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Prospectus for
The Rydex Variable Annuity
Individual Flexible Purchase Payment
Deferred Variable Annuity Contract
issued by
Variable Account A
of
Keyport Life Insurance Company
125 High Street
Boston, Massachusetts 02110
Service Office:
Keyport Life Insurance Co.
P.O. Box 691
Leesburg, VA 20178
(877) 569-3789
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This prospectus describes the Rydex variable annuity Contracts offered by
Keyport Life Insurance Company. This Contract may be sold under different
names. Most transactions involving this Contract may be performed through
the Internet Service Center.
The value of your Contract will fluctuate on a variable basis. The Contract
is designed to help you in your retirement planning. You may purchase it on
a tax qualified or non-tax qualified basis.
To apply for the Contract, you must be of legal age, in a state where the
Contracts may lawfully be sold.
You may not purchase a Contract if either you or the Annuitant are over 90
years old before we receive your application. You may not purchase a tax-
qualified Contract if you or the Annuitant are over 75 years old before we
receive your application (age 90 applies to Roth IRAs).
The minimum initial purchase payment for the Contract in most cases is
$15,000. After the initial purchase payment, the minimum subsequent
payment is $1,000. If you elect to have monthly electronic fund transfers,
the minimum subsequent payment is $250. We reserve the right to limit the
total purchase payments made under this Contract to $5,000,000.
If the value of your Contract is less than $5,000, we reserve the right to
cancel your Contract and pay you the value of your Contract.
We will allocate your initial purchase payment to the investment options
you choose in the proportions you choose. Subsequent purchase payments will
automatically be allocated to the Rydex U.S. Government Money Market Sub-
account. You may then transfer funds from the Rydex U.S. Government Money
Market Sub-account to any of the other available Sub-accounts. The
Contract currently offers six investment options, each of which is a Sub-
account of Variable Account A. Currently, you may choose among the Sub-
accounts investing in the following Eligible Funds:
RYDEX VARIABLE TRUST: Rydex Nova Fund; Rydex Ursa Fund; Rydex OTC Fund;
Rydex Precious Metals Fund; Rydex U.S. Government Bond Fund and Rydex U.S.
Government Money Market Fund
Prospectuses for the Eligible Funds are attached. The purchase of a
Contract involves certain risks. Investment performance of the Eligible
Funds may vary. We do not guarantee any minimum Contract Value under the
Contract. An investment in the Rydex U.S. Government Money Market Sub-
account is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although the Rydex U.S.
Government Sub-account seeks to preserve the value of your investment at
$1.00 per share it is possible to lose money by investing in the Rydex U.S.
Government Money Market Sub-account.
This prospectus contains important information about the Contract you
should know before investing. You should read it before investing and keep
it for future reference. You may download or print the prospectus from our
website. If you require a free paper copy of this prospectus or the
prospectuses for the Eligible Funds, please call or write our Service
Office at the address above.
We have filed a Statement of Additional Information ("SAI") with the
Securities and Exchange Commission. The current SAI has the same date as
this prospectus and is incorporated by reference in this prospectus. A
table of contents for the SAI appears on the last page of this prospectus.
If you would like a free paper copy of this SAI, e-mail
[email protected] or call the telephone number provided above. The
SAI is also available through the SEC website (http://www.sec.gov). In
addition, other information regarding the Company and the Separate Account
is available through the SEC website or, if you prefer a paper copy, you
may send an e-mail request to our Internet Service Center or by calling the
telephone number above.
The date of this prospectus is March 15, 2000.
The SEC has not approved or disapproved these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
TABLE OF CONTENTS
Definitions
Summary of Contract Features
Fee Table
Example
Explanation of Fee Table and Example
Keyport and the Variable Account
Purchase Payments and Applications
Investments of the Variable Account
Allocations of Purchase Payments
Eligible Funds
Transfer of Variable Account Value
Substitution of Eligible Funds and Other Variable Account Changes
Deductions
Deductions for Annuity Asset Charge
Deductions for Premium Taxes
Deductions for Income Taxes
Total Variable Account Expenses
Contract Value Deductions
The Contracts
Variable Account Value
Valuation Periods
Calculation of Contract Value
Modification of the Contract
Right to Revoke
Death Benefit Provisions
Death of Annuitant
Contract Ownership
Assignment
Partial Withdrawals and Surrender
Annuity Provisions
Annuity Benefits
Annuity Option and Income Date
Annuity Options
Variable Annuity Payment Values
Proof of Age, Sex, and Survival of Annuitant
Suspension of Payments
Advertising
Tax Status
Introduction
Taxation of Annuities in General
Qualified Plans
Individual Retirement Annuities
Annuity Purchases by Nonresident Aliens
Variable Account Voting Privileges
Sales of the Contracts
Legal Proceedings
Records and Reports
Inquiries by Contract Owners
Table of Contents--Statement of Additional Information
DEFINITIONS
Accumulation Unit: A unit of measurement which we use to calculate Variable
Account Value.
Annuitant: The natural person on whose life annuity benefits are based
starting on the Income Date.
Annuity Option: A form of payment of the annuity available under the
Contract.
Annuity Payment: An amount paid at regular intervals after the Income Date
under one of several Annuity Options. The amount paid may vary.
Annuity Unit: A unit of measure used to calculate the amount of Annuity
Payments after the Income Date.
Contract: The variable annuity contract between you and us.
Contract Anniversary: Each anniversary of the Contract Date.
Contract Date: The date your Contract becomes effective. The date we
receive your completed application and initial purchase payment.
Contract Owner ("you"): The person(s) having the privileges of ownership
defined in the Contract.
Contract Value: The value of all Variable Account amounts under your
Contract at a given time.
Contract Year: Each 12-month period beginning on the Contract Date and each
Contract Anniversary thereafter.
Company ("we", "us", "our", "Keyport"): Keyport Life Insurance Company.
Designated Beneficiary: The person you designate to receive any death
benefits under the Contract.
Eligible Funds: The underlying mutual funds in which the Variable Account
invests.
