May 1, 1997 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
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
[ ] 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
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
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 May 1, 1997
TABLE OF CONTENTS
Page
Glossary of Special Terms 3
Summary of Expenses 4
Synopsis 5
Condensed Financial Information 5
Performance Information 6
Keyport and the Variable Account 6
Purchase Payments and Applications 7
Investments of the Variable Account 7
Allocations of Purchase Payments 7
Eligible Funds 8
Transfer of Variable Account Value 9
Substitution of Eligible Funds and Other
Variable Account Changes 9
Deductions 10
Deductions for Certificate Maintenance Charge 10
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 11
The Certificates 11
Variable Account Value 11
Valuation Periods 11
Net Investment Factor 11
Modification of the Certificate 11
Right to Revoke 11
Death Provisions for Non-Qualified Certificates 12
Death Provisions for Qualified Certificates 12
Certificate Ownership 13
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 15
Suspension of Payments 15
Tax Status 15
Introduction 15
Taxation of Annuities in General 15
Qualified Plans 16
Individual Retirement Annuities 17
Variable Account Voting Privileges 17
Sales of the Certificates 17
Legal Proceedings 17
Inquiries by Certificate Owners 17
Table of Contents--Statement of Additional
Information 18
Appendix A--Telephone Instructions 19
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.
SUMMARY OF EXPENSES
The expense summary format below, including the examples, was adopted by the
Securities and Exchange Commission to assist the owner of a variable annuity
certificate in understanding the transaction and operating expenses the owner
will directly or indirectly bear under a certificate. The values reflect
expenses of the Variable Account as well as the Eligible Funds under the
Certificates. The expenses shown for the Eligible Funds and the examples
should not be considered a representation of future expenses.
Certificate Owner Transaction Expenses
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of Purchase Payments): 0%
Maximum Total Certificate Owner Transaction Expenses1
(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%
Manning & Napier Insurance Fund and SteinRoe Trust Annual Expenses2
(as a percentage of average net assets)
Total
Fund Operating
Management Other Expenses (After
Fees Expenses Any Reimbursement)3
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% .15% .65%
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.
Sub-Account 1 Year 3 Years 5 Years 10 Years
MNMGP $16 $53 $96 $237
MNGP 16 53 96 237
MNMHP 16 53 96 237
MNSCP 16 53 96 237
MNEP 16 53 96 237
MNBP 13 42 76 189
CIF 11 36 65 161
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 All Manning & Napier Insurance Fund and SteinRoe Trust expenses are for
1996. The Manning & Napier Insurance Fund expenses reflect the 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, 1998. The SteinRoe Trust's manager was
not required to reimburse expenses as of the date of this Prospectus. The
total percentages shown in the table for MNMHP, MNSCP, MNEP, MNGP, MNMGP, and
MNBP are after expense reimbursement. In the absence of any expense
reimbursement, each Fund's expenses in 1996 would have been 2.5%.
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. 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 but currently does not do so. (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.
CONDENSED FINANCIAL INFORMATION
Accumulation Unit Values*
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year** of Year of Year Year
MNMGP 10.000 10.104 0 1996
Available in 1996 but no accumulation units were purchased
MNGP 10.000 10.244 0 1996
Available in 1996 but no accumulation units were purchased
MNMHP 10.000 10.434 0 1996
Available in 1996 but no accumulation units were purchased
MNSCP 10.000 10.714 246 1996
MNEP 10.000 10.554 241 1996
MNBP 10.000 9.934 0 1996
Available in 1996 but no accumulation units were purchased
CIF 10.000 10.073 0 1996
Available in 1996 but no accumulation units were purchased
* Accumulation Unit Values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number.
** Each $10.000 value is as of November 4, 1996, which is the date the Fund
Sub-Account first became available.
The full financial statements for Keyport and the Variable Account 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 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. Its home office is at 235
Promenade Street, Providence, Rhode Island 02903 and will be relocated in
May, 1997 to 695 George Washington Highway, Lincoln, Rhode Island 02865.
Keyport writes 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 company.
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
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 replacing an existing life insurance
or annuity policy that was issued by either Keyport or an affiliated company,
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:
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
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 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.
Eligible Funds of Manning & Napier Insurance
Fund and Variable Account Sub-Accounts Investment Objective
Manning & Napier Moderate Growth Portfolio
(MNMGP Sub-Account) Seeks with equal emphasis
long-term growth and
preservation of capital.
Manning & Napier Growth Portfolio
(MNGP Sub-Account) Seeks long-term growth of
capital. The secondary
objective is the
preservation of capital.
Manning & Napier Maximum Horizon Portfolio
(MNMHP Sub-Account) Seeks to achieve the high
level of long-term
capital growth typically
associated with the stock
market.
Manning & Napier Small Cap Portfolio
(MNSCP Sub-Account) Seeks to achieve long-
term growth of capital by
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
(MNBP Sub-Account) Seeks to maximize total
return in the form of
both 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.
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 has no limit on the number or frequency of transfers and
it is not charging a transfer fee, but reserves the right to charge $25 for
each transfer in excess of 12 per Certificate Year. However, 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.
Currently, Keyport is limiting each transfer to a maximum of $500,000. All
transfers requested for a Certificate on the same day will be treated as a
single transfer and the total combined transfer amount will be subject to the
$500,000 limitation. If the $500,000 limitation is exceeded, no amount of the
transfer will be executed by Keyport.
In applying the $500,000 limitation, Keyport may treat as one transfer all
transfers requested by a Certificate Owner for multiple Certificates he or
she owns. If the $500,000 limitation is exceeded for multiple transfers
requested on the same day that are treated as a single transfer, no amount of
the transfer will be executed by Keyport.
In applying the $500,000 limitation to transfers requested by a common
attorney-in-fact or investment adviser, Keyport will treat as one transfer
all transfers requested under different Certificates that are being requested
under powers of attorney with a common attorney-in-fact or that are, in
Keyport's determination, based on the recommendation of a common investment
adviser or broker/dealer. If the $500,000 limitation is exceeded for multiple
transfers requested on the same day that are treated as a single transfer, no
amount of the transfer will be executed by Keyport. If a transfer is executed
under one Certificate and, within the next 30 days, a transfer request for
another Certificate is determined by Keyport to be related to the executed
transfer under this paragraph's rules, the transfer request will not be
executed by Keyport. In order for it to be executed, it would need to be
requested again after the 30 day period has expired and it, along with any
other transfer requests that are collectively treated as a single transfer,
would need to total less than $500,000.
Keyport's interest in applying these limitations is to protect the interests
of both Certificate Owners who are not engaging in significant transfer
activity and Certificate Owners who are engaging in such activity. Keyport
has determined that the actions of Certificate Owners engaging in significant
transfer activity among Sub-Accounts may cause an adverse affect on the
performance of the Eligible Fund for the Sub-Account involved. The movement
of Sub-Account values from one Sub-Account to another may prevent the
appropriate Eligible Fund 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.
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.
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. 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.
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.
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 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.
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; and (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 dividing the amount being applied to a fixed
annuity Option 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 in its entirety to a variable annuity
Option. Whether variable or fixed, the same amount 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.
