November 11, 1996 Prospectus for
KEYPORT ADVISOR VARIABLE ANNUITY
Including Eligible Fund Prospectuses for
THE ALGER AMERICAN FUND
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
KEYPORT VARIABLE INVESTMENT TRUST
MFS VARIABLE INSURANCE TRUST
STEINROE VARIABLE INVESTMENT TRUST
<PAGE>
GROUP FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
Variable Account A
OF
KEYPORT LIFE INSURANCE COMPANY
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This Prospectus offers Group Variable Annuity Contracts (the "Contracts") and
the related Certificates (the "Certificates") that are designed to fund
benefits under certain group arrangements including those that qualify for
special tax treatment under the Internal Revenue Code of 1986 (the "Code").
As required by certain states, the Certificates may be offered as individual
contracts. Unless otherwise noted or the context so requires all references
to the Certificates include the Contracts and the individual Contracts. The
Certificates are offered on a flexible payment basis.
The variable annuity Contract (form number DVA(1)) and the Certificates
described in this prospectus provide for accumulation of Certificate Values
on a variable basis, and also on a fixed basis, and payments of periodic
annuity payments on either a variable or fixed basis. The Certificates are
designed for use by individuals for retirement planning purposes.
This prospectus generally describes only the variable features of the
Certificate (for a summary of the fixed features, see Appendix A on Page 27).
If the Certificate Owner elects to have Certificate Values accumulated on a
variable basis, Purchase Payments will be allocated to a segregated
investment account of Keyport Life Insurance Company ("Keyport"), designated
Variable Account A ("Variable Account").
The Variable Account invests in shares of the following investment companies
at their net asset value: The Alger American Fund ("Alger American
Fund")--Alger American Growth Portfolio ("Alger Growth") and Alger American
Small Capitalization Portfolio ("Alger Small Cap"); Alliance Variable
Products Series Fund, Inc. ("Alliance Series Fund")--Global Bond Portfolio
("Alliance Global Bond") and Premier Growth Portfolio ("Alliance Premier
Growth"); Keyport Variable Investment Trust ("Colonial
Trust")--Colonial-Keyport Growth and Income Fund ("Colonial Growth &
Income"), Colonial-Keyport International Fund for Growth ("Colonial Int'l
Fund for Growth"), Colonial-Keyport Strategic Income Fund ("Colonial
Strategic Income"), Colonial-Keyport U.S. Fund for Growth ("Colonial U.S.
Fund for Growth"), Colonial-Keyport Utilities Fund ("Colonial Utilities"),
and Newport-Keyport Tiger Fund ("Colonial-Newport Tiger"); MFS Variable
Insurance Trust ("MFS Trust")--MFS Emerging Growth Series ("MFS Emerging
Growth") and MFS Research Series ("MFS Research"); and SteinRoe Variable
Investment Trust ("SteinRoe Trust")-- SteinRoe Capital Appreciation Fund
("SteinRoe Capital Appreciation"), SteinRoe Cash Income Fund ("SteinRoe Cash
Income"), SteinRoe Managed Assets Fund ("SteinRoe Managed Assets"), SteinRoe
Managed Growth Stock Fund ("SteinRoe Managed Growth Stock"), and SteinRoe
Mortgage Securities Income Fund ("SteinRoe Mortgage Securities Income").
The Variable Account may offer other forms of the Contracts and Certificates
with features, and fees and charges which vary from the Certificates, and
provide for investment in other Sub-accounts which may invest in different or
additional mutual funds. Other Contracts and Certificates will be described
in separate prospectuses and statements of additional information.
A Statement of Additional Information dated the same as this prospectus has
been filed with the Securities and Exchange Commission and is herein
incorporated by reference. It is available, at no charge, by writing Keyport
at 125 High Street, Boston, MA 02110, by calling (800) 437-4466, or by
returning the postcard on the back cover of this prospectus. A table of
contents for the Statement of Additional Information is on Page 26.
The Certificates may be sold by or through banks or other depository
institutions. The Contract and Certificates: (bullet) are not insured by the
FDIC; (bullet) are not a deposit or other obligation of, or guaranteed by,
the depository institution; and (bullet) are subject to investment risks,
including the possible loss of principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS SETS FORTH THE INFORMATION A PROSPECTIVE INVESTOR SHOULD KNOW
BEFORE INVESTING. THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE OR JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED BY
KEYPORT TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING, AND IF
GIVEN OR MADE, SUCH UNAUTHORIZED INFORMATION OR REPRESENTATIONS SHOULD NOT BE
RELIED UPON.
The date of this prospectus is November 11, 1996
1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Glossary of Special Terms 3
Summary of Expenses 4
Synopsis 7
Performance Information 8
Keyport and the Variable Account 8
Purchase Payments and Applications 9
Investments of the Variable Account 9
Allocations of Purchase Payments 9
Eligible Funds 10
Transfer of Variable Account Value 12
Substitution of Eligible Funds and Other
Variable Account Changes 13
Deductions 13
Deductions for Certificate Maintenance
Charge 13
Deductions for Mortality and Expense Risk
Charge 14
Deductions for Daily Distribution Charge 14
Deductions for Contingent Deferred Sales
Charge 14
Deductions for Transfers of Variable Account
Value 15
Deductions for Premium Taxes 15
Deductions for Income Taxes 15
Total Variable Account Expenses 15
Other Services 16
The Certificates 17
Variable Account Value 17
Valuation Periods 17
Net Investment Factor 17
Modification of the Certificate 18
Right to Revoke 18
Death Provisions for Non-Qualified
Certificates 18
Death Provisions for Qualified Certificates 19
Certificate Ownership 20
Assignment 20
Partial Withdrawals and Surrender 20
Annuity Provisions 20
Annuity Benefits 20
Income Date and Annuity Option 20
Change in Income Date and Annuity Option 21
Annuity Options 21
Variable Annuity Payment Values 22
Proof of Age, Sex, and Survival of Annuitant 22
Suspension of Payments 22
Tax Status 22
Introduction 22
Taxation of Annuities in General 22
Qualified Plans 24
Tax-Sheltered Annuities 24
Individual Retirement Annuities 25
Corporate Pension and Profit-Sharing Plans 25
Deferred Compensation Plans with Respect to
Service for State and Local Governments 25
Variable Account Voting Privileges 25
Sales of the Certificates 25
Legal Proceedings 26
Inquiries by Certificate Owners 26
Table of Contents--Statement of Additional
Information 26
Appendix A--The Fixed Account (also known as
the Modified Guaranteed Annuity Account) 27
Appendix B--Telephone Instructions 30
</TABLE>
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GLOSSARY OF SPECIAL TERMS
Accumulation Unit: An accounting unit of measure used to calculate Variable
Account Value.
Annuitant: The Annuitant is the natural person to whom any annuity payments
will be made starting on the Income Date. The Annuitant may not be over age
80 on the Certificate Date (age 75 for Qualified Certificates).
Certificate Anniversary: The same month and day as the Certificate Date in
each subsequent year of the Certificate.
Certificate Date: The effective date of the Certificate; it is shown on the
Certificate Schedule.
Certificate Owner: The person (or persons in the case of joint ownership) who
possesses all the ownership rights under the Certificate. The primary
Certificate Owner may not be over age 80 on the Certificate Date (age 75 for
Qualified Certificates and age 80 for a joint Owner).
Certificate Value: The sum of the Variable Account Value and the Fixed
Account Value.
Certificate Withdrawal Value: The Certificate Value increased or decreased by
a limited Market Value Adjustment less any premium taxes and Certificate
Maintenance Charge and applicable Contingent Deferred Sales Charges.
Certificate Year: Any period of 12 months commencing with the Certificate
Date and each Certificate Anniversary thereafter shall be a Certificate Year.
Covered Person: The person(s) identified on the Certificate Schedule whose
death may result in an Adjustment of Certificate Value, a waiver of any
Contingent Deferred Sales Charges and a waiver of any Market Value Adjustment
or whose medically necessary stay in a hospital or nursing facility may allow
the Certificate Owner to be eligible for either a total or partial waiver of
the Contingent Deferred Sales Charge.
Designated Beneficiary: The person who may be entitled to receive benefits
following the death of the Annuitant, Certificate Owner, or joint Certificate
Owner. The Designated Beneficiary will be the first person among the
following who is alive on the date of death: primary Certificate Owner; joint
Certificate Owner; primary beneficiary; contingent beneficiary; and if none
of the above is alive, the primary Certificate Owner's estate. If the primary
Certificate Owner and joint Certificate Owner are both alive, they will be
the Designated Beneficiary together.
Eligible Funds: The mutual funds that are eligible investments for the
Variable Account under the Certificates.
Fixed Account: Part of Keyport's general account to which Purchase Payments
may be allocated or Certificate Values may be transferred.
Fixed Account Value: The value of all Fixed Account amounts accumulated under
the Certificate prior to the Income Date.
Guarantee Period Anniversary: An anniversary of a Guarantee Period's Start
Date.
Guarantee Period Month: The first Guarantee Period Month is the monthly
period which begins on the Start Date. Subsequent Guarantee Period Months
begin on the same day in the ensuing months.
Guarantee Period Year: The first Guarantee Period Year is the annual period
which begins on the Start Date. Subsequent Guarantee Period Years begin on
each Guaranteed Period Anniversary.
In Force: The status of the Certificate before the Income Date so long as it
is not totally surrendered, the Certificate Value under a Certificate does
not go to zero, and there has not been a death of the Annuitant or any
Certificate Owner that will cause the Certificate to end within at most five
years of the date of death.
Income Date: The date on which annuity payments are to begin.
Non-Qualified Certificate: Any Certificate that is not issued under a
Qualified Plan.
Office: Keyport's executive office, which is 125 High Street, Boston,
Massachusetts 02110.
Qualified Certificate: Certificates issued under Qualified Plans.
Qualified Plan: A retirement plan established pursuant to the provisions of
Sections 401, 403(b) or 408(b) of the Internal Revenue Code. Keyport treats
Section 457 plans as Qualified Plans.
Start Date: The date an amount is first allocated to a Guarantee Period.
Variable Account: A separate investment account of Keyport into which
Purchase Payments under the Certificates may be allocated. The Variable
Account is divided into Sub-Accounts ("Sub-Account") that correspond to the
Eligible Funds in which they invest.
Variable Account Value: The value of all Variable Account amounts accumulated
under the Certificate prior to the Income Date.
Written Request: A request written on a form satisfactory to Keyport, signed
by the Certificate Owner and a disinterested witness, and filed at Keyport's
Office.
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SUMMARY OF EXPENSES
The expense summary format below, including the examples, was adopted by the
Securities and Exchange Commission to assist the owner of a variable annuity
certificate in understanding the transaction and operating expenses the owner
will directly or indirectly bear under a certificate. The values reflect
expenses of the Variable Account as well as the Eligible Funds under the
Certificates. The expenses shown for the Eligible Funds and the examples
should not be considered a representation of future expenses.
Certificate Owner Transaction Expenses
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of Purchase Payments): 7%(1)
Years from Date of Payment Sales Charge
- -------------------------- ------------
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 or later 0%
Maximum Total Certificate Owner Transaction
Expenses
(as a percentage of Purchase Payments): 7%
Annual Certificate Maintenance Charge(2) $36
Variable Account Annual Expenses
(as a percentage of average net assets)
Mortality and Expense Risk Charge: 1.25%
Distribution Charge: .15%
----
Total Variable Account Annual Expenses: 1.40%
4
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Alger American Fund, Alliance Series Fund, Colonial Trust,
MFS Trust, and SteinRoe Trust Annual Expenses(3)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Total Fund
Operating Expenses
Management Other After Any Expense
Fund Fees Expenses Reimbursements(4)
- --------------------------------- --------- -------- ----------------
<S> <C> <C> <C>
Alger Growth .75% .10% .85%
Alger Small Cap .85 .07 .92
Alliance Global Bond .00 .95 .95 (1.77%)(4)
Alliance Premier Growth .76 .19 .95 (1.19%)(4)
Colonial Growth & Income .65 .16 .81
Colonial Int'l Fund for Growth .90 .50 1.40
Colonial-Newport Tiger .90 .82 1.72
Colonial Strategic Income .65 .15 .80 (.94 %)(4)
Colonial U.S. Fund for Growth .80 .20 1.00 (1.07%)(4)
Colonial Utilities .65 .18 .83
MFS Emerging Growth .75 .25 1.00 (2.91%)(4)
MFS Research .75 .25 1.00 (3.90%)(4)
SteinRoe Capital Appreciation .65 .11 .76
SteinRoe Cash Income .50 .13 .63
SteinRoe Managed Assets .60 .06 .66
SteinRoe Managed Growth Stock .65 .09 .74
SteinRoe Mortgage Securities Income .55 .14 .69
</TABLE>
THE ABOVE EXPENSES FOR THE ELIGIBLE FUNDS WERE PROVIDED BY THE FUNDS. KEYPORT
HAS NOT INDEPENDENTLY VERIFIED THE ACCURACY OF THE INFORMATION.
Example #1 -- Assuming surrender of the Certificate at the
end of the periods shown.(5)
A $1,000 investment in each Sub-Account listed would be subject to the
expenses shown, assuming 5% annual return on assets.
<TABLE>
<CAPTION>
Sub-Account 1 Year 3 Years 5 Years 10 Years
----------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Alger Growth $ 93 $125 $166 $329
Alger Small Cap 94 127 170 338
Alliance Global Bond 94 128 172 342
Alliance Premier Growth 94 128 172 342
Colonial Growth & Income 93 123 164 324
Colonial Int'l Fund for Growth 99 141 197 397
Colonial-Newport Tiger 102 151 213 435
Colonial Strategic Income 93 123 164 323
Colonial U.S. Fund for Growth 95 129 175 348
Colonial Utilities 93 124 165 327
MFS Emerging Growth 95 129 175 348
MFS Research 95 129 175 348
SteinRoe Capital Appreciation 93 122 161 318
SteinRoe Cash Income 91 118 154 301
SteinRoe Managed Assets 92 119 156 305
SteinRoe Managed Growth Stock 92 121 160 315
SteinRoe Mortgage Securities Income 92 120 157 309
</TABLE>
5
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Example #2 -- Assuming annuitization of the Certificate at the end of the
periods shown.(5)
A $1,000 investment in each Sub-Account listed would be subject to the
expenses shown, assuming 5% annual return on assets.
<TABLE>
<CAPTION>
Sub-Account 1 Year 3 Years 5 Years 10 Years
- ------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Alger Growth 23 76 136 329
Alger Small Cap 24 78 140 338
Alliance Global Bond 24 79 142 342
Alliance Premier Growth 24 79 142 342
Colonial Growth & Income 23 75 134 324
Colonial Int'l Fund for Growth 29 93 167 397
Colonial-Newport Tiger 32 103 184 435
Colonial Strategic Income 23 74 134 323
Colonial U.S. Fund for Growth 25 81 145 348
Colonial Utilities 23 75 135 327
MFS Emerging Growth 25 81 145 348
MFS Research 25 81 145 348
SteinRoe Capital Appreciation 23 73 131 318
SteinRoe Cash Income 21 69 124 301
SteinRoe Managed Assets 22 70 126 305
SteinRoe Managed Growth Stock 22 72 130 315
SteinRoe Mortgage Securities Income 22 71 127 309
</TABLE>
Example #3 -- Assuming the Certificate stays in force through the periods
shown.
A $1,000 investment in each Sub-Account listed would be subject to the same
expenses shown in Example #2, assuming 5% annual return on assets.
(1)Contingent Deferred Sales Charges are deducted only if the Certificate is
totally or partially surrendered. A surrender will not incur the Charge
percentage shown as follows:
1. In any Certificate Year, Certificate Owners may withdraw an aggregate
amount, not to exceed, at the time of withdrawal, the Certificate's earnings,
which equal: (a) the Certificate Value, less (b) the portion of the Purchase
Payments not previously withdrawn.
2. In any Certificate Year after the first, Certificate Owners may withdraw,
in addition to the amount available in 1., the amount by which 10% of the
Certificate Value as of the preceding Certificate Anniversary exceeds the
amount available in 1.
(2)Keyport reserves the right to impose a transfer fee after prior notice to
Certificate Owners, but currently does not impose any charge. Premium taxes
are not shown. Keyport deducts the amount of premium taxes, if any, when paid
unless Keyport elects to defer such deduction.
(3)All Trust and Fund expenses are for 1995. The Alliance Series Fund, Colonial
Trust (Colonial Strategic Income and Colonial U.S. Fund for Growth only), and
MFS Trust expenses reflect such Fund's or Trust's adviser's agreement to
reimburse expenses above certain limits (see footnote 4).
(4)Expense information shown for Alliance Series Fund has been restated to
reflect current fees and is net of voluntary expense reimbursements. The
Alliance Series Fund Adviser has agreed to continue such reimbursements for
the foreseeable future. Each percentage shown in the parentheses is what the
total expenses would be in the absence of expense reimbursement: for Alliance
Global Bond--1.77%; and for Alliance Premier Growth--1.19%.
Colonial Trust's manager has agreed until 4/30/97 to reimburse all expenses,
including management fees, in excess of the following percentage of the
average annual net assets of each Fund, so long as such reimbursement would
not result in the Fund's inability to qualify as a regulated investment
company under the Internal Revenue Code: 1.00% for Colonial Growth & Income,
Colonial Utilities and Colonial U.S. Fund for Growth; 1.75% for Colonial
Int'l Fund for Growth and Colonial-Newport Tiger; and .80% for Colonial
Strategic Income. The total percentages shown in the table for Colonial
Strategic Income and Colonial U.S. Fund for Growth are after expense
reimbursement. Each percentage shown in the parentheses is what the total for
1995 would be in the absence of expense reimbursement: for Colonial Strategic
Income--.94%; and for Colonial U.S. Fund for Growth--1.07%.
MFS Trust's Adviser has agreed to bear, subject to reimbursement, expenses
for each of the two Eligible Funds shown such that each Fund's total
operating expenses shall not exceed, on an annualized basis, 1.00% of the
average daily net assets of the Fund from November 2, 1994 through December
31, 1996, 1.25% of the average daily net assets of the Fund from January
6
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1, 1997 through December 31, 1998, and 1.50% of the average daily net assets
of the Fund from January 1, 1999 through December 31, 2004; provided however,
that this obligation may be terminated or revised at any time. Each
percentage shown in the parentheses is what the total expenses would be in
the absence of expense reimbursement: for MFS Emerging Growth--2.91%; and for
MFS Research--3.90%.
SteinRoe Trust's adviser has voluntarily agreed until 4/30/97 to reimburse
all expenses, including management fees, in excess of the following
percentage of the average annual net assets of each Fund, so long as such
reimbursement would not result in the Fund's inability to qualify as a
regulated investment company under the Internal Revenue Code: .80% for
SteinRoe Capital Appreciation and Management Growth Stock; .65% for SteinRoe
Cash Income; .75% for SteinRoe Managed Assets; and .70% for SteinRoe Mortgage
Securities Income.
(5)The annuity is designed for retirement planning purposes. Surrenders prior
to the Income Date are not consistent with the long-term purposes of the
Certificate and the applicable tax laws.
The examples should not be considered a representation of past or future
expenses and charges of the Sub-Accounts. Actual expenses may be greater or
less than those shown. Similarly, the assumed 5% annual rate of return is not
an estimate or a guarantee of future investment performance. See "Deductions"
in this prospectus, "Management of the Fund" in the prospectuses for Alger
American Fund and the Alliance Series Fund, "Trust Management Organizations"
and "Expenses of the Funds" in the prospectus for Colonial Trust, "Management
of the Series" and "Expenses" in the prospectus for MFS Trust, and "How the
Funds are Managed" in the prospectus for SteinRoe Trust.
SYNOPSIS
The following Synopsis should be read in conjunction with the detailed
information in this prospectus and the Statement of Additional Information.
Please refer to the Glossary of Special Terms for the meaning of certain
defined terms. Variations from the information appearing in this prospectus
due to individual state requirements are described in supplements which are
attached to this prospectus, or in endorsements to the Certificates, as
appropriate.
The Certificate allows Certificate Owners to allocate Purchase Payments to
the Variable Account and also to the Fixed Account. The Variable Account is a
separate investment account maintained by Keyport. The Fixed Account is part
of Keyport's "general account", which consists of all Keyport's assets except
the Variable Account and the assets of other separate accounts maintained by
Keyport. Certificate Owners may allocate payments to, and receive annuity
payments from the Variable Account and/or the Fixed Account. If the
Certificate Owner allocates payments to the Variable Account, the
accumulation values and annuity payments will fluctuate according to the
investment experience of the Sub-Accounts chosen. If the Certificate Owner
allocates payments to the Fixed Account, the accumulation values will
increase at guaranteed interest rates and annuity payments will be of a fixed
amount. Fixed Account Values are subject to a limited market value
adjustment. (See Appendix A on Page 27 for more information on the Fixed
Account.) If the Certificate Owner allocates payments to both Accounts, then
the accumulation values and annuity payments will be variable in part and
fixed in part.
The Certificate permits Purchase Payments to be made on a flexible Purchase
Payment basis. The minimum initial payment is $5,000. The minimum amount for
each subsequent payment is $1,000 or such lesser amount as Keyport may permit
from time to time (currently $250). (See "Purchase Payments" on Page 9.)
There are no deductions made from Purchase Payments for sales charges at the
time of purchase. A Contingent Deferred Sales Charge may be deducted in the
event of a total or partial surrender (see "Surrenders" on Page 20). The
Contingent Deferred Sales Charge is based on a graded table of charges. The
charge will not exceed 7% of that portion of the amount surrendered that
represents Purchase Payments made during the seven years immediately
preceding the request for surrender. (See "Deductions for Contingent Deferred
Sales Charge" on Page 14.)
Keyport deducts a Mortality and Expense Risk Charge, which is equal on an
annual basis to 1.25% of the average daily net asset values in the Variable
Account attributable to the Certificates. (See "Deductions for Mortality and
Expense Risk Charge" on Page 14.) Keyport also deducts a daily distribution
charge which is equal on an annual basis to .15% of the same values. (See
"Deductions for Daily Distribution Charge" on Page 14.)
Keyport deducts an annual Certificate Maintenance Charge (currently $36.00)
from the Variable Account Value for administrative expenses. Prior to the
Income Date, Keyport reserves the right to change this charge for future
years. Keyport will in certain instances waive this charge. (See "Deductions
for Certificate Maintenance Charge" on Page 13.)
