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 September 30, 2000 Commission File No. 33-62895
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John Hancock Variable Life Insurance Company
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2664016
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(State or other jurisdiction (I.R.S. Employer incorporation
of organization) or Identification No.)
200 Clarendon Street, Boston, Massachusetts 02117
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617)572-9196
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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 September 30, 2000
----- ----------------------------------------
Common stock, $50 par value 50,000
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
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FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
Page
Item 1. Unaudited Financial Statements
Statements of Financial Position as of September 30,
2000 and December 31, 1999 ........................................... 1
Statements of Operations and Unassigned Deficit
for the Three and Nine Months Ended September 30, 2000 and 1999 ...... 2
Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 .................................... 3
Statements of Stockholder's Equity for the
Nine Months Ended September 30, 2000 and 1999 ........................ 4
Condensed Notes to Financial Statements .............................. 5
Item 2. Management's Discussion and Analysis ............................ 6
Item 3. Quantitative an Qualitative Disclosures
About Market Risk ............................................ 11
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 13
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
2000 1999
------------------------------------
(In millions)
<S> <C> <C>
ASSETS
Bonds $1,378.1 $1,216.3
Preferred stocks 40.9 35.9
Common stocks 1.9 3.2
Investment in affiliates 81.5 80.7
Mortgage loans on real estate 478.2 433.1
Real estate 24.7 25.0
Policy loans 205.3 172.1
Cash Items:
Cash in banks 7.7 27.2
Temporary cash investments 242.6 222.9
-----------------------------------
250.3 250.1
Premiums due and deferred 33.4 29.9
Investment income due and accrued 45.6 33.2
Other general account assets 27.9 65.3
Assets held in separate accounts 8,618.1 8,268.2
-----------------------------------
TOTAL ASSETS $11,185.9 $10,613.0
===================================
OBLIGATIONS AND STOCKHOLDER'S EQUITY
OBLIGATIONS
Policy reserves $2,116.9 $1,866.6
Federal income and other taxes payable 29.8 67.3
Other general account obligations 209.8 219.0
Transfers from separate account, net (232.7) (221.6)
Asset valuation reserve 22.4 23.1
Obligations related to separate accounts 8,611.2 8,261.6
-----------------------------------
TOTAL OBLIGATIONS 10,757.4 10,216.0
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 572.4 572.4
Unassigned deficit (146.4) (177.9)
-----------------------------------
TOTAL STOCKHOLDER'S EQUITY 428.5 397.0
-----------------------------------
TOTAL OBLIGATIONS AND STOCKHOLDER'S EQUITY $11,185.9 $10,613.0
===================================
</TABLE>
See condensed notes to the financial statements (unaudited).
1
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND UNASSIGNED DEFICIT
<TABLE>
<CAPTION>
(Unaudited)
Three months ended Nine months ended
September 30 September 30
--------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
INCOME
Premiums $217.9 $236.9 $704.9 $689.1
Net investment income 45.1 35.0 128.1 99.4
Other, net 124.9 162.9 367.4 424.8
------------- ------------- ------------- -------------
387.9 434.8 1,200.4 1,213.3
BENEFITS AND EXPENSES
Payments to policyholders and beneficiaries 86.1 91.5 268.5 265.9
Additions to reserves to provide for future
payments to policyholders and beneficiaries 189.3 223.0 619.0 659.8
Expenses of providing service to
policyholders and obtaining new
insurance 85.1 71.8 239.0 225.3
State and miscellaneous taxes 3.2 5.0 16.5 15.9
------------- ------------- ------------- -------------
363.7 391.3 1,143.0 1,166.9
------------- ------------- ------------- -------------
GAIN FROM OPERATIONS BEFORE
FEDERAL INCOME TAXES AND NET
REALIZED CAPITAL GAINS (LOSSES) 24.2 43.5 57.4 46.4
Federal income taxes 2.8 20.8 19.7 20.4
------------- ------------- ------------- -------------
GAIN FROM OPERATIONS BEFORE NET
REALIZED CAPITAL GAINS (LOSSES) 21.4 22.7 37.7 26.0
Net realized capital gains (losses) (1.0) 1.4 (0.5) 0.4
------------- ------------- ------------- -------------
NET INCOME 20.4 24.1 37.2 26.4
Unassigned deficit at beginning of period (163.4) (52.2) (177.9) (49.2)
Net unrealized capital gains (losses) and
other adjustments (3.2) ( 0.4) (5.2) ( 3.5)
Provision for litigation reserve 0.0 (194.9) 0.0 (194.9)
Other reserves and adjustments (0.2) ( 1.0) ( 0.5) (3.2)
------------- ------------- ------------- -------------
UNASSIGNED DEFICIT AT END OF PERIOD $ (146.4) $ (224.4) $ (146.4) $ (224.4)
============= ============= ============= =============
</TABLE>
See condensed notes to the financial statements (unaudited).