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 Variable
Account or determine their value; or (d) the Securities and Exchange
Commission permits delay for the protection of security holders. The
applicable rules and regulations of the Securities and Exchange Commission
shall govern as to whether the conditions described in (b) and (c) exist.
TAX STATUS
Introduction
The Certificate is designed for use by individuals in retirement plans which
may or may not be Qualified Plans under the provisions of the Internal
Revenue Code (the "Code"). The ultimate effect of federal income taxes on the
Certificate Value, on annuity payments, and on the economic benefit to the
Certificate Owner, Annuitant or Designated Beneficiary depends on the type of
retirement plan for which the Certificate is purchased and upon the tax and
employment status of the individual concerned. The discussion contained
herein is general in nature and is not intended as tax advice. Each person
concerned should consult a competent tax adviser. No attempt is made to
consider any applicable state or other tax laws. Moreover, the discussion
herein is based upon Keyport's understanding of current federal income tax
laws as they are currently interpreted. No representation is made regarding
the likelihood of continuation of those current federal income tax laws or of
the current interpretations by the Internal Revenue Service.
Taxation of Annuities in General
Section 72 of the Code governs taxation of annuities in general. There are no
income taxes on increases in the value of a Certificate until a distribution
occurs, in the form of a full surrender, a partial surrender, an assignment
or gift of the Certificate, or annuity payments. A trust or other entity
owning a Non-Qualified Certificate other than as an agent for an individual
is taxed differently; increases in the value of a Certificate are taxed
yearly whether or not a distribution occurs.
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 for lump-sum
distributions received before January 1, 2000. 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 that is allocated to
variable payments 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 that is allocated to fixed payments 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
payment. Thus, the total taxable amount for each annual payment would be
accelerated to the time of the first monthly payout and reported in the tax
year in which the first monthly payout is received.
Penalty Tax. Payments received by Certificate Owners, Annuitants, and
Designated Beneficiaries under Certificates may be subject to both ordinary
income taxes and a penalty tax equal to 10% of the amount received that is
includable in income. The penalty tax is not imposed on amounts received: (a)
after the taxpayer attains age 59-1/2; (b) in a series of substantially equal
payments made for life or life expectancy; (c) after the death of the
Certificate Owner (or, where the Certificate Owner is not a human being,
after the death of the Annuitant); (d) if the taxpayer becomes totally and
permanently disabled; or (e) under a Non-Qualified Certificate's annuity
payment option that provides for a series of substantially equal payments,
provided only one Purchase Payment is made to the Certificate, the
Certificate is not issued as a result of a Section 1035 exchange, and the
first annuity payment begins in the first Certificate Year.
Income Tax Withholding. Keyport is required to withhold federal income taxes
on taxable amounts paid under Certificates unless the recipient elects not to
have withholding apply. Keyport will notify recipients of their right to
elect not to have withholding apply.
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 instructions
in the same proportion as it votes shares for which it has received
instructions.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation thereof should change, and
as a result Keyport determines that it is permitted to vote the shares of the
Eligible Funds in its own right, it may elect to do so.
The person having the voting interest under a Certificate prior to the Income
Date shall be the Certificate Owner. The number of shares held in each Sub-
Account which are attributable to each Certificate Owner is determined by
dividing the Certificate Owner's Variable Account Value in each Sub-Account
by the net asset value of the applicable share of the Eligible Fund. The
person having the voting interest after the Income Date under an annuity
payment option shall be the payee. The number of shares held in the Variable
Account which are attributable to each payee is determined by dividing the
reserve for the annuity payments by the net asset value of one share. During
the annuity payment period, the votes attributable to a payee decrease as the
reserves underlying the payments decrease.
The number of shares in which a person has a voting interest will be
determined as of the date coincident with the date established by the
respective Eligible Fund for determining shareholders eligible to vote at the
meeting of the Fund and voting instructions will be solicited by written
communication prior to such meeting in accordance with the procedures
established by the Eligible Fund.
Each person having the voting interest in the Variable Account will receive
periodic reports relating to the Eligible Fund(s) in which he or she has an
interest, proxy material and a form with which to give such voting
instructions with respect to the proportion of the Eligible Fund shares held
in the Variable Account corresponding to his or her interest in the Variable
Account.
SALES OF THE CERTIFICATES
Keyport Financial Services Corp. ("KFSC") serves as the Principal Underwriter
for the Certificate described in this prospectus. The Certificate will be
sold by salespersons who represent Keyport Life Insurance Company (KFSC's
corporate parent) as variable annuity agents and who are registered
representatives of broker/dealers who have entered into distribution
agreements with KFSC. KFSC is registered under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers, Inc.
It is located at 125 High Street, Boston, Massachusetts 02110.
Different Certificates may be sold (1) to a person who is an officer,
director, or employee of Keyport, or an affiliate of Keyport, a trustee or
officer of an Eligible Fund, 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
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 5
Yields for Cash Income Fund (CIF) Sub-Account 6
Financial Statements 7
Keyport Life Insurance Company 9
Variable Account A 32
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.
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 May 1, 1997. 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.....................................................5
Yields for Cash Income Fund (CIF) Sub-Account............................6
Financial Statements.......................................................7
Keyport Life Insurance Company...........................................9
Variable Account A......................................................32
The date of this statement of additional information is May 1, 1997.
mn1997.sai
KEYPORT LIFE INSURANCE COMPANY
Liberty Mutual Insurance Company ("Liberty Mutual"), a multi-line
insurance company, is the ultimate corporate parent of Keyport. Liberty
Mutual ultimately controls Keyport through the following intervening holding
company subsidiaries: Liberty Mutual Equity Corporation, LFC Holdings Inc.,
Liberty Financial Companies, Inc. ("LFC") and SteinRoe Services, Inc. Liberty
Mutual, as of December 31, 1996, owned, indirectly, approximately 83% 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
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
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 Life Insurance Company
at December 31, 1996 and for the year then ended, and the financial
statements of Keyport Life Insurance Company-Variable Account A as of
December 31, 1996 and for the year then ended appearing in this Statement of
Additional Information have been audited Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Keyport Life Insurance Company
and subsidiaries as of December 31, 1995 and for each of the years in the two-
year period ended December 31, 1995 have been included herein in reliance on
the report of KPMG Peat Marwick LLP, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1995
financial statements refers to a change in accounting to adopt Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities.
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
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-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.
For the 7-day period ended 12/31/96 the yield for the CIF Sub-Account
was 3.71% and the effective yield was 3.78%.
FINANCIAL STATEMENTS
The consolidated financial statements of Keyport and the Variable
Account are included in the statement of additional information. The
consolidated financial statements of Keyport are provided as relevant to its
ability to meet its financial obligations under the Certificates and should
not be considered as bearing on the investment performance of the assets held
in the Variable Account.
Report of Independent Auditors
The Board of Directors
Keyport Life Insurance Company
We have audited the accompanying consolidated balance sheet of Keyport
Life Insurance Company as of December 31, 1996, and the related
consolidated statements of income, stockholder's equity, and cash flows for
the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Keyport Life Insurance Company at December 31, 1996 and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
1994, the Company changed its method of accounting for certain investments
in debt and equity securities.
