10-Q 1 d01-35026.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 Commission File Number: 33-62895 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Exact name of registrant as specified in charter MASSACHUSETTS 04-2664016 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 200 Clarendon Street Boston, Massachusetts 02117 (Address of principal executive offices) (617) 572-6000 (Registrant's telephone number, including area code) 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) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Number of shares outstanding of our only class of common stock as of November 9, 2001: 50,000 1 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS -- (CONTINUED)

The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME

The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME

The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these unaudited consolidated financial statements. 7 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1 -- Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements of John Hancock Variable Life Insurance Company (the Company), a wholly-owned subsidiary of John Hancock Life Insurance Company (John Hancock or the Parent), have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these unaudited consolidated financial statements contain all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These unaudited consolidated financial statements should be read in conjunction with the Company's annual audited financial statements as of December 31, 2000 included in the Company's Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission (hereafter referred to as the Company's 2000 Form 10-K). Prior to 2000, the Company did not prepare its financial statements in accordance with accounting principles generally accepted in the United States and financial information on such basis currently is not readily available for earlier periods. Comparative financial statements for 1999 and 1998 prepared on a statutory-basis are included in the Company's 2000 Form 10-K. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Reorganization and Initial Public Offering Pursuant to a Plan of Reorganization approved by its policyholders and the Commonwealth of Massachusetts Division of Insurance, effective February 1, 2000, John Hancock converted from a mutual life insurance company to a stock life insurance company (i.e., demutualized) and became a wholly-owned subsidiary of John Hancock Financial Services, Inc., which is a holding company. In connection with the reorganization, John Hancock changed its name to John Hancock Life Insurance Company. In addition, on February 1, 2000, John Hancock Financial Services, Inc. completed its initial public offering and 102 million shares of common stock were issued at an initial public offering price of $17 per share. Cumulative Effect of Accounting Change In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement 133." This Statement amends SFAS No. 133 to defer its effective date for one year, to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." This Statement makes certain changes in the hedging provisions of SFAS No. 133, and is effective concurrent with SFAS No. 133. As amended, SFAS No. 133 requires all derivatives to be recognized on the balance sheet at fair value, and establishes special accounting for the following three types of hedges: fair value hedges, cash flow hedges, and hedges of foreign currency exposures of net investments in foreign operations. Special accounting for qualifying hedges provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the corresponding change in value of the hedged item. If the derivative is accounted for as a hedge, depending on the nature of the hedge, the change in the fair value of derivatives is either offset against the change in the fair value of the hedged asset, liability or firm commitment through earnings or recognized in other comprehensive income until the change in value of the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized immediately in earnings and is included in net realized and other investment gains. As a result, such amounts are not included in the determination of the Company's segment after tax operating income. In addition, SFAS No. 133, as amended, precludes the designation of held-to-maturity fixed maturity investment securities as hedged items in hedging relationships where the hedged risk is interest rate risk. 8 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 1 -- Summary of Significant Accounting Policies - (Continued) On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The Company's risk management philosophy has not changed as a result of adoption of the Statement. The adoption of SFAS No. 133, as amended, resulted in a charge to operations of $1.6 million (net of tax of $0.4 million) as of January 1, 2001. In addition, as of January 1, 2001, a $7.2 million (net of tax of $3.9 million) cumulative effect of accounting change was recorded in other comprehensive income for the transition adjustment in the adoption of SFAS No. 133, as amended, and the reclassification of certain securities from the held-to-maturity category to the available-for-sale category. The transition adjustment for the adoption of SFAS No. 133 resulted in an increase in other comprehensive income of $0.8 million (net of tax of $0.4 million). The adjustment for the reclassification of $0.6 billion of the held-to-maturity fixed maturity investment portfolio to the available-for-sale category resulted in an increase in other comprehensive income of $6.4 million (net of tax of $3.4 million) as of January 1, 2001. New Accounting Pronouncements In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for under a single method - the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also clarifies the criteria to recognize intangible assets separately from goodwill. SFAS No. 141 is effective for business combinations initiated after June 30, 2001. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and other intangible assets deemed to have indefinite lives no longer be amortized to earnings, but instead be reviewed at least annually for impairment. Intangible assets with definite lives will continue to be amortized over their useful lives. SFAS No. 142 will be effective January 1, 2002. At September 30, 2001 and 2000, the Company did not have any indefinite-lived intangible assets. In September 2001, the FASB's Emerging Issues Task Force reached a consensus on Issue 01-10, "Accounting for the Impact of the Terrorist Attacks of September 11, 2001." Issue 01-10 presents guidance relative to accounting for and financial reporting of the events of September 11, 2001 (the Events), including both how and when to measure, record and report losses and any resulting liabilities which are directly attributable to the Events. Based on a comprehensive review of the Company's operations, the Company believes that the Events had no material financial impact on the earnings or financial position of the Company. Codification In March 1998, the National Association of Insurance Commissioners (NAIC) adopted codified statutory accounting principles (Codification) that became effective January 1, 2001. Codification changes prescribed statutory accounting practices and results in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. The state of domicile of the Company adopted Codification as the prescribed basis of accounting on which insurers must report their statutory-basis results effective January 1, 2001. The cumulative effect of changes in accounting principles adopted to conform to the requirements of Codification was reported as an adjustment to surplus in the statutory-basis financial statements as of January 1, 2001. Although the implementation of Codification reduced the Company's statutory-basis capital and surplus, the Company remains in compliance with all regulatory and contractual obligations. Note 2 -- Transactions with Parent John Hancock provides the Company with personnel, property and facilities in carrying out certain of its corporate functions. John Hancock annually determines a fee (the parent company service fee) for these services and facilities based on a number of criteria, which are periodically revised to reflect continuing changes in the Company's operations. The parent company service fee is included in other operating costs and expenses within the Company's income statements. John Hancock charged the Company a service fee of $40.0 million and $45.0 million for the three month periods ended September 30, 2001 and 2000, respectively, and $120.0 million and $125.6 million for the nine month periods ended September 30, 2001 and 2000, respectively. As of September 30, 2001, the Company owed John Hancock $12.5 million related to these services, which is included in other liabilities. John Hancock has 9 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 2 -- Transactions with Parent - (Continued) guaranteed that, if necessary, it will make additional capital contributions to prevent the Company's shareholder's equity from declining below $1.0 million. The company has also entered into reinsurance agreements with John Hancock which are further discussed in the Liquidity and Capital Resources section of the Form 10-Q for the period ended September 30, 2001. Note 3 -- Segment Information The Company's reportable segments are strategic business units offering different products and services. The reportable segments are managed separately, as they focus on different products, markets or distribution channels. Retail-Protection Segment. Offers a variety of individual life insurance, including participating whole life, term life, universal life and variable life insurance. Products are distributed through multiple distribution channels, including insurance agents and brokers and alternative distribution channels that include banks, financial planners, direct marketing and the Internet. Retail-Asset Gathering Segment. Offers individual annuities, consisting of fixed deferred annuities, fixed immediate annuities, and variable annuities. This segment distributes its products through distribution channels including insurance agents and brokers affiliated with the Company, securities brokerage firms, financial planners, and banks. 10 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 3 -- Segment Information - (Continued) The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Allocations of net investment income are based on the amount of assets allocated to each segment. Other costs and operating expenses are allocated to each segment based on a review of the nature of such costs, cost allocations utilizing time studies, and other relevant allocation methodologies. Management of the Company evaluates performance based on segment after-tax operating income, which excludes the effect of net realized investment and other gains or losses and other unusual or non-recurring events and transactions. Segment after-tax operating income is determined by adjusting GAAP net income for net realized investment and other gains and losses and certain other items which management believes are not indicative of overall operating trends. While these items may be significant components in understanding and assessing the Company's financial performance, management believes that the presentation of after-tax operating income enhances its understanding of the Company's results of operations by highlighting net income attributable to the normal, recurring operations of the business. Amounts reported as segment adjustments in the tables below primarily relate to: (i) certain net realized investment and other gains (losses), net of related amortization adjustment for deferred policy acquisition costs; (ii) restructuring costs related to our distribution systems and retail operations; (iii) other demutualization related costs; and (iv) the surplus tax. The following table summarizes selected financial information by segment for the three and nine month periods ended September 30, 2001 and 2000, respectively, and reconciles segment revenues and segment after-tax operating income to amounts reported in the consolidated statements of income (in millions):