Keyport reserves the right to deduct a charge of $25 for each transfer in
excess of 12 per Certificate Year. (See "Transfer of Variable Account Value"
on Page 12.)
Premium taxes will be charged against the Certificate Value. Currently such
premium taxes range from 0% to 5.0%. (See "Deductions for Premium Taxes" on
Page 15.)
There are no federal income taxes on increases in the value of a Certificate
until a distribution occurs, in the form of a lump sum payment, annuity
payments, or the making of a gift or assignment of the Certificate. A federal
penalty tax (currently 10%) may also apply. (See "Tax Status" on Page 22.)
The Certificate allows the Certificate Owner to revoke the Certificate
generally within 10 days of delivery (see "Right to Revoke" on Page 18). For
most states, Keyport will refund the Certificate Value as of the date the
returned Certificate is received by Keyport, plus any distribution charges
previously deducted. The Certificate Owner thus will bear the investment risk
during the revocation period. In other states, Keyport will return Purchase
Payments. In
7
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such other states Purchase Payments will be allocated to the SteinRoe Cash
Income Sub-Account during the "freelook" period plus an additional 10 days.
The full financial statements for Keyport are in the Statement of Additional
Information.
PERFORMANCE INFORMATION
The Variable Account may from time to time advertise certain performance
information concerning its various Sub-Accounts.
Keyport and certain of the Eligible Funds have been offering contracts for
periods prior to the commencement of the offering of the Certificates
described in this prospectus. The performance information will be based on
historical results of Eligible Funds that apply to the Certificate for the
specified time periods.
This performance information is not intended to indicate either past
performance under an actual Certificate or future performance.
The Sub-Accounts may advertise total return information for various periods
of time. Total return performance information is based on the overall
percentage change in value of a hypothetical investment in the specific
Sub-Account over a given period of time.
Average annual total return information shows the average percentage change
in the value of an investment in the Sub-Account from the beginning date of
the measuring period to the end of that period. This standardized version of
average annual total return reflects all historical investment results, less
all charges and deductions applied against the Sub-Account and a Certificate
(including any Contingent Deferred Sales Charge that would apply if a
Certificate Owner surrendered the Certificate at the end of each period
indicated). Average total return does not take into account any premium taxes
and would be lower if these taxes were included.
In order to calculate average annual total return, Keyport divides the change
in value of a Sub-Account under a Certificate surrendered on a particular
date by a hypothetical $1,000 investment in the Sub-Account made by the
Certificate Owner at the beginning of the period illustrated. The resulting
total rate for the period is then annualized to obtain the average annual
percentage change during the period. Annualization assumes that the
application of a single rate of return each year during the period will
produce the ending value, taking into account the effect of compounding.
The Sub-Accounts may present additional total return information computed on
a different basis.
First, the Sub-Accounts may present total return information computed on the
same basis as described above, except deductions will not include the
Contingent Deferred Sales Charge. This presentation assumes that the
investment in the Certificate continues beyond the period when the Contingent
Deferred Sales Charge applies, consistent with the long-term investment and
retirement objectives of the Certificate. The total return percentage will
thus be higher under this method than the standard method described above.
Second, the Sub-Accounts may present total return information calculated by
dividing the change in a Sub-Account's Accumulation Unit value over a
specified time period by the Accumulation Unit value of that Sub-Account at
the beginning of the period. This computation results in a 12-month change
rate or, for longer periods, a total rate for the period which Keyport
annualizes in order to obtain the average annual percentage change in the
Accumulation Unit value for that period. The change percentages do not take
into account the Contingent Deferred Sales Charge, the Certificate
Maintenance Charge and premium tax charges. The percentages would be lower if
these charges were included.
The SteinRoe Cash Income Sub-Account is a money market Sub-Account that also
may advertise yield and effective yield information. The yield of the
Sub-Account refers to the income generated by an investment in the
Sub-Account over a specifically identified 7-day period. This income is
annualized by assuming that the amount of income generated by the investment
during that week is generated each week over a 52-week period and is shown as
a percentage. The yield reflects the deduction of all charges assessed
against the Sub-Account and a Certificate but does not take into account
Contingent Deferred Sales Charges and premium tax charges. The yield would be
lower if these charges were included.
The effective yield of the SteinRoe Cash Income Sub-Account is calculated in
a similar manner but, when annualizing such yield, income earned by the
Sub-Account is assumed to be reinvested. This compounding effect causes
effective yield to be higher than yield.
KEYPORT AND THE VARIABLE ACCOUNT
Keyport Life Insurance Company was incorporated in Rhode Island in 1957 as a
stock life insurance company. Its executive and administrative offices are at
125 High Street, Boston, Massachusetts 02110 and its home office is at 235
Promenade Street, Providence, Rhode Island 02903.
Keyport writes individual life insurance and individual and group annuity
contracts on a non-participating basis. Keyport is licensed to do business in
all states except New York and is also licensed in the District of Columbia
and the Virgin Islands. Keyport has been rated A+ (Superior) by A.M. Best and
Company, independent analysts of the insurance industry. Keyport has been
rated A+ each year since 1976, the first year Keyport was subject to Best's
alphabetic rating system. Standard & Poor's ("S & P") has rated Keyport AA-
for excellent financial security, Moody's has rated Keyport A1 for good
financial strength and Duff & Phelps has rated Keyport AA- for very high
claims paying ability. The Best's A+ rating is in the highest rating
8
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category, which also includes A++. S & P and Duff & Phelps have one rating
category above AA and Moody's has two rating categories above A. The Moody's
"-" modifier signifies that Keyport is in the higher end of the A category
while the S&P and Duff & Phelps "-" modifier signifies that Keyport is at the
lower end of the AA category. These ratings merely reflect the opinion of the
rating company as to the relative financial strength of Keyport and Keyport's
ability to meet its contractual obligations to its policyholders. Even though
assets in the Variable Account are held separately from Keyport's other
assets, ratings of Keyport may still be relevant to Certificate Owners since
not all of Keyport's contractual obligations relate to payments based on
those segregated assets (e.g., see "Death Provisions" for Keyport's
obligation after certain deaths to increase the Certificate Value if it is
less than Death Benefit Amount or otherwise enhance the death benefit with
interest).
Keyport is one of the Liberty Financial Companies. Keyport is ultimately
controlled by Liberty Mutual Insurance Company of Boston, Massachusetts, a
multi-line insurance and financial services institution.
The Variable Account was established by Keyport pursuant to the provisions of
Rhode Island Law on January 30, 1996. The Variable Account meets the
definition of "separate account" under the federal securities laws. The
Variable Account is registered with the Securities and Exchange Commission as
a unit investment trust under the Investment Company Act of 1940. Such
registration does not involve supervision of the management of the Variable
Account or Keyport by the Securities and Exchange Commission.
Obligations under the Certificates are the obligations of Keyport. Although
the assets of the Variable Account are the property of Keyport, these assets
are held separately from the other assets of Keyport and are not chargeable
with liabilities arising out of any other business Keyport may conduct.
Income, capital gains and/or capital losses, whether or not realized, from
assets allocated to the Variable Account are credited to or charged against
the Variable Account without regard to the income, capital gains, and/or
capital losses arising out of any other business Keyport may conduct. Thus,
Keyport does not guarantee the investment performance of the Variable
Account. The Variable Account Value and the amount of variable annuity
payments will vary with the investment performance of the investments in the
Variable Account.
PURCHASE PAYMENTS AND APPLICATIONS
The initial Purchase Payment is due on the Certificate Date. The minimum
initial Purchase Payment is $5,000. Additional Purchase Payments can be made
at the Certificate Owner's option. Each subsequent Purchase Payment must be
at least $1,000 or such lesser amount as Keyport may permit from time to time
(currently $250). Keyport may reject any Purchase Payment.
If the application for a Certificate is in good order and it calls for
amounts to be allocated to the Variable Account, Keyport will apply the
initial Purchase Payment to the Variable Account and credit the Certificate
with Accumulation Units within two business days of receipt. If the
application for a Certificate is not in good order, Keyport will attempt to
get it in good order within five business days. If it is not complete at the
end of this period, Keyport will inform the applicant of the reason for the
delay and that the Purchase Payment will be returned immediately unless the
applicant specifically consents to Keyport's keeping the Purchase Payment
until the application is complete. Once the application is complete, the
Purchase Payment will be applied within two business days of its completion.
Keyport has reserved the right to reject any application.
Keyport confirms, in writing, to the Certificate Owner the allocation of all
Purchase Payments and the re-allocation of values after any requested
transfer. Keyport must be notified immediately by the Certificate Owner of
any processing error.
Keyport will permit others to act on behalf of an applicant in certain
instances, including the following two examples. First, Keyport will accept
an application for a Certificate that contains a signature signed under a
power of attorney if a copy of that power of attorney is submitted with the
application. Second, Keyport will issue a Certificate that is not replacing
an unaffiliated company's existing life insurance or annuity policy without
having previously received a signed application from the applicant. Certain
dealers or other authorized persons such as employers and Qualified Plan
fiduciaries will inform Keyport of an applicant's answers to the questions in
the application by telephone or by order ticket and cause the initial
Purchase Payment to be paid to Keyport. If the information is in good order,
Keyport will issue the Certificate with a copy of an application completed
with that information. The Certificate will be delivered to the Certificate
Owner with a letter from Keyport that will give the Certificate Owner an
opportunity to respond to Keyport if any of the application information is
incorrect. Alternatively, Keyport's letter may request the Certificate Owner
to confirm the correctness of the information by signing either a copy of the
application or a Certificate delivery receipt that ratifies the application
in all respects (in either case, a copy of the signed document would be
returned to Keyport for its permanent records). All purchases are confirmed,
in writing, to the applicant by Keyport. Keyport's liability under a
Certificate extends only to amounts so confirmed.
INVESTMENTS OF THE VARIABLE ACCOUNT
Allocations of Purchase Payments
Purchase Payments applied to the Variable Account will be invested in one or
more of the Eligible Fund Sub-Accounts designated as permissible investments
in accordance with the selection made by the Certificate Owner in the
application. Any selection must specify the percentage of the Purchase
Payment that is allocated to each Sub-Account or must specify the asset
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allocation model selected. (See "Other Services, The Programs".) The
percentage for each Sub-Account, if not zero, must be at least 5% and must be
a whole number. A Certificate Owner may change the allocation percentages
without fee, penalty or other charge. Allocation changes must be made by
Written Request unless the Certificate Owner has by Written Request
authorized Keyport to accept telephone allocation instructions from the
Certificate Owner or from a person acting for the Certificate Owner as an
attorney-in-fact under a power of attorney. By authorizing Keyport to accept
telephone changes, a Certificate Owner agrees to accept and be bound by the
conditions and procedures established by Keyport from time to time. The
current conditions and procedures are in Appendix B and Certificate Owners
authorizing telephone allocation instructions will be notified, in advance,
of any changes.
The Variable Account is segmented into Sub-Accounts. Each Sub-Account
contains the shares of one of the Eligible Funds and such shares are
purchased at net asset value. Eligible Funds and Sub-accounts may be added or
withdrawn as permitted by applicable law. The Sub-Accounts in the Variable
Account and the corresponding Eligible Funds currently are as follows:
<TABLE>
<S> <C>
Eligible Funds of Alger American Fund Sub-Accounts
- -------------------------------------- ------------
Alger Growth Alger Growth Sub-Account
Alger Small Cap Alger Small Cap Sub-Account
Eligible Funds of Alliance Series Fund Sub-Accounts
- -------------------------------------- ------------
Alliance Global Bond Alliance Global Bond Sub-Account
Alliance Premier Growth Alliance Premier Growth Sub-Account
Eligible Funds of Colonial Trust Sub-Accounts
- -------------------------------------- ------------
Colonial Growth & Income Colonial Growth & Income Sub-Account
Colonial Int'l Fund for Growth Colonial Int'l Fund for Growth Sub-Account
Colonial-Newport Tiger Colonial-Newport Tiger Sub-Account
Colonial Strategic Income Colonial Strategic Income Sub-Account
Colonial U.S. Fund for Growth Colonial U.S. Fund for Growth Sub-Account
Colonial Utilities Colonial Utilities Sub-Account
Eligible Funds of MFS Trust Sub-Accounts
- -------------------------------------- ------------
MFS Emerging Growth MFS Emerging Growth Sub-Account
MFS Research MFS Research Sub-Account
Eligible Funds of SteinRoe Trust Sub-Accounts
- -------------------------------------- ------------
SteinRoe Capital Appreciation SteinRoe Capital Appreciation Sub-Account
SteinRoe Cash Income SteinRoe Cash Income Sub-Account
SteinRoe Managed Assets SteinRoe Managed Assets Sub-Account
SteinRoe Managed Growth Stock SteinRoe Managed Growth Stock Sub-Account
SteinRoe Mortgage Securities Income SteinRoe Mortgage Securities Income Sub-Account
</TABLE>
Eligible Funds
The Eligible Funds which are the permissible investments of the Variable
Account are the separate funds listed above of Alger American Fund, Alliance
Series Fund, Colonial Trust, MFS Trust and SteinRoe Trust, and any other
mutual funds with which Keyport and the Variable Account may enter into a
participation agreement for the purpose of making such mutual funds available
as Eligible Funds under certain Certificates.
Fred Alger Management, Inc. ("Alger Management") is the investment manager
for both Eligible Funds of Alger American Fund. Alger Management has been in
the business of providing investment advisory services since 1964.
Alliance Capital Management L.P. is the investment advisor for both Eligible
Funds of Alliance Series Fund. AIGAM International Limited serves as
sub-adviser for Alliance Global.
Keyport Advisory Services Corp. ("KASC"), a subsidiary of Keyport, is the
manager for Colonial Trust and its Eligible Funds. Colonial Management
Associates, Inc. ("Colonial"), an affiliate of Keyport, serves as sub-adviser
for the Eligible Funds (except for Newport Tiger). Colonial has provided
investment advisory services since 1931. Newport Fund Management, Inc., an
affiliate of Keyport, serves as sub-adviser for Colonial-Newport Tiger.
Massachusetts Financial Services Company ("MFS") is the investment advisor
for both Eligible Funds of MFS Trust. MFS is America's oldest mutual fund
organization. MFS and its predecessor organizations have a history of money
management dating from 1924 and the founding of the first mutual fund in the
United States, Massachusetts Investors Trust.
Stein Roe & Farnham Incorporated ("Stein Roe") is the investment adviser for
each Eligible Fund of SteinRoe Trust. In 1986, Stein Roe was organized and
succeeded to the business of Stein Roe & Farnham, a partnership. Stein Roe is
an affiliate of Keyport. Stein Roe and its predecessor have provided
investment advisory and administrative services since 1932.
The investment objectives of the Eligible Funds are briefly described below.
More detailed information, including investor considerations related to the
risks of investing in a particular Eli-
10
<PAGE>
gible Fund, may be found in the current prospectus for that Fund. An investor
should read that prospectus carefully before selecting a fund for investing.
The prospectus is available, at no charge, from a salesperson or by writing
Keyport at the address shown on Page 1 or by calling (800) 437-4466.
<TABLE>
<S> <C>
Eligible Funds of Alger
American Fund and Variable
Account Sub-Accounts Investment Objective
- --------------------------- --------------------
Alger Growth
(Alger Growth Sub-Account) Long-term capital appreciation
Alger Small Cap
(Alger Small Cap Sub-Account) Long-term capital appreciation.
Eligible Funds of Alliance
Series Fund and Variable
Account Sub-Accounts Investment Objective
- --------------------------- --------------------
Alliance Global Bond A high level of return from a combination of current
(Alliance Global Bond income and capital appreciation by investing in
Sub-Accounts) a globally diversified portfolio of high quality
debt securities denominated in the U.S. Dollar
and a range of foreign currencies.
Alliance Premier Growth
(Alliance Premier Growth
Sub-Account) Growth of capital rather than current income.
Eligible Funds of Colonial
Trust and Variable Account
Sub-Accounts Investment Objective
- --------------------------- --------------------
Colonial Growth & Income Primarily income and long-term capital growth
(Colonial Growth & Income Sub-Account) and, secondarily, preservation of capital.
Colonial Int'l Fund for Growth
(Colonial Int'l Fund for Growth Long-term capital growth, by investing primarily
Sub-Account) in non-U.S. equity securities.
Colonial-Newport Tiger Long term capital growth by investing primarily
(Colonial-Newport Tiger in equity securities of companies located in the
Sub-Account) four Tigers of Asia (Hong Kong, Singapore, South
Korea and Taiwan) and the other mini-Tigers of
East Asia (Malaysia, Thailand, Indonesia, China
and the Philippines).
Colonial Strategic Income A high level of current income, as is consistent
(Colonial Strategic Income with prudent risk and maximizing total return,
Sub-Account) by diversifying investments primarily in U.S.
and foreign government and high yield, high risk
corporate debt securities.
Colonial U.S. Fund for Growth Growth exceeding over time the S&P 500 Index
(Colonial U.S. Fund for Growth (Standard & Poor's Corporation Composite Stock
Sub-Account) Price Index) performance.
Colonial Utilities Primarily current income and, secondarily,
(Colonial Utilities Sub-Account) long-term capital growth.
Eligible Funds of MFS Trust
and Variable Account
Sub-Accounts Investment Objective
- --------------------------- --------------------
MFS Emerging Growth
(MFS Emerging Growth
Sub-Account) Long-term growth of capital.
MFS Research
(MFS Research Sub-Account) Long-term growth of capital and future income.
11
<PAGE>
Eligible Funds of SteinRoe
Trust and Variable Account
Sub-Accounts Investment Objective
- --------------------------- --------------------
SteinRoe Capital Appreciation Capital growth by investing primarily in
(SteinRoe Capital Appreciation Sub-common stocks, convertible securities, and
Sub-Account) other securities selected for prospective
capital growth.
SteinRoe Cash Income High current income from short-term money market
(SteinRoe Cash Income instruments while emphasizing preservation of
Sub-Account) capital and maintaining excellent liquidity.
SteinRoe Managed Assets
(SteinRoe Managed Assets High total investment return through investment
Sub-Account) in a changing mix of securities.
SteinRoe Managed Growth Stock
(SteinRoe Managed Growth Stock Long-term growth of capital through investment
Sub-Account) primarily in common stocks.
SteinRoe Mortgage Securities Income Highest possible level of current income
(SteinRoe Mortgage Securities Income consistent with safety of principal and
Sub-Account) maintenance of liquidity through investment
primarily in mortgage-backed securities.
</TABLE>
There is no assurance that the Eligible Funds will achieve their stated
objectives.
All the Eligible Funds are funding vehicles for variable annuity contracts
and variable life insurance policies offered by separate accounts of Keyport and
of insurance companies affiliated and unaffiliated with Keyport. The risks
involved in this "mixed and shared funding" are disclosed in the Eligible Fund
prospectuses under the following captions: Alger American Fund-- "Participating
Insurance Companies and Plans"; Alliance Series Fund--"Introduction to the
Fund"; Colonial Trust--"The Trust"; MFS Trust--"Investment Concept of the
Trust"; and SteinRoe Trust--"The Trust".
Transfer of Variable Account Value
Certificate Owners may transfer Variable Account Value from one Sub-Account
to another Sub-Account and/or to the Fixed Account.
The Certificate allows Keyport to charge a transfer fee and to limit the
number of transfers that can be made in a specified time period. Certificate
Owners should be aware that transfer limitations may prevent a Certificate
Owner from making a transfer on the date he or she wants to, with the result
that the Certificate Owner's future Certificate Value may be lower than it
would have been had the transfer been made on the desired date.
Currently, Keyport is not charging a transfer fee of $25 for each transfer
in excess of 12 per Certificate Year. For transfers under different
Certificates that are being requested under powers of attorney with a common
attorney-in-fact or that are, in Keyport's determination, based on the
recommendation of a common investment adviser or broker/dealer, there is a
transfer limitation of one transfer every 30 days.
Keyport is also limiting each transfer to a maximum of $500,000. All
transfers requested for a Certificate on the same day will be treated as a
single transfer and the total combined transfer amount will be subject to the
$500,000 limitation. If the $500,000 limitation is exceeded, no amount of the
transfer will be executed by Keyport.
In applying the $500,000 limitation, Keyport may treat as one transfer all
transfers requested by a Certificate Owner for multiple Certificates he or
she owns. If the $500,000 limitation is exceeded for multiple transfers
requested on the same day that are treated as a single transfer, no amount of
the transfer will be executed by Keyport.
In applying the $500,000 limitation to transfers requested by a common
attorney-in-fact or investment adviser, Keyport will treat as one transfer
all transfers requested under different Certificates that are being requested
under powers of attorney with a common attorney-in-fact or that are, in
Keyport's determination, based on the recommendation of a common investment
adviser or broker/dealer. If the $500,000 limitation is exceeded for multiple
transfers requested on the same day that are treated as a single transfer, no
amount of the transfer will be executed by Keyport. If a transfer is executed
under one Certificate and, within the next 30 days, a transfer request for
another Certificate is determined by Keyport to be related to the executed
transfer under this paragraph's rules, the transfer request will not be
executed by Keyport. In order for it to be executed, it would need to be
requested again after the 30 day period has expired and it, along with any
other transfer requests that are collectively treated as a single transfer,
would need to total less than $500,000.
Keyport's interest in applying these limitations is to protect the
interests of both Certificate Owners who are not engaging in significant
transfer activity and Certificate Owners who are engaging in such activity.
Keyport has determined that the actions of Certificate Owners engaging in
significant transfer activity among Sub-Accounts may cause an adverse affect
on the performance of the Eligible Fund for the Sub-Account involved. The
movement of Sub-Account values from one Sub-Account to another may prevent
the appropriate Eligible Fund
12
<PAGE>
from taking advantage of investment opportunities because it must maintain a
liquid position in order to handle redemptions. Such movement may also cause
a substantial increase in Fund transaction costs which must be indirectly
borne by Certificate Owners.
Certificate Owners will be notified, in advance, of the imposition of any
transfer fee or of a change in the limitation on the number of transfers. The
fee will not exceed the lesser of $25 and the cost of effecting a transfer.