Ernst & Young LLP
February 5, 1997
Boston, Massachusetts
Independent Auditors' Report
The Board of Directors
Keyport Life Insurance Company
We have audited the consolidated financial statements of Keyport Life
Insurance Company and subsidiaries as of December 31, 1995, and for each of
the years in the two-year period ended December 31, 1995, as listed in the
accompanying index. These consolidated financial statements and financial
statement schedules 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 the
results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in note 1 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.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31
ASSETS 1996 1995
Cash and investments:
Fixed maturities available for sale
(amortized cost: 1996 - $10,500,431;
1995 - $9,227,834) $10,718,644 $ 9,535,948
Equity securities (cost: 1996 - $19,412;
1995 - $17,521) 35,863 25,214
Mortgage loans 67,005 74,505
Policy loans 532,793 498,326
Other invested assets 183,622 10,748
Cash and cash equivalents 767,385 777,384
Total cash and investments 12,305,312 10,922,125
Accrued investment income 146,778 132,856
Deferred policy acquisition costs 250,355 179,672
Value of insurance in force 70,819 43,939
Intangible assets 19,186 20,314
Federal income taxes recoverable 323 9,205
Other assets 40,316 12,859
Separate account assets 1,091,468 959,224
Total assets $13,924,557 $12,280,194
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $11,637,528 $10,084,392
Current federal income taxes 13,123 7,666
Deferred federal income taxes 25,747 32,823
Payable for investments purchased
and loaned 211,234 317,715
Other liabilities 38,476 46,161
Separate account liabilities 1,017,667 889,106
Total liabilities 12,943,775 11,377,863
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 73,599 85,772
Retained earnings 398,235 307,611
Total stockholder's equity 980,782 902,331
Total liabilities and stockholder's equity $13,924,557 $12,280,194
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year Ended December 31
1996 1995 1994
Revenues:
Investment income $ 790,365 $ 755,930 $ 689,575
Interest credited to policyholders (572,719) (555,725) (481,926)
Investment spread 217,646 200,205 207,649
Net realized investment gains (losses) 5,509 (3,958) (8,220)
Fee income:
Surrender charges 14,934 14,772 11,545
Separate account fees 15,987 13,154 12,495
Management fees 2,613 1,841 1,233
Total fee income 33,534 29,767 25,273
Expenses:
Policy benefits (3,477) (4,448) (4,838)
Operating expenses (43,815) (44,475) (54,295)
Amortization of deferred policy
acquisition costs (60,225) (58,541) (52,174)
Amortization of value of insurance
in force (10,196) (9,479) (16,989)
Amortization of intangible assets (1,130) (1,130) (1,130)
Total expenses (118,843) (118,073) (129,426)
Income before federal income tax
expense 137,846 107,941 95,276
Federal income tax expense (47,222) (38,331) (32,051)
Net income $ 90,624 $ 69,610 $ 63,225
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Net
Unrealized
Additional Investment
Common Paid-in Gains Retained
Stock Capital (Losses) Earnings Total
Balance,
January 1, 1994 $ 1,508 $505,933 $ 546 $176,283 $ 684,270
Adjustment to
beginning balance
for change in
accounting
principle, net of
federal income
taxes 41,614 41,614
Net income 63,225 63,225
Common stock dividend
(1,206 shares) 1,507 (1,507)
Change in net
unrealized investment
gains (losses) (106,624) (106,624)
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
Net income 90,624 90,624
Change in net unrealized
investment gains
(losses) (12,173) (12,173)
Balance,
December 31, 1996 $ 3,015 $505,933 $ 73,599 $398,235 $ 980,782
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31
1996 1995 1994
Cash flows from operating
activities:
Net income $ 90,624 $ 69,610 $ 63,225
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to
policyholders 572,719 555,725 481,926
Net realized investement
(gains) losses (5,509) 3,958 8,220
Amortization of value of
insurance in force and
intangible assets 11,326 10,609 18,120
Net amortization on
investements (29,088) 9,688 12,215
Change in deferred
policy acquisition costs (24,403) (24,630) (38,852)
Change in current and
deferred federal income
taxes 4,938 1,953 7,731
Net change in other assets
and liabilities (42,634) (62,375) (16,718)
Net cash provided by
operating activities 577,973 564,538 535,867
Cash flow from investing activities:
Investments purchased -
held to maturity -- -- (277,626)
Investments purchased -
available for sale (4,363,074) (2,851,013) (2,624,493)
Investments sold -
held to maturity -- 14,930 10,637
Investments sold -
available for sale 1,714,023 605,197 950,885
Investments matured -
held to maturity -- 317,773 576,021
Investments matured -
available for sale 1,387,664 906,522 854,441
Increase in policy loans (34,467) (21,033) (35,143)
Decrease in mortgage loans 7,500 54,947 26,520
Other assets purchased, net (130,087) -- --
Value of business acquired,
net of cash (30,865) -- (961)
Net cash used in
investing activities (1,449,306) (972,677) (519,719)
Cash flows from financing
activities:
Withdrawals from
policyholder accounts (1,154,087) (933,785) (1,034,464)
Deposits to policyholder
accounts 2,134,504 1,116,975 1,202,076
Securities lending (119,083) 317,715 --
Net cash provided by
financing activities 861,334 500,905 167,612
Change in cash and cash equivalents (9,999) 92,766 183,760
Cash and cash equivalents at
beginning of year 777,384 684,618 500,858
Cash and cash equivalents at end
of year $767,385 $777,384 $684,618
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. Accounting Policies
Organization
Keyport Life Insurance Company offers a diversified line of fixed,
indexed, and variable annuity products designed to serve the growing
retirement saving market. These annuity products are sold through a wide
ranging network of banks, agents, and securities dealers.
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").
Principles of Consolidation
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 Corp., (collectively the "Company").
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. All significant intercompany transactions
and balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
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"). Investments in debt and equity
securities classified as available for sale are carried at fair value, and
after-tax unrealized gains and losses (net of adjustments to deferred
policy acquisition costs and value of insurance in force) are reported as a
separate component of stockholder's equity. Realized investment gains and
losses are calculated on a first-in, first-out basis.
On December 31, 1995, pursuant to the "Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company made a one-time reclassification of certain fixed
maturity securities from held to maturity to available for sale. The
amortized cost of those securities at the time of transfer was $1.4
billion, and the unrealized gain of $13.9 million was recorded net of taxes
in stockholder's equity.
For the mortgage backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments over the estimated economic life of the
security. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments and any resulting adjustment is
included in investment income.
Mortgage loans are carried at amortized cost. Policy loans are carried
at the unpaid principal balances plus accrued interest.
Fee Income
Fees from investment advisory services are recognized as revenues when
services are provided. Revenues from fixed and variable annuities and
single premium whole life policies include mortality charges, surrender
charges, policy fees, and contract fees and are recognized when earned.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which
vary with, and are primarily related to, the production of new business.