11 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Segment Information - (Continued)

12 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 3 -- Segment Information - (Continued)

The Company operates only in the United States and has no reportable major customers. Note 4 -- Derivatives and Hedging Instruments The Company uses various derivative instruments to hedge and manage its exposure to changes in interest rate levels, foreign exchange rates, and equity market prices, and to manage the duration of assets and liabilities. The fair value of derivative instruments classified as assets at September 30, 2001 was $10.9 million, and appears on the Consolidated Balance Sheet in other assets. The fair value of derivative instruments classified as liabilities at September 30, 2001 was $17.4 million and appears on the Consolidated Balance Sheet in other liabilities. In certain of these cases, the Company uses hedge accounting as allowed by SFAS No. 133, as amended, by designating derivative instruments as either fair value or cash flow hedges. For derivative instruments that are designated as fair value hedges, the change in fair value of the derivative instrument as well as the offsetting change in fair value of the hedged item are recorded in realized investment gains and losses. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the change in fair value of the derivative instrument is recorded in other comprehensive income, and then reclassified into income when the hedged item affects income. Hedge effectiveness is assessed quarterly by a variety of techniques including regression analysis and cumulative dollar offset. In certain cases, there is no hedge ineffectiveness because the derivative instrument was constructed such that all the terms of the derivative exactly match the hedged risk in the hedged item. For derivative instruments not designated as hedges, the change in fair value of the derivative is recorded in realized investment gains and losses. 13 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 4 -- Derivatives and Hedging Instruments - (Continued) In cases where the Company receives or pays a premium as consideration for entering into a derivative instrument (i.e., interest rate caps and floors, swaptions, and equity collars), the premium is amortized into investment income over the useful life of the derivative instrument. The fair value of such premiums (i.e., the inherent ineffectiveness of the derivative) is excluded from the assessment of hedge effectiveness and is included in realized investment gains and losses. Fair Value Hedges The Company uses interest rate futures contracts and interest rate swap agreements as part of its overall strategies of managing the duration of assets and liabilities or the average life of certain asset portfolios to specified targets. Interest rate swap agreements are contracts with a counterparty to exchange interest rate payments of a differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal). The net differential to be paid or received on interest rate swap agreements and currency rate swap agreements is accrued and recognized as a component of net investment income. The Company uses equity collar agreements to reduce its equity market exposure with respect to certain common stock investments that the Company holds. A collar consists of a written call option that limits the Company's potential for gain from appreciation in the stock price as well as a purchased put option that limits the Company's potential for loss from a decline in the stock price. Currency rate swap agreements are used to manage the Company's exposure to foreign exchange rate fluctuations. Currency rate swap agreements are contracts to exchange the currencies of two different countries at the same rate of exchange at specified future dates. For the three and nine month periods ended September 30, 2001, the Company recognized net losses of $3.7 million and $3.8 million, respectively, related to the ineffective portion of its fair value hedges, and a net gain of $0.1 million and a net loss of $0.1 million, respectively, related to the portion of the hedging instruments that were excluded from the assessment of hedge effectiveness. For the three months ended September 30, 2001, all of the Company's hedged firm commitments qualified as fair value hedges. Cash Flow Hedges The Company used interest rate cap floor and agreements to hedge the interest rate risk associated with minimum interest rate guarantees in certain of its life insurance and annuity businesses. For the three and nine month periods ended September 30, 2001, the Company recognized no gains or losses related to the ineffective portion of its cash flow hedges, and a net gain of $2.9 million and $0.4 million, respectively, related to the portion of the hedging instruments that was excluded from the assessment of hedge effectiveness. For the three and nine month periods ended September 30, 2001, all of the Company's hedged forecasted transactions qualified as cash flow hedges. For the three and nine month periods ended September 30, 2001, no amounts were reclassified from other accumulated comprehensive income to earnings and it is anticipated that no amounts will be reclassified from other accumulated comprehensive income to earnings within the next twelve months. The Company does not enter into hedging transactions for variable cash flows thus the Company currently has no maximum length for which variable cash flows are hedged. For the three and nine month periods ended September 30, 2001, none of the Company's cash flow hedges have been discontinued because of the probability that the original forecasted transaction would not occur by the end of the originally specified time period documented at inception of the hedging relationship. There was no transition adjustment for the adoption of SFAS No.133 representing the accumulation in other comprehensive income of the effective portion of the Company's cash flow hedges as of January 1, 2001. There 14 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Note 4 -- Derivatives and Hedging Instruments - (Continued) were no losses incurred for the effective portion of the change in fair value of derivative instruments designated as cash flow hedges and added to accumulated other comprehensive income. Derivatives Not Designated as Hedging Instruments The Company enters into interest rate swap agreements, interest rate futures contracts, and interest rate cap and floor agreements to manage exposure to interest rates as described above under Fair Value Hedges without designating the derivatives as hedging instruments. 15 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY ITEM 2. MANAGEMENT'S DISCUSSION and ANALYSIS OF FINANCIAL CONDITION and RESULTS of OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) addresses the financial condition of John Hancock Variable Life Insurance Company (the Company) as of September 30, 2001, compared with December 31, 2000, and its consolidated results of operations for the three and nine month periods ended September 30, 2001 and September 30, 2000 and, where appropriate, factors that may affect future financial performance. This discussion should be read in conjunction with the Company's MD&A and annual audited financial statements as of December 31, 2000 included in the Company's Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission (hereafter referred to as the Company's 2000 Form 10-K). Prior to 2000, the Company did not prepare its financial statements in accordance with accounting principles generally accepted in the United States and financial information on such basis currently is not readily available for earlier periods. Comparative financial statements for 1999 and 1998 prepared on a statutory-basis are included in the Company's 2000 Form 10-K. Statements, analyses, and other information contained in this report relating to trends in the Company's operations and financial results, the markets for the Company's products, the future development of the Company's business, and the contingencies and uncertainties to which the Company may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their effects on the Company, which may not be those anticipated by management. The Company's actual results may differ materially from the results anticipated in these forward-looking statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Important Factors that May Affect Future Results" included herein for a discussion of factors that could cause or contribute to such material differences. Overview We are a leading life insurance company providing a broad range of products and services in the retail market, which offers insurance protection and asset gathering products and services, primarily to retail consumers. Our revenues are derived principally from: o premiums on individual life insurance and annuities with life contingencies; o product charges from variable and universal life insurance products and annuities; o net investment income and realized investment gains on general account assets. Our expenses consist principally of insurance benefits provided to policyholders, interest credited on policyholders' general account balances, dividends to policyholders, other operating costs and expenses, which include commissions and general business expenses, net of expenses deferred, amortization of deferred policy acquisition costs, and premium and income taxes. Our profitability depends in large part upon: (1) the adequacy of our product pricing, which is primarily a function of competitive conditions, our ability to assess and manage trends in mortality and morbidity experience, our ability to generate investment earnings and our ability to maintain expenses in accordance with pricing assumptions and (2) the maintenance of our target spreads between the rate of earnings on our investments and rates credited on policyholders' general account balances. 16 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Results of Operations The table below presents the consolidated results of operations for the three and nine month periods ended September 30, 2001 and 2000, respectively.

Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Consolidated income before income taxes and cumulative effect of accounting change of $38.7 million, for the three months ended September 30, 2001 increased by $2.5 million, or 6.9%, from that reported in the comparable prior year period. The Protection Segment's income before income taxes and cumulative effect of accounting change increased $1.0 million, or 2.8%, for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 primarily due to an increase in universal life and investment-type product charges of $2.7 million, or 3.6%. Income before income taxes and cumulative effect of accounting change in the Asset Gathering Segment was $2.4 million, an increase of $1.5 million, or 166.7%, for the three months ended September 30, 2001 from that reported in the comparable prior year period. The increase in Asset Gathering was primarily due to lower amortization of deferred policy acquisition costs in the current period and a decrease in other operating costs and expenses. Revenues of $156.5 million for the three months ended September 30, 2001 increased $9.6 million, or 6.5%, compared to the three months ended September 30, 2000, primarily due to a $12.8 million, or 9.5%, increase in revenues in the Protection Segment. The Protection Segment's increase in revenues was primarily driven by a $9.4 million increase in premiums and an increase in universal life and investment-type product charges. Growth in premiums and universal life and investment-type product charges is being driven by growth in the in-force and an increase in fees on variable life insurance products. Revenues in the Asset Gathering Segment decreased $3.2 million, or 26.4%, primarily due to lower investment-type product charges on variable annuity products, which decreased $3.6 million from the prior period due to deteriorating market conditions for the separate accounts. Benefits and expenses of $117.8 million for the three months ended September 30, 2001 increased $7.1 million, or 6.4%, compared to the three months ended September 30, 2000, primarily due to an increase of $11.8 million, or 11.9%, in the Protection Segment. The increase in Protection was driven by an $18.2 million increase in benefits to policyholders and a $7.7 million increase in the amortization of deferred policy acquisition costs driven by growth in the in-force. Protection's increase in benefits to policyholders was partially offset by a $12.6 million decrease in other operating costs and expenses due to our on going cost reduction programs. Benefits and expenses in the Asset Gathering Segment decreased $4.7 million, or 42.0%, for the quarter ended September 30, 2001, primarily due to a $3.4 million decrease in amortization of deferred policy acquisition costs and a decrease in other operating costs and expenses. The Company's effective tax rate on income before income taxes and cumulative effect accounting change was 18.9% and 37.3% for the three month periods ended September 30, 2001 and 2000, respectively. The decrease in the Company's effective tax rate is primarily due to the implementation of a tax strategy to calculate separate account dividends received deduction and the adjustment of the prior year's equity-based tax to actual rates. 17 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Consolidated income before income taxes and cumulative effect of accounting change of $146.5 million, for the nine months ended September 30, 2001 increased by $30.1 million, or 25.9%, from that reported in the comparable prior year period. The Protection Segment's income before income taxes and cumulative effect of accounting change increased $24.6 million, or 21.6%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000 due to an increase in universal life and investment-type product charges of $20.6 million, or 9.4%, and an increase in net investment income of $9.7 million, or 6.1%. Partially offsetting this increased revenue was an increase in benefits to policyholders and amortization of deferred policy acquisition costs; however, operating expenses decreased $15.4 million. Income before income taxes and cumulative effect of accounting change in the Asset Gathering Segment increased $5.5 million, or 220.0% for the nine months ended September 30, 2001 from that reported in the comparable prior year period. The increase in Asset Gathering was primarily due to $6.3 million in net realized investment and other losses in the prior year while no such losses were incurred in 2001. Revenues of $484.6 million for the nine months ended September 30, 2001 increased $62.7 million, or 14.9%, compared to the nine months ended September 30, 2000, primarily due to a $60.7 million, or 15.5%, increase in revenues in the Protection Segment. The Protection Segment's increase in revenues was primarily driven by a $26.2 million increase in premiums, a $20.6 million increase in universal life and investment-type product charges, and a $9.7 million increase in net investment income. Growth in universal life and investment-type product charges and premiums was driven by growth in the in-force and an increase in fees on variable life insurance products. Revenues in the Asset Gathering Segment increased $2.0 million, or 6.8%, primarily due to net realized investment and other losses of approximately $6.3 million in the comparable prior year period while no such losses were incurred in for the nine months ended September 30, 2001. Benefits and expenses of $338.1 million for the nine months ended September 30, 2001 increased $32.6 million, or 10.7%, compared to the nine months ended September 30, 2000, primarily due to an increase of $36.1 million, or 13.0%, in the Protection Segment. The increase in Protection was driven by a $28.8 million increase in benefits to policyholders and a $26.2 million increase in amortization of deferred policy acquisition costs due to lower separate account performance and revised estimate relating to the implementation of new modeling systems during the period. Protection's increases in benefits and amortization was partially offset by a $15.4 million decrease in operating expenses due to our on going cost reduction programs. Benefits and expenses in the Asset Gathering Segment