2
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
September 30
---------------------------
2000 1999
---- ----
(In millions)
<S> <C> <C>
Cash flows from operating activities:
Insurance premiums $ 709.2 $ 691.1
Net investment income 115.4 92.1
Benefits to policyholders and beneficiaries ( 249.3) (358.0)
Dividends paid to policyholders ( 19.5) ( 19.0)
Insurance expenses and taxes (264.8) (268.1)
Net transfers to separate accounts (379.5) (519.4)
Other, net 317.4 386.7
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NET CASH PROVIDED FROM OPERATIONS 228.9 5.4
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Cash flows used in investing activities:
Bond purchases (386.2) (194.8)
Bond sales 140.4 61.2
Bond maturities and scheduled redemptions 56.7 57.5
Bond prepayments 23.8 16.6
Stock purchases ( 5.9) ( 1.2)
Proceeds from stock sales 1.4 3.6
Real estate purchases ( 0.3) ( 1.9)
Real estate sales 0.1 17.8
Other invested assets purchases (3.6) ( 4.5)
Proceeds from the sale of other invested assets 0.9 0.0
Mortgage loans issued ( 71.7) ( 48.0)
Mortgage loan repayments 26.1 19.6
Other, net (10.4) 13.3
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NET CASH USED IN INVESTING ACTIVITIES (228.7) (60.8)
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Cash flows from financing activities:
Capital contribution 0.0 170.4
Net increase (decrease) in short-term note payable 0.0 (62.1)
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NET CASH PROVIDED FROM FINANCING ACTIVITIES 0.0 108.3
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INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS 0.2 52.9
Cash and temporary cash investments at beginning of year 250.1 19.9
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CASH AND TEMPORARY CASH INVESTMENTS
AT THE END OF PERIOD $ 250.3 $ 72.8
============= =============
</TABLE>
See condensed notes to the financial statements (unaudited).
3
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Paid-in Unassigned
Stock Capital Deficit Total
--------------- --------------- -------------- ---------------
(In millions)
<S> <C> <C> <C> <C>
For the nine months ended September 30, 1999
(unaudited)
Balance at January 1, 1999 $ 2.5 $377.5 $(49.2) $330.8
1999 Transactions:
Capital contribution 170.4 170.4
Net income 26.4 26.4
Net unrealized capital gains and other
adjustments ( 3.5) ( 3.5)
Provision for litigation reserve (194.9) (194.9)
Other reserves and adjustments ( 3.2) ( 3.2)
--------------- --------------- -------------- ---------------
Balance at September 30, 1999 $ 2.5 $547.9 $(224.4) $326.0
=============== =============== ============== ===============
For the nine months ended September 30, 2000
(unaudited)
Balance at January 1, 2000 $ 2.5 $572.4 $(177.9) $397.0
2000 Transactions:
Capital contribution
Net income 37.2 37.2
Net unrealized capital gains and other
adjustments (5.2) (5.2)
Provision for litigation reserve 0.0 0.0
Other reserves and adjustments ( 0.5) ( 0.5)
--------------- --------------- -------------- ---------------
Balance at September 30, 2000 $ 2.5 $572.4 $(146.4) $428.5
=============== =============== ============== ===============
</TABLE>
See condensed notes to the financial statements (unaudited).