Transfers must be made by Written Request unless the Certificate Owner has
by Written Request authorized Keyport to accept telephone transfer requests
from the Certificate Owner or from a person acting for the Certificate Owner
as an attorney-in-fact under a power of attorney. By authorizing Keyport to
accept telephone transfer instructions, a Certificate Owner agrees to accept
and be bound by the conditions and procedures established by Keyport from
time to time. The current conditions and procedures are in Appendix B and
Certificate Owners authorizing telephone transfers will be notified, in
advance, of any changes. Written transfer requests may be made by a person
acting for the Certificate Owner as an attorney-in-fact under a power of
attorney.
Transfer requests received by Keyport before the close of trading on the
New York Stock Exchange (currently 4:00 PM Eastern Time) will be initiated at
the close of business that day. Any requests received later will be initiated
at the close of the next business day. Each request from a Certificate Owner
to transfer value will be executed by both redeeming and acquiring
Accumulation Units on the day Keyport initiates the transfer.
If 100% of any Sub-Account's value is transferred and the allocation
formula for Purchase Payments includes that Sub-Account, then the allocation
formula for future Purchase Payments will automatically change unless the
Certificate Owner instructs otherwise. For example, if the allocation formula
is 50% to Sub-Account A and 50% to Sub-Account B and all of Sub-Account A's
value is transferred to Sub-Account B, the allocation formula will change to
100% to Sub-Account B unless the Certificate Owner instructs otherwise.
Substitution of Eligible Funds and Other Variable Account Changes
If the shares of any of the Eligible Funds should no longer be available for
investment by the Variable Account or if in the judgment of Keyport's
management further investment in such fund shares should become inappropriate
in view of the purpose of the Certificate, Keyport may add or substitute
shares of another Eligible Fund or of another mutual fund for Eligible Fund
shares already purchased under the Certificate. No substitution of Fund
shares in any Sub-Account may take place without prior approval of the
Securities and Exchange Commission and notice to Certificate Owners, to the
extent required by the Investment Company Act of 1940.
Keyport has also reserved the right, subject to compliance with the law as
currently applicable or subsequently changed: (a) to operate the Variable
Account in any form permitted under the Investment Company Act of 1940 or in
any other form permitted by law; (b) to take any action necessary to comply
with or obtain and continue any exemptions from the Investment Company Act of
1940 or to comply with any other applicable law; (c) to transfer any assets
in any Sub-Account to another Sub-Account, or to one or more separate
investment accounts, or to Keyport's general account; or to add, combine or
remove Sub-Accounts in the Variable Account; and (d) to change the way
Keyport assesses charges, so long as the aggregate amount is not increased
beyond that currently charged to the Variable Account and the Eligible Funds
in connection with the Certificates.
DEDUCTIONS
Deductions for Certificate Maintenance Charge
Keyport has responsibility for all administration of the Certificates and the
Variable Account. This administration includes, but is not limited to,
preparation of the Certificates, maintenance of Certificate Owners' records,
and all accounting, valuation, regulatory and reporting requirements. Keyport
makes a Certificate Maintenance Charge for such services during the
accumulation and annuity payment periods. At the present time the Certificate
Maintenance Charge is $36 per Certificate Year. PRIOR TO THE INCOME DATE THE
CERTIFICATE MAINTENANCE CHARGE IS NOT GUARANTEED AND MAY BE CHANGED BY
KEYPORT. The charge will not exceed the anticipated costs of administering
the Certificate.
The Certificate Maintenance Charge will be waived before the Income Date if:
(i) the Certificate Value is greater than or equal to $40,000 on the
Certificate Anniversary date this charge is imposed, or (ii) Purchase
Payments of at least $2,000 have been made in the prior Certificate Year and
there has been no partial withdrawal in the prior Certificate Year.
The Certificate Maintenance Charge will be waived on and after the Income
Date for the current year if:
(i) variable annuity Option A (Income for a Fixed Number of Years) is
applicable; and
(ii) at the time of the first payment of the year, the present value of all
of the remaining payments (see "Option A" on Page 21) is greater than or
equal to $40,000.
Prior to the Income Date, the full amount of the charge will be deducted from
the Variable Account Value on each Certificate Anniversary and on the date of
any total surrender not falling on the Certificate Anniversary. On the Income
Date, a pro-rata portion of the charge due on the next Certificate
Anniversary will be deducted from the Variable Account Value. This pro-rata
charge covers the period from the prior Certificate Anniversary to the Income
Date. For example, if the Income Date occurs 73
13
<PAGE>
days after that prior anniversary, then one-fifth (i.e., 73 days/ 365 days)
of the annual charge would be deducted on the Income Date. The charge will be
deducted from each Sub-Account in the proportion that the value of each
bears to the Variable Account Value.
Once annuity payments begin on the Income Date or once they begin after
surrender benefits are applied under a settlement option, the yearly cost of
the Certificate Maintenance Charge for a payee's annuity will be the same as
the yearly amount in effect immediately before the annuity payments begin.
Keyport may not later change the amount of the Certificate Maintenance Charge
deducted from the annuity payments. The charge will be deducted on a pro-rata
basis from each annuity payment. For example, if annuity payments are
monthly, then one-twelfth of the annual charge will be deducted from each
payment.
Deductions for Mortality and Expense Risk Charge
Although variable annuity payments made to Annuitants will vary in accordance
with the investment performance of the investments of the Variable Account,
they will not be affected by the mortality experience (death rate) of persons
receiving such payments or of the general population. Keyport guarantees the
Death Benefits described below (see "Death Provisions"). Keyport assumes an
expense risk since the Certificate Maintenance Charge after the Income Date
will stay the same and not be affected by variations in expenses.
To compensate it for assuming mortality and expense risks, for each
Valuation Period Keyport deducts from each Sub-Account a Mortality and
Expense Risk Charge equal on an annual basis to 1.25% of the average daily
net asset value of the Sub-Account. The charge is deducted during both the
accumulation and annuity periods (i.e., both before and after the Income
Date). Less than the full charge will be deducted from Sub-Account values
attributable to Certificates issued to employees of Keyport and other persons
specified in "Sales of the Certificates".
Deductions for Daily Distribution Charge
Keyport also deducts from each Sub-Account each Valuation Period a daily
Distribution Charge equal on an annual basis to 0.15% of the average daily
net asset value of the Sub-Account. This charge compensates Keyport for
certain sales distribution expenses relating to the Certificate.
This charge will not be deducted from Sub-Account values attributable to
Certificates that have reached the maximum cumulative distribution charge
limit defined below and to Certificates issued to employees of Keyport and
other persons specified in "Sales of the Certificates". The charge is also
not deducted from Sub-Account values attributable to Annuity Units. Keyport
may decide not to deduct the charge from Sub-Account values attributable to
a Certificate issued in an internal exchange or transfer of an annuity
contract of Keyport's general account.
Deductions for Contingent Deferred Sales Charge
A sales charge is not deducted from the Certificate's Purchase Payments when
initially received. However, a Contingent Deferred Sales Charge may be
deducted upon a surrender.
In order to determine whether a Contingent Deferred Sales Charge will be
due upon a partial or total surrender, Keyport maintains a separate set of
records. These records identify the date and amount of each Purchase Payment
made to the Certificate and the Certificate Value over time.
Certificate Owners will be permitted to make partial surrenders during the
Accumulation Period without incurring a Contingent Deferred Sales Charge, as
follows:
1. In any Certificate Year, Certificate Owners may withdraw an aggregate
amount not to exceed, at the time of the withdrawal, the Certificate's
earnings, which equal: (a) the Certificate Value, less (b) the portion of the
Purchase Payments not previously withdrawn.
2. In any Certificate Year after the first, Certificate Owners may
withdraw, in addition to the amount available in 1., the amount by which 10%
of the Certificate Value as of the preceding Certificate Anniversary exceeds
the amount available in 1.
Contingent Deferred Sales Charges, as discussed below, will be deducted
with respect to withdrawals in excess of these amounts.
In computing the applicable charge amounts, the amount of any surrender in
any Certificate Year after the first as set forth in 2. above, will be
deducted from the Purchase Payments in chronological order from the oldest to
the most recent until the amount is fully deducted. Any amount so deducted
will not be subject to a charge.
The following additional amounts will be deducted from the Purchase
Payments in the same chronological order: the amount of any surrender in the
first Certificate Year in excess of the amount set forth in 1. above and the
amount of any surrender in any later Certificate Year in excess of the
combined amount set forth in 1. and 2. above. The Contingent Deferred Sales
Charge for each Purchase Payment from which a deduction is made will be equal
to (a) multiplied by (b), where:
(a) is the amount so deducted; and
(b) is the applicable percentage for the number of years that have elapsed
from the date of that payment to the date of surrender. Years are
measured from the month and day of payment to the same month and day
in each subsequent calendar year. The percentages applicable to each
Purchase Payment during the seven years after the date of its payment
are: 7% during year 1; 6% during year 2; 5% during year 3; 4% during
year 4; 3% during year 5; 2% during year 6; 1% during year 7; and 0%
thereafter.
14
<PAGE>
The applicable Contingent Deferred Sales Charges for each Purchase Payment
are then totalled. The lesser of this total amount and the Certificate's
maximum cumulative distribution charge will be deducted from the Certificate
Value in the same manner as the surrender amount. The maximum cumulative
distribution charge is equal to (a) less (b), where (a) is 9% of the total
Purchase Payments made to the Certificate and (b) is the sum of all prior
Contingent Deferred Sale Charge deductions from the Certificate Value and all
prior Variable Account daily distribution charges applicable to the
Certificate from the 0.15% distribution charge factor. After each surrender,
Keyport's records will be adjusted to reflect any deductions made from the
applicable Purchase Payments.
Example: Two Purchase Payments were made one year apart for $5,000 and
$7,000. The Certificate Value has grown to an assumed $13,200 when the
Certificate Owner decides to withdraw $8,000. The Certificate Value at the
beginning of the Certificate Year of surrender was $13,000. The Contingent
Deferred Sales Charge percentages at the time of surrender are an assumed 5%
for the $5,000 payment and 6% for the $7,000 payment. The portion of the
surrender representing the Certificate's earnings ($13,200 less $12,000, or
$1,200) would not be subject to charges. Since $1,200 is less than the amount
guaranteed not to have charges (10% of $13,000, or $1,300), an additional
$100 would not be subject to charges. This $100 would be deducted from the
oldest Purchase Payment, reducing it from $5,000 to $4,900. The $1,200
increase in value plus the additional $100 leaves $6,700 ($8,000 - 1,200 -
100) to be deducted. This $6,700 would be deducted from the $4,900 of the
first payment still left and $1,800 of the second payment. The total
Contingent Deferred Sales Charge would be $4,900 multiplied by the applicable
5% and $1,800 times the applicable 6%, or a total of $353. The distribution
charge records would now reflect $0 for the 1st payment and $5,200 for the
2nd payment. The $8,000 requested plus the $353 charge would be deducted from
Certificate Values under the rules specified in "Partial Withdrawals and
Surrender" on Page 20.
The Contingent Deferred Sales Charge, when it is applicable, will be used
to cover the expenses of selling the Certificate, including compensation paid
to selling dealers and the cost of sales literature. Any expenses not covered
by the charge will be paid from Keyport's general account, which may include
monies deducted from the Variable Account for the Mortality and Expense Risk
Charge. A dealer selling the Certificate may receive up to 6.00% of Purchase
Payments with additional compensation later based on the Certificate Value of
those payments. During certain time periods selected by Keyport and KFSC, the
percentage may increase to 6.25%.
The Contingent Deferred Sales Charge will be waived in the event a Covered
Person is confined in a medical facility in accordance with the provisions
and conditions of an endorsement relating to such confinements.
The Contingent Deferred Sales Charge will be eliminated under Certificates
issued to employees of Keyport and other persons specified in "Sales of the
Certificates".
Keyport may reduce or change to 0% any Contingent Deferred Sales Charge
percentage under a Certificate issued in an internal exchange or transfer of
an annuity contract of Keyport's general account.
Deductions for Transfers of Variable Account Value
The Certificate allows Keyport to charge a transfer fee. Currently no fee is
being charged. Certificate Owners will be notified, in advance, of the
imposition of any fee. The fee will not exceed the lesser of $25 and the cost
of effecting a transfer.
Deductions for Premium Taxes
Keyport deducts the amount of any premium taxes levied by any state or
governmental entity when paid unless Keyport elects to defer such deduction.
It is not possible to describe precisely the amount of premium tax payable on
any transaction involving the Certificate offered hereby. Such premium taxes
depend, among other things, on the type of Certificate (Qualified or
Non-Qualified), on the state of residence of the Certificate Owner, the state
of residence of the Annuitant, the status of Keyport within such states, and
the insurance tax laws of such states. Currently such premium taxes range
from 0% to 5.0% of either total Purchase Payments or Certificate Value.
Deductions for Income Taxes
Keyport will deduct from any amount payable under the Certificate any income
taxes that a governmental authority requires Keyport to withhold with respect
to that amount. See "Income Tax Withholding" and "Tax-Sheltered Annuities".
Total Variable Account Expenses
Total Variable Account expenses in relation to the Certificate will be the
Certificate Maintenance Charge, the Mortality and Expense Risk Charge, and
the Daily Sales Charge.
The value of the assets in the Variable Account will reflect the value of
Eligible Fund shares and therefore the deductions from and expenses paid out of
the assets of the Eligible Funds. These deductions and expenses are described in
the Eligible Fund prospectuses.
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OTHER SERVICES
The Programs. Keyport offers several investment related programs which are
available only prior to the Income Date: Asset Allocation; Dollar Cost
Averaging; Systematic Investment; and Systematic Withdrawal Programs. A
Rebalancing Program is available prior to and after the Income Date. Under
each Program, the related transfers between and among Sub-Accounts and the
Fixed Account are not counted as one of the twelve free transfers. Each of
the Programs has its own requirements, as discussed below. Keyport reserves
the right to terminate any Program.
If the Certificate Owner has submitted the required telephone authorization
form, certain changes may be made by telephone. For those Programs involving
transfers, Owners may change instructions by telephone with regard to which
Sub-Accounts or the Fixed Account Certificate Value may be transferred. The
current conditions and procedures are described in Appendix B.
Dollar Cost Averaging Program. Keyport offers a Dollar Cost Averaging Program
that Certificate Owners may participate in by Written Request. The program
periodically transfers Accumulation Units from the SteinRoe Cash Income
Sub-Account or the One-Year Guarantee Period of the Fixed Account to other
Sub-Accounts selected by the Certificate Owner. The program allows a
Certificate Owner to invest in Variable Sub-Accounts over time rather than
having to invest in those Sub-Accounts all at once. The program is available
for initial and subsequent Purchase Payments and for Certificate Value
transferred into the SteinRoe Cash Income Sub-Account or the One-Year
Guarantee Period. Under the program, Keyport makes automatic transfers on a
periodic basis out of the SteinRoe Cash Income Sub-Account or the One-Year
Guarantee Period into one or more of the other available Sub-Accounts
(Keyport reserves the right to limit the number of Sub-Accounts the
Certificate Owner may choose but there are currently no limits).
The Certificate Owner by Written Request must specify the SteinRoe Cash
Income Sub-Account or the One Year Guarantee Period from which the transfers
are to be made, the monthly amount to be transferred (minimum $150) and the
Sub-Account(s) to which the transfers are to be made. The first transfer
will occur at the close of the Valuation Period that includes the 30th day
after the receipt of the Certificate Owner's Written Request. Each succeeding
transfer will occur one month later (e.g., if the 30th day after the receipt
date is April 8, the second transfer will occur at the close of the Valuation
Period that includes May 8). When the remaining value is less than the
monthly transfer amount, that remaining value will be transferred and the
program will end. Before this final transfer, the Certificate Owner may
extend the program by allocating additional Purchase Payments to the SteinRoe
Cash Income Sub-Account or the One Year Guarantee Period or by transferring
Certificate Value to the SteinRoe Cash Income Sub-Account or the One Year
Guarantee Period. The Certificate Owner may, by Written Request or by
telephone, change the monthly amount to be transferred, change the
Sub-Account(s) to which the transfers are to be made, or end the program. The
program will automatically end if the Income Date occurs. Keyport reserves
the right to end the program at any time by sending the Certificate Owner a
notice one month in advance.
Written or telephone instructions must be received by Keyport by the end
(currently 4:00 PM Eastern Time) of the business day preceding the next
scheduled transfer in order to be in effect for that transfer. Telephone
instructions are subject to the conditions and procedures established by
Keyport from time to time. The current conditions and procedures appear in
Appendix B, and Certificate Owners in a dollar cost averaging program will be
notified, in advance, of any changes.
Asset Allocation Program. Certificate Owners may select from five asset
allocation model portfolios developed by Ibbotoson Associates (Model A --
Capital Preservation, Model B -- Income and Growth, Model C -- Moderate
Growth, Model D -- Growth, and Model E -- Aggressive Growth). If a
Certificate Owner elects one of the models, initial and subsequent Purchase
Payments will automatically be allocated among the Sub-Accounts in the model.
Only one model may be used in a Certificate at a time. Certificate Owners may
use a questionnaire and scoring system to determine the model which
corresponds to their risk tolerance and time horizons.
Periodically Ibbotoson Associates will review the models and may determine
that a reconfiguration of the Sub-Accounts and percentage allocations among
those Sub-Accounts is appropriate. Certificate Owners will receive
notification prior to any reconfiguration.
The Fixed Account is not available in any asset allocation model. A
Certificate Owner may allocate initial or subsequent Purchase Payments, or
Certificate Value, between an asset allocation model and the Fixed Account.
Rebalancing Program. In accordance with the Certificate Owner's election of
the relative Purchase Payment percentage allocations, Keyport will
automatically rebalance the Certificate Value of each Sub-Account either
monthly, quarterly, semi-annually, or annually. On the last day of the
period selected, Keyport will automatically rebalance the Certificate Value
in each of the Sub-Accounts to match the current Purchase Payment percentage
allocations. The Program may be terminated at any time and the percentages
may be altered by Written Request. The requested change must be received at
the Office ten (10) days prior to the end of the period selected. Certificate
Value allocated to the Fixed Account is not subject to automatic rebalancing.
After the Income Date, automatic rebalancing applies only to variable annuity
payments and Keyport will rebalance the number of Annuity Units in each
Sub-Account (Annuity Units are used to calculate the amount of each Sub-
Account annuity payment; see "Variable Annuity Benefits" in the Statement of
Additional Information).
Systematic Investment Program. Purchase Payments may be made by monthly draft
against the bank account of any Certificate Owner who has completed and
returned to Keyport a Systematic Investment Program application and
authorization form. The application and authorization form may be obtained
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from Keyport or from the sales representative. Each Systematic Investment
Program Purchase Payment is subject to a minimum of $250.
Systematic Withdrawal Program. To the extent permitted by law, Keyport will
make monthly, quarterly, semi-annually or annual distributions of a
predetermined dollar amount to the Certificate Owner that has enrolled in the
Systematic Withdrawal Program. Under the Program, all distributions will be
made directly to the Certificate Owner and will be treated for federal tax
purposes as any other withdrawal or distribution of Certificate Value. (See
"Tax Status".) The Certificate Owner may specify the amount of each partial
withdrawal, subject to a minimum of $100. Systematic withdrawals may be made
from any Sub-Account or Guarantee Period of the Fixed Account. In each
Certificate Year, portions of Certificate Value may be withdrawn without the
imposition of any Contingent Deferred Sales Charge ("Free Withdrawal
Amount"). If withdrawals pursuant to the Program are greater than the Free
Withdrawal Amount, the amount of the withdrawals greater than the Free
Withdrawal Amount will be subject to the applicable Contingent Deferred Sales
Charge. Any unrelated voluntary partial withdrawal a Certificate Owner makes
during a Certificate Year will be aggregated with withdrawals pursuant to the
Program to determine the applicability of any Contingent Deferred Sales
Charge under the Certificate provisions regarding partial withdrawals.
Unless the Certificate Owner specifies the Sub-Account or Sub-Accounts or
the Fixed Account from which withdrawals of Certificate Value shall be made
or if the amount in a specified Sub-Account is less than the predetermined
amount, Keyport will make withdrawals under the Program in the manner
specified for partial withdrawals in "Partial Withdrawals and Surrender". All
Sub-Account withdrawals under the Program will be effected by canceling the
number of Accumulation Units equal in value to the amount to be distributed
to the Certificate Owner and any applicable Contingent Deferred Sales Charge.
The Program may be combined with all other Programs except the Systematic
Investment Program.
It may not be advisable to participate in the Systematic Withdrawal Program
and incur a Contingent Deferred Sales Charge when making additional Purchase
Payments under the Certificate.
THE CERTIFICATES
Variable Account Value
The Variable Account Value for a Certificate is the sum of the value of each
Sub-Account to which values are allocated under a Certificate. The value of
each Sub-Account is determined at any time by multiplying the number of
Accumulation Units attributable to that Sub-Account by the Accumulation Unit
value for that Sub-Account at the time of determination. The Accumulation
Unit value is an accounting unit of measure used to determine the change in
an Accumulation Unit's value from Valuation Period to Valuation Period.
Each Purchase Payment that is made results in additional Accumulation
Units being credited to the Certificate and the appropriate Sub-Account
thereunder. The number of additional units for any Sub-Account will equal the
amount allocated to that Sub-Account divided by the Accumulation Unit value
for that Sub-Account at the time of investment.
Valuation Periods
The Variable Account is valued each Valuation Period using the net asset
value of the Eligible Fund shares. A Valuation Period is the period
commencing at the close of trading on the New York Stock Exchange on each
Valuation Date and ending at the close of trading for the next succeeding
Valuation Date. A Valuation Date is each day that the New York Stock Exchange
is open for business. The New York Stock Exchange is currently closed on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net Investment Factor
Variable Account Value will fluctuate in accordance with the investment
results of the underlying Eligible Funds. In order to determine how these
fluctuations affect value, Keyport utilizes an Accumulation Unit value. Each
Sub-account has its own Accumulation Units and value per Unit. The Unit value
applicable during any Valuation Period is determined at the end of that
period.
When Keyport first purchased Eligible Fund shares on behalf of the
Variable Account, Keyport valued each Accumulation Unit at a specified dollar
amount. The Unit value for each Sub-Account in any Valuation Period
thereafter is determined by multiplying the value for the prior period by a
net investment factor. This factor may be greater or less than 1.0;
therefore, the Accumulation Unit may increase or decrease from Valuation
Period to Valuation Period. Keyport calculates a net investment factor for
each Sub-Account by dividing (a) by (b) and then subtracting (c) (i.e., (a /
b) - c), where:
(a) is equal to:
(i) the net asset value per share of the Eligible Fund at the end of the
Valuation Period; plus
(ii) the per share amount of any distribution made by the Eligible Fund if
the "ex-dividend" date occurs during that same Valuation Period.
