GROUP FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
Variable Account A
OF
KEYPORT LIFE INSURANCE COMPANY
- ------------------------------------------------------------------------------
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 Contracts 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 Certificates.
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 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 the variable features of the Certificate.
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 Eligible Funds of
Manning & Napier Insurance Fund, Inc. ("Manning & Napier Insurance Fund") at
their net asset value: Manning & Napier Moderate Growth Portfolio ("MNMGP"),
Manning & Napier Growth Portfolio ("MNGP"), Manning & Napier Maximum Horizon
Portfolio ("MNMHP"), Manning & Napier Small Cap Portfolio ("MNSCP"), Manning
& Napier Equity Portfolio ("MNEP"), and Manning & Napier Bond Portfolio
("MNBP"). The Variable Account also invests in shares of the following
Eligible Fund of SteinRoe Variable Investment Trust ("SteinRoe Trust") at its
net asset value: Cash Income Fund ("CIF").
The Variable Account may offer other forms of the contracts and certificates
that have features, fees and charges which vary from the Certificates, and
that provide for investment in other Sub-accounts which 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. It may also be
obtained by writing Manning & Napier Insurance Fund, Inc. at P.O. Box 40610,
Rochester, New York 14604, or calling (800) 466-3863. A table of contents for
the Statement of Additional Information is on Page 17.
The Contract and Certificates: are not insured by the FDIC; are not a deposit
or other obligation of, or guaranteed by, the depository institution; and 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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Glossary of Special Terms 3
Summary of Expenses 4
Synopsis 5
Performance Information 5
Keyport and the Variable Account 6
Purchase Payments and Applications 6
Investments of the Variable Account 7
Allocations of Purchase Payments 7
Eligible Funds 7
Transfer of Variable Account Value 8
Substitution of Eligible Funds and Other Variable
Account Changes 9
Deductions 9
Deductions for Certificate Maintenance Charge 9
Deductions for Mortality and Expense Risk Charge 10
Deductions for Transfers of Variable Account Value 10
Deductions for Premium Taxes 10
Deductions for Income Taxes 10
Total Variable Account Expenses 10
Other Services 10
The Certificates 10
Variable Account Value 10
Valuation Periods 11
Net Investment Factor 11
Modification of the Certificate 11
Right to Revoke 11
Death Provisions for Non-Qualified Certificates 11
Death Provisions for Qualified Certificates 12
Certificate Ownership 12
Assignment 13
Partial Withdrawals and Surrender 13
Annuity Provisions 13
Annuity Benefits 13
Income Date and Annuity Option 13
Change in Income Date and Annuity Option 13
Annuity Options 13
Variable Annuity Payment Values 14
Proof of Age, Sex, and Survival of Annuitant 14
Suspension of Payments 14
Tax Status 15
Introduction 15
Taxation of Annuities in General 15
Qualified Plans 16
Individual Retirement Annuities 16
Variable Account Voting Privileges 16
Sales of the Certificates 17
Legal Proceedings 17
Inquiries by Certificate Owners 17
Table of Contents--Statement of Additional
Information 17
Appendix A--Telephone Instructions 18
</TABLE>
2
<PAGE>
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 Issue 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 Page
3 of 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 Issue Date (age 75 for
Qualified Contracts and age 85 for a joint Owner).
Certificate Value: The Variable Account Value.
Certificate Withdrawal Value: The Certificate Value less any premium taxes
and Certificate Maintenance Charge.
Certificate Year: Any period of 12 months commencing with the Certificate
Date and each Certificate Anniversary thereafter shall be a Certificate Year.
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.
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
Section 408(b) of the Internal Revenue Code.
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.
3
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C>
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of Purchase Payments): 0%
Maximum Total Certificate Owner Transaction
Expenses(1)
(as a percentage of Purchase Payments): 0%
Certificate Maintenance Charge $35
Variable Account Annual Expenses
(as a percentage of average net assets)
Mortality and Expense Risk Charge: .35%
Total Variable Account Annual Expenses: .35%
</TABLE>
Manning & Napier Insurance Fund and SteinRoe Trust Annual Expenses(2)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Total
Fund Operating
Management Other Expenses (After
Fees Expenses Any Reimbursement)(3)
---------- ------ -------------------
<S> <C> <C> <C>
MNMGP 1.00% .20% 1.20%
MNGP 1.00% .20% 1.20%
MNMHP 1.00% .20% 1.20%
MNSCP 1.00% .20% 1.20%
MNEP 1.00% .20% 1.20%
MNBP .50% .35% .85%
CIF .50% .13% .63%
</TABLE>
THE ABOVE EXPENSES FOR THE ELIGIBLE FUNDS WERE PROVIDED BY MANNING & NAPIER
INSURANCE FUND AND STEINROE TRUST. KEYPORT HAS NOT INDEPENDENTLY VERIFIED THE
ACCURACY OF THE INFORMATION.