In Force: The status of your Contract before the Income Date, as long as:
(1) you do not totally surrender it,
(2) your Contract Value is greater than zero, and
(3) if the Annuitant or any Contract Owner has died, fewer than five
years have passed since the date of death.
Income Date: The date on which Annuity Payments are to begin.
Internet Service Center: The Internet site that provides variable annuity
contract documents and information to current and prospective Contract
Owners and through which various transactions may be performed. Certain of
these transactions may require faxed or mailed signatures.
Net Asset Value: The difference between the value of assets and the amount
of liabilities.
Non-Qualified Contract: Any Contract that is not issued under a Qualified
Plan.
Qualified Contract: A Contract issued under a Qualified Plan.
Qualified Plan: A retirement plan which receives special tax treatment
under Sections 401, 403(b), 408(b) or 408A of the Internal Revenue Code
("Code") or a deferred compensation plan for a state and local government
or another tax exempt organization under Section 457 of the Code.
Sub-account: The portion of the Variable Account which invests in shares of
a particular Eligible Fund.
Valuation Date: Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation Period: The period commencing at the close of trading (currently
4:00 p.m. ET) on each day that the NYSE is open for trading (in other
words, the Valuation Date) and ending at the close of such trading on the
next succeeding Valuation Date.
Variable Account: Variable Account A which is a separate investment account
of the Company into which purchase payments under the Contracts may be
allocated. The Variable Account is divided into Sub-accounts, each of which
invests in shares of an Eligible Fund.
SUMMARY OF CONTRACT FEATURES
Because this is a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus before
deciding to invest. Further, individual state requirements that are
different from the information in this prospectus are described in
supplements to this prospectus or in endorsements to the Contract.
WHAT ARE MY INVESTMENT CHOICES? You can allocate and reallocate your
investment among the Sub-accounts of the Variable Account, each of which in
turn invests in one of the following Eligible Funds:
Rydex Variable Trust ("Rydex Trust"):
Rydex Nova Fund
Rydex Ursa Fund
Rydex OTC Fund
Rydex Precious Metals Fund
Rydex U.S. Government Bond Fund
Rydex U.S. Government Money Market Fund
HOW DOES THE CONTRACT WORK? During the accumulation period, you may make
purchase payments to us. Prior to annuitization, you may choose to withdraw
some or all of your Contract Value. When you begin Annuity Payments, your
periodic Annuity Payments will be based upon your Contract Value on the
Income Date. Subsequently, Annuity Payments will vary depending upon the
performance of the Funds you select. (See "The Contracts".)
WHAT CAN I DO THROUGH THE INTERNET SERVICE CENTER? Most transactions
associated with your Contract can be accomplished through the Internet
Service Center. We will send you information concerning your Contract, and
you can receive documents concerning your Contract, through the Internet
Service Center. You can monitor the status of your Contract, move funds
from one Sub-account to another, change your e-mail or mailing address,
etc., all through the Internet Service Center. For security reasons, we may
issue you a PIN or password which you will use to access the Internet
Service Center. Certain transactions, however, such as a change of
Beneficiary or a total withdrawal of funds from the Contract, may not be
completed through the Internet Service Center, but will also require a
signed request that is faxed or mailed to our Service Office.
WHAT CHARGES ARE ASSOCIATED WITH THIS CONTRACT? We apply an annual charge
totaling .90% to the daily net asset value of the Variable Account. (See
"Deductions".)
Each Eligible Fund also has additional operating expenses associated with
its daily operation. Finally, each fund pays a management fee to its
investment advisors based upon the average daily net asset value of the
Fund. See the FEE TABLE. These fees and expenses are more fully described
in the prospectuses for the funds.
If your state assesses a premium tax with respect to your Contract, we will
deduct those amounts upon full surrender (including a surrender for the
Death Benefit) or annuitization.
HOW WILL MY ANNUITY PAYMENTS BE CALCULATED? If you decide to annuitize, you
elect an Annuity Option. Your periodic payment will be based upon the
Annuity Option you selected, the changing values of the Sub-accounts in
which you have invested, and your age at the Income Date. (See "Annuity
Options".) Remember that you will benefit from any gain, and bear the risk
of any drop, in the value of the securities in the Sub-accounts of the
Variable Account.
WHAT HAPPENS IF I DIE BEFORE I ANNUITIZE? We will pay to your designated
beneficiary the greater of your Contract Value or the sum of your purchase
payments adjusted for partial withdrawals. (See "Death Provisions".)
MAY I SURRENDER THE CONTRACT OR MAKE A WITHDRAWAL? Yes. (See "Partial
Withdrawals and Surrender".) You will be subject to income taxes on any
earnings you withdraw and you may also be subject to a 10% income tax
penalty. (See "Tax Status".)
DO I GET A FREE LOOK AT THIS CONTRACT? Yes. If within ten days (or a longer
period if required by law) of the date you receive the signed Contract
through the Internet Service Center, you cancel the Contract through the
Internet Service Center or return it, postage prepaid, to the Service
Office of Keyport, it will be canceled. If you live in a state that
requires "return of Contract Value", you may invest in the Sub-Accounts
during this period (the "Right to Revoke Period"). You bear the investment
risk during this Right to Revoke Period. If you live in a state that
requires "return of purchase payments", during this Right to Revoke Period
and for ten additional days to allow for delivery of the notice from and to
Us, your purchase payments will be invested in the Rydex U.S. Government
Money Market Sub-account. You may change, at anytime during the Right to
Revoke Period, the allocation(s) to the Sub-accounts of the Variable
Account that you specified on your application. (See "Right to Revoke".)
FEE TABLE
Contract Owner Transaction Expenses
Sales Load Imposed on Purchases: 0%
Maximum Surrender Charge
(as a percentage of purchase payments): 0%
Annual Contract Maintenance Charge: $0
Transfer Charge: $0
Variable Account Annual Expenses
(as a percentage of average net assets)
Annuity Asset Charge: .90%
(This charge is for administrative, mortality and expense risk
fees. See "Deductions".)