decreased $3.5 million, or 13.0%, for the nine months ended September 30, 2001, primarily due to a $3.5 million decrease in other operating costs and expenses and $2.7 million decrease in amortization of deferred policy acquisition costs. The decreases were partially offset by an increase in benefits to policyholders of $2.7 million, primarily due to payments to policyholders under the guaranteed minimum death benefit feature of the variable annuity products. Results of Operations by Segment We operate our business in two business segments, the Protection Segment and the Asset Gathering Segment. Both of our business segments primarily serve retail customers. The Company's reportable segments are strategic business units offering different products and services, and are managed separately, as they focus on different products, markets or distribution channels. Retail-Protection Segment. Offers a variety of individual life insurance, including participating whole life, term life, universal life and variable life insurance. Products are distributed through multiple distribution channels, including insurance agents and brokers and alternative distribution channels that include banks, financial planners, direct marketing and the Internet. Retail-Asset Gathering Segment. Offers individual annuities, consisting of fixed deferred annuities, fixed immediate annuities, and variable annuities. This segment distributes its products through distribution channels including insurance agents and brokers affiliated with the Company, securities brokerage firms, financial planners, and banks. We evaluate segment performance on segment after-tax operating income, which excludes the effect of net realized investment and other gains and losses and other unusual or non-recurring events and transactions. Segment after-tax operating income is determined by adjusting GAAP net income for net realized investment and other gains and 18 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY losses, cumulative effect of accounting changes, and certain other items which we believe are not indicative of overall operating trends. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of segment after-tax operating income enhances the understanding of our results of operations by highlighting net income attributable to the normal, recurring operations of the business. However, segment after-tax operating income is not a substitute for net income determined in accordance with GAAP. A discussion of the adjustments to GAAP reported income, many of which affect each operating segment, follows the table below. A reconciliation of segment after-tax operating income, as adjusted, to GAAP reported net income precedes each segment discussion.

(1) See "Adjustments to GAAP Reported Net Income" set forth below. Adjustments to GAAP Reported Net Income Our GAAP reported net income was affected by net realized investment gains and losses and other unusual or non-recurring events and transactions presented in the reconciliation of GAAP reported net income to segment after-tax operating income in Note 3 - Segment Information in the notes to the unaudited consolidated financial statements. A description of these adjustments follows. In both periods, net realized investment and other gains and losses have been excluded from segment after-tax operating income due to their volatility between periods and because such data are often excluded by analysts and investors when evaluating the overall financial performance of insurers. The volatility between periods can be impacted by fluctuations in the market, as well as by changes in the volume of activity, which can be influenced by us and our investment decisions. Net realized investment and other gains and losses have been reduced by amortization of deferred policy acquisition costs to the extent that such amortization results from such gains and losses. We believe presenting realized investment and other gains and losses in this format provides information useful in evaluating our operating performance. This presentation may not be comparable to presentations made by other insurers. Summarized below is a reconciliation of (a) net realized investment and other gains per the unaudited consolidated financial statements and (b) the adjustment made for net realized investment gains to calculate segment after-tax operating income for the three and nine month periods ended September 30, 2001 and 2000. 19 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY

As part of John Hancock's on-going Competitive Position Project the Company has incurred restructuring charges to reduce costs and increase future operating efficiency by consolidating portions of its operations. After-tax restructuring costs were $0.2 million for the nine month period ended September 30, 2000. No such costs were incurred in the three months ended September 30, 2001 and 2000, or the nine months ended September 30, 2001, respectively. During 2000, the Company incurred expenses to improve its financial analysis and financial reporting abilities which were made in conjunction with the demutualization of John Hancock. These charges primarily included consulting fees and planning and expense management costs. After-tax charges for these other demutualization related costs were $0.6 million for the nine month period ended September 30, 2000. No such costs were incurred in 2001. Effective within the year 2000, the Company is no longer subject to the surplus tax imposed on mutual life insurance companies and their wholly-owned stock subsidiaries. During the three month period ended September 30, 2001 and 2000, the Company recognized a reduction in equity based taxes of $4.6 million and $0.1 million, respectively, and during the nine month period end September 30, 2001 and 2000 the Company recognized a reduction in equity based taxes of $4.6 million and $1.8 million, respectively, resulting from a revised estimate related to prior years. This after-tax credit was excluded from after-tax operating income for these periods. 20 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Retail-Protection Segment The following table presents certain summary financial data relating to the Protection Segment for the periods indicated.