4
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared on
the basis of accounting practices prescribed or permitted by the Commonwealth of
Massachusetts Division of Insurance and in conformity with the practices of the
National Association of Insurance Commissioners (NAIC), which practices differ
from generally accepted accounting principles (GAAP). Pursuant to Financial
Accounting Standard Board Interpretation 40, "Applicability of General Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises" (FIN 40),
as amended which was effective for 1996 financial statements, financial
statements based on statutory accounting practices can no longer be described as
prepared in conformity with GAAP.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ending September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
5
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT DISCUSSION AND ANALYSIS
Financial condition
During the past nine 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 stockholder's equity also grew during this
period. The following chart shows a percentage growth in total assets, total
obligations and total stockholder's equity for the nine-month period ended
September 30, 2000:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(in millions) % change
<S> <C> <C> <C>
------------------------------------------------------------- ----------------- ----------------- -----------
Total assets - JHVLICO $ 11,185.9 $ 10,613.0 5.4%
------------------------------------------------------------- ----------------- ----------------- -----------
Total assets - JHVLICO separate accounts $ 8,618.1 $ 8,268.2 4.2%
------------------------------------------------------------- ----------------- ----------------- -----------
Total obligations - JHVLICO $ 10,757.4 $ 10,216.0 5.3%
------------------------------------------------------------- ----------------- ----------------- -----------
Total obligations - JHVLICO separate accounts $ 8,611.2 $ 8,261.6 4.2%
------------------------------------------------------------- ----------------- ----------------- -----------
Total stockholder's equity $ 428.5 $ 397.0 7.9%
------------------------------------------------------------- ----------------- ----------------- -----------
</TABLE>
Separate account assets and liabilities consist primarily of the fund balances
associated with JHVLICO's variable life and annuity business. The asset holdings
include fixed income, equity growth, total return real estate, global, and
international mutual funds with liabilities representing amounts due to
policyholders.
Investments
JHVLICO's bond portfolio remains highly diversified. It maintains the
diversity of its bond portfolio by
(1) investing in a wide variety of geographic regions and industry
groups, and
(2) limiting the size of individual investment relative to the total
portfolio.
JHVLICO invests new money predominantly in long-term investment grade corporate
bonds. As a result, 84.3% of JHVLICO's general account bonds were investment
grade bonds, and 11.1% were medium grade bonds as of September 30, 2000. The
corresponding percentages as of December 31, 1999, were 86.0% and 9.8%,
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 September 30, 2000, the remaining 4.6% of JHVLICO's
total general account bonds consisted of lower grade bonds and bonds in default.
Bonds in default represent 1.1% 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, other
invested assets and issue real estate mortgages totaling $22.8 million, $8.2
million and $15.3 million, respectively, at September 30, 2000. The
corresponding amounts at December 31, 1999 were $15.4 million, $0.0 million and
$3.5 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 September 30, 2000 expire in
2000 and 2001.
6
<PAGE>
Reserves and obligations
JHVLICO's obligations consist primarily of aggregate reserves for life
and annuity policies and contracts. As of September 30, 2000, JHVLICO's general
account reserves totaled $2,116.9 million and its separate account obligations
totaled $8,611.2 million. As of December 31, 1999, the corresponding amounts
were $1,866.6 million and $8,261.6 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. Total 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 1999 for
the vast majority of reserves. During 2000 and 1999, 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.
JHVLICO includes the AVR in its obligations. Its AVR was $22.4 million
at September 30, 2000, and $23.1 million as of December 31, 1999. 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,
stockholder's equity. During 2000 and 1999, there have been no voluntary
contributions to the AVR. Changes in the AVR are accounted for as direct
increases or decreases in stockholder's equity. The impact of the AVR on
JHVLICO's stockholder's equity position will depend, in part, on JHVLICO's
investment portfolio.