Total Variable Account Annual Expenses: .90%
Rydex Variable Trust Annual Expenses1
(as a percentage of average net assets)
Total Fund
Management Other Operating
Fund Fees Expenses Expenses
Rydex Nova Fund .75% .80% 1.55%
Rydex Ursa Fund .90% .83% 1.73%
Rydex OTC Fund .75% .80% 1.55%
Rydex Precious Metals Fund .75% 1.42% 2.17%
Rydex U.S. Government
Bond Fund .50% 1.02% 1.52%
Rydex U.S. Government
Money Market Fund .50% .89% 1.39%
The above expenses for the Eligible Funds were provided by the Funds. We
have not independently verified the accuracy of the information.
1All Trust and Fund expenses are for 1999. The Rydex Trust expenses reflect
such Trust's manager's and servicing company's agreement to reimburse
expenses above certain limits (see footnote 2).
PADCO Advisors II, Inc., investment adviser to the Rydex Variable
Trust, and PADCO Service Company, Inc., servicer to the Rydex Variable
Trust, may from time to time volunteer to waive fees and/or reimburse
expenses. For the period ending December 31, 1999, there were no waivers
or reimbursements.
EXAMPLE
Example 1. If your Contract stays in force through the periods shown or is
surrendered or annuitized at the end of the periods shown, you would pay
the following expenses on a $1,000 investment, assuming 5% annual return on
assets.
Sub-account 1 Year 3 Years 5 Years 10 Years
Rydex Nova $25 $ 79 $142 $343
Rydex Ursa 26 85 152 365
Rydex OTC 25 79 142 343
Rydex Precious Metals 31 99 176 418
Rydex U.S. Government Bond 24 78 140 339
Rydex U.S. Government Money Market 23 74 133 322
EXPLANATION OF FEE TABLE AND EXAMPLE
The purpose of the fee table is to illustrate the expenses you may directly
or indirectly bear under a Contract. The table reflects expenses of the
Variable Account as well as the Eligible Funds. You should read
"Deductions" in this prospectus and the sections relating to expenses of
the Eligible Funds in their prospectuses. The fee table and example does
not include any taxes or tax penalties you may be required to pay if you
surrender your Contract. We deduct the amount of any premium taxes (which
currently range from 0% to 5%) upon full surrender (including a surrender
for the Death Benefit) or annuitization.
The example should not be considered a representation of past or future
expenses and charges of the Sub-accounts. Your actual expenses may be
greater or less than those shown. Similarly, the 5% annual rate of return
assumed in the example is not an estimate or a guarantee of future
investment performance. See "Deductions" in this prospectus, and
"Management" in the prospectus for Rydex Trust.
The Contracts described in this prospectus have not previously been made
available for sale, and may include fees and charges that are different
from our other variable annuity contracts. These differences will produce
differing Accumulation Unit values. Therefore, no condensed financial
information is provided. Our full financial statements and those for 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.
Performance information is not an estimate or guarantee of future
investment performance, and does not represent the actual experience of
amounts invested by a particular Contract Owner.
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 Sub-account
over a given period of time.
The Sub-accounts may present, along with any current required performance
information, additional total return information that is computed on a
different basis. Certain of the Eligible Funds have been available for
other variable annuity contracts prior to the beginning of the offering of
the Contracts described in this prospectus. Any performance information for
such periods will be based on the historical results of the Eligible Funds
and applying the fees and charges of the Contract for the specified time
periods.
The Rydex U.S. Government Money Market 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 seven-day period. We
annualize this income by assuming that the amount of income generated by
the investment during that week is generated each week over a 52-week
period. It is shown as a percentage. The yield reflects the deduction of
all charges assessed against the Sub-account but does not include premium
tax charges. The yield would be lower if those charges were included.
We calculate the effective yield of the Rydex U.S. Government Money Market
Sub-account in a similar manner but, when annualizing the yield, we assume
income earned by the Sub-account is reinvested. This compounding effect
causes effective yield to be higher than yield.
KEYPORT AND THE VARIABLE ACCOUNT
We were incorporated in Rhode Island in 1957 as a stock life insurance
company. Our executive and administrative offices are at 125 High Street,
Boston, Massachusetts 02110. Our home office is at 695 George Washington
Highway, Lincoln, Rhode Island 02865. The mailing address of our Service
Office is Post Office Box 691, Leesburg, Virginia 20178. Our Internet
Service Center is http://www.AnnuityNet.com.
We write individual life insurance and individual and group annuity
contracts that are "non-participating". That is, we do not pay dividends or
benefits based on our financial performance. We are licensed to do business
in all states except New York and are also licensed in the District of
Columbia and the Virgin Islands. We are rated A (Excellent) for financial
strength by A.M. Best and Company, independent analysts of the insurance
industry. Standard & Poor's ("S&P") rates us AA- for very strong financial
security, Moody's rates us A2 for good financial strength and Duff & Phelps
rates us AA- for very high claims paying ability. The Best's A rating is in
the second highest rating category, which also includes a lower rating of A-
. S&P and Duff & Phelps have one rating category above AA and Moody's has
two rating categories above A. The Moody's "2" modifier means that we are
in the middle of the A category. The S&P and Duff & Phelps "-" modifier
signifies that we are at the lower end of the AA category. These ratings
reflect the opinion of the rating company as to our relative financial
strength and ability to meet contractual obligations to our policyholders.
Even though we hold the assets in the Variable Account separately from our
other assets, our ratings may still be relevant to you since not all of our
contractual obligations relate to payments based on those segregated
assets. Our ratings do not affect or influence the performance of the
Eligible Funds or the Separate Account.
We are a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may use the IMSA logo and membership in IMSA in
advertisements. Being a member means that we have chosen to participate in
IMSA's Life Insurance Ethical Market Conduct Program.
We are indirectly owned by Liberty Financial Companies, Inc. and are
ultimately controlled by Liberty Mutual Insurance Company of Boston,
Massachusetts, a multi-line insurance and financial services institution.
We established the Variable Account pursuant to the provisions of Rhode
Island Law on January 30, 1996. 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 mean the
Securities and Exchange Commission supervises us or the management of the
Variable Account.