(b) is the net asset value per share of the Eligible Fund at the end of
the prior Valuation Period.
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(c) is equal to:
(i) the Valuation Period equivalent of the Mortality and Expense
Risk Charge; plus
(ii) the Valuation Period equivalent of the daily Distribution
Charge; plus
(iii) a charge factor, if any, for any tax provision established by
Keyport as a result of the operations of that Sub-Account.
If a Certificate ever reaches the maximum cumulative sales charge limit
defined in "Deductions for Contingent Deferred Sales Charge", Unit values
without (c)(ii) above will be used thereafter. For Certificates issued to
employees of Keyport and other persons specified in "Sales of the
Certificates", Unit values with .35% in (c)(i) above and without (c)(ii)
above will be used. Unit values without (c)(ii) above may be used for certain
Certificates issued in an internal exchange or transfer (see "Deductions for
Daily Distribution Charge").
Modification of the Certificate
Only Keyport's President or Secretary may agree to alter the Certificate or
waive any of its terms. Any changes must be made in writing and with the
Certificate Owner's consent, except as may be required by applicable law.
Right to Revoke
The Certificate Owner may return the Certificate within 10 days after he or
she receives it by delivering or mailing it to Keyport's Office. The return
of the Certificate by mail will be effective when the postmark is affixed to
a properly addressed and postage-prepaid envelope. The returned Certificate
will be treated as if Keyport never issued it and Keyport will refund either
the Certificate Value or Purchase Payments, as required by state law. If the
Certificate is delivered in a state that requires the return of Certificate
Value, Certificate Value will immediately be allocated to the Sub-Accounts
selected in the application. If the Certificate is delivered in a state that
requires the return of Purchase Payments, Certificate Value will be allocated
to the SteinRoe Cash Income Sub-Account (a Money Market Sub-Account) for a
period of 20 or 30 days if the particular state requires a "free-look" period
of 10 or 20 days, respectively. Thereafter the Certificate Value will be
allocated to the Sub-Accounts selected in the application.
For Certificates delivered in California to a Certificate Owner age 60 or
older, the Certificate Owner may return the Certificate to Keyport's Office
or to the agent from whom the Certificate was purchased. If the Certificate
is received at Keyport's Office or by the agent within 30 days after the
Certificate Owner receives the Certificate, Keyport will refund the
Certificate Value.
DEATH PROVISIONS FOR NON-QUALIFIED CERTIFICATES
Death of Primary Owner, Joint Owner or Certain Non-Owner Annuitant. These
provisions apply if, before the Income Date while the Certificate is In
Force, the primary Certificate Owner or any Joint Certificate Owner dies
(whether or not the decedent is also the Annuitant) or the Annuitant dies
under a Certificate with a non-natural Certificate Owner such as a trust. The
Designated Beneficiary will control the Certificate after such a death.
If the decedent's surviving spouse (if any) is the sole Designated
Beneficiary, the surviving spouse will automatically become the new sole
primary Certificate Owner as of the decedent's date of death. And, if the
Annuitant is the decedent, the new Annuitant will be any living contingent
annuitant, otherwise the surviving spouse. The Certificate may continue until
another death occurs (i.e., until the death of the Annuitant, primary
Certificate Owner or joint Certificate Owner). Except for this paragraph, all
of "Death Provisions" will apply to that subsequent death.
In all other cases, the Certificate may continue up to five years from the
date of death. During this period, the Designated Beneficiary may exercise
all ownership rights, including the right to make transfers or partial
surrenders or the right to totally surrender the Certificate for its
Surrender Value. If the Certificate is still in effect at the end of the
five-year period, Keyport will automatically end it then by paying the
Certificate Value to the Designated Beneficiary. If the Designated
Beneficiary is not then alive, Keyport will pay any person(s) named by the
Designated Beneficiary in a Written Request; otherwise the Designated
Beneficiary's estate.
The Covered Person under this paragraph shall be the decedent if he or she is
the first to die of the primary Certificate Owner, Joint Certificate Owner,
Annuitant, or, if there is a non-natural Certificate Owner such as a trust,
the Annuitant shall be the Covered Person. If the Covered Person dies, the
Certificate Value will be increased, as provided below, if it is less than
the Death Benefit Amount ("DBA"). The DBA is:
The DBA at issue is the initial Purchase Payment. Thereafter, the DBA is
calculated for each Valuation period by adding any additional Purchase
Payments, and deducting any partial withdrawals, including any applicable
surrender charge. This resulting amount is the "net Purchase Payment death
benefit". The Certificate Value for each Certificate Anniversary (the
"Anniversary Value") before the 81st birthday of the Covered Person is
determined. Each Anniversary Value is increased by any Purchase Payments made
after that anniversary. This resultant value is then decreased by an amount
calculated at the time of any partial withdrawal made after that anniversary.
The amount is calculated by taking the amount of any partial withdrawal, and
dividing by the Certificate Value immediately preceding the partial withdrawal,
and then multiplying by the Anniversary Value immediately preceding the
withdrawal. The greatest Anniversary Value, as so adjusted, (the
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"greatest Anniversary Value") is the DBA unless the net Purchase Payment
death benefit is higher. The net Purchase Payment death benefit will be the
DBA if such amount is higher than the greatest Anniversary Value.
When Keyport receives due proof of the Covered Person's death, Keyport will
compare, as of the date of death, the Certificate Value to the DBA. If the
Certificate Value was less than the DBA, Keyport will increase the current
Certificate Value by the amount of the difference. Note that while the amount
of the difference is determined as of the date of death, that amount is not
added to the Certificate Value until Keyport receives due proof of death. The
amount to be credited will be allocated to the Variable Account and/or the
Fixed Account based on the Purchase Payment allocation selection that is in
effect when Keyport receives due proof of death. Whether or not the
Certificate Value is increased because of this minimum death provision, the
Designated Beneficiary may surrender the Certificate within 90 days of the
date of the Covered Person's death for the Certificate Withdrawal Value
without any applicable Contingent Deferred Sales Charge being deducted. For a
surrender after 90 days and for a surrender at any time after the death of a
non-Covered Person, any applicable Contingent Deferred Sales Charge would be
deducted. If the Certificate is not surrendered, it will continue for the
time period specified above.
Payment of Benefits. Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may direct by Written Request that Keyport pay
any benefit of $5,000 or more under an annuity payment option that meets the
following: (a) the first payment to the Designated Beneficiary must be made
no later than one year after the date of death; (b) payments must be made
over the life of the Designated Beneficiary or over a period not extending
beyond that person's life expectancy; and (c) any payment option that
provides for payments to continue after the death of the Designated
Beneficiary will not allow the successor payee to extend the period of time
over which the remaining payments are to be made.
Death of Certain Non-Certificate Owner Annuitant. These provisions apply if,
before the Income Date while the Certificate is In Force, (a) the Annuitant
dies, (b) the Annuitant is not a Certificate Owner, and (c) the Certificate
Owner is a natural person. The Certificate will continue after the
Annuitant's death. The new Annuitant will be any living contingent annuitant,
otherwise the primary Certificate Owner. If the Annuitant is the first to die
of the Certificate's primary Certificate Owner, Joint Certificate Owner and
Annuitant, then the Annuitant is the Covered Person and the Certificate Value
will be increased, as provided below, if it is less than the Death Benefit
Amount ("DBA"), as defined above. When Keyport receives due proof of the
Annuitant's death, Keyport will compare, as of the date of death, the
Certificate Value to the DBA. If the Certificate Value was less than the DBA,
Keyport will increase the current Certificate Value by the amount of the
difference. Note that while the amount of the difference is determined as of
the date of death, that amount is not added to the Certificate Value until
Keyport receives due proof of death. The amount to be credited will be
allocated to the Variable Account and/or the Fixed Account based on the
Purchase Payment allocation selection that is in effect when Keyport receives
due proof of death. Whether or not the Certificate Value is increased because
of this minimum death provision, the Certificate Owner may surrender the
Certificate within 90 days of the date of the Annuitant's death for the
Certificate Withdrawal Value without any applicable Contingent Deferred Sales
Charge being deducted. For a surrender after 90 days, any applicable
Contingent Deferred Sales Charge would be deducted.
DEATH PROVISIONS FOR QUALIFIED CERTIFICATES
Death of Annuitant. If the Annuitant dies before the Income Date while the
Certificate is In Force, the Designated Beneficiary will control the
Certificate after such a death. The Certificate Value will be increased, as
provided below, if it is less than the Death Benefit Amount ("DBA") as
defined above. When Keyport receives due proof of the Annuitant's death,
Keyport will compare, as of the date of death, the Certificate Value to the
DBA. If the Certificate Value was less than the DBA, Keyport will increase
the current Certificate Value by the amount of the difference. Note that
while the amount of the difference is determined as of the date of death,
that amount is not added to the Certificate Value until Keyport receives due
proof of death. The amount to be credited will be allocated to the Variable
Account and/or the Fixed Account based on the Purchase Payment allocation
selection that is in effect when Keyport receives due proof of death. Whether
or not the Certificate Value is increased because of this minimum death
provision, the Designated Beneficiary may surrender the Certificate within 90
days of the date of the Annuitant's death for the Certificate Withdrawal
Value without any applicable Contingent Deferred Sales Charge being deducted.
For a surrender after 90 days, any applicable Contingent Deferred Sales
Charge would be deducted.
If the Certificate is not surrendered, it may continue for the time period
permitted by the Internal Revenue Code provisions applicable to the
particular Qualified Plan. During this period, the Designated Beneficiary may
exercise all ownership rights, including the right to make transfers or
partial withdrawals or the right to totally surrender the Certificate for its
Certificate Withdrawal Value. If the Certificate is still in effect at the
end of the period, Keyport will automatically end it then by paying the
Certificate Withdrawal Value (without the deduction of any applicable
Contingent Deferred Sales Charge) to the Designated Beneficiary. If the
Designated Beneficiary is not alive then, Keyport will pay any person(s)
named by the Designated Beneficiary in a Written Request; otherwise the
Designated Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may direct by
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Written Request that Keyport pay any benefit of $5,000 or more under an
annuity payment option that meets the following: (a) the first payment to the
Designated Beneficiary must be made no later than one year after the date of
death; (b) payments must be made over the life of the Designated Beneficiary
or over a period not extending beyond that person's life expectancy; and (c)
any payment option that provides for payments to continue after the death of
the Designated Beneficiary will not allow the successor payee to extend the
period of time over which the remaining payments are to be made.
CERTIFICATE OWNERSHIP
The Certificate Owner shall be the person designated in the application. The
Certificate Owner may exercise all the rights of the Certificate. Joint
Certificate Owners are permitted but not contingent Certificate Owners.
The Certificate Owner may by Written Request change the Certificate Owner,
primary beneficiary, contingent beneficiary or contingent annuitant. An
irrevocably-named person may be changed only with the written consent of such
person.
Because a change of Certificate Owner by means of a gift (i.e., a transfer
without full and adequate consideration) may be a taxable event, a
Certificate Owner should consult a competent tax adviser as to the tax
consequences resulting from such a transfer.
Any Qualified Certificate may have limitations on transfer of ownership. A
Certificate Owner should consult the Plan Administrator and a competent tax
adviser as to the tax consequences resulting from such a transfer.
ASSIGNMENT
The Certificate Owner may assign the Certificate at any time. A copy of any
assignment must be filed with Keyport. The Certificate Owner's rights and
those of any revocably-named person will be subject to the assignment. Any
Qualified Certificate may have limitations on assignability.
Because an assignment may be a taxable event, a Certificate Owner should
consult a competent tax adviser as to the tax consequences resulting from any
such assignment.
PARTIAL WITHDRAWALS AND SURRENDER
The Certificate Owner may make partial withdrawals from the Certificate.
Keyport must receive a Written Request and the minimum amount to be withdrawn
must be at least $300 or such lesser amount as Keyport may permit in
conjunction with a Systematic Withdrawal Program. If the Certificate Value
after a partial withdrawal would be below $2,500, Keyport will treat the
request as a withdrawal of only the excess amount over $2,500. The amount
withdrawn will include any applicable Contingent Deferred Sales Charge and
therefore the amount actually withdrawn may be greater than the amount of the
surrender check requested. Unless the request specifies otherwise, the total
amount withdrawn will be deducted from all Sub-Accounts of the Variable
Account in the ratio that the value in each Sub-Account bears to the total
Variable Account Value. If there is no value, or insufficient value, in the
Variable Account, then the amount surrendered, or the insufficient portion,
will be deducted from the Fixed Account in the ratio that each Guarantee
Period's value bears to the total Fixed Account Value.
The Certificate Owner may totally surrender the Certificate by making a
Written Request. Surrendering the Certificate will end it. Upon surrender,
the Certificate Owner will receive the Certificate Withdrawal Value.
Keyport will pay the amount of any surrender within seven days of receipt of
such request. Alternatively, the Certificate Owner may purchase for himself
or herself an annuity option with any surrender benefit of at least $5,000.
Keyport's consent is needed to choose an option if the Certificate Owner is
not a natural person.
Annuity options based on life contingencies cannot be surrendered after
annuity payments have begun. Option A, which is not based on life
contingencies, may be surrendered if a variable payout has been selected.
Because of the potential tax consequences of a full or partial surrender, a
Certificate Owner should consult a competent tax adviser regarding a
surrender.
ANNUITY PROVISIONS
Annuity Benefits
If the Annuitant is alive on the Income Date and the Certificate is In Force,
payments will begin under the annuity option or options the Certificate Owner
has chosen. The amount of the payments will be determined by applying the
Certificate Value increased or decreased by a limited Market Value Adjustment
of Fixed Account Value described in Appendix A (less any premium taxes not
previously deducted and less any applicable Certificate Maintenance Charge)
on the Income Date in accordance with the option selected.
Income Date and Annuity Option
The Certificate Owner may select an Income Date and an Annuity Option at the
time of application. If the Certificate Owner does not select an Annuity
Option, Option B will automatically be designated. If the Certificate Owner
does not select an Income Date for the Annuitant, the Income Date will
automatically be the Annuitant's 90th birthday or any maximum date permitted
under state law.
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Change in Income Date and Annuity Option
The Certificate Owner may choose or change an Annuity Option or the Income
Date by making a Written Request to Keyport at least 30 days prior to the
Income Date. However, any Income Date must be: (a) for fixed annuity options,
not earlier than the first Certificate Anniversary; (b) not later than the
Annuitant's 90th birthday or any maximum date permitted under state law.
Annuity Options
The Annuity Options are:
Option A: Income for a Fixed Number of Years;
Option B: Life Income with 10 Years of Payments Guaranteed; and
Option C: Joint and Last Survivor Income.
Other options may be arranged by mutual consent. Each option is available in
two forms - as a variable annuity for use with the Variable Account and as a
fixed annuity for use with Keyport's general account Fixed Account. Variable
annuity payments will fluctuate while fixed annuity payments will not. The
dollar amount of each fixed annuity payment will be determined by deducting
from the Certificate Value increased or decreased by a limited Market Value
Adjustment described in Appendix A any premium taxes not previously deducted
and any applicable Certificate Maintenance Charge and then dividing the
remainder by $1,000 and multiplying the result by the greater of: (a) the
applicable factor shown in the appropriate table in the Certificate; or (b)
the factor currently offered by Keyport at the time annuity payments begin.
This current factor may be based on the sex of the payee unless to do so
would be prohibited by law.
If no Annuity Option is selected, Option B will automatically be applied.
Unless the Certificate Owner chooses otherwise, Variable Account Value, less
any premium taxes not previously deducted and less any applicable Certificate
Maintenance Charge will be applied to a variable annuity option and Fixed
Account Value increased or decreased by a limited Market Value Adjustment
described in Appendix A less any premium taxes not previously deducted will
be applied to a fixed annuity option. Whether variable or fixed, the same
Certificate Value applied to each option will produce a different initial
annuity payment as well as different subsequent payments.
The payee is the person who will receive the sum payable under an annuity
option. Any annuity option that provides for payments to continue after the
death of the payee will not allow the successor payee to extend the period of
time over which the remaining payments are to be made.
If the amount available to apply under any variable or fixed option is less
than $5,000, Keyport has reserved the right to pay such amount in one sum to
the payee in lieu of the payment otherwise provided for.
Annuity payments will be made monthly unless quarterly, semi-annual or
annual payments are chosen by Written Request. However, if any payment
provided for would be or becomes less than $100, Keyport has the right to
reduce the frequency of payments to such an interval as will result in each
payment being at least $100.
Option A: Income For a Fixed Number of Years. Keyport will pay an annuity for
a chosen number of years, not fewer than 5 nor over 50 (a period of years
over 30 may be chosen only if it does not exceed the difference between age
100 and the Annuitant's age on the date of the first payment). At any time
while variable annuity payments are being made, the payee may elect to
receive the following amount: (a) the present value of the remaining
payments, commuted at the interest rate used to create the annuity factor for
this option (this interest rate is 6% per year (5% per year for Oregon
Certificates), unless 3% per year is chosen by Written Request at the time
the option is selected); less (b) any Contingent Deferred Sales Charge due by
treating the value defined in (a) as a total surrender. (See "Deductions for
Contingent Deferred Sales Charge".) Instead of receiving a lump sum, the
payee may elect another payment option and the amount applied to the option
will not be reduced by the charge defined in (b) above. If, at the death of
the payee, Option A payments have been made for fewer than the chosen number
of years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present value
of the remaining payments, commuted at the interest rate used to create
the annuity factor for this option. For the variable annuity, this
interest rate is 6% per year (5% per year for Oregon Certificates),
unless 3% per year had been chosen by the payee at the time the option
was selected.
The Mortality and Expense Risk Charge is deducted during the Option A payment
period if a variable payout has been selected, but Keyport has no mortality
risk during this period.
If annual payments are chosen for Option A and a variable payout has been
selected, Keyport has available a "stabilizing" payment option that may be
chosen. Each annual payment will be determined as described in "Variable
Annuity Payment Values". Each annual payment will then be placed in Keyport's
general account, from which it will be paid out in twelve equal monthly
payments. The sum of the twelve monthly payments will exceed the annual
payment amount because of an interest rate factor used by Keyport that will
vary from year to year. The commutation method described above for
calculating the present value of remaining payments applies to the annual
payments. Any monthly payments remaining before the next annual payment will
be commuted at the interest rate used to determine that year's monthly
payments.
See "Annuity Payments" on Page 23 for the manner in which Option A may be
taxed.
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Option B: Life Income with 10 Years of Payments Guaranteed. Keyport will pay
an annuity during the lifetime of the payee. If, at the death of the payee,
payments have been made for fewer than 10 years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present value
of the remaining payments, commuted at the interest rate used to create
the annuity factor for this option. For the variable annuity, this
interest rate is 6% per year (5% per year for Oregon Certificates),
unless 3% per year had been chosen by the payee at the time the option
was selected.
The amount of the annuity payments will depend on the age of the payee on the
Income Date and it may also depend on the payee's sex.
Option C: Joint and Last Survivor Income. Keyport will pay an annuity for as
long as either the payee or a designated second natural person is alive. The
amount of the annuity payments will depend on the age of both persons on the
Income Date and it may also depend on each person's sex. IT IS POSSIBLE UNDER
THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF BOTH PAYEES DIE AFTER THE
RECEIPT OF THE FIRST PAYMENT OR TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF BOTH
PAYEES DIE AFTER RECEIPT OF THE SECOND PAYMENT AND SO ON.
Variable Annuity Payment Values
The amount of the first variable annuity payment is determined by Keyport
using an annuity purchase rate that is based on an assumed annual investment
return of 6% per year (5% per year for Oregon Certificates), unless 3% is
chosen by Written Request. Subsequent variable annuity payments will
fluctuate in amount and reflect whether the actual investment return of the
selected Sub-Account(s) (after deducting the Mortality and Expense Risk
Charge) is better or worse than the assumed investment return. The total
dollar amount of each variable annuity payment will be equal to: (a) the sum
of all Sub-Account payments; less (b) the pro-rata amount of the annual
Certificate Maintenance Charge. Currently, a payee may instruct Keyport to
change the Sub-Account(s) used to determine the amount of the variable
annuity payments unlimited times every 12 months.
Proof of Age, Sex, and Survival of Annuitant
Keyport may require proof of age, sex or survival of any payee upon whose
age, sex or survival payments depend. If the age or sex has been misstated,
Keyport will compute the amount payable based on the correct age and sex. If
income payments have begun, any underpayments Keyport may have made will be
paid in full with the next annuity payment. Any overpayments, unless repaid
in one sum, will be deducted from future annuity payments until Keyport is
repaid in full.
SUSPENSION OF PAYMENTS
Keyport reserves the right to postpone surrender payments from the Fixed
Account for up to six months. Keyport reserves the right to suspend or
postpone any type of payment from the Variable Account for any period when:
(a) the New York Stock Exchange is closed other than customary weekend or
holiday closings; (b) trading on the Exchange is restricted; (c) an emergency
exists as a result of which it is not reasonably practicable to dispose of
securities held in the Variable Account or determine their value; or (d) the
Securities and Exchange Commission permits delay for the protection of
security holders. The applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions described in
(b) and (c) exist.
TAX STATUS
Introduction
The Certificate is designed for use by individuals in retirement plans which
may or may not be Qualified Plans under the provisions of the Internal
Revenue Code (the "Code"). The ultimate effect of federal income taxes on the
Certificate Value, on annuity payments, and on the economic benefit to the
Certificate Owner, Annuitant or Designated Beneficiary depends on the type of
retirement plan for which the Certificate is purchased and upon the tax and
employment status of the individual concerned. The discussion contained
herein is general in nature and is not intended as tax advice. Each person
concerned should consult a competent tax adviser. No attempt is made to
consider any applicable state or other tax laws. Moreover, the discussion
herein is based upon Keyport's understanding of current federal income tax
laws as they are currently interpreted. No representation is made regarding
the likelihood of continuation of those current federal income tax laws or of
the current interpretations by the Internal Revenue Service.
Taxation of Annuities in General
Section 72 of the Code governs taxation of annuities in general. There are no
income taxes on increases in the value of a Certificate until a distribution
occurs, in the form of a full surrender, a partial surrender, an assignment or
gift of the Certificate, or annuity payments.