Example--Assuming surrender or annuitization of the Certificate at the end of
the periods shown4 or that the Certificate stays in force through the periods
shown.
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>
MNMGP $13 $42 $77 $190
MNGP 13 42 77 190
MNMHP 13 42 77 190
MNSCP 13 42 77 190
MNEP 13 42 77 190
MNBP 9 31 56 141
CIF 7 24 44 109
</TABLE>
(1)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.
(2)The Manning & Napier Insurance Fund expenses are estimated and reflect the
Manning & Napier Insurance Fund manager's agreement to reimburse expenses
above certain limits (see footnote 3). The SteinRoe Trust expenses are for
1995 and reflect the SteinRoe Trust manager's agreement to reimburse
expenses above certain limits (see footnote 3).
(3)The managers of Manning & Napier Insurance Fund and SteinRoe Trust have
agreed to reimburse all expenses, including management fees, in excess of
the following percentage of the average annual net assets of each Eligible
Fund, so long as such reimbursement would not result in the Eligible Fund's
inability to qualify as a regulated investment company under the Internal
Revenue Code: MNMGP 1.2%, MNGP 1.2%, MNMHP 1.2%, MNSCP 1.2%, MNEP 1.2%, MNBP
.85%, CIF .65%. The Manning & Napier Insurance Fund manager's fee waiver and
assumption of expenses agreement is voluntary and may be terminated at any
time. The SteinRoe Trust manager's fee waiver and assumption of expenses
agreement is effective until April 30, 1997. The total percentages shown in
the table for MNMHP, MNSCP, MNEP, MNGP, MNMGP, and MNBP are after estimated
expense reimbursement. In the absence of any expense reimbursement, the
managers of the Manning & Napier Insurance Fund estimate Fund expenses to be
2.5% for MNMGP, MNGP, MNMHP, MNSCP, and MNEP, and 2.15% for MNBP.
(4)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.
4
<PAGE>
The example 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" in the prospectus for Manning
& Napier Insurance Fund, 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. The Variable Account is a separate investment account
maintained by Keyport. Certificate Owners may allocate payments to, and
receive annuity payments from, the Variable 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.
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. (See "Purchase Payments and Applications" on Page 6.)
There are no deductions made from Purchase Payments for sales charges at the
time of purchase or upon surrender.
Keyport deducts a Mortality and Expense Risk Charge, which is equal on an
annual basis to .35% of the average daily net asset values in the Variable
Account attributable to the Contracts. (See "Deductions for Mortality and
Expense Risk Charge" on Page 10.)
Keyport deducts an annual Contract Maintenance Charge (currently $35.00) from
the Variable Account Value for administrative expenses. Prior to the Income
Date, Keyport reserves the right to change this charge for future years. (See
"Deductions for Certificate Maintenance Charge" on Page 9.)
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 10.)
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 10.)
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 15.)
The Certificate allows the Certificate Owner to revoke the Certificate
generally within 10 days of delivery (see "Right to Revoke" on Page 11). For
most states, Keyport will refund the Certificate Value as of the date the
returned Certificate is received by Keyport, plus any sales 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 such other states Purchase Payments will be allocated to the CIF
Sub-Account during the "freelook" period.
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.
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.
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.
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
5
<PAGE>
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 Certificate Maintenance
Charge and premium tax charges. The percentages would be lower if these
charges were included.
The CIF 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 premium tax charges. The yield
would be lower if these charges were included.
The effective yield of the CIF 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
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
"1" 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 the guaranteed minimum death value amount).
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. Keyport may reject any Purchase Payment.