Obligations under the Contracts are our obligations. Although the assets of
the Variable Account are our property, these assets are held separately
from our other assets and are not chargeable with liabilities arising out
of any other business we 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 we may conduct.
PURCHASE PAYMENTS AND APPLICATIONS
The initial purchase payment is due on the Contract Date. The minimum
initial purchase payment is $15,000. You may make additional purchase
payments. Each subsequent purchase payment must be at least $1,000 or any
lesser amount we may permit. We will reduce the subsequent purchase payment
to $250 in cases where you arrange for subsequent purchase payments by
electronic funds transfer. Subsequent purchase payments will automatically
be allocated to the Rydex U.S. Government Money Market Sub-account. You may
then transfer funds from the Rydex U.S. Government Money Market Sub-account
to any of the other available Sub-accounts. We reserve the right to cancel
this Contract and return the Contract Value to you if the value of your
Contract is less than $5,000. We may reject any purchase payment or any
application. Purchase payments are allocated to a Contract based on the
applicable Sub-account accumulation unit value(s) next determined after we
receive it.
We have attempted to make the application process for the Contract as
simple as possible. You may apply for the Contract on this Internet Service
Center website (http://www.AnnuityNet.com) by completing our online
application. During the application process, information is transferred
between your computer and the Internet Service Center through a secure
internet connection. In order to complete the online application, you will
need to supply the following information:
o the full name, address, telephone number, date of birth, and Social
Security or Taxpayer Identification Number for the Primary Owner,
Annuitant, and any Joint Owner; and
o the full name, address, and relationship to the Owner of any
Beneficiary(ies) that you wish to designate. If you do not designate
any Beneficiary(ies), your estate will be the beneficiary.
Once you have completed the online application, you will be asked to print
a copy of the application. You must sign this application and fax or mail
it to our Service Office before we can process your application.
You may make your initial purchase payment by personal check, by enclosing
your check with your signed application. During the online application
process, you may also choose to make purchase payments by Electronic Funds
Transfer (EFT). If you choose the EFT option, it will still be necessary
for you to enclose either a deposit slip or a voided check with your signed
application when you mail the application to our Service Office.
If your application for a Contract is complete, we will apply your initial
purchase payment to the Variable Account within two business days of
receipt. If you live in a state that requires "return of purchase
payments", during the Right to Revoke Period and for ten additional days to
allow for delivery of the notice from and to Us, your purchase payments
will be invested in the Rydex U.S. Government Money Market Sub-account.
Once this period has ended, your purchase payments will then be allocated
to the Sub-accounts you have selected. You may change, at anytime during
the Right to Revoke Period, the allocation(s) to the Sub-accounts of the
Variable Account that you specified on your application.
If the application is incomplete, we will notify you and try to complete it
within five business days. If it is not complete at the end of this period,
we will inform you of the reason for the delay. The purchase payment will
be returned immediately unless you specifically consent to our 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.
We will send you a written notification by e-mail, to your last known e-
mail address, showing the allocation of all purchase payments and the re-
allocation of values after any transfer you have requested. You must notify
us immediately of any error.
We may request you to confirm that the information is correct by signing a
copy of the letter or a Contract delivery receipt. We will send you a
written notice confirming all purchases. Our liability under any Contract
relates only to amounts so confirmed.
INVESTMENTS OF THE VARIABLE ACCOUNT
Allocations of Purchase Payments
The Variable Account is segmented into Sub-accounts. Each Sub-account
invests in shares of one of the Eligible Funds. We may add or withdraw
Eligible Funds and Sub-accounts as permitted by applicable law.
We will invest your initial purchase payment to the Variable Account in the
Sub-accounts you choose, after the expiration of the Right to Revoke
Period. Your selection must specify the percentage of the initial purchase
payment that is allocated to each Sub-account. The percentage for each Sub-
account, if not zero, must be a whole number. The total of your specified
allocations for the initial purchase payment must equal 100%. Subsequent
purchase payments will automatically be allocated to the Rydex U.S.
Government Money Market Sub-account. From there, you may transfer purchase
payments to the Sub-account investing in other Eligible Funds as you may
select.
Eligible Funds
The Eligible Funds are the separate funds listed within the Rydex Trust.
Keyport and the Variable Account may enter into agreements with other
mutual funds for the purpose of making such mutual funds available as
Eligible Funds under certain Contracts.
We do not promise that the Eligible Funds will meet their investment
objectives. Amounts you have allocated to Sub-accounts may grow, decline,
or grow less in value than you expect, depending on the investment
performance of the Eligible Funds in which the Sub-accounts invest. You
bear the investment risk that those Eligible Funds possibly will not meet
their investment objectives. You should carefully review their attached
prospectuses before allocating amounts to the Sub-accounts of the Variable
Account. The Eligible Funds are available for the separate accounts of
insurance companies unaffiliated with us. The risks involved in this "mixed
and shared funding" are disclosed in the Eligible Funds' prospectuses under
the following caption: "Purchasing and Redeeming Shares".
PADCO Advisors II, Inc. serves as the investment adviser and manager of the
Eligible Funds of the Rydex Trust.
Please see the Fund Prospectus for a complete description of the investment
techniques utilized by the Funds, including the risks and volatility of
these investments. Moreover, the strategic or tactical asset allocation
program that can be utilized in a Contract of this type may be
characterized as aggressive investing. There can be no assurance that you
or any financial advisor will predict market moves successfully. If you
utilized a financial advisor, you should carefully consider his or her
education, experience, and reputation.
We briefly describe the Eligible Funds and the objectives they seek to
achieve below:
Eligible Funds of Rydex Trust
and Variable Account
Sub-accounts Investment Objective
Rydex Nova Fund Investment returns that correspond
("Rydex Nova Sub-account") to 150% of the daily price movement
of the S&P 500 Index.
Rydex Ursa Fund Investment returns that will
("Rydex Ursa Sub-account") inversely correlate to the
performance of the S&P 500 Index.
Rydex OTC Fund Investment results that correspond
("Rydex OTC Sub-account") to a benchmark for over-the-counter
securities. The current benchmark
is the NASDAQ 100 Index.