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Surrenders, Assignments and Gifts. A Certificate Owner who fully
surrenders his or her Certificate is taxed on the portion of the payment that
exceeds his or her cost basis in the Certificate. For Non-Qualified
Certificates, the cost basis is generally the amount of the Purchase Payments
made for the Certificate and the taxable portion of the surrender payment is
taxed as ordinary income. For Qualified Certificates, the cost basis is
generally zero and the taxable portion of the surrender payment is generally
taxed as ordinary income subject to special 5-year income averaging. A
Designated Beneficiary receiving a lump sum surrender benefit after the death
of the Annuitant or Certificate Owner is taxed on the portion of the amount
that exceeds the Certificate Owner's cost basis in the Certificate. If the
Designated Beneficiary elects to receive annuity payments within 60 days of
the decedent's death, different tax rules apply. See "Annuity Payments"
below. For Non-Qualified Certificates, the tax treatment applicable to
Designated Beneficiaries may be contrasted with the income-tax-free treatment
applicable to persons inheriting and then selling mutual fund shares with a
date-of-death value in excess of their basis.
Partial withdrawals received under Non-Qualified Certificates prior to
annuitization are first included in gross income to the extent Certificate
Value exceeds Purchase Payments. Then, to the extent the Certificate Value
does not exceed Purchase Payments, such withdrawals are treated as a
non-taxable return of principal to the Certificate Owner. For partial
withdrawals under a Qualified Certificate, payments are treated first as a
non-taxable return of principal up to the cost basis and then a taxable
return of income. Since the cost basis of Qualified Certificates is generally
zero, partial surrender amounts will generally be fully taxed as ordinary
income.
A Certificate Owner who assigns or pledges a Non-Qualified Certificate is
treated as if he or she had received the amount assigned or pledged and thus
is subject to taxation under the rules applicable to partial withdrawals or
surrenders. A Certificate Owner who gives away the Certificate (i.e.,
transfers it without full and adequate consideration) to anyone other than
his or her spouse is treated for income tax purposes as if he or she had
fully surrendered the Certificate.
A special computational rule applies if Keyport issues to the Certificate
Owner, during any calendar year, (a) two or more Certificates or (b) one or
more Certificates and one or more of Keyport's other annuity contracts. Under
this rule, the amount of any distribution includable in the Certificate
Owner's gross income is to be determined under Section 72(e) of the Code by
treating all the Keyport contracts as one contract. Keyport believes that
this means the amount of any distribution under one Certificate will be
includable in gross income to the extent that at the time of distribution the
sum of the values for all the Certificates or contracts exceeds the sum of
the cost bases for all the contracts.
Annuity Payments. The non-taxable portion of each variable annuity payment
is determined by dividing the cost basis of the Certificate by the total
number of expected payments while the non-taxable portion of each fixed
annuity payment is determined by an "exclusion ratio" formula which
establishes the ratio that the cost basis of the Certificate bears to the
total expected value of annuity payments for the term of the annuity. The
remaining portion of each payment is taxable. Such taxable portion is taxed
at ordinary income rates. For Qualified Certificates, the cost basis is
generally zero. With annuity payments based on life contingencies, the
payments will become fully taxable once the payee lives longer than the life
expectancy used to calculate the non-taxable portion of the prior payments.
Because variable annuity payments can increase over time and because certain
payment options provide for a lump sum right of commutation, it is possible
that the IRS could determine that variable annuity payments should not be
taxed as described above but instead should be taxed as if they were received
under an agreement to pay interest. This determination would result in a
higher amount (up to 100%) of certain payments being taxable.
With respect to the "stabilizing" payment option available under Annuity
Option 1, pursuant to which each annual payment is placed in Keyport's
general account and paid out with interest in twelve equal monthly payments,
it is possible the IRS could determine that receipt of the first monthly
payout of each annual payment is constructive receipt of the entire annual
payment. Thus, the total taxable amount for each annual payment would be
accelerated to the time of the first monthly payout and reported in the tax
year in which the first monthly payout is received.
Penalty Tax. Payments received by Certificate Owners, Annuitants, and
Designated Beneficiaries under Certificates may be subject to both ordinary
income taxes and a penalty tax equal to 10% of the amount received that is
includable in income. The penalty tax is not imposed on amounts received: (a)
after the taxpayer attains age 59-1/2; (b) in a series of substantially equal
payments made for life or life expectancy; (c) after the death of the
Certificate Owner (or, where the Certificate Owner is not a human being,
after the death of the Annuitant); (d) if the taxpayer becomes totally and
permanently disabled; or (e) under a Non-Qualified Certificate's annuity
payment option that provides for a series of substantially equal payments,
provided only one Purchase Payment is made to the Certificate, the
Certificate is not issued as a result of a Section 1035 exchange, and the
first annuity payment begins in the first Certificate Year.
Income Tax Withholding. Keyport is required to withhold federal income
taxes on taxable amounts paid under Certificates unless the recipient elects
not to have withholding apply. Keyport will notify recipients of their right
to elect not to have withholding apply. See "Tax-Sheltered Annuities" (TSAs)
for an alternative type of withholding that may apply to distributions from
TSAs that are eligible for rollover to another TSA or an individual
retirement annuity or account (IRA).
Section 1035 Exchanges. A Non-Qualified Certificate may be purchased with
proceeds from the surrender of an existing annuity contract. Such a
transaction may qualify as a tax-free exchange pursuant to Section 1035 of
the Code. It is Keyport's understanding that in such an event: (a) the new
Certificate will
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be subject to the distribution-at-death rules described in "Death Provisions
for Non-Qualified Certificates"; (b) Purchase Payments made between August
14, 1982 and January 18, 1985 and the income allocable to them will,
following an exchange, no longer be covered by a "grandfathered" exception to
the penalty tax for a distribution of income that is allocable to an
investment made over ten years prior to the distribution; and (c) Purchase
Payments made before August 14, 1982 and the income allocable to them will,
following an exchange, continue to receive the following "grandfathered" tax
treatment under prior law: (i) the penalty tax does not apply to any
distribution; (ii) partial withdrawals are treated first as a non-taxable
return of principal and then a taxable return of income; and (iii)
assignments are not treated as surrenders subject to taxation. Keyport's
understanding of the above is principally based on legislative reports
prepared by the Staff of the Congressional Joint Committee on Taxation.
Diversification Standards. The U.S. Secretary of the Treasury has issued
regulations that set standards for diversification of the investments
underlying variable annuity contracts (other than pension plan contracts).
The Eligible Funds are designed to be managed to meet the diversification
requirements for the Certificate as those requirements may change from time
to time. If the diversification requirements are not satisfied, the
Certificate would not be treated as an annuity contract. As a consequence to
the Certificate Owner, income earned on a Certificate would be taxable to the
Certificate Owner in the year in which diversification requirements were not
satisfied, including previously non-taxable income earned in prior years. As
a further consequence, Keyport would be subjected to federal income taxes on
assets in the Variable Account.
The Secretary of the Treasury announced in September 1986 that he expects
to issue regulations which will prescribe the circumstances in which a
Certificate Owner's control of the investments of a segregated asset account
may cause the Certificate Owner, rather than the insurance company, to be
treated as the owner of the assets of the account. The regulations could
impose requirements that are not reflected in the Certificate. Keyport,
however, has reserved certain rights to alter the Certificate and investment
alternatives so as to comply with such regulations. Since the regulations
have not been issued, there can be no assurance as to the content of such
regulations or even whether application of the regulations will be
prospective. For these reasons, Certificate Owners are urged to consult with
their own tax advisers.
Qualified Plans
The Certificate is designed for use with several types of Qualified Plans.
The tax rules applicable to participants in such Qualified Plans vary
according to the type of plan and the terms and conditions of the plan
itself. Therefore, no attempt is made herein to provide more than general
information about the use of the Certificate with the various types of
Qualified Plans. Participants under such Qualified Plans as well as
Certificate Owners, Annuitants, and Designated Beneficiaries are cautioned
that the rights of any person to any benefits under such Qualified Plans may
be subject to the terms and conditions of the plans themselves regardless of
the terms and conditions of the Certificate issued in connection therewith.
Following are brief descriptions of the various types of Qualified Plans and
of the use of the Certificate in connection therewith. Purchasers of the
Certificate should seek competent advice concerning the terms and conditions
of the particular Qualified Plan and use of the Certificate with that Plan.
Tax-Sheltered Annuities
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts and,
subject to certain contribution limitations, exclude the amount of Purchase
Payments from gross income for tax purposes. However, such Purchase Payments
may be subject to Social Security (FICA) taxes. This type of annuity contract
is commonly referred to as a "Tax-Sheltered Annuity" (TSA).
Section 403(b)(11) of the Code contains distribution restrictions.
Specifically, benefits may be paid, through surrender of the Certificate or
otherwise, only (a) when the employee attains age 59-1/2, separates from
service, dies or becomes totally and permanently disabled (within the meaning
of Section 72(m)(7) of the Code) or (b) in the case of hardship. A hardship
distribution must be of employee contributions only and not of any income
attributable to such contributions. Section 403(b)(11) does not apply to
distributions attributable to assets held as of December 31, 1988. Thus, it
appears that the law's restrictions would apply only to distributions
attributable to contributions made after 1988, to earnings on those
contributions, and to earnings on amounts held as of 12/31/88. The Internal
Revenue Service has indicated that the distribution restrictions of Section
403(b)(11) are not applicable when TSA funds are being transferred tax-free
directly to another TSA issuer, provided the transferred funds continue to be
subject to the Section 403(b)(11) distribution restrictions.
Keyport will notify a Certificate Owner who has requested a distribution
from a Certificate if all or part of such distribution is eligible for
rollover to another TSA or to an individual retirement annuity or account
(IRA). Any amount eligible for rollover treatment will be subject to
mandatory federal income tax withholding at a 20% rate if the Certificate
Owner receives the amount rather than directing Keyport by Written Request to
transfer the amount as a direct rollover to another TSA or IRA.
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Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity."
These Individual Retirement Annuities are subject to limitations on the
amount which may be contributed, the persons who may be eligible, and on the
time when distributions may commence. In addition, distributions from certain
types of Qualified Plans may be placed on a tax-deferred basis into an
Individual Retirement Annuity.
Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of retirement plans for employees. Such retirement plans may
permit the purchase of the Certificate to provide benefits under the plans.
Deferred Compensation Plans With Respect to Service for
State and Local Governments
Section 457 of the Code, while not actually providing for a Qualified Plan as
that term is normally used, provides for certain deferred compensation plans
that enjoy special income tax treatment with respect to service for
tax-exempt organizations, state governments, local governments, and agencies
and instrumentalities of such governments. The Certificate can be used with
such plans. Under such plans, a participant may specify the form of
investment in which his or her participation will be made. However, all such
investments are owned by and subject to the claims of general creditors of
the sponsoring employer.
VARIABLE ACCOUNT VOTING PRIVILEGES
In accordance with its view of present applicable law, Keyport will vote the
shares of the Eligible Funds held in the Variable Account at regular and
special meetings of the shareholders of the Eligible Funds in accordance with
instructions received from persons having the voting interest in the Variable
Account. Keyport will vote shares for which it has not received instructions
in the same proportion as it votes shares for which it has received
instructions.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation thereof should change, and
as a result Keyport determines that it is permitted to vote the shares of the
Eligible Funds in its own right, it may elect to do so.
The person having the voting interest under a Certificate prior to the Income
Date shall be the Certificate Owner. The number of shares held in each
Sub-Account which are attributable to each Certificate Owner is determined by
dividing the Certificate Owner's Variable Account Value in each Sub-Account
by the net asset value of the applicable share of the Eligible Fund. The
person having the voting interest after the Income Date under an annuity
payment option shall be the payee. The number of shares held in the Variable
Account which are attributable to each payee is determined by dividing the
reserve for the annuity payments by the net asset value of one share. During
the annuity payment period, the votes attributable to a payee decrease as the
reserves underlying the payments decrease.
The number of shares in which a person has a voting interest will be
determined as of the date coincident with the date established by the
respective Eligible Fund for determining shareholders eligible to vote at the
meeting of the Fund and voting instructions will be solicited by written
communication prior to such meeting in accordance with the procedures
established by the Eligible Fund.
Each person having the voting interest in the Variable Account will receive
periodic reports relating to the Eligible Fund(s) in which he or she has an
interest, proxy material and a form with which to give such voting
instructions with respect to the proportion of the Eligible Fund shares held
in the Variable Account corresponding to his or her interest in the Variable
Account.
SALES OF THE CERTIFICATES
Keyport Financial Services Corp. ("KFSC") serves as the Principal Underwriter
for the Certificate described in this prospectus. The Certificate will be
sold by salespersons who represent Keyport Life Insurance Company KFSC's
corporate parent as variable annuity agents and who are registered
representatives of broker/dealers who have entered into distribution
agreements with KFSC. KFSC is registered under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers, Inc.
It is located at 125 High Street, Boston, Massachusetts 02110.
Different Certificates may be sold (1) to a person who is an officer,
director, or employee of Keyport, or an affiliate of Keyport, a trustee or
officer of an Eligible Fund, an employee of the investment adviser or
sub-investment adviser of an Eligible Fund, or an employee or associated
person of an entity which has entered into a sales agreement with the
Principal Underwriter for the distribution of Certificates, or (2) to any
Qualified Plan established for such a person. Such Certificates may be
different from the Certificates sold to others in that (1) they are not
subject to the deduction for the Certificate Maintenance Charge, the
asset-based Sales charge or the Contingent Deferred Sales Charge and (2) they
have a Mortality and Expense Risk Charge of 0.35% per year.
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LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account or the Principal
Underwriter are a party. Keyport is engaged in various kinds of routine
litigation which in its judgment is not of material importance in relation to
the total capital and surplus of Keyport.
INQUIRIES BY CERTIFICATE OWNERS
Certificate Owners with questions about their Certificates may write Keyport
Life Insurance Company, Client Service Department, 125 High Street, Boston,
MA 02110, or call (800) 367-3653.
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Keyport Life Insurance Company 2
Variable Annuity Benefits 2
Variable Annuity Payment Values 2
Re-Allocating Sub-Account Payments 3
Custodian 4
Principal Underwriter 4
Experts 4
Investment Performance 4
Yields for SteinRoe Cash Income Sub-Account 5
Financial Statements 6
Keyport Life Insurance Company 7
</TABLE>
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APPENDIX A
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THE FIXED ACCOUNT (ALSO KNOWN AS THE MODIFIED GUARANTEED ANNUITY ACCOUNT)
Introduction
This Appendix describes the Fixed Account option available under the
Certificate.
FIXED ACCOUNT VALUES PROVIDED BY THE CERTIFICATE ARE SUBJECT TO A MARKET
VALUE ADJUSTMENT, THE OPERATION OF WHICH MAY RESULT IN UPWARD OR DOWNWARD
ADJUSTMENTS IN AMOUNTS TRANSFERRED AND AMOUNTS PAID (INCLUDING WITHDRAWALS,
SURRENDERS, DEATH BENEFITS, AND AMOUNTS APPLIED TO PURCHASE ANNUITY PAYMENTS)
TO A CERTIFICATE OWNER OR OTHER PAYEE. IN NO EVENT WILL THE DOWNWARD MARKET
VALUE ADJUSTMENT ELIMINATE INTEREST AT THE RATE OF 3% PER YEAR APPLIED TO THE
AMOUNT ALLOCATED TO A GUARANTEED PERIOD. PAYMENTS MADE FROM FIXED ACCOUNT
VALUES AT THE END OF THEIR GUARANTEE PERIOD ARE NOT SUBJECT TO THE MARKET
VALUE ADJUSTMENT.
Purchase Payments allocated to the Fixed Account option become part of
Keyport's general account. Because of applicable exemptive and exclusionary
provisions, interests in the Fixed Account options have not been registered
under the Securities Act of 1933 ("1933 Act"), nor is the general account an
investment company under the Investment Company Act. Accordingly, neither the
general account, the Fixed Account option, nor any interest therein, are
subject to regulation under the 1933 Act or the Investment Company Act.
Keyport understands that the Securities and Exchange Commission has not
reviewed the disclosure in the prospectus relating to the general account and
the Fixed Account option.
Investments in the Fixed Account and Capital Protection Plus
Purchase Payments will be allocated to the Fixed Account in accordance with
the selection made by the Certificate Owner in the application. Any selection
must specify that percentage of the Purchase Payment that is to be allocated
to each Guarantee Period of the Fixed Account. The percentage, if not zero,
must be at least 5%. The Certificate Owner may change the allocation
percentages without fee, penalty or other charge. Allocation changes must be
made by Written Request unless the Certificate Owner has by Written Request
authorized Keyport to accept telephone allocation instructions from the
Certificate Owner. By authorizing Keyport to accept telephone changes, a
Certificate Owner agrees to accept and be bound by the conditions and
procedures established by Keyport from time to time. The current conditions
and procedures are in Appendix C and Certificate Owners authorizing telephone
allocation instructions will be notified, in advance, of any changes.
Keyport currently offers Guarantee Periods of 1, 3, 5, and 7 years.
Keyport may change at any time the number of Guarantee Periods it offers
under newly-issued and in-force Certificates, as well as the length of those
Guarantee Periods. If Keyport stops offering a particular Guarantee Period,
existing Fixed Account Value in such Guarantee Period would not be affected
until the end of the Period (at that time, a Period of the same length would
not be a transfer option). Each Guarantee Period currently offered is
available for initial and subsequent Purchase Payments and for transfers of
Certificate Value.
Keyport offers a Capital Protection Plus program that a Certificate Owner
may request. Under this program, Keyport will allocate part of the Purchase
Payment to the Guarantee Period selected by the Certificate Owner so that
such part, based on that Guarantee Period's interest rate in effect on the
date of allocation, will equal at the end of the Guarantee Period the total
Purchase Payment. The rest of the Purchase Payment will be allocated to the
Sub-Account(s) of the Variable Account based on the Certificate Owner's
allocation. If any part of the Fixed Account Value is surrendered or
transferred before the end of the Guarantee Period, the Value at the end of
that Period will not equal the original Purchase Payment amount.
For an example of Capital Protection Plus, assume Keyport receives a
Purchase Payment of $10,000 when the interest rate for the 7-year Guarantee
Period is 6.75% per year. Keyport will allocate $6,331 to that Guarantee
Period because $6,331 will increase at that interest rate to $10,000 after 7
years. The remaining $3,669 of the payment will be allocated to the Sub-
Account(s) selected by the Certificate Owner.
Fixed Account Value
The Fixed Account Value at any time is equal to:
(a) all Purchase Payments allocated to the Fixed Account plus the interest
subsequently credited on those payments; plus
(b) any Variable Account Value transferred to the Fixed Account plus the
interest subsequently credited on the transferred value; less
(c) any prior partial withdrawals from the Fixed Account, including any
charges therefor; less
(d) any Fixed Account Value transferred to the Variable Account.
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Interest Credits
Keyport will credit interest daily (based on an annual compound interest
rate) to Purchase Payments allocated to the Fixed Account at rates declared
by Keyport for Guarantee Periods of one or more years from the month and day
of allocation. Any rate set by Keyport will be at least 3% per year.
Keyport's method of crediting interest means that Fixed Account Value
might be subject to different rates for each Guarantee Period the Certificate
Owner has selected in the Fixed Account. For purposes of this section,
Variable Account Value transferred to the Fixed Account and Fixed Account
Value renewed for another Guarantee Period shall be treated as a Purchase
Payment allocation.
Application of Market Value Adjustment
Any surrender, withdrawal, transfer, or application to an Annuity Option of
Fixed Account Value from a Guarantee Period of three years or more is subject
to a limited Market Value Adjustment, unless: (1) the effective date of the
transaction is at the end of the Guarantee Period; or (2) the effective date
of a surrender is within 90 days of the date of death of the first Covered
Person to die.
If a Market Value Adjustment applies to either a surrender or the
application to an Annuity Option, then any negative Market Value Adjustment
amount will be deducted from the Certificate Value and any positive Market
Value Adjustment amount will be added to the Certificate Value. If a Market
Value Adjustment applies to either a partial withdrawal or a transfer, then
any negative Market Value Adjustment amount will be deducted from the partial
withdrawal or transfer amount after the withdrawal or transfer amount has
been deducted from the Fixed Account Value, and any positive Market Value
Adjustment amount will be added to the applicable amount after it has been
deducted from the Fixed Account Value.
No Market Value Adjustment is ever applicable to Guarantee Periods of
fewer than three years.
Effect of Market Value Adjustment
A Market Value Adjustment reflects the change in prevailing current interest
rates since the beginning of a Guarantee Period. The Market Value Adjustment
may be positive or negative, but any negative Adjustment may be limited in
amount (see Market Value Adjustment Factor below).
Generally, if the Treasury Rate for the Guarantee Period is lower than the
Treasury Rate for a new Guarantee Period with a length equal to the time
remaining in the Guarantee Period, then the application of the limited Market
Value Adjustment will result in a reduction of the amount being surrendered,
withdrawn, transferred, or applied to an Annuity Option.
Similarly, if the Treasury Rate for the Guarantee Period is higher than
the Treasury Rate for a new Guarantee Period with a length equal to the time
remaining in the Guarantee Period, then the application of the Market Value
Adjustment will result in an increase in the amount being surrendered,
withdrawn, transferred, or applied to an Annuity Option.
The Market Value Adjustment will be applied before the deduction of any
applicable surrender charges or applicable taxes.
Market Value Adjustment Factor
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to a Payment Option, by the
Market Value Adjustment Factor. The Market Value Adjustment Factor is
calculated as the larger of Formula (1) or (2):
(1) (1+a)/(1+b)(n/12)-1
where:
"a" is the Treasury Rate for the number of Guarantee Period Years in the
Guarantee Period;
"b" is the Treasury Rate for a period equal to the time remaining (rounded
up to the next whole number of Guarantee Period Years) to the expiration of
the Guarantee Period; and
"n" is the number of complete Guarantee Period Months remaining before the
expiration of the Guarantee Period.
(2) (1.03)/(1+i)(y+d/#)-1
where:
"i" is the Guaranteed Interest Rate for the Guarantee Period;
"y" is the number of complete Guarantee Period Years that have elapsed in
Your Guarantee Period;
"d" is the number of days since the last Guarantee Period Anniversary or,
if "y" is zero, the number of days since the start of the Guarantee Period;
and
"#" is the number of days in the current Guarantee Period Year (i.e., the
sum of "d" and the number of days until the next Guarantee Period
Anniversary).