The 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
stockholder equity account but amortizes them into net investment income over
the estimated remaining lives of the investments disposed. At September 30, 2000
and December 31, 1999, JHVLICO's IMR balance was $6.0 million and $7.4 million,
respectively. The impact of the IMR on JHVLICO's stockholder's equity depends
upon the amount of future interest related capital gains and losses on fixed
income investments.
7
<PAGE>
Results of operations
For the nine months ending September 30, 2000, net gain from
operations, before net realized capital losses, totaled $37.7 million, an $11.7
million increase over the same period during 1999. For the quarter ending
September 30, 2000, net gain from operations, before net realized capital
losses, totaled $21.4 million, a $1.3 million decrease compared to the same
period during 1999. The nine-month increase in net gain is principally due to
positive results in the life insurance line of business within JHVLICO. This
line of business had a growth in net gain of $11.9 million. Increased separate
account fees and a continued overall reduction to the Company's expenses of
providing service to policyholders further increased the operating gain. The
quarter ending decrease is primarily due to a 1999 $14.6 million pre-tax expense
reimbursement adjustment under a modified coinsurance agreement in the variable
annuity line of business. This occurred during the quarter ending September 30,
1999, which has not recurred during the quarter ending September 30, 2000.
For the nine months ending September 30, 2000, total revenues decreased
by 1.1% (or $12.9 million) to $1,200.4 million as compared to the same period
during 1999. For the quarter ending September 30, 2000, total revenues decreased
by 10.8% (or $46.9 million) to $387.9 million as compared to the same period
during 1999. For the nine months ending September 30, 2000, premium, net of
premium ceded to reinsurers, increased by 2.3% (or $15.8 million) to $704.9
million as compared to the same period during 1999. For the quarter ending
September 30, 2000, premium, net of premium ceded to reinsurers, decreased by
8.0% (or $19.0 million) to $217.9 million as compared to the same period during
1999. For the nine months ending September 30, 2000, net investment income
increased by 28.9% (or $28.7 million) to $128.1 million as compared to the same
period during 1999. For the quarter ending September 30, 2000, net investment
income increased by 28.9% (or $10.1 million) to $45.1 million as compared to the
same period during 1999. These increases are primarily due to a $12.6 million,
and a $4.0 million increase in gross income on short-term bonds for the nine and
three month period ended September 30, 2000, respectively. These increases can
both be attributed to an increased liquid asset base. For the nine months ending
September 30, 2000, and for the quarter ending September 30, 2000, other income
decreased by $57.4 million and $38.0 million respectively compared to the same
periods in 1999. These decreases were primarily attributable to the decrease in
commission and expense allowances, and reserve adjustments on reinsurance ceded.
For the nine months ending September 30, 2000, total benefits and
expenses decreased by 2.0% (or $23.9 million) to $1,143.0 million as compared to
the same period during 1999. For the quarter ending September 30, 2000, total
benefits and expenses decreased by 7.1% (or $27.6 million) to $363.7 million as
compared to the same period during 1999. For the nine months ending September
30, 2000, benefit payments and additions to reserves decreased by 4.1% (or $38.2
million) to $887.5 million as compared to the same period during 1999. For the
quarter ending September 30, 2000, benefit payments and additions to reserves
decreased by 12.4% (or $39.1 million) to $275.4 million as compared to the same
period during 1999. For the nine months ending September 30, 2000, insurance
expenses increased by 6.1% (or $13.7 million) to $239.0 million as compared to
the same period during 1999. For the quarter ending September 30, 2000,
insurance expenses increased by 18.5% (or $13.3 million) to $85.1 million as
compared to the same period during 1999. This consists of a $27.4 million
increase in commission expenses resulting from the sale of new and renewal
business, and a $13.7 million decrease in expense due to lower systems expense
(less Y2K and demutualization systems expense in 2000).