Such costs include commissions, costs of policy issuance, underwriting,
and selling expenses. These costs are deferred and amortized in relation
to the present value of estimated gross profits from mortality, investment,
and expense margins. Deferred policy acquisition costs are adjusted for
amounts relating to unrealized gains and losses on fixed maturity
securities the Company has designated as available for sale. This
adjustment, net of tax, is included with the change in net unrealized gains
or losses that is credited or charged directly to stockholder's equity.
Deferred policy acquisition costs have been decreased by $103.7 million at
December 31, 1996, and decreased by $151.4 million at December 31, 1995 for
this adjustment.
Value of Insurance in Force
Value of insurance in force represents the actuarially-determined
present value of projected future gross 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 15 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.30%, 5.58% and 5.49% for the
years ended December 31, 1996, 1995 and 1994, respectively.
The value of insurance in force is adjusted for amounts relating to the
recognition of unrealized investment gains and losses. This adjustment,
net of tax, is included with the change in net unrealized gains or losses
that is credited or charged directly to stockholder's equity. Value of
insurance in force has decreased by $26.0 million at December 31, 1996, and
decreased by $32.5 million at December 31, 1995 for this adjustment.
Estimated net amortization expense of the value of insurance in force as
of December 31, 1996 is as follows (in thousands): 1997 - $14,237; 1998 -
$12,206; 1999 - $11,236; 2000 - $10,034; 2001 - $8,582; and thereafter -
$40,506.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis over twenty-five years.
Separate Account Assets and Liabilities
The assets and liabilities resulting from variable annuity and variable
life policies are segregated in separate accounts. Separate account assets,
which are carried at fair value, consist principally of investments in
mutual funds. Investment income and changes in asset values are allocated
to the 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. As of December 31, 1996 and
1995, Keyport also classified as separate account assets $73.8 million and
$72.5 million, respectively, of its investments in certain mutual funds
sponsored by affiliates of the Company.
Policy Liabilities
Policy liabilities consist of deposits received plus credited interest,
less accumulated policyholder charges, assessments, and withdrawals related
to deferred annuities and single premium whole life policies. Policy
benefits that are charged to expense include benefit claims incurred in the
period in excess of related policy account balances.
Income Taxes
Keyport Life Insurance Company, Keyport Advisory Services Corporation,
and Keyport Financial Services Corp. are included in the consolidated
federal income tax return filed by Liberty Mutual. Income taxes have been
provided using the liability method in accordance with SFAS No. 109,
"Accounting for Income Taxes," and are calculated as if the companies filed
their own income tax returns. Independence Life is required under tax law
to file its own federal income tax return.
Cash Equivalents
Short-term investments having an original maturity of three months or
less are classified as cash equivalents.
Recent Accounting Pronouncement
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). The relevant provisions of
SFAS 125 relating to securities lending, dollar rolls, and other similar
secured transactions become effective after December 31, 1997. It is not
expected that the adoption of SFAS 125 will have a material effect on the
Company's consolidated financial position or results of operations.
2. Acquisitions
On August 9, 1996, Keyport entered into a 100 percent coinsurance
agreement for a $954.0 million block of single premium deferred annuities
issued by Fidelity & Guaranty Life Insurance Company ("F&G Life"). Under
this transaction, the investment risk of the annuity policies was
transferred to Keyport. However, F&G Life will continue to administer the
policies and will remain contractually liable for the performance of all
policy obligations. This transaction increased investments by $923.1
million and value of insurance in force by $30.9 million.
3. Investments
Fixed Maturities
As of December 31, 1996 and 1995, the Company did not hold any
investments in fixed maturities that were classified as held to maturity or
trading securities. The amortized cost, gross unrealized gains and losses
and fair value of fixed maturity securities are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996
U.S. Treasury securities $ 35,308 $ 130 $ (87) $ 35,351
Mortgage backed securities
of U.S. government
corporations and
agencies 1,666,094 41,401 (8,569) 1,698,926
Obligations of states
and political
subdivisions 23,895 382 (49) 24,228
Debt securities issued
by foreign governments 246,339 11,718 (554) 257,503
Corporate securities 4,093,473 153,422 (12,298) 4,234,597
Other mortgage backed
securities 2,413,020 47,596 (23,970) 2,436,646
Asset backed
securities 1,736,012 15,531 (6,440) 1,745,103
Senior secured loans 286,290 - - 286,290
Total fixed maturities $10,500,431 $ 270,180 $ (51,967) $10,718,644
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1995
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 $9,227,834 $ 394,082 $ (85,968) $ 9,535,948
At December 31, 1996, gross unrealized gains on equity securities,
interest rate cap agreements and investments in separate accounts
aggregated $29.9 million, and gross unrealized losses aggregated $5.3
million, respectively. At December 31, 1995, gross unrealized gains on
equity securities, interest rate cap agreements and investments in separate
accounts aggregated $16.9 million, and gross unrealized losses aggregated
$9.3 million, respectively.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1996 are as follows (in thousands):
Amortized Fair
Cost Value
December 31, 1996
Due in one year or less $ 487,373 $ 489,136
Due after one year through five years 1,522,400 1,559,816
Due after five years through ten years 2,013,432 2,084,939
Due after ten years 662,100 704,078
4,685,305 4,837,969
Mortgage and asset backed securities 5,815,126 5,880,675
$10,500,431 $10,718,644
Actual maturities will differ in some cases from those shown above
because borrowers may have the right to call or prepay obligations.
Net Investment Income
Net investment income is summarized as follows (in thousands):
Year Ended December 31
1996 1995 1994
Fixed maturities $ 737,372 $ 681,998 $635,947
Mortgage loans and other invested assets 11,422 12,881 15,416
Policy loans 30,188 28,485 26,295
Equity securities 4,494 4,807 2,132
Cash and cash equivalents 36,138 41,643 20,727
Gross investment income 819,614 769,814 700,517
Investment expenses (12,708) (10,837) (10,118)
Amortization of options and interest
rate caps (16,541) (3,047) (824)
Net investment income $ 790,365 $ 755,930 $689,575
There were no non-income producing fixed maturity investments as of
December 31, 1996 or 1995.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
1996 1995 1994
Year Ended December 31
Fixed maturities held to maturity:
Gross gains $ - $ 1,306 $ 3,493
Gross losses - (64) (755)
Fixed maturities available for sale:
Gross gains 24,304 8,156 26,043
Gross losses (17,814) (15,982) (26,831)
Equity securities 916 1,279 (845)
Interest rate swaps - (860) (28)
Other (208) (13) (809)
Impairment write-downs - - (11,514)
Gross realized investment gains (losses) 7,198 (6,178) (11,246)
Amortization adjustments of deferred
policy acquisition costs and value of
insurance inforce (1,689) 2,220 3,026
Net realized investment gains (losses) $ 5,509 $ (3,958) $ (8,220)
Proceeds from sales of fixed maturities available for sale were $1.7
billion, $565.4 million and $927.8 million, for the years ended December
31, 1996, 1995, and 1994, respectively. The sale of fixed maturities held
to maturity during 1995 and 1994 relate to certain securities, with
amortized cost of $15.0 million and $10.6 million, respectively, which were
sold specifically due to a decline in the issuers' credit quality.