In Formulas (1) and (2), all references to Guarantee Period, Guarantee
Period Anniversary, Guarantee Period Month, and Guarantee Period Year relate
to the Guarantee Period from which is being taken the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Option.
As stated above, the Formula (2) amount will apply only if it is greater
than the Formula (1) amount. This will occur only when the Formula (1) amount
is negative and the Formula (2) amount
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is a smaller negative number. Formula (2) thus ensures that a full (normal)
negative Market Value Adjustment of Formula (1) will not apply to the extent
it would decrease the Guarantee Period's Fixed Account Value (before the
deduction of any applicable surrender charges or any applicable taxes) below
the following amount:
(a) the amount allocated to the Guarantee Period; less
(b) any prior systematic or partial withdrawal amounts; less
(c) any prior amounts transferred to the Variable Account or to another
Guarantee Period in the Fixed Account; plus
(d) interest on the above items (a) through (c) credited annually at a rate
of 3% per year.
Treasury Rates
The Treasury Rate for a Guarantee Period is the interest rate in the Treasury
Constant Maturity Series, as published by the Federal Reserve Board, for a
maturity equal to the number of years specified in "a" and "b" in Formula (1)
above. For "a", Keyport uses the Treasury Constant Maturity Series for the
week which includes the most recent Determination Date on or preceding the
Reset Date for Your Guarantee Period. For "b", Keyport uses the Treasury
Constant Maturity Series for the week which includes the most recent
Determination Date on or preceding the date of calculation of the Market
Value Adjustment Factor. The Determination Dates are the last business day
prior to the first and fifteenth of each calendar month.
If the number of years specified in "a" or "b" is not equal to a maturity
in the Treasury Constant Maturity Series, the Treasury Rate will be
determined by straight line interpolation between the interest rates of the
next highest and next lowest maturities.
If the Treasury Constant Maturity Series becomes unavailable, Keyport will
adopt a comparable constant maturity index or, if such a comparable index
also is not available, Keyport will replicate calculation of the Treasury
Constant Maturity Series Index based on U.S. Treasury Security coupon rates.
End of A Guarantee Period
Keyport will notify a Certificate Owner in writing at least 30 days prior to
the end of a Guarantee Period. At the end of the Guarantee Period, Keyport
will automatically transfer the Guarantee Period's Fixed Account Value to the
Money Market Sub-Account of the Variable Account unless Keyport previously
received a Certificate Owner's Written Request of: (1) election of a new
Guarantee Period from among those being offered by Keyport at that time; or
(2) instructions to transfer the ending Guarantee Period's Fixed Account
Value to one or more Sub-accounts of the Variable Account. A new Guarantee
Period cannot be longer than the number of years remaining until the Income
Date.
Transfers of Fixed Account Value
The Certificate Owner may transfer Fixed Account Value from one Guarantee
Period to another or to one or more Sub-Accounts of the Variable Account
subject to any applicable Market Value Adjustment. If the Fixed Account Value
represents multiple Guarantee Periods, the transfer request must specify from
which values the transfer is to be made.
The Certificate allows Keyport to limit the number of transfers that can
be made in a specified time period. Currently, Keyport is limiting Variable
Account and Fixed Account transfers to generally unlimited transfers per
calendar year with a $500,000 per transfer dollar limit. See "Transfer of
Variable Account Value". These limitations will not apply to any transfer
made at the end of a Guarantee Period. Certificate Owners will be notified,
in advance, of a change in the limitation on the number of transfers.
Transfer requests must be by Written Request unless the Certificate Owner
has authorized Keyport by Written Request to accept telephone transfer
instructions from the Certificate Owner or from a person acting for the
Certificate Owner as an attorney-in-fact under a power of attorney. By
authorizing Keyport to accept telephone transfer instructions, a Certificate
Owner agrees to accept and be bound by the conditions and procedures
established by Keyport from time to time. The current conditions and
procedures are in Appendix C and Certificate Owners authorizing telephone
transfers will be notified, in advance, of any changes. Written transfer
requests may be made by a person acting for the Certificate Owner as an
attorney-in-fact under a power of attorney.
Transfer requests received by Keyport before the close of trading on the
New York Stock Exchange (currently 4:00 PM Eastern Time) will be executed at
the close of business that day. Any requests received later will be executed
at the close of the next business day.
The amount of the transfer will be deducted from the specified values in
the manner stated in the next section below.
If 100% of a Guarantee Period's value is transferred and the current
allocation for Purchase Payments includes that Guarantee Period, then the
allocation formula for future Purchase Payments will automatically change
unless the Certificate Owner instructs otherwise. For example, if the
allocation formula is 50% to the one-year Guarantee Period and 50% to
Sub-Account A and all Fixed Account Value is transferred to Sub-Account A,
the allocation formula will change to 100% to Sub-Account A.
29
<PAGE>
APPENDIX B
- ------------------------------------------------------------------------------
TELEPHONE INSTRUCTIONS
Telephone Transfers of Certificate Values
1. If there are Joint Certificate Owners, both must authorize Keyport to
accept telephone instructions but either Certificate Owner may give Keyport
telephone instructions.
2. All callers will be required to identify themselves. Keyport reserves
the right to refuse to act upon any telephone instructions in cases where the
caller has not sufficiently identified himself/herself to Keyport's
satisfaction.
3. Neither Keyport nor any person acting on its behalf shall be subject to
any claim, loss, liability, cost or expense if it or such person acted in
good faith upon a telephone instruction, including one that is unauthorized
or fraudulent; however, Keyport will employ reasonable procedures to confirm
that a telephone instruction is genuine and, if Keyport does not, Keyport may
be liable for losses due to an unauthorized or fraudulent instruction. The
Certificate Owner thus bears the risk that an unauthorized or fraudulent
instruction that is executed may cause the Certificate Value to be lower than
it would be had no instruction been executed.
4. All conversations will be recorded with disclosure at the time of the call.
5. The application for the Certificate may allow a Certificate Owner to
create a power of attorney by authorizing another person to give telephone
instructions. Unless prohibited by state law, such power will be treated as
durable in nature and shall not be affected by the subsequent incapacity,
disability or incompetency of the Certificate Owner. Either Keyport or the
authorized person may cease to honor the power by sending written notice to
the Certificate Owner at the Certificate Owner's last known address. Neither
Keyport nor any person acting on its behalf shall be subject to liability for
any act executed in good faith reliance upon a power of attorney.
6. Telephone authorization shall continue in force until (a) Keyport
receives the Certificate Owner's written revocation, (b) Keyport discontinues
the privilege, or (c) Keyport receives written evidence that the Certificate
Owner has entered into a market timing or asset allocation agreement with an
investment adviser or with a broker/dealer.
7. Telephone transfer instructions received by Keyport at 800-367-3653
before the close of trading on the New York Stock Exchange (currently 4:00
P.M. Eastern Time) will be initiated that day based on the unit value prices
calculated at the close of that day. Instructions received after the close of
trading on the NYSE will be initiated the following business day.
8. Once instructions are accepted by Keyport, they may not be canceled.
9. All transfers must be made in accordance with the terms of the
Certificate and current prospectus. If the transfer instructions are not in
good order, Keyport will not execute the transfer and will notify the caller
within 48 hours.
10. If 100% of any Sub-Account's value is transferred and the allocation
formula for Purchase Payments includes that Sub-Account, then the allocation
formula for future Purchase Payments will change accordingly unless Keyport
receives telephone instructions to the contrary. For example, if the
allocation formula is 50% to Sub-Account A and 50% to Sub-Account B and all
of Sub-Account A's value is transferred to Sub-Account B, the allocation
formula will change to 100% to Sub-Account B unless Keyport is instructed
otherwise.
Telephone Changes to Purchase Payment Allocation Percentages
Numbers 1-6 above are applicable.
30
<PAGE>
NO POSTAGE
NECESSARY
IF MAILED
IN THE
UNITED STATES
BUSINESS REPLY MAIL
FIRST CLASS MAIL PERMIT NO. 6719 BOSTON, MA
POSTAGE WILL BE PAID BY ADDRESSEE
KEYPORT LIFE INSURANCE CO.
125 HIGH STREET
BOSTON, MA 02110-9773
<PAGE>
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
[KEYPORT LOGO]
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
Service Hotline 800-367-3653 Keyline 800-367-3654
Keyport Logo is a registered service mark of Keyport Life Insurance Company.
K.A.VAP 11/96
[ ] Yes. I would like to receive the Keyport Advisor Variable Annuity Statement
of Additional Information.
[ ] Yes. I would like to receive the Statement of Additional Information for
the Eligible Funds of:
[ ] The Alger American Fund [ ] Alliance Variable Products Series
[ ] Keyport Variable Investment Trust Fund, Inc.
[ ] SteinRoe Variable Investment Trust [ ] MFS Variable Insurance Trust
-----------------------------------------------------------------------------
Name
-----------------------------------------------------------------------------
Address
-----------------------------------------------------------------------------
City State Zip
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
GROUP FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VARIABLE ACCOUNT A
OF
KEYPORT LIFE INSURANCE COMPANY ("Keyport")
This Statement of Additional Information is not a prospectus but it relates
to, and should be read in conjunction with, the Keyport Advisor variable
annuity prospectus dated November 11, 1996. The prospectus is available, at
no charge, by writing Keyport at 125 High Street, Boston, MA 02110 or by
calling (800) 437-4466.
TABLE OF CONTENTS
Page
Keyport Life Insurance Company 2
Variable Annuity Benefits 2
Variable Annuity Payment Values 2
Re-Allocating Sub-Account Payments 3
Custodian 4
Principal Underwriter 4
Experts 4
Investment Performance 4
Yields for SteinRoe Cash Income Sub-Account 5
Financial Statements 6
Keyport Life Insurance Company 7
The date of this statement of additional information is November 11, 1996.
1
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Liberty Mutual Insurance Company ("Liberty Mutual"), a multi-line
insurance and financial services institution, is the ultimate corporate
parent of Keyport. Liberty Mutual ultimately controls Keyport through the
following intervening holding company subsidiaries: Liberty Mutual Equity
Corporation, Liberty Financial Companies, Inc. ("LFC") and SteinRoe Services,
Inc. Liberty Mutual, as of March 31, 1995, owned, indirectly, approximately
81.9% of the combined voting power of the outstanding stock of LFC (with the
balance being publicly held). For additional information about Keyport, see
page 8 of the prospectus.
VARIABLE ANNUITY BENEFITS
Variable Annuity Payment Values
For each variable payment option, the total dollar amount of each
periodic payment will be equal to: (a) the sum of all Sub-account payments;
less (b) the pro-rata amount of the annual Certificate Maintenance Charge.
The first payment for each Sub-Account will be determined by deducting
any applicable Certificate Maintenance Charge and any applicable state
premium taxes and then dividing the remaining value of that Sub-Account by
$1,000 and multiplying the result by the greater of: (a) the applicable
factor from the Certificate's annuity table for the particular payment
option; or (b) the factor currently offered by Keyport at the time annuity
payments begin. This current factor may be based on the sex of the payee
unless to do so would be prohibited by law.
The number of Annuity Units for each Sub-Account will be determined by
dividing such first payment by the Sub-Account Annuity Unit value for the
Valuation Period that includes the date of the first payment. The number of
Annuity Units remains fixed for the annuity payment period. Each Sub-Account
payment after the first one will be determined by multiplying (a) by (b),
where: (a) is the number of Sub-Account Annuity Units; and (b) is the
Sub-Account Annuity Unit value for the Valuation Period that includes the
date of the particular payment.
Variable annuity payments will fluctuate in accordance with the
investment results of the underlying Eligible Funds. In order to determine
how these fluctuations affect annuity payments, Keyport uses an Annuity Unit
value. Each Sub-Account has its own Annuity Units and value per Unit. The
Annuity Unit value applicable during any Valuation Period is determined at
the end of such period.
When Keyport first purchased Eligible Fund shares on behalf of the
Variable Account, Keyport valued each Annuity Unit for each Sub-Account at a
specified dollar amount. The Unit value for each Sub-Account in any Valuation
Period thereafter is determined by multiplying the value for the prior period
by a net investment factor. This factor may be greater or less than 1.0;
therefore, the Annuity Unit may increase or decrease from Valuation Period to
Valuation Period. For each assumed annual investment rate (AIR), Keyport
2
<PAGE>
calculates a net investment factor for each Sub-Account by dividing (a) by
(b), where:
(a) is equal to the net investment factor as defined in the
prospectus without any deduction for the sales charge defined in
(c)(ii) of the net investment factor formula; and
(b) is the assumed investment factor for the current Valuation
Period. The assumed investment factor adjusts for the interest
assumed in determining the first variable annuity payment. Such
factor for any Valuation Period shall be the accumulated value,
at the end of such period, of $1.00 deposited at the beginning of
such period at the assumed annual investment rate (AIR). The AIR
for Annuity Units based on the Certificate's annuity tables is 6%
per year (5% per year for Oregon Certificates). An AIR of 3% per
year is also currently available upon Written Request.
With a particular AIR, payments after the first one will increase or
decrease from month to month based on whether the actual annualized
investment return of the selected Sub-Account(s) (after deducting the
Mortality and Expense Risk Charge) is better or worse than the assumed AIR
percentage. If a given amount of Sub-Account value is applied to a
particular payment option, the initial payment will be smaller if a 3% AIR is
selected instead of a 6% AIR but, all other things being equal, the
subsequent 3% AIR payments have the potential for increasing in amount by a
larger percentage and for decreasing in amount by a smaller percentage. For
example, consider what would happen if the actual annualized investment
return (see the first sentence of this paragraph) is 9%, 6%, 3%, or 0%
between the time of the first and second payments. With an actual 9% return,
the 3% AIR and 6% AIR payments would both increase in amount but the 3% AIR
payment would increase by a larger percentage. With an actual 6% return, the
3% AIR payment would increase in amount while the 6% AIR payment would stay
the same. With an actual return of 3%, the 3% AIR payment would stay the
same while the 6% AIR payment would decrease in amount. Finally, with an
actual return of 0%, the 3% AIR and 6% AIR payments would both decrease in
amount but the 3% AIR payment would decrease by a smaller percentage. Note
that the changes in payment amounts described above are on a percentage basis
and thus do not illustrate when, if ever, the 3% AIR payment amount might
become larger than the 6% AIR payment amount. Note though that if Option 1
(Income for a Fixed Number of Years) is selected and payments continue for
the entire period, the 3% AIR payment amount will start out being smaller
than the 6% AIR payment amount but eventually the 3% AIR payment amount will
become larger than the 6% AIR payment amount.
Re-Allocating Sub-Account Payments
The number of Annuity Units for each Sub-Account under any variable
annuity option will remain fixed during the entire annuity payment period
unless the payee makes a written request for a change. Currently, a payee
can instruct Keyport to change the Sub-Account(s) used to determine the
amount of the variable annuity payments unlimited times every 12 months. The
3
<PAGE>
payee's request must specify the percentage of the annuity payment that is to
be based on the investment performance of each Sub-Account. The percentage
for each Sub-Account, if not zero, must be at least 5% and must be a whole
number. At the end of the Valuation Period during which Keyport receives the
request, Keyport will: (a) value the Annuity Units for each Sub-Account to
create a total annuity value; (b) apply the new percentages the payee has
selected to this total value; and (c) recompute the number of Annuity Units
for each Sub-Account. This new number of units will remain fixed for the
remainder of the payment period unless the payee requests another change.
CUSTODIAN
The custodian of the assets of the Variable Account is State Street
Bank and Trust Company, a state chartered trust company. Its principal office is
at 225 Franklin Street, Boston, Massachusetts.
PRINCIPAL UNDERWRITER
The Contract, which is offered continuously, is distributed by Keyport
Financial Services Corp. ("KFSC"), a wholly-owned subsidiary of Keyport.
EXPERTS
The consolidated financial statements of Keyport as of December 31,
1995 and 1994 and for each of the years in the three-year period ended December
31, 1995 included herein, have been included herein in reliance on the report of
KPMG Peat Marwick LLP, independent certified public accountants, and upon
authority of said firm as experts in accounting and auditing.
INVESTMENT PERFORMANCE
The Variable Account may from time to time quote performance
information concerning its various Sub-Accounts. A Sub-Account's performance may
also be compared to the performance of sub-accounts used with variable annuities
offered by other insurance companies. This comparative information may be
expressed as a ranking prepared by Financial Planning Resources, Inc. of Miami,
FL (The VARDS Report), Lipper Analytical Services, Inc., or by Morningstar, Inc.
of Chicago, IL (Morningstar's Variable Annuity Performance Report), which are
independent services that compare the performance of variable annuity
sub-accounts. The rankings are done on the basis of changes in accumulation unit
values over time and do not take into account any charges (such as sales charges
or administrative charges) that are deducted directly from contract values.
Ibbotson Associates of Chicago, IL provides historical returns from
1926 on capital markets in the United States. The Variable Account may quote the
performance of its Sub-Accounts in conjunction with the long-term performance of
capital markets in order to illustrate general long-term risk versus reward
investment scenarios. Capital markets tracked by Ibbotson Associates include
common stocks, small company stocks, long-term corporate bonds, long-term
government bonds, U.S. Treasury Bills, and the U.S. inflation rate. Historical
total returns are determined by Ibbotson Associates for: Large Company Stocks,
represented by the Standard and Poor's Composite Price Index (an unmanaged
weighted index of 90 stocks prior to March 1957 and 500 stocks thereafter of
industrial, transportation, utility and financial companies
4
<PAGE>
widely regarded by investors as representative of the stock market); Small
Company Stocks, represented by the fifth capitalization quintile (i.e., the
ninth and tenth deciles) of stocks on the New York Stock Exchange for 1926-
1981 and by the performance of the Dimensional Fund Advisors Small Company
9/10 (for ninth and tenth deciles) Fund thereafter; Long Term Corporate
Bonds, represented beginning in 1969 by the Salomon Brothers Long-Term High-
Grade Corporate Bond Index, which is an unmanaged index of nearly all Aaa and
Aa rated bonds, represented for 1946-1968 by backdating the Salomon Brothers
Index using Salomon Brothers' monthly yield data with a methodology similar
to that used by Salomon Brothers in computing its Index, and represented for
1925-1945 through the use of the Standard and Poor's monthly High-Grade
Corporate Composite yield data, assuming a 4% coupon and a 20-year maturity;
Long-Term Government Bonds, measured each year using a portfolio containing
one U.S. government bond with a term of approximately twenty years and a
reasonably current coupon; U.S. Treasury Bills, measured by rolling over each
month a one-bill portfolio containing, at the beginning of each month, the
shortest-term bill having not less than one month to maturity; Inflation,
measured by the Consumer Price Index for all Urban Consumers, not seasonably
adjusted, since January, 1978 and by the Consumer Price Index before then.
The stock capital markets may be contrasted with the corporate bond and U.S.
government securities capital markets. Unlike an investment in stock, an
investment in a bond that is held to maturity provides a fixed rate of
return. Bonds have a senior priority to common stocks in the event the
issuer is liquidated and interest on bonds is generally paid by the issuer
before it makes any distributions to common stock owners. Bonds rated in the
two highest rating categories are considered high quality and present minimal
risk of default. An additional advantage of investing in U.S. government
bonds and Treasury bills is that they are backed by the full faith and credit
of the U.S. government and thus have virtually no risk of default. Although
government securities fluctuate in price, they are highly liquid.
Yields for SteinRoe Cash Income Sub-Account
Yield and effective yield percentages for the SteinRoe Cash Income Sub-
Account are calculated using the method prescribed by the Securities and
Exchange Commission. Both yields reflect the deduction of the annual 1.40%
asset-based Certificate charges. Both yields also reflect, on an allocated
basis, the Certificate's annual $36 Certificate Maintenance Charge. Both
yields do not reflect Contingent Deferred Sales Charges and premium tax
charges. The yields would be lower if these charges were included. The
following are the standardized formulas:
Yield equals: (A - B
----- - 1) X 365
---
C 7
Effective Yield Equals: (A - B) 365/7 - 1
-----
C
Where:
A = the Accumulation Unit value at the end of the 7-day period.
B = hypothetical Certificate Maintenance Charge for the 7-day
period. The assumed annual SteinRoe Cash Income charge is equal
to the $36 Certificate charge multiplied by a fraction equal to
the average number of Certificates with SteinRoe Cash Income
Sub-Account value
5
<PAGE>
during the 7-day period divided by the average total number of
Certificates during the 7-day period. This annual amount is
converted to a 7-day charge by multiplying it by 7/365. It is
then equated to an Accumulation Unit size basis by multiplying it
by a fraction equal to the average value of one SteinRoe Cash
Income Accumulation Unit during the 7-day period divided by the
average Certificate Value in SteinRoe Cash Income Sub-Account
during the 7-day period.
C = the Accumulation Unit value at the beginning of the 7-day
period.
The yield formula assumes that the weekly net income generated by an
investment in the SteinRoe Cash Income Sub-Account will continue over an
entire year. The effective yield formula also annualizes seven days of net
income but it assumes that the net income is reinvested over the year. This
compounding effect causes effective yield to be higher than the yield.
FINANCIAL STATEMENTS
The Variable Account has not yet commenced operations and therefore no
financial statements are included. The Financial Statements of Keyport are
provided as relevant to its ability to meet its financial obligations under
the Certificates.
6
<PAGE>
Independent Auditors' Report
The Board of Directors
Keyport Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Keyport Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Keyport Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 2(b) to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, effective January 1, 1994.