When 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
6
<PAGE>
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, if a Certificate is not replacing an existing life
insurance or annuity policy (other than a Keyport policy), Keyport will issue
a Certificate 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. The percentage for each
Sub-Account, if not zero, must be at least 10% 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 A 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 Manning & Napier Insurance Fund Sub-Accounts
- ---------------------------------------------------- ------------
Manning & Napier Moderate Growth Portfolio ("MNMGP") MNMGP Sub-Account
Manning & Napier Growth Portfolio ("MNGP") MNGP Sub-Account
Manning & Napier Maximum Horizon Portfolio ("MNMHP") MNMHP Sub-Account
Manning & Napier Small Cap Portfolio ("MNSCP") MNSCP Sub-Account
Manning & Napier Equity Portfolio ("MNEP") MNEP Sub-Account
Manning & Napier Bond Portfolio ("MNBP") MNBP Sub-Account
Eligible Fund of SteinRoe Trust Sub-Account
- ------------------------------- -----------
Cash Income Fund ("CIF") CIF Sub-Account
</TABLE>
Eligible Funds
The Eligible Funds which are the permissible investments of the Variable
Account are the separate funds of Manning & Napier Insurance Fund, the
separate funds of 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.
Manning & Napier Insurance Fund is an open-end management investment
company that offers separate series (Portfolios). Manning & Napier Advisors,
Inc. ("Manning & Napier Advisors"), 1100 Chase Square, Rochester, New York
14604, acts as Manning & Napier Insurance Fund's investment adviser. Mr.
William Manning controls the Advisor by virtue of his ownership of the
securities of the Advisor. Manning & Napier Advisors also is generally
responsible for supervision of the overall business affairs of Manning &
Napier Insurance Fund, including supervision of service providers to the Fund
and direction of Manning & Napier Advisors' directors,officers or employees
who may be elected as officers of Manning & Napier Insurance Fund to serve as
such.
Stein Roe & Farnham Incorporated ("Stein Roe"), One South Wacker Drive,
Chicago, Illinois 60606, is the investment adviser for the 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
7
<PAGE>
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 Eligible Fund, may be found in the
current prospectus for that Fund. An investor should read that prospectus
carefully before selecting a Sub-Account that invests in an Eligible Fund.
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. The
Prospectus may also be obtained by writing Manning & Napier Insurance Fund,
Inc. at P.O. Box 40610, Rochester, New York 14604, or calling (800) 466-3863.
<TABLE>
<CAPTION>
Eligible Funds of Manning & Napier
Insurance Fund and Variable Account
Sub-Accounts Investment Objective
------------------------------------ --------------------
<S> <C>
Manning & Napier Moderate Growth Portfolio Seeks with equal emphasis long-term growth and
(MNMGP Sub-Account) preservation of capital.
Manning & Napier Growth Portfolio Seeks long-term growth of capital. The secondary
(MNGP Sub-Account) objective is the preservation of capital.
Manning & Napier Maximum Horizon Portfolio Seeks to achieve the high level of long-term capital
(MNMHP Sub-Account) growth typically associated with the stock market.
Manning & Napier Small Cap Portfolio Seeks to achieve long-term growth of capital by
(MNSCP Sub-Account) investing principally in the equity securities of
small issuers.
Manning & Napier Equity Portfolio
(MNEP Sub-Account) Seeks long-term growth of capital.
Manning & Napier Bond Portfolio Seeks to maximize total return in the form of both
(MNBP Sub-Account) income and capital appreciation by investing in fixed
income securities without regard to maturity.
Eligible Fund of SteinRoe Trust and
Variable Account Sub-Account Investment Objective
- ------------------------------------- --------------------
Cash Income Fund (CIF Sub-Account) Seeks to provide high current income from short-term
money market instruments while emphasizing
preservation of capital and maintaining excellent
liquidity.
</TABLE>
There is no assurance that the Eligible Funds will achieve their stated
objectives. The Manning & Napier Insurance Fund and SteinRoe Trust 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 Manning & Napier Insurance Fund and
in the SteinRoe Trust prospectuses under the captions "Sales And Redemptions"
and "The Trust", respectively.
Transfer of Variable Account Value
Certificate Owners may transfer Variable Account Value from one Sub-Account
to another Sub-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, but reserves the right to charge $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
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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 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 A 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
assesses a Certificate Maintenance Charge for such services during the
accumulation and annuity payment periods. At the present time the Certificate
Maintenance Charge is $35 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.