Rydex Precious Metals Fund Seeks to provide capital
("Rydex Precious Metals appreciation by investing in U.S.
Sub-account") and foreign companies that are
involved in the precious metals
sector, including exploration,
mining, production and development,
and other precious metals related
services.
Rydex U.S. Government Bond Fund Investment results that correspond
("Rydex U.S. Government Bond to a benchmark for U.S. Government
Sub-account") Securities. The current benchmark is
120% of the daily price movement of
the Long Treasury Bond.
Rydex U.S. Government Money Security of principal, high current
Market Fund ("Rydex U.S. Government income and liquidity.
Money Market Sub-account")
Transfer of Variable Account Value
You may transfer Variable Account Value from one Sub-account to another
after expiration of the Right to Revoke Period. We do not limit the number
or frequency of transfers.
You may submit your transfer requests through the Internet Service Center.
If we receive your request before the relevant transaction cut-off times,
we will initiate it at the close of business that day. We will initiate any
requests received after the relevant transaction cut-off time at the close
of the next business day. We will execute your request to transfer value by
both redeeming and acquiring Accumulation Units on the day we initiate the
transfer.
The transaction cut-off times for the receipt of transfer requests are
currently as follows:
o for the Rydex U.S. Government Bond Sub-account, the time is
2:30 p.m. Eastern Time;
o for the Rydex Precious Metals Sub-account, the time is 3:15 p.m.
Eastern Time;
o for the Rydex Nova, Rydex Ursa, and Rydex OTC Sub-accounts, the
time is 3:30 p.m. Eastern time;
o for the Rydex U.S. Government Money Market Sub-account, the time
is 4:00 p.m. Eastern Time.
If you choose to make a transfer between Sub-accounts that have different
transaction cut-off times, the earlier cut-off time as shown above will
apply to your transfer request. If the primary exchange or market on which
the underlying Eligible Fund transacts business closes early, the above cut-
off time will be approximately thirty minutes (forty-five minutes, in the
case of the Rydex Precious Metals Fund) prior to the close of such exchange
or market.
Transfer requests which you submit to us will remain in a queue with any
other transfers you have submitted for any given valuation date. Your
transfer requests will be executed in the order received. You may at any
time view a list of transfer requests you have submitted that are awaiting
execution by accessing your personal account information through the
Internet Service Center. You may also retract a transfer request by
removing it from the queue at any time prior to the earliest transaction
cutoff time for any of the Sub-accounts involved in the transaction. In
addition, you may not retract a transfer request if there are any
subsequent request(s) in the queue for which any of the relevant
transaction cutoff times have passed.
Substitution of Eligible Funds and Other Variable Account Changes
If shares of any of the Eligible Funds are no longer available for
investment by the Variable Account, or further investment in the shares of
an Eligible Fund is no longer appropriate under the Contract, we may add or
substitute shares of another Eligible Fund or of another mutual fund for
Eligible Fund shares already purchased or to be purchased in the future.
Any substitution of securities will comply with the requirements of the
Investment Company Act of 1940.
We also reserve the right to make the following changes in relation to the
Variable Account and Eligible Funds:
o to operate the Variable Account in any form permitted by law;
o to take any action necessary to comply with applicable law or
obtain and continue any exemption from applicable law;
o to transfer any assets in any Sub-account to another or to one or
more separate investment accounts;
o to add, combine or remove Sub-accounts in the Variable Account; and
o to change how we assess charges, so long as we do not increase them
above the maximum total amount shown in the Fee Table in connection
with your Contract.
DEDUCTIONS
Deductions for Annuity Asset Charge
We deduct an annuity asset charge on a daily basis in computing the
Accumulation Unit values from each Sub-account. The annuity asset charge is
equal, on an annual basis, to .90% of the average daily net asset value of
each Sub-account. We deduct the charge both before and after the Income
Date.
The charge compensates us for administrative expenses we incur and for
mortality and expense risks we assume. Our administrative expenses include,
but are not limited to, bookkeeping costs, the cost of maintaining our
Service Office and our Internet Service Center, and the costs associated
with sales of the Contract. We assume the risk that annuitants as a class
may live longer than expected (mortality risk), and that expenses may be
higher than the deductions for those expenses (expense risk). In either
case, the loss will fall on us. Conversely, if such deductions exceed our
actual expenses, the excess will be profit to us.
Deductions for Premium Taxes
We deduct the amount of any premium taxes required by any state or
governmental entity. We deduct premium taxes from Contract Value when they
are paid. The actual amount of any such premium taxes will depend, among
other things, on the type of Contract you purchase (Qualified or Non-
Qualified), on your state of residence, the state of residence of the
Annuitant, and the insurance tax laws of those states. Currently such
premium taxes range from 0% to 5.0% of total purchase payments.
Deductions for Income Taxes
We will deduct income taxes from any amount payable under the Contract that
a governmental authority requires us to withhold. See "Income Tax
Withholding".
Total Variable Account Expenses
Total Variable Account expenses you will incur will be the annuity asset
charge and, if applicable, a tax charge factor. (See "Calculation of
Contract Value".)
The value of the assets in the Variable Account will reflect the value of
Eligible Fund shares and the deductions and expenses paid out of the assets
of the Eligible Funds. Each Eligible Fund pays a management fee to its
investment adviser(s) based upon the average daily net asset value of the
Fund. Each Eligible Fund also has additional operating expenses associated
with the daily operation of the funds. The prospectuses for the Eligible
Funds describe these deductions and expenses.
THE CONTRACTS
Variable Account Value
The Variable Account Value for your Contract is based on the sum of your
proportionate interest in the value of each Sub-account to which you have
allocated values. We determine the value of each Sub-account at any time by
multiplying the number of Accumulation Units attributable to that Sub-
account by its Accumulation Unit value.
Each purchase payment you make results in the credit of additional
Accumulation Units to your Contract and the appropriate Sub-account.