(1) See "Adjustments to GAAP Reported Net Income" included in this MD&A. Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Segment after-tax operating income was $26.3 million for the three months ended September 30, 2001, an increase of $2.0 million, or 8.2%, from $24.3 million for the three months ended September 30, 2000. The increase in the Protection Segment's after-tax operating income is primarily due to a $12.7 million decrease in other operating costs and expenses and a $9.4 million increase in premiums. Partially offsetting this was an increase in benefits to policyholders of $18.2 million due to growth in the in-force. Revenues were $150.9 million for the three months ended September 30, 2001, an increase of $14.7 million, or 10.8%, from $136.2 million for the three months ended September 30, 2000. Revenue growth was driven by a $9.4 million increase in premiums, a $2.7 million increase in universal life and investment-type product charges and a $2.5 million increase in net investment income. The increase in premiums, universal life and investment-type product charges, and net investment income is driven by growth in the in-force and, with respect to product charges, an increase in fees on variable life insurance products. Benefits and expenses were $111.3 million for the three months ended September 30, 2001, an increase of $11.7 million, or 11.7%, from $99.6 million for the three months ended September 30, 2000. Benefits to policyholders increased $18.2 million, or 29.5% primarily due to growth in the in-force. Amortization of deferred policy acquisition costs increased $7.7 million primarily due to growth in the in-force. Partially offsetting the increases was a $12.7 million decrease in other operating costs and expenses driven by our on going cost reduction programs. 21 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Segment after-tax operating income was $90.7 million for the nine months ended September 30, 2001, an increase of $10.3 million, or 12.8%, from $80.4 million for the nine months ended September 30, 2000. The increase in the Protection Segment's after-tax operating income is primarily due to a $26.2 million increase in premiums, a $20.6 million increase in universal life and investment-type product charges, and a $14.3 million decrease in other operating costs and expenses. Partially offsetting these items were an increase in benefits to policyholders of $28.8 million, and an increase in amortization of deferred policy acquisition costs of $26.2 million. Revenues were $455.9 million for the nine months ended September 30, 2001, an increase of $56.6 million, or 14.2%, from $399.3 million for the nine months ended September 30, 2000. Revenue growth was primarily driven by a $26.2 million increase in premiums, a $20.6 million increase in universal life and investment-type product charges, and a $9.7 million increase in net investment income. The increase in premiums, universal life and investment-type product charges, and net investment income is driven by growth in the in-force and, with respect to product charges, an increase in fees on variable life insurance products. Benefits and expenses were $314.7 million for the nine months ended September 30, 2001, an increase of $37.2 million, or 13.4%, from $277.5 million for the nine months ended September 30, 2000. Benefits to policyholders increased $28.8 million, primarily due to growth in the in-force. In addition, amortization of deferred policy acquisition costs increased $26.2 million, or 177.0%, due to a decline in separate account performance. Offsetting these increases was a decrease in other operating costs and expenses of $14.3 million due to our on going cost reduction programs. Retail-Asset Gathering Segment The following table presents certain summary financial data relating to the Asset Gathering Segment for the periods indicated.

(1) See "Adjustments to GAAP Reported Net Income" included in this MD&A. Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Segment after-tax operating income was $2.5 million for the three months ended September 30, 2001, an increase of $3.2 million, or 457.1%, from the comparable prior year period. The increase in Asset Gathering was primarily due to $1.9 million, or 28.8%, decrease in other operating costs and expenses and a $3.4 million, or 97.1%, decrease in 22 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY amortization of deferred policy acquisition costs. Investment-type product charges decreased $3.6 million, or 28.1%, from the comparable prior year period. Revenues were $8.9 million for the three months ended September 30, 2001 a decrease of $3.3 million, or 27.0%, from the comparable prior year period. Revenue consisted primarily of $9.2 million in investment-type product charges on variable annuity products, which decreased $3.6 million from the prior period. Investment-type product charges on variable annuity products decreased due to deteriorating market conditions for the separate accounts. Partially offsetting the impact of a decline in average variable annuity reserves, the Company increased its product fees in the fourth quarter of 2000, which were effective for the entire three month period ended September 30, 2001. Benefits and expenses decreased $4.7 million, or 42.0%, to $6.5 million for the three months ended September 30, 2001 from $11.2 million reported in the comparable prior year period. The decrease in benefits and expenses is primarily due to a $1.9 million decrease in other operating cost and expenses resulting from our on going cost reduction programs. In addition, amortization of deferred policy acquisition costs decreased $3.4 million. Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Segment after-tax operating income was $5.9 million for the nine months ended September 30, 2001, an increase of $0.5 million, or 9.3%, from the comparable prior year period. The increase was primarily due to lower operating expenses resulting from our on going cost reduction programs. Revenues were $31.4 million for the nine months ended September 30, 2001, a decrease of $4.3 million, or 12.0%, from the comparable prior year period. Revenue consisted primarily of $33.1 million in investment-type product charges on variable annuity products, which decreased $4.8 million from the prior period. Partially offsetting a decline in average variable annuity reserves, the Company increased its product fees in the fourth quarter of 2000, which were effective for the entire nine month period ended September 30, 2001. Benefits and expenses decreased $3.4 million, or 12.7%, to $23.4 million for the nine months ended September 30, 2001 from $26.8 million reported in the comparable prior year period. The decrease in benefits and expenses is primarily due to a $3.4 million decrease in other operating costs and expenses due to our on going cost reduction programs and a $2.7 million decrease in amortization of deferred policy acquisition costs on lower account balances. Partially offsetting these decreases in expenses was an increase in benefits to policyholders from payments to policyholders under the guaranteed minimum death benefit feature of the variable annuity products. 23 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY General Account Investments Overall Composition of the General Account Invested assets, excluding separate accounts, totaled $3.4 billion and $3.0 billion as of September 30, 2001 and December 31, 2000, respectively. The portfolio composition has not significantly changed at September 30, 2001 as compared to December 31, 2000. The following table shows the composition of investments in our general account portfolio.