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 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.
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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 Benefit"). 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 these 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 .35% 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 "Distribution of the Certificates".
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".
Total Variable Account Expenses
The Variable Account's total expenses in relation to the Certificate will be
the Certificate Maintenance Charge and the Mortality and Expense Risk 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 prospectus.
OTHER SERVICES
Keyport offers the following investment related program which is available
only prior to the Income Date: Systematic Withdrawal Program. This Program
has its own requirements, as discussed below. Keyport reserves the right to
terminate the Program.
If the Certificate Owner has submitted the required telephone authorization
form, certain changes may be made by telephone. The current conditions and
procedures are described in Appendix A.
Systematic Withdrawal Program. To the extent permitted by law, Keyport will
make monthly, quarterly, semi-annual or annual distributions of a
predetermined dollar amount to a 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".) A Certificate Owner may specify the amount of each partial
withdrawal, subject to a minimum of $100.
Unless the Certificate Owner specifies the Sub-Account or Sub-Accounts 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 from the Sub-Accounts in amounts
proportionate to the amounts in the Sub-Accounts. Withdrawals are subject to
the applicable minimum Sub-Account balances. All 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.
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.
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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
The 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.
(c) is equal to:
(i) the Valuation Period equivalent of the daily Mortality and
Expense risk Charge; plus
(ii) a charge factor, if any, for any tax provision established by
Keyport as a result of the operations of that Sub-Account.
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 either Keyport's Office or
Manning & Napier Insurance Fund, Inc., P.O. Box 40610, Rochester, New York,
14604. 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 CIF 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,
Manning & Napier Insurance Fund's office, or to the agent from whom the
Certificate was purchased. If the Certificate is received at Keyport's
Office, Manning & Napier Insurance Fund'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 the death. And, if the
Annuitant is the decedent, the new Annuitant will be any living contingent
annuitant, otherwise the surviving spouse. The Certificate can stay in force
until another death occurs (i.e., until the death of the Annuitant, primary
Certificate Owner or joint Certificate Owner). Except for this paragraph, all
"Death Provisions" will apply to that subsequent death.
In all other cases, the Certificate can 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
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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.
The covered person under this paragraph shall be the primary Certificate
Owner 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:
Death Benefit. The death benefit at issue is the initial Purchase Payment.
Thereafter, it is the prior death benefit plus any additional Purchase
Payments, less any partial withdrawals, including any applicable surrender
charge.
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 based on the
Purchase Payment allocation selection that is in effect when Keyport receives
due proof of death. 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 in force after the
Annuitant's death. The new Annuitant will be any living contingent annuitant,
otherwise the primary Certificate Owner.
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 based on the Purchase Payment allocation selection that is in effect
when Keyport receives due proof of death.
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 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 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.
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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 periodic 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. 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.
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 payment 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 (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 Annuity Option at the
time of application. If the Certificate Owner does not select a 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.
Change in Income Date and Annuity Option
The Certificate Owner may choose or change a 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. 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 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. 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 a payment
option. Any payment 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.
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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). Instead of receiving a lump sum, the payee can elect
another payment option. If, at the death of the payee, Option A payments have
been made for less 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 can 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" for the manner in which Option A may be taxed.
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 less 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 can instruct Keyport to
change the Sub-Account(s) used to determine the amount of the variable
annuity payments once every 6 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 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 Vari-
14
<PAGE>
able 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.
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
Settlement 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 pay-
15
<PAGE>
ment. 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.
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 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 (including previously
non-taxable income earned in prior years) would be taxable to the Certificate
Owner in the year in which diversification requirements were not satisfied.
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 Qualified Plans. The tax rules
applicable to participants in 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 Qualified Plans. Participants under a Qualified Plan as well
as Certificate Owners, Annuitants, and Designated Beneficiaries are cautioned
that the rights of any person to any benefits under a Qualified Plan may be
subject to the terms and conditions of the plan regardless of the terms and
conditions of the Certificate issued in connection therewith. Following is a
brief description of the type of Qualified Plans offered 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.
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.
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 instruc-
16
<PAGE>
tions 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, 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 they are not subject to the deduction for the
Certificate Maintenance Charge.