Deferred tax liabilities for the Company's unrealized holding gains and
losses, net of adjustments to deferred policy acquisition costs and value
of insurance inforce were $39.5 million and $46.2 million at December 31,
1996 and 1995, respectively.
No investment in any person or its affiliates (other than bonds issued
by agencies of the United States government) exceeded ten percent of
stockholder's equity at December 31, 1996.
At December 31, 1996, the Company did not have a material concentration
of financial instruments in a single investee, industry or geographic
location.
At December 31, 1996, $987.0 million of fixed maturities were below
investment grade.
4. Off Balance Sheet Financial Instruments
The Company's primary objective in acquiring off balance sheet 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
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 primarily
include managing the effective duration of portfolio securities and
utilizing interest rate swaps and caps. Outstanding off balance sheet
financial instruments, shown in notional amounts along with their carrying
value and fair values, are as follows (in thousands):
Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1996 1995 1996 1996 1995 1995
Interest rate
cap agreements $ 450,000 $ 450,000 $ 6,192 $ 1,363 $ 8,755 $ 1,461
Indexed call
options - - 109,561 109,561 7,785 7,785
Interest rate
swaps 2,275,000 1,975,000 (8,753) (8,753) (64,124) (64,124)
The interest rate cap agreements, which expire in 1997 through 2000,
entitle the Company to receive payments from the counterparties on
specified future dates, contingent on future interest rates. For each cap,
the amount of such payment, if any, is determined by the excess of a market
interest rate over a specified cap rate times the notional amount. The
premium paid for the interest rate caps is included in other invested
assets and is being amortized over the terms of the agreements and is
included in net investment income. Interest rate contracts relating to
investments designated as available for sale are adjusted to fair value
with the resulting unrealized gains and losses included in stockholder's
equity. Fair values for these contracts are based on current settlement
values. The current settlement values are based on quoted market prices
and brokerage quotes, which utilize pricing models or formulas using
current assumptions.
The Company uses indexed call options for purposes of hedging its equity-
indexed products. The call options hedge the interest credited on these 1
and 5 year term products, which is based on the changes in the Standard &
Poor's 500 Composite Stock Price Index ("S&P Index"). Premiums paid on the
call options are amortized to interest expense over the terms of the
underlying equity-indexed products using the straight line method. Gains
and losses, if any, resulting from the early termination of the call option
are deferred and amortized to interest credited over the remaining term of
the underlying equity-indexed products.
At December 31, 1996 the Company had approximately $73.1 million of
unamortized premium in call option contracts. The call options' maturities
range from 1997 to 2001. The Company carries its S&P Index call options at
market value.
Deferred losses of $7.9 million and $10.6 million as of December 31,
1996 and 1995, respectively, resulting from terminated interest rate swap
agreements are included with the related fixed maturity securities to which
the hedge applied and are being amortized over the life of such securities.
The Company is exposed to potential credit loss in the event of
nonperformance by counterparties on interest rate cap agreements and
interest rate swaps. Nonperformance is not anticipated and, therefore, no
collateral is held or pledged. The credit risk associated with these
agreements is minimized by purchasing such agreements from investment-grade
counterparties.
5. Income Taxes
Income tax expense is summarized as follows (in thousands):
Year Ended December 31 1996 1995 1994
Current $52,369 $37,746 $18,118
Deferred (5,147) 585 13,933
$47,222 $38,331 $32,051
A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31 1996 1995 1994
Expected income tax expense $ 48,246 $ 37,779 $ 33,347
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (1,216) (1,737) (2,099)
Amortization of goodwill 396 396 396
Other, net (204) 1,893 407
Income tax expense $ 47,222 $ 38,331 $ 32,051
The components of deferred federal income taxes are as follows (in
thousands):
December 31 1996 1995
Deferred tax assets:
Policy liabilities $171,327 $140,971
Guaranty fund expense 6,260 7,679
Deferred gain on interest rate swaps -- 312
Net operating loss carryforwards 2,667 3,041
Other 3,915 1,039
Total deferred tax assets 184,169 153,042
Deferred tax liabilities:
Deferred policy acquisition costs (63,076) (44,468)
Value of insurance in force and
intangible assets (20,539) (7,152)
Excess of book over tax basis of
investments (118,403) (127,991)
Separate account asset (4,557) (2,539)
Deferred loss on interest rate swaps (2,765) (3,715)
Other (576) --
Total deferred tax liabilities (209,916) (185,865)
Net deferred tax liability $ (25,747) $ (32,823)
As of December 31, 1996, the Company had approximately $7.6 million of
purchased net operating loss carryforwards (relating to the acquisition of
Independence Life). Utilization of these net operating loss carryforwards,
which expire through 2006, is limited to use against future profits. The
Company believes that it is more likely than not that it will realize the
benefit of its deferred tax assets.
Income taxes paid were $46.9 million, $44.7 million and $28.8 million in
1996, 1995 and 1994, respectively.
6. Retirement Plans
Keyport employees and certain employees of Liberty Financial are
eligible to participate in the Liberty Financial Companies, Inc. Pension
Plan (the "Plan"). It is the Company's practice to fund amounts for the
Plan sufficient to meet the minimum requirements of the Employee Retirement
Income Security Act of 1974. Additional amounts are contributed from time
to time when deemed appropriate by the Company. 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. Plan assets
consist principally of investments in certain mutual funds sponsored by an
affiliated company.
The Company also has an unfunded non-qualified Supplemental Pension Plan
("Supplemental Plan") collectively with the Plan, (the "Plans"), to replace
benefits lost due to limits imposed on Plan benefits under the Internal
Revenue Code.
The following table sets forth the Plans' funded status. Substantially
all the Plans' assets are invested in mutual funds sponsored by the
Company.
December 31
(Dollars in thousands) 1996 1995
Actuarial present value of benefit
obligations:
Vested benefit obligations $ 7,172 $ 6,082
Accumulated benefit obligation $ 7,963 $ 6,915
Projected benefit obligation $10,559 $ 9,185
Plan assets at fair value (6,399) (5,703)
Projected benefit obligation in excess of
the Plans' assets 4,160 3,482
Unrecognized net actuarial loss (1,496) (1,740)
Prior service cost not yet recognized in
net periodic pension cost (183) (206)
Accrued pension cost $ 2,481 $ 1,536
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:
Year Ended December 31 1996 1995 1994
Pension cost includes the following
components:
Service cost benefits earned during the
period $ 717 $ 541 $ 532
Interest cost on projected benefit
obligation 725 603 534
Actual return on Plan assets (732) (999) 63
Net amortization and deferred amounts 357 600 (338)
Total net periodic pension cost $1,067 $ 745 $ 791
Discount rate 7.50% 7.25% 8.25%
Rate of increase in compensation level 5.25% 5.25% 5.25%
Expected long-term rate of return on
assets 8.50% 8.50% 8.50%
The Company provides various other funded and unfunded defined
contribution plans, which include savings and investment plans and
supplemental savings plans. For each of the years ended December 31, 1996,
1995 and 1994, expenses related to these defined contribution plans totaled
(in thousands) $589.7, $595.0 and $533.5, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used
to determine the fair value of the Company's financial instruments. The
aggregate fair value amounts presented herein do not necessarily represent
the underlying value of the Company, and accordingly, care should be
exercised in deriving conclusions about the Company's business or financial
condition based on the fair value information presented herein.