(1) In addition to bonds, the fixed maturity security portfolio contains redeemable preferred stock with a carrying value of $43.9 million and $42.4 million as of September 30, 2001 and December 31, 2000, respectively. Carrying value is composed of investments categorized as held-to-maturity, which are carried at amortized cost, and investments categorized as available-for-sale, which are carried at fair value. The total fair value of the fixed maturity security portfolio was $2,263.2 and $1,698.6 million, at September 30, 2001 and December 31, 2000, respectively. (2) The fair value of the mortgage loan portfolio was $582.1 million and $467.3 million as of September 30, 2001 and December 31, 2000, respectively. (3) Policy loans are secured by the cash value of the underlying life insurance policies and do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. (4) Cash and cash equivalents are included in total invested assets for the purposes of calculating yields on the income producing assets for the Company. Cash and cash equivalents are not considered part of Total Investments as shown on the consolidated balance sheet of the Company of $3,245.4 million and $2,704.7 million at September 30, 2001 and December 31, 2000, respectively. (5) Total Investments on the Company's Consolidated Balance Sheet excludes amounts for cash and cash equivalents of $133.1 million and $277.3 million as of September 30, 2001 and December 31, 2000, respectively. Consistent with the nature of the Company's product liabilities, assets are heavily oriented toward fixed maturity securities. The Company determines the allocation of assets primarily on the basis of cash flow and return requirements of its products and by the level of investment risk. Fixed Maturity Securities. The fixed maturity securities portfolio is predominantly comprised of low risk, investment grade, publicly and privately traded corporate bonds and senior tranches of asset-backed securities (ABS) and mortgage-backed securities (MBS), with the balance invested in government bonds. The fixed maturity securities portfolio also includes redeemable preferred stock. As of September 30, 2001, fixed maturity securities represented 67.0% of general account investment assets with a carrying value of $2.3 billion, roughly comprised of 60% public securities and 40% private securities. Each year the Company directs the majority of its net cash inflows into investment grade fixed maturity securities. Typically between 5% and 15% of funds allocated to fixed maturity securities are invested in below-investment-grade bonds with the majority of that balance in BB category. The Company is subject to a policy limiting the overall level of these bonds to no more than 10% of total John Hancock US Life Insurance Company statutory invested assets. Allocations are based on an assessment of relative value and the likelihood of enhancing risk-adjusted portfolio returns. While the Company has profited from the below-investment-grade asset class in the past, care is taken to manage its growth strategically by limiting its size relative to the Company's total assets. 24 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY The following table shows the composition by issuer of the fixed maturity securities portfolio. Fixed Maturity Securities -- By Issuer

In keeping with the investment philosophy of tightly managing interest rate risk, the Company's MBS & ABS holdings are heavily concentrated in commercial MBS where the underlying loans are largely call protected, which means they are not pre-payable without penalty prior to maturity at the option of the issuer. By investing in MBS and ABS securities with relatively predictable repayments, the Company adds high quality, liquid assets to the portfolios without incurring the risk of cash flow variability. The Securities Valuation Office (SVO) of the National Association of Insurance Commissioners evaluates all public and private bonds purchased as investments by insurance companies. The SVO assigns one of nine investment categories to each security it reviews. Category 1 is the highest quality rating, and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as Standard & Poors (S&P) and Moody's (i.e., BBB-/Baa3 or higher), while Categories 3-6 are the equivalent of below-investment grade securities. SVO ratings are reviewed and may be revised at least once a year. The following table sets forth the SVO ratings for the Company's bond portfolio along with an equivalent S&P rating agency designation. The majority of bonds are investment grade, with 86.6% invested in Category 1 and 2 securities as of September 30, 2001. Below investment grade bonds were 8.8% of total invested assets as of September 30, 2001. This allocation reflects the Company's strategy of avoiding the unpredictability of interest rate risk in favor of relying on the bond analysts' ability to better predict credit or default risk. The bond analysts operate in an industry-based, team-oriented structure that permits the evaluation of a wide range of below investment grade offerings in a variety of industries resulting in a well-diversified high yield portfolio. A majority 67.1% of below investment grade bonds are in category 3, the highest quality below investment grade. Category 6 bonds, those in or near default, represent securities that were originally acquired as long-term investments, but subsequently became distressed. The fair value of bonds in or near default was $15.9 million and $18.3 million as of September 30, 2001 and December 31, 2000, respectively. 25 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Fixed Maturity Securities -- By Credit Quality

(1) With respect to securities that are awaiting an SVO rating, the Company has assigned a rating based on an analysis that it believes is equivalent to that used by the SVO. (2) Comparisons between SVO and S&P ratings are published by the National Association of Insurance Commissioners. (3) Does not include redeemable preferred stock with a carrying value of $43.9 million and $42.4 million as of September 30, 2001 and December 31, 2000, respectively. Investment Results The following table summarizes the Company's investment results for the periods indicated. Overall, the yield, net of investment expenses, on the general account portfolio decreased from the three month and the nine month periods ended September 30, 2000. The lower yield was the result of scheduled maturities rolling over into new investments with less favorable interest rates and narrower acquisition spreads than those present in our 2000 fixed maturity portfolio. The inflow of new cash was invested at rates that were less than the overall portfolio earnings rate during the first nine months of 2000. Indicative of this environment, between September 2000 and September 2001, the 10-year U.S. Treasury rate fell 132 basis points, while Moody's seasoned BAA spreads fell by 9 basis points.