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 either write
Keyport Life Insurance Company, 125 High Street, Boston, MA 02110, or call
(800) 367-3653 or write Manning & Napier Insurance Fund, Inc. at P.O. Box
40610, Rochester, New York 14604 or call (800) 466-3863.
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 Cash Income Fund (CIF)
Sub-Account 5
Financial Statements 6
Keyport Life Insurance Company 7
</TABLE>
17
<PAGE>
APPENDIX A
TELEPHONE INSTRUCTIONS
Telephone Transfers of Certificate Values
1. If there are joint Certificate Owners, both must authorize Keyport and
Manning & Napier Insurance Fund, Inc. ("Manning & Napier Insurance Fund") to
accept telephone instructions but either Certificate Owner can give 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 or
Manning & Napier Insurance Fund's satisfaction.
3. Neither Keyport, Manning & Napier Insurance Fund, 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 and/or Manning &
Napier Insurance Fund will employ reasonable procedures to confirm that a
telephone instruction is genuine and, if Keyport and/or Manning & Napier
Insurance Fund does not, Keyport and/or Manning & Napier Insurance Fund 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, Manning
& Napier Insurance Fund 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, Manning & Napier Insurance Fund 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 and/or
Manning & Napier Insurance Fund receives the Certificate Owner's written
revocation, (b) Keyport and/or Manning & Napier Insurance Fund discontinues
the privilege, or (c) Keyport and/or Manning & Napier Insurance Fund 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
and/or Manning & Napier Insurance Fund at (800) 466-3863 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 and/or Manning & Napier
Insurance Fund, 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 and/or Manning & Napier Insurance Fund 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.
18
<PAGE>
November 11, 1996 Prospectus for
MANNING & NAPIER VARIABLE ANNUITY
Including Eligible Fund Prospectuses for
MANNING & NAPIER INSURANCE FUND, INC.:
Manning & Napier Moderate Growth Portfolio
Manning & Napier Growth Portfolio
Manning & Napier Maximum Horizon Portfolio
Manning & Napier Small Cap Portfolio
Manning & Napier Equity Portfolio
Manning & Napier Bond Portfolio
STEINROE VARIABLE INVESTMENT TRUST:
Cash Income Fund
<PAGE>
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
Sales/Service Hotline (800) 466-3863
Keyport Logo is a registered service mark of
Keyport Insurance Company
[perforated BRC back]
[ ] Yes. I would like to receive the Manning & Napier Variable Annuity
Statement of Additional Information.
[ ] Yes. I would like to receive the Manning & Napier Insurance Fund, Inc.
Statement of Additional Information.
[ ] Yes. I would like to receive the SteinRoe Variable Investment Trust
Statement of Additional Information.
---------------------------------------------------------------------------
Name
---------------------------------------------------------------------------
Address
---------------------------------------------------------------------------
City State Zip
<PAGE>
[BRC with bar code and FIM code]
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
NO POSTAGE
NECESSARY
IF MAILED
IN THE
UNITED STATES
<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 Manning & Napier 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. It may also be obtained by writing Manning & Napier
Insurance Fund, Inc. at P.O. Box 40610, Rochester, New York 14604, or by
calling (800) 466-3868.
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 Cash Income Fund (CIF) 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 6 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; 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 1 time every 6 months. The payee's
request must specify the percentage of the annuity payment that is to be
3
<PAGE>
based on the investment performance of each Sub-Account. The percentage for
each Sub-Account, if not zero, must be at least 10% 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 Certificates, which are offered continuously, are 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 Cash Income Fund (CIF) Sub-Account
Yield and effective yield percentages for the CIF Sub-Account are calculated
using the method prescribed by the Securities and Exchange Commission. Both
yields reflect the deduction of the annual 0.35% asset-based Certificate
charge. Both yields also reflect, on an allocated basis, the Certificate's
annual $35 Certificate Maintenance Charge. Both yields do not reflect
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 CIF charge is equal to the $35
Certificate charge multiplied by a fraction equal to the average
number of Certificates with CIF Sub-Account value during the
7-day period divided by the average total number of Certificates
during the 7-
5
<PAGE>
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 CIF Accumulation Unit during the 7-day
period divided by the average Certificate Value in CIF
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 CIF 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>
<PAGE>
See accompanying notes to consolidated financial statements.
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.
December 31,
1995 1994
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
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.