The following methods and assumptions were used by the Company in
determining fair values of financial instruments:
Fixed maturities and equity securities: Fair values for fixed
maturity securities are based on quoted market prices, where
available. For fixed maturities not actively traded, the fair
values are determined using values from independent pricing
services, or, in the case of private placements, are determined
by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the
securities. The fair values for equity securities are based on
quoted market prices.
Mortgage loans: The fair value of mortgage loans are
determined by discounting future cash flows to the present at
current market rates, using expected prepayment rates.
Policy loans: The carrying value of policy loans approximates
fair value.
Other invested assets, cash: The carrying value for assets
classified as other invested assets and cash in the accompanying
balance sheets approximates their fair value.
Policy liabilities: Deferred annuity contracts are assigned
fair value equal to current net surrender value. Annuitized
contracts are valued based on the present value of the future
cash flows at current pricing rates.
The fair values and carrying values of the Company's financial
instruments are as follows (in thousands):
December 31 1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity
securities $10,718,644 $10,718,644 $ 9,535,948 $ 9,535,948
Equity securities 35,863 35,863 25,214 25,214
Mortgage loans 67,005 73,424 74,505 79,697
Policy loans 532,793 532,793 498,326 498,326
Other invested assets 183,622 183,622 10,748 10,748
Cash and cash
equivalents 767,385 767,385 777,384 777,384
Liabilities:
Policy liabilities 11,637,528 11,127,352 10,084,392 9,650,113
8. Quarterly Financial Data, in thousands (unaudited)
Quarter Ended 1996 March 31 June 30 September 30 December 31
Investment income $ 187,728 $ 188,334 $ 200,253 $ 214,050
Interest credited to
policyholders (138,109) (136,161) (146,071) (152,378)
Investment spread 49,619 52,173 54,182 61,672
Net realized investment
gains (losses) 2,052 (2,487) 755 5,189
Fee income 7,769 8,006 9,015 8,744
Pretax income 30,340 29,650 34,575 43,281
Net income 19,688 19,943 22,289 28,704
Quarter Ended 1995 March 31 June 30 September 30 December 31
Investment income $ 183,784 $ 189,496 $ 189,652 $ 192,998
Interest credited to
policyholders (130,919) (139,226) (143,317) (142,263)
Investment spread 52,865 50,270 46,335 50,735
Net realized investment
gains (losses) (5,652) (719) 1,430 983
Fee income 7,308 7,919 7,217 7,323
Pretax income 23,348 29,452 28,395 26,746
Net income 15,370 18,675 18,251 17,314
9. Statutory Information
Keyport is domiciled in Rhode Island and prepares its statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the Department of Business Regulation of the
State of Rhode Island. Statutory surplus differs from stockholder's equity
reported in accordance with GAAP primarily because policy acquisition costs
are expensed when incurred, investment reserves and policy liabilities are
based on different assumptions, and income tax expense reflects only taxes
paid or currently payable. Keyport's statutory surplus and net income are
as follows (in thousands):
Year Ended December 31 1996 1995 1994
Statutory surplus $ 567,735 $ 535,179 $ 546,440
Statutory net income 40,237 38,264 23,385
10. Transactions with Affiliated Companies
The Company reimbursed Liberty Financial and certain affiliates for
expenses incurred on its behalf for the years ended December 31, 1996, 1995
and 1994. 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 $7.8 million, $7.6 million and $7.3 million for the years ended
December 31, 1996, 1995 and 1994 , respectively. In addition, certain
affiliated companies distribute the Company's products and were paid $6.4
million, $7.6 million and $15.3 million by the Company for the years ended
December 31, 1996, 1995, and 1994, respectively.
Keyport has mortgage notes in the original principal amount of $100.0
million on properties owned by certain indirect subsidiaries of Liberty
Mutual. The notes were purchased for their face value. Liberty Mutual has
agreed to provide credit support to the obligors under these notes with
respect to certain payments of principal and interest thereon. As of
December 31, 1996 and 1995, the amounts outstanding were $39.5 million.
Dividend payments to Liberty Financial from the Company are governed
by insurance laws which restrict the maximum amount of dividends that may
be paid without prior approval of the Department of Business Regulation of
the State of Rhode Island. As of December 31, 1996, the maximum amount of
dividends (based on statutory surplus and statutory net gains from
operations) which may be paid by Keyport was approximately $42.5 million.
11. Commitments and Contingencies
Leases: The Company leases data processing equipment, furniture and
certain office facilities from others under operating leases expiring in
various years through 2001. Rental expense (in thousands) amounted to
$3,213, $3,221 and $3,011 for the years ended December 31, 1996, 1995 and
1994, respectively. For each of the next five years, and in the aggregate,
as of December 31, 1996, the following are the minimum future rental
payments under noncancelable operating leases having remaining terms in
excess of one year (in thousands):
Year Payments
1997 $ 2,641
1998 2,992
1999 2,815
2000 2,731
2001 2,715
$ 13,894
Legal Matters: The Company is involved at various times in litigation
common to its business. In the opinion of management, provisions made for
potential losses are adequate and the resolution of any such litigation is
not expected to have a material adverse effect on the Company's financial
condition or its results of operations.
Regulatory Matters: 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 1996, 1995 and 1994, Keyport was assessed $10.0 million, $8.1 million,
and $7.7 million, respectively. During 1996, 1995 and 1994, Keyport
recorded $1.0 million, $2.0 million, and $7.2 million respectively, of
provisions for state guaranty fund association expense. At December 31,
1996 and 1995, the reserve for such assessments was $12.9 million and $21.9
million, respectively.
Report of Independent Auditors
To the Board of Directors of Keyport Life Insurance Company
and Contract Owners of Variable Account A
We have audited the accompanying statement of assets and liabilities of
Keyport Life Insurance Company - Variable Account A as of December 31, 1996,
and the related statement of operations and changes in net assets for the
period from January 30, 1996 (commencement of operations) to December 31,
1996. These financial statements are the responsibility of Keyport Life
Insurance Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Keyport Life Insurance
Company - Variable Account A at December 31, 1996 and the results of its
operations and changes in net assets for the period from January 30, 1996
(commencement of operations) to December 31, 1996, in conformity with
generally accepted accounting principles.
March 14, 1997 ERNST & YOUNG LLP
Boston, Massachusetts
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Assets and Liabilities
December 31, 1996
Assets
Investments at market value:
Alger American Fund
Alger American Growth Portfolio - 2,574 shares
(cost $89,593) $ 88,377
Alger American Small Capitalization Portfolio - 1,663
shares (cost $67,665) 68,038
Alliance Variable Products Series Fund, Inc.
Alliance Global Bond Portfolio - 3,150 shares (cost $36,918) 36,985
Alliance Premier Growth Portfolio - 3,304 shares (cost $52,286) 51,880
MFS Variable Insurance Trust
MFS Emerging Growth Series - 4,151 shares (cost $56,072) 54,956
MFS Research Series 8,516 shares (cost $113,236) 111,820
Manning & Napier Insurance Fund, Inc.