Liquidity and Capital Resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of business operations. Historically, our principal cash flow sources have been premiums, deposits and charges on policies, investment income, maturing investments and proceeds from sales of investment assets. In addition to the need for cash flow to meet operating expenses, our liquidity requirements relate principally to the liabilities associated with our various life insurance and annuity products and to the funding of investments in new products, processes and technologies. 26 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Sources of cash for the Company are premiums, deposits and charges on policies and contracts, investment income, maturing investments, and proceeds from sales of investment assets. In addition to the need for cash flow to meet operating expenses, our liquidity requirements relate principally to the liabilities associated with various life insurance and annuities and to the funding of investments in new products, processes, and technologies. Product liabilities include the payment of benefits under life insurance, policies and annuity contracts and the payment of policy surrenders, withdrawals and policy loans. The Company periodically adjusts its investment policy to respond to changes in short-term and long-term cash requirements and provide adequate funds to pay benefits without forced sales of investments. The liquidity of our insurance operations is also related to the overall quality of our investments. As of September 30, 2001, $1,921.8 million, or 86.6% of the fixed maturity securities held by us and rated by Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc. (S&P) or the National Association of Insurance Commissioners were rated investment grade (BBB or higher by S&P or 1 or 2 by the National Association of Insurance Commissioners). The remaining $298.8 million, or 13.4%, of fixed maturity investments, and 8.8% of invested assets, were rated non-investment grade. For additional discussion of our investment portfolio see the General Account Investments section above in this Management's Discussion and Analysis of Financial Condition and Results of Segment Operations. We employ an asset/liability management approach tailored to the specific requirements of each of our product lines. Each product line has an investment strategy based on the specific characteristics of the liabilities in the product line. As part of this approach, we develop investment policies and operating guidelines for each portfolio based upon the return objectives, risk tolerance, liquidity, and tax and regulatory requirements of the underlying products and business segments. Net cash provided by (used in) operating activities was $243.0 million and ($248.9) million for the nine months ended September 30, 2001 and 2000, respectively. The increase in 2001 compared to 2000 resulted primarily due to an increase in policy liabilities of $522.6 million and an increase in income taxes. These increases were partially offset by increases in other assets net of other liabilities. Net cash used in investing activities was $481.2 million and $246.5 million for the nine months ended September 30, 2001 and 2000, respectively. The increase in cash used in investing activities in 2001 as compared to 2000 resulted from fewer sales and increased acquisitions of fixed maturities during the nine months ended September 30, 2001, an increase in net purchases of $323.4 million, as compared to prior period. Partially offsetting these uses of cash was a small increase in maturities, prepayments and scheduled redemptions of fixed maturities, short-term investments and mortgage loans. Net cash provided by financing activities was $94.0 million and $491.7 million, for the nine months ended September 30, 2001 and 2000, respectively. The decrease in 2001 as compared to 2000 resulted from an increase in cash payments made on maturities and withdrawals of universal life insurance and investment-type contracts and minimal growth in cash payments received as deposits of universal life insurance and investment-type contracts. Maturities and withdrawals on universal life insurance and investment-type contracts grew by $419.7 million for the nine months ended September 30, 2001, as compared to prior period. We maintain reinsurance programs designed to protect against large or unusual losses. Based on our review of our reinsurers' financial statements and reputations in the reinsurance marketplace, we believe that our reinsurers are financially sound, and, therefore, that we have no significant exposure to uncollectable reinsurance in excess of uncollectable amounts already recognized in our unaudited consolidated financial statements. The Company has also entered into reinsurance agreements which transfers risks and profits to John Hancock Life Insurance Company, the parent. The reinsurance agreements provide reinsurance expense allowances to reimburse the Company for the related expenses. The agreements cover variable annuity, variable life insurance and term life insurance contracts issued by the Company. Given our historical cash flows and that of our wholly owned subsidiary and current financial results, management believes that the cash flow from the operating activities over the next year will provide sufficient liquidity for our operations and pay other operating expenses. Although we anticipate that we will be able to meet our cash requirements, we can give no assurances in this regard. 27 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Important Factors that May Affect Future Results The statements, analyses, and other information contained herein relating to trends in the Company's operations and financial results, the markets for the Company's products, the future development of the Company's business, and the contingencies and uncertainties to which the Company may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their effects on the Company, which may not be those anticipated by management. Our actual results may differ materially from the results anticipated in these forward-looking statements. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the following: (1) a significant downgrade in our ratings for claims-paying ability and financial strength may lead to policy and contract withdrawals and materially harm our ability to market our products; (2) elimination of Federal tax benefits for our products and other changes in laws and regulations that could adversely affect sales of our life insurance and annuity products; (3) we face increasing competition from mutual fund companies, banks and investment management firms as well as from other insurance companies; (4) a decline or increased volatility in the securities markets, and other changes in general economic conditions, may adversely affect variable life insurance and variable annuity businesses; (5) our life insurance sales are highly dependent on a third party distribution relationship; (6) customers may not be responsive to new or existing products or distribution channels, (7) interest rate volatility may adversely affect our profitability; (8) our net income and revenues will suffer if customers surrender annuities and variable and universal life insurance policies; (9) we will face losses if the claims on our insurance products, or reductions in rates of mortality on our annuity products, are greater than we projected; (10) we face risks relating to our investment portfolio; (11) we may experience volatility in net income due to changes in standards for accounting for derivatives and other changes; (12) we are subject to risk-based capital requirements and possible guaranty fund assessments; (13) the National Association of Insurance Commissioners' codification of statutory accounting practices adversely affected our statutory surplus; (14) John Hancock may be unable to retain personnel who are key to our business; (15) litigation and regulatory proceedings may result in financial losses, harm our reputation and divert management resources, and (16) we face unforeseen liabilities arising from our acquisitions and dispositions of businesses. Readers are also directed to other risks and uncertainties discussed, as well as to further discussion of the risks described above, in other documents filed by the Company with the United States Securities and Exchange Commission. The Company specifically disclaims any obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise. ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK Capital Markets Risk Management The Company maintains a disciplined, comprehensive approach to managing capital market risks inherent in its business operations. To mitigate these risks, and effectively support Company objectives, investment operations are organized and staffed to focus investment management expertise on specific classes of investments, with particular emphasis placed on private placement markets. In addition, a dedicated unit of asset / liability risk management (ALM) professionals centralizes the implementation of its interest rate risk management program. As an integral component of its ALM program, derivative instruments are used in accordance with risk reduction techniques established through Company policy. The Company's use of derivative instruments is monitored on a regular basis by the Parent's Investment Compliance Department and reviewed quarterly with senior management and the Parent's Committee of Finance. The Company's principal capital market exposures are credit and interest rate risk, although we have certain exposures to changes in equity prices and foreign currency exchange rates. Credit risk pertains to the uncertainty associated with the ability of an obligor or counterparty to continue to make timely and complete payments of contractual principal and/or interest. Interest rate risk pertains to the market value fluctuations that occur within fixed maturity securities or liabilities as market interest rates move. Equity and foreign currency risk pertain to price fluctuations, associated with the Company's ownership of equity investments or non-US dollar denominated investments, driven by dynamic market environments. 28 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Credit Risk The Company manages the credit risk inherent in its fixed maturity securities by applying strict credit and underwriting standards, with specific limits regarding the proportion of permissible below investment grade holdings. We also diversify our fixed maturity securities with respect to investment quality, issuer, industry, geographical, and property-type concentrations. Where possible, consideration of external measures of creditworthiness, such as ratings assigned by nationally recognized rating agencies, supplement our internal credit analysis. The Company uses simulation models to examine the probability distribution of credit losses to ensure that it can readily withstand feasible adverse scenarios. In addition, the Company periodically examines, on various levels of aggregation, its actual default loss experience on significant asset classes to determine if the losses are consistent with the levels assumed in product pricing and rating agencies' quality-specific cohort default data. These tests have generally found the Company's aggregate experience to be favorable relative to these external benchmarks and consistent with priced-for levels. As of September 30, 2001, the Company's fixed maturity portfolio was comprised of 86.6% investment grade securities and 13.4% below-investment-grade securities. These percentages are consistent with recent experience and indicative of the Company's long-standing investment philosophy of pursuing moderate amounts of credit risk in return for higher expected returns. We believe that credit risk can be successfully managed given our proprietary credit evaluation models and experienced personnel. Interest Rate Risk The Company maintains a tightly controlled approach to managing its potential interest rate risk. Interest rate risk arises from many of our primary activities, as we invest substantial funds in interest-sensitive assets to support the issuance of our various interest-sensitive liabilities within our Protection and Asset Gathering Segments. The Company manages interest rate sensitive segments of the business, and the supporting investments, under one of two broadly defined risk management methods designed to provide an appropriate matching of assets and liabilities. For guaranteed rate products, where contractual liability cash flows are highly predictable (e.g., immediate annuities) sophisticated duration-matching techniques are utilized to manage the segment's exposure to both parallel and non-parallel yield curve movements. Typically this type of management is expressed as a duration tolerance of only +/- .05 years, with other measures used for limiting exposure to non-parallel risk. For non-guaranteed rate products, such as whole life insurance or single premium deferred annuities, liability cash flows are less predictable. Therefore, a conventional duration-matching strategy is less effective at managing the inherent risk. For these products, we manage interest rate risk based on scenario-based portfolio modeling that seeks to identify the most appropriate investment strategy given probable policyholder behavior and liability crediting needs under a wide range of interest rate environments. As of September 30, 2001, there have been no material changes to the interest rate exposures as reported in the Company's 2000 Form 10-K. Derivative Instruments The Company uses a variety of derivative financial instruments, including swaps, caps, floors, and exchange traded futures contracts, in accordance with Company policy. Permissible derivative applications include the reduction of economic risk (i.e., hedging) related to changes in yields, price, cash flows, and currency exchange rates. In addition, certain limited applications of "income generation" are allowed. Examples of this type of use include the purchase of call options to offset the sale of embedded options in Company liability issuance or the purchase of swaptions to offset the purchase of embedded put options in certain investments. The Company does not make a market or trade derivatives for the purpose of speculation. The Parent's Investment Compliance Unit monitors all derivatives activity for consistency with internal policies and guidelines. All derivatives trading activity is reported monthly to the Parent's Committee of Finance for review, with a comprehensive governance report provided jointly each quarter by the Parent's Derivatives Supervisory Officer and Chief Investment Compliance Officer. The table below reflects the Company's derivative positions as of September 30, 2001. The notional amounts in the table represent the basis on which pay or receive amounts are 29 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY calculated and are not reflective of credit risk. These exposures represent only a point in time and will be subject to change as a result of ongoing portfolio and risk management activities.

Our non-exchange-traded derivatives are exposed to the possibility of loss from a counterparty failing to perform its obligations under terms of the derivative contract. We believe the risk of incurring losses due to nonperformance by our counterparties is remote. To manage this risk, Company procedures include the (a) on-going evaluation of each counterparty's credit ratings, (b) the application of credit limits and monitoring procedures based on an internally developed, scenario-based, risk assessment system, (c) monthly reporting of each counterparty's "potential exposure", (d) master netting agreements and, where appropriate, (e) collateral agreements. 30 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY ITEM 6. EXHIBITS and REPORTS on FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- NONE b) Reports on Form 8-K. There were no reports on Form 8-K required to be filed during the period covered by this report. 31 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the dates indicated. JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: /s/ Michele G. Van Leer November 14, 2001 ---------------------------------------- Michele G. Van Leer Vice Chairman and President By: /s/ Earl W. Baucom November 14, 2001 ---------------------------------------- Earl W. Baucom Controller (Principal Accounting Officer) 32

HANCOCK JOHN VARIABLE LIFE INSURANCE CO 10-Q