February 16, 1996 /s/KPMG Peat Marwick LLP
<PAGE>
KEPORT LIFE INSURANCE COMPANY
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Assets December 31,
1995 1994
<S> <C> <C>
Cash and investments:
Fixed maturities available for sale (amortized
cost: 1995 - $9,227,834; 1994 - $6,795,065) $ 9,535,948 $ 6,509,815
Fixed maturities held to maturity (fair value:
1995 - 0; 1994 - $1,442,665) - 1,448,680
Equity securities (cost: 1995-$17,521; 1994-$13,627) 25,214 12,941
Mortgage loans 74,505 129,452
Policy loans 498,326 477,293
Other invested assets 10,748 11,994
Cash and cash equivalents 777,384 684,618
Total cash and investments 10,922,125 9,274,793
Accrued investment income 132,856 111,936
Deferred policy acquisition costs 179,672 439,232
Value of insurance in force 43,939 139,221
Deferred federal income taxes - 42,361
Intangible assets 20,314 21,444
Federal income taxes recoverable 9,205 4,911
Other assets 11,859 10,772
Separate account assets 959,224 828,934
Total assets $12,279,194 $10,873,604
Liabilities and Stockholder's Equity
Policy liabilities:
Policyholder account balances $10,073,806 $ 9,333,755
Other policyholders' funds 10,586 10,289
Total policy liabilities 10,084,392 9,344,044
Current federal income taxes 7,666 -
Deferred federal income taxes 32,823 -
Payable for investments purchased and loaned 317,715 -
Guaranty association fees 21,940 24,688
Other liabilities 23,221 57,978
Separate account liabilities 889,106 764,409
Total liabilities 11,376,863 10,191,119
Stockholder's equity:
Common stock, $1.25 par value; authorized 8,000
shares; issued and outstanding 2,412 shares 3,015 3,015
Additional paid-in capital 505,933 505,933
Net unrealized investment gains (losses) 85,772 (64,464)
Retained earnings 307,611 238,001
Total stockholder's equity 902,331 682,485
Total liabilities and stockholder's equity $12,279,194 $10,873,604
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Consolidated Income Statements
Year Ended December 31
1995 1994 1993
Revenues:
Net investment income $757,361 $689,575 $669,667
Insurance revenues 29,767 25,273 18,158
Net realized investment gains (losses) (3,958) (8,220) 11,403
Total revenues 783,170 706,628 699,228
Benefits and expenses:
Interest credited to policyholders 557,156 481,926 504,205
Policy benefits 4,448 4,838 3,113
Operating expenses 42,475 47,095 36,983
Guaranty association expenses 2,000 7,200 3,714
Amortization of deferred policy acquisition costs 58,541 52,174 41,003
Amortization of value of insurance in force 9,479 16,989 22,375
Amortization of intangible assets 1,130 1,130 1,130
Total benefits and expenses 675,229 611,352 612,523
Income before federal income taxes 107,941 95,276 86,705
Federal income tax expense 38,331 32,051 28,710
Net income $ 69,610 $ 63,225 $ 57,995
See accompanying notes to consolidated financial statements.
KEYPORT LIFE INSURANCE COMPANY
Consolidated Statements of Stockholder's Equity
(in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Investment
Common Paid-In Gains Retained
Stock Capital (Losses) Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $1,508 $430,933 $ 5,687 $118,288 $556,416
Net income 57,995 57,995
Capital contribution by parent 75,000 75,000
Change in net unrealized
investment gains (losses) (5,141) (5,141)
Balance, December 31, 1993 1,508 505,933 546 176,283 684,270
Net income 63,225 63,225
Common stock dividend 1,507 (1,507) -
(1,206 shares)
Change in net unrealized
investment gains (losses) (65,010) (65,010)
<PAGE>
Balance, December 31, 1994 3,015 505,933 (64,464) 238,001 682,485
Net income 69,610 69,610
Change in net unrealized
investment gains (losses) 150,236 150,236
Balance, December 31, 1995 $3,015 $ 505,933 $ 85,772 $307,611 $902,331
</TABLE>
See accompanying notes to consolidated financial statements.
KEYPORT LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 69,610 $ 63,225 $ 57,995
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to policyholders 557,156 478,797 501,073
Net realized investment losses (gains) 3,958 8,220 (11,403)
Amortization of value of insurance in force
and intangible assets 10,609 18,120 23,505
Net amortization (accretion) on investments 9,688 12,215 (3,132)
Change in deferred policy acquisition costs (24,630) (38,852) (50,531)
Change in current and deferred federal
income taxes 1,953 7,731 10,988
Change in guaranty association fees (2,748) 140 (3,669)
Net change in other assets and liabilities (61,058) (13,729) (102)
Total adjustments 494,928 472,642 466,729
Net cash provided by operating
activities 564,538 535,867 524,724
Cash flows from investing activities:
Investments purchased - held to maturity - (277,626) (2,674,315)
Investments purchased - available for sale (2,851,013) (2,624,493) -
Investments sold - held to maturity 14,930 10,637 97,816
Investments sold - available for sale 605,197 950,885 387,305
Investments matured - held to maturity 317,773 576,021 1,195,083
Investments matured - available for sale 906,522 854,441 758,279
Increase in policy loans (21,033) (35,143) (38,661)
Decrease in mortgage loans 54,947 26,520 3,416
Acquisition of subsidiary, net of cash acquired - (961) (24,831)
Net cash used in investing activities (972,677) (519,719) (295,908)
Cash flows from financing activities:
Withdrawals from policyholder accounts (933,785) (1,034,464) (1,295,617)
Deposits to policyholder accounts 1,116,975 1,202,076 856,339
Capital contribution by parent - - 75,000
Securities lending 317,715 - -
Net cash provided by (used in)
<PAGE>
financing activities 500,905 167,612 (364,278)
Change in cash and cash equivalents 92,766 183,760 (135,462)
Cash and cash equivalents at beginning of year 684,618 500,858 636,320
Cash and cash equivalents at end of year $ 777,384 $ 684,618 $ 500,858
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(in thousands)
(1) Organization
Keyport Life Insurance Company offers a diversified line of fixed and
variable annuity products designed to serve the growing retirement savings
market. These annuity products primarily consist of single premium deferred
and variable annuities that are sold through a wide ranging network of banks,
agents, and securities dealers.
The consolidated financial statements include Keyport Life Insurance Company
and its wholly owned subsidiaries, Independence Life and Annuity Company
("Independence Life"), Keyport Advisory Services Corporation, and Keyport
Financial Services Corporation (collectively, the "Company"). The Company is
a wholly owned subsidiary of Stein Roe Services Incorporated ("Stein Roe").
Stein Roe is a wholly owned subsidiary of Liberty Financial Companies,
Incorporated ("Liberty Financial") which is a majority-owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
(2) Summary of Significant Accounting Policies
(a) Basis of Reporting and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could subsequently differ from
such estimates. All significant intercompany transactions and balances have
been eliminated.
(b) Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 , "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). SFAS 115 segregates fixed maturity
investments into three classifications: "held to maturity", "trading" and
"available for sale." Securities may be designated as held to maturity only
if there is the positive intent and ability to hold these securities to
maturity. Held to maturity securities are carried at amortized cost.
Securities purchased for short-term resale are classified as trading and are
carried at fair value. Unrealized gains and losses on trading account
securities are recognized in income. Fixed maturity investments are
classified as available for sale if they might be sold in response to changes
in market interest rates, changes in the security's prepayment risk, general
liquidity needs, or other factors. Available for sale securities are carried
at fair value and unrealized gains and losses (net of related adjustments to
deferred policy acquisition costs, value of insurance in force and deferred
income taxes) are recorded directly to stockholder's equity. Equity
securities are classified as available for sale and are carried at fair
value. Unrealized gains and losses on equity securities are credited or
charged directly to stockholder's equity net of applicable deferred income
<PAGE>
taxes.
Accordingly, as of January 1, 1994, the Company reclassified certain fixed
maturity investments from the held to maturity to the available for sale
category to conform to the classification criteria prescribed in SFAS 115.
This had the effect of recording a net unrealized gain of $41,614 directly
to stockholder's equity.
As of December 31, 1995, pursuant to a Guide to Implementation of SFAS 115
issued by the Financial Accounting Standards Board in November 1995, the
Company made a one-time reclassification from fixed maturities held to
maturity to fixed maturities available for sale. This had the effect of
recording a net unrealized gain of $13,867 directly to stockholder's equity.
The Company enters into dollar roll transactions to enhance the yield of its
mortgage backed portfolio. Dollar roll transactions represent a one month
reverse repurchase agreement involving mortgage backed securities, frequently
those issued by a U.S. Government Agency. Dollar roll transactions under
which substantially the same securities are received at the end of the
repurchase period are accounted for as financing arrangements. Accordingly,
both the collateral and repurchase liability are reflected on the balance
sheet and the transaction fee is recorded over the period of the agreement.
As of December 31, 1995, the Company was engaged in one dollar roll agreement
classified as a financing arrangement involving a FNMA mortgage backed
security with market value of $87,198. The Company did not enter into dollar
roll agreements during 1994.
The Company from time to time engages in securities lending under which it
lends certain U.S. Government and corporate bonds to approved counterparties
to enhance the yield of its bond portfolio. The carrying values of the loaned
securities are unaffected by the transaction, and the lending fee is recorded
during the period the securities are loaned. The Company records the
collateral received for the security lending transaction as an asset and its
obligation to return the collateral at the end of the transaction as a
liability. As of December 31, 1995, the Company had recorded an asset, and a
corresponding liability of $230,517 for cash pledged as collateral. The
Company did not enter into any securities lending transactions in 1994.
Fixed maturities and mortgage loans with premiums and discounts are amortized
using the interest method. Unamortized premiums and discounts on mortgage
backed securities are amortized using the interest method over the estimated
remaining term of the securities, adjusted for anticipated prepayments.
Policy loans are carried at the unpaid principal balance plus accrued
interest. Cash and cash equivalents are carried at cost, which approximates
market.
Realized investment gains and losses are calculated on a first-in, first-out
basis. For each investment security where a decline in value is determined to
be other than temporary, the Company's policy is to write down the investment
security to fair value with the charge to realized investment losses. Sales
of securities supporting the Company's single premium deferred annuities and
single premium whole life products result in adjustments to the amortization
of the deferred policy acquisition costs and the value of insurance in force.
The increase or decrease in amortization relating to such adjustments is
included in realized investment gains and losses to reflect the acceleration
or delay in the incidence of the estimated gross profits.
<PAGE>
(c) Derivative Financial Instruments
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" ("SFAS 119"). SFAS 119
requires specific disclosures about derivative financial instruments such as
forward, swap and option contracts and requires distinguishing between
financial instruments held or issued for trading purposes and financial
instruments held or issued for purposes other than trading.
As part of the Company's overall risk management policy, the Company uses
interest rate swaps and interest rate caps. Interest rate swaps are used to
reduce the risk in a rising interest rate environment by providing additional
investment income to cover higher competitive credited rates to policy-
holders to reduce the invested asset duration, and to better match the
interest rates earned on invested assets with those interest rates credited
to policyholders. Interest rate swaps are considered synthetic alterations
since the objective of the swaps is to change the characteristics of the
underlying invested assets to reduce the impact of rising interest rates.
Since interest rate swaps are designated as synthetic alterations of
securities available for sale, interest rate swaps are carried at fair value
for those securities, and the unrealized gain or loss is included in
stockholder's equity.
The net differential to be paid or received on interest rate swaps is
recorded monthly in investment income as interest rates change. From time to
time, swap positions may be terminated. If the terminated swap was accounted
for as a hedge, realized gains or losses are amortized over the remaining
life of the swap. Conversely, if the terminated swap was not accounted for as
a hedge, or the assets and liabilities that were altered no longer exist, the
swap position is marked to market, and realized gains or losses are
immediately recognized in income. The Company is exposed to potential credit
loss in the event of nonperformance by the counterparty to the interest rate
swap agreements with respect to only the net differential payments.
Interest rate caps are used to minimize exposure to rising interest rates.
The Company receives payments when the indexed rate exceeds the stated strike
rate. The cost of interest rate caps is amortized on a straight-line basis
over the period to maturity. Since interest rate caps are designed as
synthetic alterations of securities available for sale, interest rate caps
are carried at fair value and the unrealized gain or loss is included in
stockholder's equity.
The Company also utilizes derivative financial instruments to replicate
positions in a trading portfolio of pass-through mortgage backed securities.
As a result, these derivative financial instruments are classified as trading
instruments and are recorded at fair value. Realized and unrealized changes
in fair value are recognized in realized investment gains and losses.
Interest income arising from these trading instruments is included in net
investment income.
(d) Recognition of Insurance Revenues and Policy Benefits
Revenues from single premium whole life policies and single premium deferred
annuities include mortality charges, surrender charges, policy fees and
contract fees and are recognized when assessed. Policyholder account balances
consist of deposits received plus credited interest, less accumulated policy-
holder charges, assessments, and withdrawals. Policy benefits that are
charged to expenses include benefit claims incurred in the period in excess
<PAGE>
of related policy account balances. Interest crediting rates ranged from
3.60% to 8.35%, 3.75% to 8.50%, and 3.75% to 8.90% at December 31, 1995,
1994, and 1993, respectively.
(e) Deferred Policy Acquisition Costs and Value of Insurance in Force
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. These
costs are deferred to the extent they are deemed recoverable from future
gross profits. Such costs include commissions, costs of policy issuance and
underwriting, and variable agency expenses. Costs deferred are amortized in
relation to the present value of estimated gross profits from mortality,
investment and expense margins. Amortization of such cost is adjusted to
reflect the effect of differences between original assumptions and actual
experience.
Value of insurance in force represents the actuarially-determined present
value of projected future profits from policies in force at the date of their
acquisition. This amount is amortized in proportion to the projected
emergence of profits over periods not exceeding fifteen years for annuities
and twenty-five years for life insurance.
Deferred policy acquisition costs and value of insurance in force are
adjusted to reflect the amounts associated with realized and unrealized
investment gains and losses pertaining to single premium deferred annuities
and single premium whole life products.
(f) Intangible Assets
Intangible assets consist primarily of goodwill. Goodwill is the excess of
the purchase price over the fair value of the net assets acquired by Liberty
Mutual and is amortized on a straight-line basis over twenty-five years.
(g) Separate Account
Separate account assets, which are carried at fair value, consist principally
of investments in mutual funds and are included as a separate caption in the
consolidated balance sheets. Investment income and changes in asset values
are fully allocated to variable annuity and variable life policyholders and,
therefore, do not affect the operating results of the Company. The Company
provides administrative services and bears the mortality risk related to
these contracts. Fees earned by the Company related to these contracts were
$14,646, $13,694 and $8,489, for the years ended December 31, 1995, 1994 and
1993, respectively. As of December 31, 1995 and 1994, the Company also
classified $72,533 and $64,962, respectively, of its investments in certain
mutual funds sponsored by the Company and its affiliates as separate account
assets.
(h) Federal Income Taxes
Beginning in 1994, the Company is included in Liberty Mutual's consolidated
tax return. The Company calculates its consolidated income tax liability as
if it filed its own consolidated federal income tax return.
(i) Cash and Cash Equivalents
Cash and cash equivalents include short-term investments which have an
original maturity of three months or less from the time of purchase.
(j) Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statement amounts to conform to the current year presentation.
<PAGE>
(3) Acquisition
On October 1, 1993, the Company acquired the common stock of Crown America
Life Insurance Company (Crown America), a Michigan insurance company, for
$27,877. The acquisition was accounted for as a purchase and, accordingly,
operating results are included in the accompanying consolidated financial
statements from date of acquisition. In connection with the acquisition, the
Company acquired assets with a fair value of $185,735 and assumed liabilities
of $157,858.
On February 22, 1994, the acquisition was completed with the contingent
purchase price payment of $1,479, which increased the value of insurance in
force.
On December 29, 1993, Crown America was redomesticated to the state of Rhode
Island and, on January 10, 1994, the name was changed to Keyport America Life
Insurance Company. On July 19, 1995, the name was changed to Independence
Life and Annuity Company.
(4) Investments
(a) Fixed Maturities
Fair values of publicly-traded securities are determined using values
reported by an independent pricing service. Fair values of conventional
mortgage backed securities not actively traded in a liquid market are
obtained through broker-dealer quotations. Fair values of private placement
bonds are determined by obtaining market indications from various
broker-dealers. The amortized cost and fair values of investments in fixed
maturities at December 31, 1995 and 1994 were as follows:
December 31,1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U.S. Treasury securities $ 360,157 $ 9,020 $ (209) $ 368,968
Mortgage backed securities of
U.S. government
corporations and agencies 1,585,538 58,795 (5,250) 1,639,083
Obligations of states and
political subdivisions 26,688 1,324 - 28,012
Debt securities issued by
foreign governments 57,446 4,258 - 61,704
Corporate securities 3,479,584 224,332 (7,309) 3,696,607
Other mortgage backed securities 1,951,480 66,530 (71,754) 1,946,256
Asset backed securities 1,543,891 29,823 (1,446) 1,572,268
Senior secured loans 223,050 - - 223,050
Total fixed maturities
available for sale $9,227,834 $394,082 $(85,968) $9,535,948
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<PAGE>
Held to maturity:
Mortgaged backed securities of
U.S. Government
corporations and agencies $ 206,569 $ 8,683 $ (18) $ 215,234
Obligations of states and
political subdivisions 21,452 277 (28) 21,701
Corporate Securities 843,669 14,564 (17,005) 841,228
Other mortgage backed securities 79,164 44 (3,385) 75,823
Asset backed securities 297,826 88 (9,235) 288,679
Total fixed maturities
held to maturity $1,448,680 $23,656 $ (29,671) $1,442,665
Available for sale:
U.S. Treasury securities $ 271,700 $ 2 $ (8,390) $ 263,312
Mortgaged backed securities of
U.S. Government
corporations and agencies 1,238,925 1,244 (76,651) 1,163,518
Obligations of states and
political subdivisions 37,718 433 - 38,151
Debt securities issued by
foreign governments 82,608 1,049 (4,079) 79,578
Corporate securities 2,607,712 17,951 (116,077) 2,509,586
Other mortgage backed securities 1,186,515 14,577 (70,250) 1,130,842
Asset backed securities 1,123,803 654 (45,713) 1,078,744
Senior secured loans 246,084 - - 246,084
Total fixed maturities
available for sale $6,795,065 $35,910 $(321,160) $6,509,815
At December 31, 1995 and 1994, bonds with an amortized cost of $7,710 and
$7,657, respectively, were on deposit with regulatory authorities.
(b) Contractual Maturities
The amortized cost and fair value of fixed maturities for the various
categories at December 31, 1995, by contractual maturity, are set forth
below. Expected maturities may differ from contractual maturities as
borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties.
December 31, 1995
Amortized Fair
Cost Value
Available for sale:
Due in one year or less $ 254,299 $ 256,055
Due after one year through five years 1,503,507 1,564,132
Due after five years through ten years 1,838,679 1,953,542
Due after ten years 550,440 604,612
4,146,925 4,378,341
Mortgage and asset
backed securities 5,080,909 5,157,607
Total fixed maturities
available for sale $9,227,834 $9,535,948
(c) Net Unrealized Investment Gains (Losses)
<PAGE>
Net unrealized investment gains (losses) as of December 31, 1995 and 1994
were as follows:
December 31
1995 1994
Fixed maturities available for sale:
Gross unrealized gains $ 394,082 $ 35,910
Gross unrealized losses (85,968) (321,160)
308,114 (285,250)
Adjustments for:
Deferred acquisition costs (151,351) 135,059
Value of insurance in force (32,459) 53,344
Total fixed maturities 124,304 (96,847)
Equity securities and investments in separate account:
Gross unrealized gains 16,927 1,932
Gross unrealized losses (1,980) (4,261)
Total equity securities 14,947 (2,329)
Interest rate caps (7,294) -
131,957 (99,176)
Deferred federal income taxes (46,185) 34,712
Net unrealized investment gains (losses) $ 85,772 $ (64,464)
(d) Net Investment Income
Net investment income is summarized as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities $683,429 $635,947 $619,847
Equity securities 4,807 2,132 2,368
Mortgage loans 12,444 15,416 17,252
Policy loans 28,485 26,295 22,766
Cash and cash equivalents 41,643 20,727 18,551
Gross investment income 770,808 700,517 680,784
Investment expenses (13,447) (10,942) (11,117)
Net investment income $757,361 $689,575 $669,667
As of December 31, 1994, the carrying value of fixed maturity investments
that were non-income producing for the preceding twelve months was $4,967.
There were no non-income producing fixed maturity investments as of December
31, 1995.
(e) Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities - held to maturity
Gross gains $ 1,306 $ 3,493 $ 31,594
Gross losses (64) (755) (3,070)
Other than temporary declines - (7,904) -
<PAGE>
Provisions for possible investment losses - - (16,609)
Fixed maturities - available for sale
Gross gains 8,156 26,043 7,097
Gross losses (15,982) (26,831) (6,311)
Other than temporary declines - (3,610) -
Provisions for possible investment losses - - 7,487
Equity securities 1,279 (845) 11,228
Interest rate swaps (860) (28) (16,193)
Interest rate caps - - (6,082)
Other (13) (809) 1,412
Gross realized investment gains (losses) (6,178) (11,246) 10,553
Amortization adjustments:
Deferred policy acquisition costs 2,220 2,675 785
Value of insurance in force - 351 65
Net realized gains (losses) $ (3,958) $ (8,220) $11,403
Proceeds from sales of fixed maturities were as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities - available for sale $565,366 $927,779 $313,568
Fixed maturities - held to maturity 14,930 10,637 97,816
Total proceeds $580,296 $938,416 $411,384
The sale of fixed maturities held to maturity during 1995 and 1994 relate to
certain securities, with an amortized cost of $14,994 and $10,630,
respectively, which were sold specifically due to a significant deterioration
in the issuer's creditworthiness.
(f) Concentration of Investments
Investments in a single entity (all of which are fully collateralized and
guaranteed by an agency or agencies of the U.S. Government) in excess of ten
percent of total stockholder's equity as of December 31, 1995 and 1994 were
as follows:
Carrying Value at
December 31,
1995 1994
Mortgage backed securities
FNMA Pool #303075 $134,884 $125,212
Morgan Stanley CMO (33-5) 108,051 101,832
FNMA Pool #303074 105,832 98,470
Investments in fixed maturities are diversified among more than one hundred
industries. Significant concentrations of credit risk are classified as
follows:
Carrying Value at
December 31,
1995 1994
Financial services $547,872 $539,537
<PAGE>
Telecommunications 324,029 276,559
Banks 323,579 247,514
Electrical services 271,822 437,339
Oil and gas 261,161 274,026
Paper products 205,889 146,472
Retail 197,064 247,874
Transportation equipment 168,588 146,593
Credit institutions - 173,565
Food and beverage - 151,758
(g) Quality Ratings
The carrying values of publicly traded and privately placed fixed maturities
at December 31, 1995 represented by each quality ratings category were as
follows:
Carrying Value at December 31, 1995
Publicly Privately
Traded Placed Total
Investment grade:
U.S. government $ 368,969 - $ 368,969
Class 1 4,996,275 $1,480,089 6,476,364
Class 2 982,096 896,673 1,878,769
Total Investment grade 6,347,340 2,376,762 8,724,102
Below investment grade:
Class 3 317,131 147,517 464,648
Class 4 201,718 123,032 324,750
Class 5 - 22,448 22,448
Total below investment grade 518,849 292,997 811,846
Total fixed maturities $6,866,189 $2,669,759 $9,535,948
The Company held no securities rated Class 6 at December 31, 1995.
