-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SdGjQNp8nX+HdOIeL8vMjJVOLqcpDbpzFxRE5turwwRuPHsT9G71UnZ5S8m9bc0t /o23N9eiu25IwsfSEYFlkw== 0000755110-99-000013.txt : 19990816 0000755110-99-000013.hdr.sgml : 19990816 ACCESSION NUMBER: 0000755110-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN VARIABLE LIFE INSURANCE CO CENTRAL INDEX KEY: 0000755110 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 042664016 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-62895 FILM NUMBER: 99687102 BUSINESS ADDRESS: STREET 1: 200 CLARENDON ST STREET 2: P O BOX 111 T-55 CITY: BOSTON STATE: MA ZIP: 02117-0111 BUSINESS PHONE: 6175729687 MAIL ADDRESS: STREET 1: 200 CLARENDON ST STREET 2: P O BOX 111 T-55 CITY: BOSTON STATE: MA ZIP: 02117-0111 10-Q 1 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 ------------- ---------- (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.
Class Shares Outstanding at June 30, 1999 - ----- ------------------------------------ common stock, $50 par value 50,000
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY -------------------------------------------- FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
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
PART I. FINANCIAL INFORMATION ITEM 1. Unaudited Financial Statements JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY STATEMENTS OF FINANCIAL POSITION
(Unaudited) June 30 December 31 1999 1998 --------- -------------- (In millions) 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 ======== ========
See condensed notes to the financial statements (unaudited). 1 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND UNASSIGNED DEFICIT
(Unaudited) Three months ended Six months ended June 30 June 30 -------------------- --------------- 1999 1998 1999 1998 --------- --------- ------ ------- (In millions) 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) ======= ======= ======= =======
See condensed notes to the financial statements (unaudited). 2 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS
(Unaudited) Six months ended June 30 ------------------------------ 1999 1998 -------------- ---------------- (In millions) 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 ======= =======
See condensed notes to the financial statements (unaudited). 3 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY STATEMENTS OF STOCKHOLDERS' EQUITY
Common Paid-In Unassigned Total Stock Capital Deficit ------------------------------------------------ (In millions) 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 =================================================
See condensed notes to the financial statements (unaudited). 4 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 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
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%) - -------------------------------------------------------------------------------
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 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 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 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)
Cash and short-term investments $ (7.4) $ 19.9 ----------------------------------------------------------------- Public bonds $624.4 $461.9 ----------------------------------------------------------------- Investment grade private placement bonds $522.7 $619.9 -----------------------------------------------------------------
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 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 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 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 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 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 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 EX-27 2
7 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. 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,242,033,780 0 0 116,789,936 415,927,088 24,792,423 1,799,543,227 (7,449,538) 382,866 0 9,455,323,503 1,779,134,485 0 0 28,165,401 51,168,673 0 0 2,500,000 325,342,718 9,455,323,503 452,275,781 64,412,527 (1,007,710) 261,862,698 611,113,402 0 0 1,955,213 (378,747) 0 0 0 0 2,333,960 0 0 0 0 0 0 0 0 0
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