8
<PAGE>
Liquidity and capital resources
JHVLICO's liquidity resources for the period ending September 30, 2000
and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
Type of investment (in millions)
<S> <C> <C>
------------------------------------------------------- --------------- ---------------
Cash and short-term investments $250.3 $250.1
------------------------------------------------------- --------------- ---------------
Public bonds $709.0 $454.1
------------------------------------------------------- --------------- ---------------
Investment grade private placement bonds $522.6 $609.4
------------------------------------------------------- --------------- ---------------
</TABLE>
In addition, JHVLICO's separate accounts assets are highly liquid and available
to meet most outflow needs for variable life insurance.
JHVLICO's management believes the liquidity resources above of $1,481.9
million as of September 30, 2000, strongly position JHVLICO to meet all its
obligations to policyholders and others. Funds provided by normal operations
generally satisfy JHVLICO's financing needs. There were no outstanding
borrowings as of September 30, 2000 and December 31, 1999.
Total surplus, also known as stockholder's equity, plus the AVR,
amounted to $450.9 million as of September 30, 2000, and $420.1 million as of
December 31, 1999. 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 $576.7
million in capital contributions from the John Hancock Life Insurance Company
("John Hancock"), its parent company, of which $572.4 million is credited to
paid-in capital and $2.5 million was credited to capital stock as of September
30, 2000. 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 stockholder's equity of at least $1.0 million. JHVLICO's
stockholder's equity, net of unassigned deficit, amounted to $428.5 million at
September 30, 2000, and $397.0 million at December 31, 1999.
During 1997, John Hancock entered into a court-approved settlement
relating to a class action lawsuit involving certain individual life insurance
policies sold from 1979 through 1996. In entering into the settlement, John
Hancock specifically denied any wrongdoing. During 1999, JHVLICO recorded a
$194.9 million reserve, through a direct charge to its unassigned deficit,
representing JHVLICO's share of the settlement and John Hancock contributed
$194.9 million of capital to JHVLICO. The reserve held at September 30, 2000
amounted to $121.2 million and is based on a number of factors, including the
estimated number of claims, the expected type of relief to be sought by class
members (general relief or alternative dispute resolution), the estimated cost
per claim and the estimated costs to administer the claims.
Given the uncertainties associated with estimating the reserve, it is
reasonably possible that the final cost of the settlement could differ
materially from the amounts presently provided for by JHVLICO. John Hancock and
JHVLICO will continue to update their estimate of the final cost of the
settlement as claims are processed and more specific information is developed,
particularly as the actual cost of the claims subject to alternative dispute
resolution becomes available. However, based on information available at this
time, and the uncertainties associated with the final claim processing and
alternative dispute resolution, the range of any additional costs related to the
settlement cannot be reasonably estimated. If JHVLICO's share of the settlement
increases, John Hancock will contribute additional capital to JHVLICO so that
JHVLICO's total stockholder's equity would not be impacted.
9
<PAGE>
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 September 30, 2000, JHVLICO's total adjusted capital as
defined by the NAIC was well in excess of the RBC standards.
10
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK.
JHVLICO maintains a disciplined, comprehensive approach to managing capital
market risks inherent in its business operations. The Company's principal
capital market exposures are credit and interest rate risk, although we have
certain exposures to changes in 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. Foreign currency risk pertains to price
fluctuations, associated with the Company's ownership of non-US dollar
denominated investments, driven by dynamic foreign exchange levels.
The active management of capital market risks is central to JHVLICO's
operations. Consistent with Company policy, JHVLICO may use the following
approaches to manage its exposure to market risk within defined tolerance
ranges: (1) rebalance its existing asset or liability portfolios; (2) change the
character of future investments purchased; or (3) use derivative instruments to
modify the market risk characteristics of existing, or future, assets and
liabilities.
Interest Rate Risk
Interest rate risk is the risk that JHVLICO will incur economic losses due
to adverse changes in interest rates. This risk arises from certain of JHVLICO's
primary activities, as JHVLICO invests funds in interest-sensitive assets to
support the issuance of certain interest-sensitive liabilities.