Purchase payments are credited to your Contract using the Accumulation Unit
value that is next calculated after we receive your purchase payment. 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
We determine the value of the Variable Account each valuation period using
the net asset value per share of the Eligible Fund shares. A valuation
period is the period generally beginning at 4:00 P.M. (ET), or any other
time for the close of trading on the New York Stock Exchange, and ending at
the close of trading for the next business day. The New York Stock Exchange
is currently closed on weekends; New Year's Day; Martin Luther King, Jr.
Day; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor
Day; Thanksgiving Day and Christmas Day.
Calculation of Contract Value
Contract Value at any time prior to the Income Date equals the sum of the
values of the Accumulation Units credited in the Sub-accounts under the
Contract. Your Contract Value will fluctuate with the investment results of
the Eligible Funds underlying the Sub-accounts you have selected.
The value of a Sub-account on any Valuation Date is the number of
Accumulation Units in the Sub-account multiplied by the value of an
Accumulation Unit in the Sub-account at the end of the Valuation Period.
Accumulation Units for each Sub-account are valued separately. Initially,
the value of an Accumulation Unit was arbitrarily established at the
inception of the Sub-account. It may increase or decrease from Valuation
Period to Valuation Period. The Accumulation Unit value for a Sub-account
for any later Valuation Period is determined as follows:
o The total value of Fund shares held in the Sub-account is calculated
by multiplying the number of Fund shares owned by the Sub-account at
the beginning of the Valuation Period by the net asset value per
share of the Fund at the end of the Valuation Period (without giving
effect to any transactions occurring during the Valuation Period),
and adding any dividend or other distribution of the Fund if the
record date for such distribution occurs during the Valuation
Period; minus
o The liabilities of the Sub-account at the end of the Valuation
Period (such liabilities include the daily charge (see below)
imposed on the Sub-account, and may include a tax charge factor (see
below); and the result is divided by
o The outstanding number of Accumulation Units in the Sub-account at
the beginning of the Valuation Period.
The daily charge imposed on a Sub-account for any Valuation Period
represent the annuity asset charge adjusted for the number of calendar days
in the Valuation Period.
No tax charge factor is currently necessary since there are no federal
income taxes attributable to the Separate Account. If we determine that
there are federal income taxes attributable to the Separate Account, we may
create a factor for such taxes to be included in the calculation.
Modification of the Contract
Only our President or Secretary may agree to alter the Contract or waive
any of its terms. A change may be made to the Contract if there have been
changes in applicable law or interpretation of law. Any changes will be
made in writing and with your consent, except as may be required by
applicable law.
Right to Revoke
Generally, you may return the Contract within 10 days after you receive it
by delivering or mailing it to us. You may also cancel the Contract within
10 days through the Internet Service Center. If you return the Contract to
us through the mail, the postmark on a properly addressed and postage-
prepaid envelope determines if a Contract is returned within the 10-day
period. We will treat the returned Contract as if we never issued it. We
will promptly refund the Contract Value or purchase payments, whichever is
required by state law, as of the date we receive the returned Contract or
the date it is cancelled through the Internet Service Center. You may ask
us which standard applies to your state. If you live in a state that
requires "return of Contract Value", you may invest in the Sub-Accounts
during this Right to Revoke Period. You bear the investment risk during
this period. If you live in a state that requires "return of purchase
payments", during the Right to Revoke Period and for ten additional days to
allow for delivery of the notice from and to Us, your initial purchase
payment will be held in the Rydex U.S. Government Money Market Sub-account.
Your initial purchase payment will not be transferred to the Sub-account(s)
you select until the Right to Revoke Period has ended.
You may change, at anytime during the Right to Revoke Period, the
allocation(s) to the Sub-accounts of the Variable Account that you
specified on your application.
In some states, under applicable law or regulation, your Right to Revoke
Period may be longer than 10 days. Please refer to your Contract.
DEATH BENEFIT PROVISIONS
You may designate a Beneficiary during your lifetime and, unless prohibited
by a previous designation, change the Beneficiary by mailing a request to
our Service Office. A change of Beneficiary may be requested through the
Internet Service Center but requires a signed request to be mailed to our
Service Office. Each change of Beneficiary revokes any previous
designation.
If there is a single Contract Owner and the Contract Owner dies before the
Income Date, the Death Benefit paid to the designated Beneficiary will be
the Contract Value as of the date on which we approve the payment of the
claim.
The Death Benefit is the greater of premium payments less any partial
withdrawals or the current Contract Value, less any applicable state
premium taxes.
The premium payment death benefit is:
o the initial premium payment, plus
o any additional premium payments, minus
o any partial withdrawals.
We will determine the value of the Death Benefit as of the date on which
the death claim is approved for payment. We will approve a claim for a
Death Benefit upon receipt of:
o proof, satisfactory to us, of the death of the Contract Owner;
o a request for payment of the Death Benefit mailed to our Service
Office; and
o our receipt of all required claim forms, fully completed.
We will make payment of an approved Death Benefit in accordance with
applicable laws and regulations governing payment of Death Benefits. We
will not allow any payment that does not satisfy the requirements of
Internal Revenue Code section 72(s) or 401(a)(9) as applicable, as amended
from time to time.
Unless otherwise provided in the Beneficiary designation, one of the
following procedures will occur on the death of a Beneficiary:
o If any Beneficiary dies before the Contract Owner, that
Beneficiary's interest will go to any other Beneficiaries named,
according to their respective interests; and/or
o If no Beneficiary survives the Contract Owner, the proceeds of the
Death Benefit will be paid to the Contract Owner's estate.
The Death Benefit payable to the Beneficiary must be distributed within
five years of the Contract Owner's date of death unless the Beneficiary
begins receiving within one year of the Contract Owner's death
substantially equal installments over a period not extending beyond the
Beneficiary's life expectancy.
If the Beneficiary is the spouse of the Contract Owner, then he or she may
elect to continue the Contract as Contract Owner. If the Contract Owner is
a corporation or other non-natural person, the death of the Annuitant will
be treated as the death of the Contract Owner and the above distribution
rules will apply.
If there are joint Contract Owners, upon the death of the first joint
Contract Owner, the surviving joint Contract Owner will receive the Death
Benefit. The surviving joint Contract Owner will be treated as the
primary, Designated Beneficiary. Any other designation on record at the
time of death will be treated as a contingent Beneficiary.