Securities that are rated class 1 or 2 by the Securities Valuation Office of
the National Association of Insurance Commissioners (NAIC), or, if not so
rated, securities that are rated "BBB-" or above by S&P, or "Baa3" or above
by Moody's (using the lower of the S&P or Moody's rating) are considered
"investment grade" securities. Securities included in the U.S. government
category in the preceding table are those as defined by the NAIC.
The distribution of fixed maturities quality ratings were as follows:
December 31,
1995 1994
Class 1 (including U.S. government) 71.8% 72.3%
Class 2 19.7% 19.9%
Class 3 4.9% 5.6%
Class 4 3.4% 2.0%
Class 5 0.2% 0.2%
(h) Derivative Financial Instruments
The Company's primary objective in acquiring certain derivative financial
instruments is the management of interest rate risk. Interest rate risk
results from a mismatch in the timing and amount of invested asset and
policyholder liability cash flows. The Company seeks to manage this risk
<PAGE>
through various asset/liability management strategies such as the setting of
renewal rates and by investment portfolio actions designed to address the
interest rate sensitivity of asset cash flows in relation to liability cash
flows. Portfolio actions used to manage interest rate risk include managing
the effective duration of portfolio securities and utilizing interest rate
swaps and caps.
Interest rate swaps
The Company uses a combination of three distinct classes of interest rate
swaps to reduce interest rate risk. The following table summarizes the
categories of swaps used, their notional amounts, their weighted average
interest rates as of the reporting period date, and their effects on the
consolidated balance sheets and statements of income. The majority of swaps
mature beginning in 1999 through 2001. The fair values of the interest rate
swaps are primarily obtained from dealer quotes. These values represent the
estimated amounts the Company would receive or pay to terminate the
contracts, taking into account current interest rates and, when appropriate,
the current creditworthiness of the counterparties.
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Interest rate swaps:
(1) Pay fixed, receive variable rate - notional amount $1,975,000 $775,000
Average pay rate 6.79% 7.19%
Average receive rate 5.88% 7.61%
Amount included in net investment income $ (2,751) $ (1,213)
Fair value $ (64,124) $ 27,587
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale $ (64,124) $ 27,587
Deferred loss - included in fixed maturities
available for sale $ (3,662) -
(2) Pay variable, receive variable rate - notional amount - $300,000
Average pay rate - 5.85%
Average receive rate - 6.42%
Amount included in net investment income $ (1,251) $ 6,781
Fair value - $(14,550)
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale - $(14,550)
Deferred loss - included in fixed maturities
available for sale $ (6,952) -
(3) Spread lock swap - notional amount - $150,000
Seven year swap spread - 0.34%
Amount included in net investment income $ 746 -
Fair value - $ 731
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale - $ 731
</TABLE>
1) The Company had thirty-six interest rate swap contracts with a notional
amount $1,975,000 and twenty contracts with a notional amount of $775,000 as
of December 31, 1995 and 1994, respectively, on which it pays a fixed rate of
interest and receives variable rates based on the two, five, and ten year
"constant maturity" treasury or swap rate. The variable rates are reset to
current market levels at six month intervals. The objective of holding this
class of derivatives is to reduce invested asset duration and better match
the interest rates earned on medium to long-term (greater than two year
<PAGE>
maturity) fixed rate assets with the interest rates credited to
policyholders. The Company has medium to long-term invested assets of
approximately $8,624,000 and $5,600,000 in 1995 and 1994, respectively. For
the majority of new and existing single premium deferred annuities, credited
rates are reset annually. In addition, rates credited on annuity policies are
closely correlated with longer term interest rates, e.g., five or ten year
market interest rates. This derivative class allows the Company to swap the
fixed interest rates received on the medium to long-term fixed rate invested
assets for a variable rate which is better correlated with rates credited to
policyholders. This reduces the Company's risk in rising interest rate
environments by providing investment income to cover higher competitive
credited rates.
2) In 1994, the Company had six interest rate swaps contracts with a
notional amount of $300,000 on which it paid a variable rate of interest
based on the six month LIBOR and received a variable rate based on the ten
year swap rate minus 1.50%. The objective of holding this class of
derivatives is to better match the interest rates earned on short term and
floating rate assets with the interest credited to policyholders. The
Company had approximately $850,000 of invested assets where the Company
received interest income based on interest rates closely correlated with
short-term LIBOR. This derivative class allowed the Company to swap variable
interest income received on short term and floating rate assets for a
variable rate which was better correlated with rates credited to
policyholders.
During 1995, certain swaps were sold as part of the Company's overall tax
planning strategy. The Company unwound one pay fixed and six pay variable
interest rate swap contracts with a notional amount of $350,000. In 1992 the
Company unwound 3 contracts with a notional amount of $300,000. The resulting
loss of $10,691 in 1995 and the gain of $16,230 in 1992 were deferred and
amortized over the original remaining terms of the contracts, in accordance
with hedge accounting. The following table summarizes the deferred gain
(loss) amounts included in the consolidated balance sheet and the expected
recognition of income by year:
December 31,
1995 1994
Amounts expected to be includes in net
invested income:
Within one year $ (1,861) $ 4,720
Within one to five years (7,862) 891
Total $ (9,723) $ 5,611
During 1993, the Company unwound interest rate swap contracts with a notional
amount of $200,000. The swaps were unwound when the associated liabilities
no longer existed, resulting in a loss of $16,193, which was recognized
immediately.
3) In 1993, the Company entered into a $150,000 notional "spread lock" that
terminated in 1995. The Company received/(paid) the present value of the
seven year swap if corporate spreads widened/(compressed) above/(below) the
seven year swap spread of 26 basis points based on the 7.5% U.S. Treasury
note maturing November 15, 2001. As the result of the termination, the
Company recognized income of $746 during 1995. The objective of this
derivative was to reduce the exposure of the Company's fixed maturity
investments to widening corporate spreads. The value of the Company's
<PAGE>
corporate bond portfolio decreased as corporate spreads widened. The
Company's spread lock swap increased in value as spreads widened and thus
reduced the Company's risk.
Interest rate caps
The Company had seven interest rate caps with a $450,000 notional amount and
six interest rate caps with a $400,000 notional amount as of December 31,
1995 and 1994, respectively. These contracts are indexed to either the three
month LIBOR, or to the two or five year constant maturity swap (CMS) rates.
Under these contracts, the Company has paid a premium for the right to
receive payments when the index rises above a predetermined level, i.e., the
strike rate. The objective of holding these derivatives is to reduce the
Company's risk in rising interest rate environments by providing additional
investment income to cover higher competitive interest credited rates on
policy liabilities.
The following table summarizes the interest rate caps, their notional
amounts, their weighted average strike and index rates as of the reporting
period date, and their effects on the consolidated balance sheets and income
statements. The majority of caps mature in 1997 and 1999. The fair values of
the interest rate caps are obtained from dealer quotes. These values
represent the estimated amounts the Company would receive or pay to terminate
the contracts, taking into account current interest rates and, when
appropriate, the current credit-worthiness of the counterparties.
December 31,
1995 1994
Interest rate caps:
Index: three month LIBOR - notional amount $ 200,000 $200,000
Weighted average strike rate 8.50% 8.50%
Weighted average current index 5.63% 6.44%
Amortization expense included in net investment income $ (648) $ (649)
Fair value $ 46 $ 2,698
Carrying value $ 1,254 $ 1,903
Unrealized gain (loss) included in fixed maturities AFS $ (1,208) $ 795
Index: two year CMS - notional amount $ 150,000 $100,000
Weighted average strike rate 7.60% 7.25%
Weighted average current index 5.28% 7.91%
Amortization expense included in net investment income $ (1,305) $ (144)
Fair Value $ 1,001 $ 4,930
Carrying value $ 5,269 $ 5,001
Unrealized gain (loss) included in fixed maturities AFS $ (4,268) $ (71)
Index: five year CMS - notional amount $ 100,000 $100,000
Weighted average strike rate 8.26% 7.93%
Weighted average current index 5.66% 7.83%
Amortization expense included in net investment income $ (564) $ (38)
Fair value $ 414 $ 2,806
Carrying value $ 2,232 $ 2,800
Unrealized gain (loss) included in fixed maturities AFS $ (1,818) $ 6
During 1993, the Company sold interest rate caps with notional amounts of
$300,000, resulting in realized losses of $4,082. In 1993, due to an other
than temporary decline in value, the Company reduced the carrying value of
the remaining interest rate caps by $2,000 resulting in a realized loss.
<PAGE>
Trading Instruments
During 1995, a $50,000 notional current coupon mortgage swap matured. The
Company paid a total return of a seven year swap to receive the total return
of a current coupon, thirty year FNMA pass-through mortgage backed security
plus .40%. The swap reset to market levels at two month intervals. The
objective of the strategy was to replicate a position in FNMA pass-throughs
with an enhanced return.
The following table summarizes the current coupon mortgage swap and the
effects on the consolidated balance sheets and income statements. The swap
matured in 1995. The fair value represents the estimated amount the Company
had paid to terminate the contracts in 1994, taking into account current
interest rates and, when appropriate, the current creditworthiness of the
counterparties.
December 31,
1995 1994
Current coupon mortgage swap:
Notional amount - $ 50,000
Pay rate at reporting date - 8.05%
Receive rate at reporting date - 8.90%
Amount included in net investment income - $ 455
Amount included in net realized investment gains (losses) $ (860) $ (28)
Fair value - $ 153
(5) Fair Value of Financial Instruments
Estimated fair values of the Company's investments in fixed maturities,
equity securities and derivative financial instruments are set forth in Note
4. Estimated fair values, methods and assumptions of the Company's other
financial instruments are set forth below.
(a) Mortgage loans
For purposes of estimating fair value, mortgage loans are segregated into
commercial real estate loans and residential mortgages. The fair value of
commercial real estate loans is calculated by discounting scheduled cash
flows through the stated maturity using estimated market rates. The estimated
market rate is based on the five year prime mortgage rate. The fair value of
residential mortgages is estimated by discounting contractual cash flows
adjusted for expected prepayments using an estimated discount rate. The
discount rate is an estimated market rate adjusted to reflect differences in
servicing costs, and the expected prepayments are estimated based upon
Company experience.
Mortgage loans are summarized as follows:
December 31, 1995
Average Estimated Estimated
Carrying Historical Discount Fair
Value Yield Rate Value
Commercial real estate loans $ 39,500 9.4% 7.5% $ 40,351
Residential mortgages 35,005 13.6% 7.5% 39,346
December 31, 1994
Average Estimated Estimated
<PAGE>
Carrying Historical Discount Fair
Value Yield Rate Value
Commercial real estate loans $ 87,000 9.4% 8.3% $ 89,795
Residential mortgages 42,452 13.7% 8.3% 49,003
The weighted average maturities (which may be different from the stated
maturities) for the cash flows used in deriving the estimated fair values for
commercial real estate loans and residential mortgages are 0.3 years and 2.3
years, respectively, at December 31, 1995, and 1.3 years and 2.7 years,
respectively, at December 31, 1994.
(b) Policy Loans
The carrying value of policy loans approximates fair value at December 31,
1995 and 1994.
(c) Policy Liabilities
The fair value of deposit liabilities with no stated maturity is equal to the
amount payable on demand. The Company considers its policy liabilities to be
similar to deposit liabilities.
The carrying value and estimated fair value of the policy liabilities at
December 31, 1995 were $10,084,392 and $9,650,113, respectively. The carrying
value and estimated fair value of the policy liabilities at December 31, 1994
were $9,344,044 and $8,961,971, respectively.
(6) Employee Benefit Plans
Keyport employees and certain employees of Liberty Financial are eligible to
participate in the Liberty Financial Companies, Inc. Pension Plan (the
"Plan"). Under the Plan, all employees are vested after five years of
service. Benefits are based on years of service, the employee's average pay
for the highest five consecutive years during the last ten years of
employment, and the employee's estimated social security retirement benefit.
The Company's funding policy is to contribute the minimum required employer
contribution under the Employee Retirement Income Security Act of 1974. The
Company may, from time to time, increase its employer contributions beyond
the minimum amount, but within IRS guidelines.
Changes in prior service costs are amortized over the expected future service
periods of active participants expected to receive benefits under the Plan as
of the date such costs are first recognized. Cumulative net actuarial gains
and losses in excess of a corridor amount are amortized over the expected
future service periods of active participants expected to receive benefits
under the Plan.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated balance sheets. Substantially all
of the Plans' assets are invested in mutual funds sponsored by an affiliated
company.
December 31,
1995 1994
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $6,082 and $4,197 $ 6,915 $ 5,025
Projected benefit obligation for service to date $ 9,185 $ 6,523
<PAGE>
Plan assets at fair value (5,703) (4,459)
Projected benefit obligation in excess of Plan assets 3,482 2,064
Unrecognized net actuarial loss (1,740) (227)
Prior service cost not yet recognized in net periodic
pension cost (206) (660)
Accrued pension cost $ 1,536 $ 1,177
Year Ended December 31,
1995 1994 1993
Pension cost includes the following components:
Service cost benefits earned during the period $ 541 $ 532 $ 392
Interest cost on projected benefit obligation 603 534 423
Actual return on Plan assets (999) 63 (185)
Net amortization and deferred amounts 600 (338) (88)
Net periodic pension cost $ 745 $ 791 $ 542
The assumptions used to develop the actuarial present value of the projected
benefit obligation, and the expected long-term rate of return on Plan assets
are as follows:
Years Ended December 31,
1995 1994 1993
Discount rate 7.25% 8.25% 7.25%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
Rate of increase in compensation levels 5.25% 5.25% 5.25%
The Company also provides a savings and investment plan with a matching
savings program containing several investment options for which substantially
all employees are eligible. In addition, the Company has a non-qualified
deferred compensation plan for certain employees.
(7) Deferred Policy Acquisition Costs and Value of Insurance In Force
The amounts of policy acquisition costs deferred and amortized are summarized
below:
Year Ended December 31,
1995 1994 1993
Balance, beginning of year $ 439,232 $ 262,646 $ 211,330
Additions:
Policy acquisition costs deferred during period:
Commissions 70,484 82,626 81,515
Other expenses 12,687 8,400 10,019
Total deferrals 83,171 91,026 91,534
Adjustments for unrealized investment losses - 135,059 -
Adjustments for realized investment losses 2,220 2,675 785
Total additions 85,391 228,760 92,319
Deductions:
Amortization expense (58,541) (52,174) (41,003)
<PAGE>
Adjustments for unrealized investment gains (286,410) - -
Total deductions (344,951) (52,174) (41,003)
Balance, end of year $ 179,672 $ 439,232 $ 262,646
The value of insurance in force is summarized below:
Year Ended December 31,
1995 1994 1993
Balance, beginning of year $ 139,221 $ 101,036 $ 115,824
Additions:
Value of insurance purchased - 1,479 7,522
Interest accrued on unamortized balance 4,578 4,994 6,124
Adjustments for unrealized investment losses - 53,344 -
Adjustments for realized investment losses - 351 65
Total additions 4,578 60,168 13,711
Deductions:
Amortization expense (14,057) (21,983) (28,499)
Adjustments for unrealized investment gains (85,803) - -
Total deductions (99,860) (21,983) (28,499)
Balance, end of year $ 43,939 $ 139,221 $ 101,036
Interest is accrued on the unamortized value of insurance in force balance at
the contract rate of 5.58%, 5.49% and 6.01% for the years ended December 31,
1995, 1994 and 1993, respectively.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1995, is as follows: 1996 - $7,747; 1997 - $8,169; 1998 -
$7,218; 1999 - $6,648; 2000 - $6,199; and thereafter - $40,417.
(8) Federal Income Taxes
The provision for federal income taxes, computed under the asset and
liability method, is summarized as follows:
Year Ended December 31,
1995 1994 1993
Current $37,746 $18,118 $24,878
Deferred 585 13,933 3,832
Federal income tax expense $38,331 $32,051 $28,710
A reconciliation of federal income tax expense as recorded in the
accompanying consolidated statements of operations with expected federal
income tax expense computed at the applicable federal tax rate of 35% is as
follows:
Year Ended December 31,
1995 1994 1993
Expected income tax expense $37,779 $33,347 $30,347
Increase (decrease) in income taxes resulting from:
Nontaxable investment income (1,737) (2,099) (2,189)
<PAGE>
Amortization of goodwill 396 396 396
Other, net 1,893 407 156
Actual federal income tax expense $38,331 $32,051 $28,710
In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted.
This law increased the Company's top marginal tax rate to 35% from 34%
retroactive to January 1, 1993. The effect of this change in tax rates on
the Company's consolidated financial statements was not material.
The components of deferred federal income taxes are as follows:
December 31,
1995 1994
Deferred tax assets:
Policy liabilities $ (140,971) $ (127,558)
Excess of tax over book bases - investments - (69,039)
Guaranty association fees (7,679) (8,642)
Net operating loss carryforward (3,041) (3,573)
Deferred gain on interest rate swap agreements (312) (1,964)
Other (1,039) (3,914)
Total deferred tax assets (153,042) (214,690)
Deferred tax liabilities:
Excess book over tax basis - investments 130,530 -
Deferred policy acquisition costs 44,468 137,909
Value of insurance inforce and intangibles 7,152 34,420
Deferred loss on interest rate swap agreements 3,715 -
Total deferred tax liabilities 185,865 172,329
Net deferred federal income tax liability (asset) $ 32,823 $ (42,361)
The Company believes that is more likely than not that the Company will
realize the benefits of the total deferred tax assets and, accordingly,
believes that a valuation allowance with respect to the realization of the
total deferred tax assets is not necessary. While there are no assurances
that this benefit will be realized, the Company expects that the net
deductible amounts will be recoverable through the reversal of taxable
temporary differences, taxes paid in the carryback period, tax planning
strategies, and future expectations of taxable income.
As of December 31, 1995 and 1994, the Company had approximately $8,688 and
$10,208 respectively, of net operating loss carryforwards relating to
Independence Life's operations prior to the acquisition by the Company. These
operating loss carryforwards are limited to use against future taxable
profits of Independence Life and expire through 2006.
Income taxes paid were $44,694, $28,811, and $17,722 for the years ended
December 31, 1995, 1994 and 1993, respectively.
(9) Statutory Information and Dividend Restrictions
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. In
converting to GAAP, adjustments to the Company's statutory amounts include:
the deferral and amortization of the costs of acquiring new policies, such as
<PAGE>
commissions and other issue costs; the deferral of federal income taxes; the
recognition as revenues of premiums for investment-type products for
statutory purposes but as deposits to policyholders' accounts under GAAP. In
addition, different assumptions are used in calculating policyholder
liabilities, different methods are used for calculating valuation allowances
for statutory and GAAP purposes, and the Company's realized gains and losses
on fixed income investments due to interest rate changes are not deferred for
GAAP. Statutory surplus and statutory net income are presented below:
Year Ended December 31,
1995 1994 1993
Statutory surplus $ 535,179 $ 546,440 $ 517,181
Statutory net income 25,689 24,871 65,315
The maximum amount of dividends which can be paid by the Company without
prior approval of the Insurance Commissioner of the State of Rhode Island is
subject to restrictions related to statutory surplus and statutory net gains
from operations. As of December 31, 1995, such restriction would limit
dividends to approximately $34,604. The Company has not paid dividends since
the acquisition by Liberty Mutual.
(10) Transactions with Affiliated Companies
As of December 31, 1995 and 1994, the Company had $39,500 and $87,000,
respectively, of commercial real estate loans of affiliated investment
partnerships. These mortgages are unconditionally guaranteed by Liberty
Mutual.
The Company reimbursed Liberty Financial and certain affiliates for expenses
incurred on its behalf for the years ended December 31, 1995, 1994 and 1993.
These reimbursements included corporate general and administrative expenses,
corporate overhead, such as executive and legal support, and investment
management services. The total amounts reimbursed were $7,626, $7,345 and
$7,444 for the years ended December 31, 1995, 1994 and 1993, respectively.
During 1993 the Company received a $75,000 capital contribution from Liberty
Financial.
(11) Commitments and Contingencies
The Company leases data processing equipment, furniture and certain office
facilities from others under operating leases expiring in various years
through 2001. Rental expense amounted to $3,221, $3,011 and $3,042 for the
years ended December 31, 1995, 1994 and 1993, respectively. For each of the
next five years, and in the aggregate, as of December 31, 1995, the following
are the minimum future rental payments under noncancelable operating leases
having remaining terms in excess of one year:
1996 $ 3,211
1997 2,641
1998 2,491
1999 2,347
2000 2,310
Thereafter 2,308
Total minimum future rental payments $15,308
<PAGE>
Under existing guaranty fund laws in all states, insurers licensed to do
business in those states can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. The actual amount of
such assessments will depend upon the final outcome of rehabilitation
proceedings and will be paid over several years. In 1995, 1994 and 1993, the
Company was assessed $8,143, $7,674 and $7,314, respectively. During 1995,
1994 and 1993, the Company recorded $2,000, $7,200, and $3,714, respectively,
of provisions for state guaranty fund association expenses.
Based on information recently provided by the industry association with
respect to aggregate assessments related to known insolvencies, the range of
future assessments with respect to known insolvencies is estimated by the
Company to be between $16,500 and $25,500, taking into account the industry
association information as well as the Company's own estimate of its
potential share of such aggregate assessments. At December 31, 1995 and
1994, the reserve for such assessments was $21,940 and $24,688, respectively.
The Company is contingently liable for certain structured settlements written
by a subsidiary of Liberty Mutual and assigned to Keyport Life. The Company
guarantees to the policyholder payment in the event of nonperformance. The
loss contingency related to the structured settlements is approximately
$160,000. In the opinion of management, the likelihood of loss is remote.
The Company is involved, from time to time, in litigation incidental to its
business. In the opinion of management, the resolution of such litigation is
not expected to have a material adverse effect on the Company's financial
condition.