JHVLICO seeks to earn returns that enhance its ability to offer
competitive rates and prices to its customers while contributing to stable
profits and long-term capital growth. Accordingly, JHVLICO's investment
objectives and decisions are a function of the underlying risks and product
offerings of each primary business operation. In addition, JHVLICO diversifies
its product portfolio offerings to include products that contain features that
protect against fluctuations in interest rates. Those features include
adjustable crediting rates, policy surrender charges, and market value
adjustments on early liquidations.
JHVLICO seeks to reduce the effect of call or prepayment risk in its fixed
maturity portfolios by limiting its exposure to investments that are not call
protected or by requiring incremental yield to compensate for the risk of the
option being exercised. Examples of investments that JHVLICO limits because of
option risk are residential mortgage-backed securities.
JHVLICO manages the interest rate risk in its assets relative to the
interest rate risk inherent in its liabilities. One of the measures JHVLICO uses
to quantify this exposure is duration, with other measures used for limiting
exposure to non-parallel interest rate risk. JHVLICO's objective is to manage
the duration gap between its assets and liabilities to within a 10% relative
band of its liability duration. In practice, the mismatch has been managed
within a tolerance of +/- .05 years
In addition to the duration management procedures described in the
preceding paragraphs, a JHVLICO subsidiary, Investors Partner Life Insurance
Company, maintains an actively managed public bond portfolio that uses interest
rate futures contracts to help manage its duration relative to that of its
benchmark. Its investment policy permits a duration tolerance of +/- .25 years
around the composite Lehman Brothers benchmark duration. In practice, the
portfolio's duration mismatch is managed to within +/- .05 years
JHVLICO also uses various derivative financial instruments to manage its
exposure to fluctuations in interest rates, including interest rate swaps,
interest rate futures, and interest rate caps. Interest rate swaps are used
primarily to more closely align the interest rate characteristics of assets and
liabilities. JHVLICO also uses interest rate futures to periodically rebalance
its duration-managed accounts. JHVLICO uses interest rate caps to hedge embedded
caps on floating-rate assets and to manage the risk associated with a sudden
rise in interest rates.
As of September 30, 2000, there have been no material changes to the
interest rate exposures as reported in the Company's 1999 Form 10-K Annual
Report.
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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.
JHVLICO's exposure to derivatives credit risk is the risk of loss from a
counterparty failing to perform the terms of the contract. JHVLICO continually
monitors its position and the credit ratings of the counterparties to these
derivative instruments. To limit exposure associated with counterparty
nonperformance on interest rate swaps and interest rate caps, JHVLICO enters
into master netting agreements with its counterparties. In addition, where
deemed appropriate, JHVLICO enters into bi-lateral collateral agreements with
certain of its counterparties. JHVLICO believes the risk of incurring losses due
to nonperformance by its counterparties is remote. Futures contracts trade on
organized exchanges and, therefore, have effectively no credit risk.
Foreign Currency Risk
Foreign currency risk is the risk that JHVLICO will incur economic losses
due to adverse changes in foreign currency exchange rates. JHVLICO holds certain
fixed income securities that are denominated in foreign currencies. Company
policy requires that we use derivatives to hedge the foreign currency risk of
these instruments (both interest payments and the final maturity payment). As of
September 30, 2000, there has been no material change in the composition of the
Company's foreign currency risk exposure. For further discussion of foreign
currency risk exposure, please refer to the Company's 1999 Form 10-K Annual
Report.
Effects of Inflation
JHVLICO does not believe that inflation has had a material effect on the
results of its operations except insofar as inflation may affect interest rates.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
John Hancock Variable Life Insurance Company
(Registrant)
Date: November 14, 2000 /s/ Thomas J. Lee
-----------------
Thomas J. Lee
Vice President
Date: November 14, 2000 /s/ Patrick J. Gill
--------------------
Patrick J. Gill
Controller