Manning & Napier Small Cap Portfolio - 246 shares (cost $2,515) 2,638
Manning & Napier Equity Portfolio - 241 shares (cost $2,526) 2,541
SteinRoe Variable Investment Trust
Cash Income Fund - 21,617 shares (cost $21,617) 21,617
Capital Appreciation Fund - 2,847 shares (cost $59,019) 59,019
Managed Assets Fund - 7,993 shares (cost $130,134) 130,134
Mortgage Securities Income Fund - 11,738 shares (cost $124,830) 115,503
Managed Growth Stock Fund - 830 shares (cost $23,750) 23,750
Keyport Variable Investment Trust
Colonial-Keyport Growth and Income Fund - 18,668 shares
(cost $276,989) 260,609
Colonial-Keyport Utilities Fund - 2,566 shares (cost $28,678) 27,452
Colonial-Keyport International Fund for Growth - 68,841 shares
(cost $142,468) 134,240
Colonial-Keyport Strategic Income Fund - 19,593 shares
(cost $236,124) 216,107
Colonial-Keyport U.S. Stock Fund - 9,539 shares
(cost $143,606) 135,641
Newport-Keyport Tiger Fund - 38,340 shares (cost $97,675) 96,618
Total assets $ 1,637,925
Net assets
Variable annuity contracts (Note 5) $ 1,636,074
Due to Keyport Life Insurance Company (Note 2) 1,851
Total net assets $ 1,637,925
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Alger American
Capitalization
Alger American Small Alliance Global
Growth Portfolio Portfolio Bond Portfolio
1996 1996 1996
Income
Dividends $ - $ - $ -
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 50 31 16
Net investment income (expense) (50) (31) (16)
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period (1,217) 373 67
Net increase (decrease) in
net assets from operations (1,267) 342 51
Purchase payments from
contract owners 89,502 67,825 36,537
Transfers between accounts 142 (129) 381
Contract terminations and
annuity payouts (50) (31) -
Other transfers from Keyport
Life Insurance Company 50 31 16
Net increase in net assets
from contract transactions 89,644 67,696 36,934
Net assets at beginning of
period - - -
Net assets at end of period $ 88,377 $ 68,038 $ 36,985
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Alliance Premier MFS Emerging MFS
Growth Portfolio Growth Series Research Series
1996 1996 1996
Income
Dividends $ - $ - $ -
Expenses (Note 3)
Mortality and expense risk
and administrative charges 25 26 55
Net investment income (expense) (25) (26) (55)
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period (406) (1,116) (1,416)
Net increase (decrease) in
net assets from operations (431) (1,142) (1,471)
Purchase payments from
contract owners 51,575 56,838 111,137
Transfers between accounts 710 (766) 2,100
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company 26 26 54
Net increase in net assets
from contract transactions 52,311 56,098 113,291
Net assets at beginning of
period - - -
Net assets at end of period $ 51,880 $ 54,956 $ 111,820
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Manning & Napier
Small Cap Manning & Napier Cash
Portfolio Equity Portfolio Income Fund
1996 1996 1996
Income
Dividends $ - $ - $ 86
Expenses (Note 3)
Mortality and expense
risk and administrative
charges - - 12
Net investment income (expense) - - 74
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period 123 15 -
Net increase (decrease)
in net assets from
operations 123 15 74
Purchase payments from
contract owners 2,500 2,500 21,129
Transfers between accounts 15 26 402
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company - - 12
Net increase in net assets
from contract transactions 2,515 2,526 21,543
Net assets at beginning of
period - - -
Net assets at end of period $ 2,638 $ 2,541 $ 21,617
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Capital Mortgage
Appreciation Managed Securities
Fund Assets Fund Income Fund
1996 1996 1996
Income
Dividends $ - $ - $ 9,327
Expenses (Note 3)
Mortality and expense risk
and administrative charges 34 76 67
Net investment income (expense) (34) (76) 9,260
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period - - (9,327)
Net increase (decrease) in
net assets from
operations (34) (76) (67)
Purchase payments from
contract owners 59,199 129,902 114,880
Transfers between accounts (180) 232 623
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company 34 76 67
Net increase in net assets
from contract transactions 59,053 130,210 115,570
Net assets at beginning of
period - - -
Net assets at end of period $ 59,019 $ 130,134 $ 115,503
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Colonial-Keyport
Managed Growth Growth and Colonial-Keyport
Stock Fund Income Fund Utilities Fund
1996 1996 1996
Income
Dividends $ - $ 16,380 $ 1,226
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 14 152 16
Net investment income(expense) (14) 16,228 1,210
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period - (16,380) (1,226)
Net increase (decrease)
in net assets from
operations (14) (152) (16)
Purchase payments from
contract owners 23,757 259,571 26,950
Transfers between accounts (7) 1,038 502
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company 14 152 16
Net increase in net assets
from contract transactions 23,764 260,761 27,468
Net assets at beginning of
period - - -
Net assets at end of period $ 23,750 $ 260,609 $ 27,452
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Colonial-Keyport Colonial-Keyport
International Fund Strategic Colonial-Keyport
for Growth Income Fund U.S. Stock Fund
1996 1996 1996
Income
Dividends $ 8,228 $ 20,017 $ 7,965
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 78 125 79
Net investment income(expense) 8,150 19,892 7,886
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period (8,228) (20,017) (7,965)
Net increase (decrease)
in net assets from
operations (78) (125) (79)
Purchase payments from
contract owners 134,121 214,591 135,230
Transfers between accounts 119 1,516 411
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company 78 125 79
Net increase in net assets
from contract transactions 134,318 216,232 135,720
Net assets at beginning of
period - - -
Net assets at end of period $134,240 $ 216,107 $ 135,641
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Newport-Keyport
Tiger Fund Total
1996 1996
Income
Dividends $ 1,057 $ 64,286
Expenses (Note 3)
Mortality and expense risk
and administrative charges 57 913
Net investment income (expense) 1,000 63,373
Realized gain (loss) - -
Unrealized appreciation
(depreciation) during
the period (1,057) (67,777)
Net increase (decrease) in net
assets from operations (57) (4,404)
Purchase payments from
contract owners 96,510 1,634,254
Transfers between accounts 108 7,243
Contract terminations and annuity
payouts - (81)
Other transfers from Keyport Life
Insurance Company 57 913
Net increase in net assets
from contract transactions 96,675 1,642,329
Net assets at beginning of period - -
Net assets at end of period $ 96,618 $ 1,637,925
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements
December 31, 1996
1. Organization
Variable Account A (the "Variable Account"), was established on January 30,
1996 as a segregated investment account of Keyport Life Insurance Company
(the "Company"). The Variable Account is registered with the Securities and
Exchange Commission as a Unit Investment Trust under the Investment Company
Act of 1940 and invests in shares of eligible funds. The Variable Account is
a funding vehicle for group and individual variable annuity contracts. The
Variable Account currently offers two contracts, distinguished principally by
the level of expenses, surrender charges, and eligible fund options. The two
contracts and their respective eligible fund options are as follows:
Keyport Advisor Variable Annuity Manning & Napier Variable Annuity
Alger American Fund: Manning & Napier Insurance Fund, Inc:
Alger American Growth Portfolio Manning & Napier Small Cap Portfolio
Alger American Small Capitalization
Portfolio Manning & Napier Equity Portfolio
Manning & Napier Moderate Growth
Portfolio
MFS Variable Insurance Trust: Manning & Napier Growth Portfolio
MFS Emerging Growth Series Manning & Napier Maximum Horizon
Portfolio
MFS Research Series Manning & Napier Bond Portfolio
SteinRoe Variable SteinRoe Variable Investment
Investment Trust (SRVIT): Trust (SRVIT):
Cash Income Fund Cash Income Fund
Capital Appreciation Fund
Managed Assets Fund
Mortgage Securities Income Fund
Managed Growth Stock Fund
Keyport Variable Investment Trust (KVIT):
Colonial-Keyport Growth and Income Fund
Colonial-Keyport Utilities Fund
Colonial-Keyport International Fund for Growth
Colonial-Keyport Strategic Income Fund
Colonial-Keyport U.S. Stock Fund
Newport-Keyport Tiger Fund
Alliance Variable Products Series Fund, Inc:
Alliance Global Bond Portfolio
Alliance Premier Growth Portfolio
On December 6, 1996, the fund name Colonial-Keyport U.S. Fund for Growth was
changed to Colonial-Keyport U.S. Stock Fund.