If the surviving joint Contract Owner, as spouse of the deceased joint
Contract Owner, continues the Contract as the sole owner in lieu of
receiving the Death Benefit, then the designated Beneficiary(s) will
receive the Death Benefit upon the death of the surviving spouse.
Death of Annuitant
If the Annuitant is also the Contract Owner or joint Contract Owner, then
the Death Benefit will be subject to the provisions of the Contract
regarding death of the Contract Owner. If a surviving spouse assumes the
contract upon death of a joint Contract Owner Annuitant, then the
contingent Annuitant becomes the Annuitant. If no contingent Annuitant is
named, then the surviving spouse becomes the Annuitant.
If an Annuitant who is not the Contract Owner or joint Contract Owner dies,
then the contingent Annuitant, if any, becomes the Annuitant. If no
contingent Annuitant is named, the Contract Owner (or joint Contract Owner
if younger) becomes the Annuitant.
CONTRACT OWNERSHIP
The Contract Owner shall be the person designated in the application and
you may exercise all the rights of the Contract. Joint Contract Owners are
permitted. Contingent Contract Owners are not permitted.
You may direct us in writing to change the Contract Owner, primary
beneficiary, contingent beneficiary or contingent annuitant. An irrevocably-
named person may be changed only with the written consent of that person.
Because a change of Contract Owner by means of a gift may be a taxable
event, you should consult a competent tax adviser as to the tax
consequences resulting from such a transfer.
Any Qualified Contract may have limitations on transfer of ownership. You
should consult the plan administrator and a competent tax adviser as to the
tax consequences resulting from such a transfer.
ASSIGNMENT
You may assign the Contract at any time. You must file a copy of any
assignment with us. Your rights and those of any revocably-named person
will be subject to the assignment. A Qualified Contract may have
limitations on your ability to assign the Contract.
Because an assignment may be a taxable event, you should consult a
competent tax adviser as to the tax consequences resulting from any such
assignment.
PARTIAL WITHDRAWALS AND SURRENDER
You may make partial withdrawals from the Contract through the Internet
Service Center or by submitting to us by mail your request for a partial
withdrawal. You may not make a partial withdrawal during the Right to
Revoke Period. The minimum withdrawal amount is $300, or such lesser amount
as we may permit. If the Contract Value after a partial withdrawal would be
below $5,000, we will treat the request as a withdrawal of only the amount
over $5,000. Unless you specify otherwise, we will deduct the total amount
withdrawn 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 minimum withdrawal amount is waived if you enter into an agreement with
an investment adviser that allows the adviser to make partial withdrawals
from your annuity to pay the service fees of the adviser. Such
distributions may have adverse tax consequences. Please consult your tax
adviser.
You may totally surrender the Contract by notifying us by mail.
Surrendering the Contract will end it. Upon surrender, you will receive the
Contract Value less any applicable premium taxes.
We will pay the amount of any surrender within seven days of receipt of
your request. Alternatively, you may purchase for yourself an annuity
payment option with any surrender benefit of at least $5,000. If the
Contract Owner is not a natural person, we must consent to the selection of
an annuity payment option.
You may not surrender annuity options based on life contingencies after
annuity payments have begun. Once annuity payments have begun, partial
withdrawals are available only under Option A.
Because of the potential tax consequences of a partial withdrawal or
surrender, you should consult a competent tax adviser.
Participants under Qualified Plans as well as Contract Owners, Annuitants,
and Designated Beneficiaries are cautioned that you may not be able to take
a partial withdrawal or surrender the Contract under a Qualified Plan. You
should seek competent advice concerning the terms and conditions of the
particular Qualified Plan and use of the Contract with that Plan.
ANNUITY PROVISIONS
Each of the Rydex Trust Funds invests in the securities of a relatively few
number of issuers. Since the assets of each Fund are invested in a limited
number of issuers, the net asset value of the Fund may be more susceptible
to a single adverse economic, political or regulatory occurrence. You
should consider this in making your decision to annuitize.
Annuity Benefits
If the Annuitant is alive on the Income Date and the Contract is In Force,
we will begin variable income payments to the Annuitant under the Annuity
Option or Options you have chosen. We determine the amount of the initial
payment(s) on the Income Date by applying the Contract Value less any
premium taxes not previously deducted to the option selected. See "Variable
Annuity Payment Values" for additional information on how we calculate
annuity payment amounts.
Subsequent payments will fluctuate in amount.
Annuity Option and Income Date
You may select an Annuity Option and Income Date at the time of application
or later. Any Income Date must be:
o not earlier than the first day after the Contract Date, and
o not later than the earlier of
(i) the later of the Annuitant's 90th birthday and the 10th
Contract Anniversary or
(ii) any maximum date permitted under state law.
If you do not select an Income Date for the Annuitant, the Income Date will
automatically be the latest date specified above.
You may choose or change an Annuity Option or the Income Date through the
Internet Service Center or by writing to us at least 30 days before the
Income Date. You may continue to make purchase payments until you reach
your Income Date.
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;
Option C: Joint and Last Survivor Income; and
you may arrange other variable income options if we agree. Fixed income
payments are not available. If you do not select an Annuity Option, we
automatically choose Option B.
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 under any annuity option is less than $5,000, we
reserve the right to pay such amount in one sum to the payee in lieu of the
payment otherwise provided for.
We will make annuity payments monthly unless you have requested quarterly,
semi-annual or annual payments. However, if any payment would be less than
$100, we have the right to reduce the frequency of payments to a period
that will result in each payment being at least $100.
Option A: Income For a Fixed Number of Years. We will pay an annuity for a
chosen number of years, not less than 5 nor more than 50. You may choose a
period of years over 30 only if it does not exceed the difference between
age 100 and the Annuitant's age on the date of the first payment. We refer
to Option A as Preferred Income Plan (PIP). At any time, the payee may
elect to receive the following amount:
o the present value of the remaining variable annuity payments,
commuted at the 5% interest rate used to create the annuity factor
for this option (this interest rate for variable annuity payments
is also referred to as the assumed investment rate (AIR) or
benchmark rate).
