently available
information.
It is documented in trade publications that the Year 2000 in foreign countries
is not being as actively addressed as in the United States. Accordingly, it is
expected that JHVLICO facilities based outside the United States face higher
degrees of Year 2000 related risk. In addition, JHVLICO has numerous customers
that hold its products. Nearly all products sold by JHVLICO contain date
sensitive data, examples of which are policy expiration dates, birth dates,
premium payment dates. Finally, the regulated nature of JHVLICO's industry
exposes it to potential supervisory or enforcement actions relating to Year 2000
issues.
If the Year 2000 issues were unresolved potential consequences would include,
among other possibilities, the inability to accurately and timely process
claims, update customers' accounts, process financial transactions, bill
customers, assess exposure to risks, determine liquidity requirements or report
accurate data to management, customers, regulators and others, as well as
business interruptions or shutdowns, including, in the case of third party
financial intermediaries such as stock exchanges and clearing agents, failed
trade settlements, inability to trade in certain markets and disruption of
funding flows; financial losses; reputational harm; increased scrutiny
12
<PAGE>
by regulators; and litigation related to Year 2000 issues. John Hancock is
attempting to limit the potential impact of the Year 2000 by monitoring the
progress of its own Year 2000 project and those of material business partners
and by developing contingency plans. However, John Hancock cannot guarantee
that it will be able to resolve all of the Year 2000 issues. Any critical
unresolved Year 2000 issues, however, could have a material adverse effect on
JHVLICO's results of operations, liquidity or financial condition or net income.
John Hancock's contingency planning initiative related to the Year 2000 project
is underway. The contingency plans address John Hancock's readiness as well as
that of material business partners on whom John Hancock and JHVLICO depend.
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.
13
<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.
14
<PAGE>
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: August 13, 1999 /s/ Thomas J. Lee
-----------------
Thomas J. Lee
Vice President
Date: August 13, 1999 /s/ Patrick F. Smith
--------------------
Patrick F. Smith
Controller
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF FINANCIAL POSITION AND THE STATEMENTS OF OPERATIONS AND UNASSIGNED
DEFICIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 1,242,033,780
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 116,789,936
<MORTGAGE> 415,927,088
<REAL-ESTATE> 24,792,423
<TOTAL-INVEST> 1,799,543,227
<CASH> (7,449,538)
<RECOVER-REINSURE> 382,866
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 9,455,323,503
<POLICY-LOSSES> 1,779,134,485
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 28,165,401
<NOTES-PAYABLE> 51,168,673
0
0
<COMMON> 2,500,000
<OTHER-SE> 325,342,718
<TOTAL-LIABILITY-AND-EQUITY> 9,455,323,503
452,275,781
<INVESTMENT-INCOME> 64,412,527
<INVESTMENT-GAINS> (1,007,710)
<OTHER-INCOME> 261,862,698
<BENEFITS> 611,113,402
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,955,213
<INCOME-TAX> (378,747)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,333,960
<EPS-BASIC> 0
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<PROVISION-CURRENT> 0
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