2. Significant Accounting Policies
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported therein. Although
actual results could differ from these estimates, any such differences are
expected to be immaterial to the Variable Account.
Shares of the eligible funds are sold to the Variable Account at the reported
net asset values. Transactions are recorded on the trade date. Income from
dividends is recorded on the ex-dividend date. Realized gains and losses on
sales of investments are computed on the basis of identified cost of the
investments sold.
Amounts due to Keyport Life Insurance Company represent mortality and expense
risk charges earned by the Company in 1996 but not transferred to the Company
until January 1997.
The operations of the Variable Account are included in the federal income tax
return of the Company, which is taxed as a Life Insurance Company under the
provisions of the Internal Revenue Code. The Company anticipates no tax
liability resulting from the operations of the Variable Account. Therefore,
no provision for income taxes has been charged against the Variable Account.
3. Expenses
Keyport Advisor Variable Annuity
There are no deductions made from purchase payments for sales charges at the
time of purchase. In the event of a contract termination, a contingent
deferred sales charge, based on a graded table of charges, is deducted. An
annual contract maintenance charge of $36 to cover the cost of contract
administration is deducted from each contractholder's account on the contract
anniversary date. Daily deductions are made from each sub-account for
assumption of mortality and expense risk at an effective annual rate of 1.25%
of contract value. A daily deduction is also made for distribution costs
incurred by the Company at an effective annual rate of 0.15% of contract
value.
Manning & Napier Variable Annuity
There are no deductions from purchase payments for sales charges at the time
of purchase. There are also no contingent deferred sales charges or
distribution charges. An annual contract maintenance charge of $35 to cover
the cost of contract administration is deducted from each contractholder's
account on the contract anniversary date. Daily deductions are made from
each sub-account for assumption of mortality and expense risk at an effective
annual rate of 0.35% of contract value.
4. Affiliated Company Transactions
Administrative services necessary for the operation of the Variable Account
are provided by the Company. The Company has absorbed all organizational
expenses including the fees of registering the Variable Account and its
contracts for distribution under federal and state securities laws. SteinRoe
& Farnham, Inc., an affiliate of the Company, is the investment advisor to
the SRVIT. Keyport Advisory Services Corporation, a wholly-owned subsidiary
of the Company, is the investment advisor to the KVIT. Colonial Management
Associates, Inc., an affiliate of the Company, is the investment sub-advisor
to the KVIT. Keyport Financial Services Corporation, a wholly-owned
subsidiary of the Company, is the principal underwriter for SRVIT and KVIT.
The investment advisors' compensation is derived from the mutual funds.
5. Unit Values
A summary of the accumulation unit values at December 31, 1996 and the
accumulation units and dollar value outstanding at December 31, 1996 are as
follows:
Unit
Value Units Dollars
Alger American Growth Portfolio $ 9.900001 8,926.9688 $88,377
Alger American Small Capitalization
Portfolio 10.064832 6,759.9737 68,038
Alliance Global Bond Portfolio 9.882608 3,744.0522 37,001
Alliance Premier Growth Portfolio 10.197991 5,012.1637 51,114
MFS Emerging Growth Series 9.716229 5,713.8423 5,517
MFS Research Series 9.978211 11,119.8290 110,956
Manning & Napier Small Cap Portfolio 10.713837 246.1303 2,637
Manning & Napier Equity Portfolio 10.553923 240.6688 2,540
Cash Income Fund 13.288493 1,619.3710 21,519
Capital Appreciation Fund 29.237169 2,017.4662 58,985
Managed Assets Fund 21.263714 6,116.4291 130,058
Mortgage Securities Income Fund 16.621076 6,945.1581 115,436
Managed Growth Stock Fund 27.242475 871.2865 23,736
Colonial-Keyport Growth and Income
Fund 15.216529 17,116.7156 260,457
Colonial-Keyport Utilities Fund 12.095187 2,268.3403 27,436
Colonial-Keyport International Fund
for Growth 10.074536 13,316.9408 134,162
Colonial-Keyport Strategic Income
Fund 12.642128 17,084.3073 215,982
Colonial-Keyport U.S. Stock Fund 15.935084 8,507.1406 135,562
Newport-Keyport Tiger Fund 12.555053 7,691.0070 96,561
125,317.7913 $1,636,074
6. Purchases and Sales of Securities
The cost of shares purchased by the Variable Account during 1996 are shown
below:
Purchases
Alger American Growth Portfolio $ 89,593
Alger American Small Capitalization Portfolio 67,665
Alliance Global bond Portfolio 36,918
Aliance Premier Growth Portfolio 52,286
MFS emerging Growth Series 56,072
MFS Research Series 113,236
Manning & Napier Small Cap Portfolio 2,515
Manning & Napier Equity Portfolio 2,526
Cash Income Fund 21,617
Capital Appreciation Fund 59,019
Managed Assets Fund 130,134
Mortgage Securities Income Fund 124,830
Managed Growth Stock Fund 23,750
Colonial-Keyport Growth and Income Fund 276,989
Colonial-Keyport Utilities Fund 28,678
Colonial-Keyport International Fund for Growth 142,468
Colonial-Keyport Strategic Income Fund 236,124
Colonial-Keyport U.S. Stock Fund 143,606
Newport-Keyport Tiger Fund 97,675
$1,705,701
There were no shares sold by the Variable Account during 1996.
7. Diversification Requirements
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal tax purposes for any period for which the investments of
the segregated asset account on which the contract is based are not
adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a
statutory safe harbor test or diversification requirements set forth in
regulations issued by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. Keyport Life Insurance Company believes that the Variable Account
satisfies the current requirements of the regulations, and it intends that
the Variable Account will continue to meet such requirements.