Instead of receiving a lump sum, the payee may elect another payment
option.
If, at the death of the payee, Option A payments have been made for fewer
than the chosen number of years:
o we will continue payments during the remainder of the period to the
successor payee; or
o the successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the 5% interest rate
used to create the annuity factor for this option.
The annuity asset charge is deducted during the Option A payment period,
but we have no mortality risk during this period.
Currently, we permit the original payee to make a number of changes to
variable payments under Option A. For regular PIPs, a change may be made
generally only on the anniversary of the date of your initial PIP payment.
The permissible changes include:
o shortening or lengthening the period certain provided the payments
already made and those to be made meet the 5 - 50 year and age 100
limits described above;
o changing to a life option - note that under this option the payee
no longer may end the payments for a commuted value;
o changing the payment frequency; and
o changing the day of the month on which payment occurs.
See "Annuity Payments" for the manner in which Option A may be taxed.
Option B: Life Income with 10 Years of Payments Guaranteed. We will pay an
annuity during the lifetime of the payee. If, at the death of the payee,
payments have been made for fewer than 10 years:
o we will continue payments during the remainder of the period to the
successor payee; or
o the successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the 5% interest rate
used to create the annuity factor for this option.
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. We 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
We determine the amount of the first payment by using an annuity purchase
rate based on an assumed annual investment rate (AIR or benchmark rate) of
5% per year. (See "Variable Annuity Payment Values" in the Statement of
Additional Information for more information on AIRs.) Subsequent payments
will fluctuate in amount and reflect whether the actual investment return
of the selected Sub-account(s) (after deducting the annuity asset charge)
is better or worse than the assumed investment rate. The total dollar
amount of each payment will be equal to the sum of all Sub-account
payments.
We limit the number of times or the frequency with which a payee may
instruct us to change the Sub-account(s) used to determine the amount of
the annuity payments to three times per contract year. We reserve the right
to change the number of transfers that we allow.
Proof of Age, Sex, and Survival of Annuitant
We 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, we
will compute the amount payable based on the correct age and sex. If income
payments have begun, we will pay in full any underpayments with the next
annuity payment and deduct any overpayments, unless repaid in one sum, from
future annuity payments until we are repaid in full.
SUSPENSION OF PAYMENTS
We reserve the right to suspend or postpone any type of payment from the
Variable Account for any period when:
o the New York Stock Exchange (NYSE) is closed other than customary
weekend or holiday closings;
o trading on the Exchange is restricted;
o 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
o 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 prior two conditions described
above exist.
ADVERTISING
We may provide to you and prospective Contract Owners advertising and other
information on a variety of topics. Such topics may include the
relationship between certain economic sectors and the economy as a whole
and its effect on various securities markets, investment strategies and
techniques (such as value investing, dollar cost averaging and asset
allocation). Such topics may also include, the advantages and
disadvantages of investing in tax-advantaged and taxable instruments,
customer profiles and hypothetical purchase scenarios, financial management
and tax and retirement planning, and other investment alternatives,
including comparisons between the Contracts and the characteristics of and
market for such alternatives.
In marketing the variable annuity Contracts, we may refer to certain
ratings assigned to us under the rating systems of the A.M. Best and
Company, Standard & Poor's, Moody's and Duff & Phelps. The objective of
these rating systems is to evaluate the various factors affecting the
overall performance of an insurance company in order to provide an opinion
about that company's relative financial strength and ability to meet its
contractual obligations. The procedure includes both a quantitative and
qualitative review of the insurance company. In marketing the Contracts and
the underlying funds, we may at times use data published by other
nationally-known independent statistical services. These service
organizations provide relative measures of such factors as an insurer's
claims paying ability, the features of particular Contracts, and the
comparative investment performance of the Eligible Funds with other
portfolios having similar objectives. A few such services are: Duff &
Phelps, the Lipper Group, Moody's, Morningstar, Standard and Poor's and
VARDS. Marketing materials may employ illustrations of compound interest,
discuss automatic withdrawal services, and describe our customer base,
assets, and our relative size in the industry. They may also discuss other
features of Keyport, the Variable Account, the Eligible Funds and their
investment management.
TAX STATUS
Introduction
This discussion is general in nature and is not intended as tax advice.
Each person concerned should consult a competent tax adviser. We make no
attempt to consider any applicable state or other tax laws. Moreover, this
discussion is based upon our understanding of current federal income tax
laws as they are currently interpreted. We make no representation regarding
the likelihood of continuation of those current federal income tax laws or
of the current interpretations by the Internal Revenue Service.
The Contract is for use by individuals in retirement plans which may or may
not be Qualified Plans that receive special tax deferral benefits under the
provisions of the Internal Revenue Code of 1986, as amended (the "Code").
The ultimate effect of federal income taxes on the Contract Value, on
annuity payments, and on the economic benefit to the Contract Owner,
Annuitant or Designated Beneficiary depends on the type of retirement plan
for which you purchase the Contract and upon the tax and employment status
of the individual concerned.
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 Contract until a
distribution occurs, in the form of a full surrender, a partial withdrawal,
an assignment or gift of the Contract, or annuity payments. A trust or
other entity owning a Non-Qualified Contract, other than as an agent for an
individual, is taxed differently; increases in the value of a Contract are
taxed yearly whether or not a distribution occurs.
Surrenders, Death Benefit Payments, Assignments and Gifts. If you fully
surrender your Contract, the portion of the payment that exceeds your cost
basis in the Contract is subject to tax as ordinary income. For Non-
Qualified Contracts, the cost basis is generally the amount of the purchase
payments made for the Contract. For Qualified Contracts, the cost basis is
generally zero and the taxable portion of the surrender payment is
generally taxed as ordinary income. A Designated Beneficiary receiving a
lump sum death benefit payment after your death or the death of the
Annuitant is similarly taxed on the portion of the amount that exceeds your
cost basis in the Contract. If the Designated Beneficiary elects that the
lump sum not be paid in order to receive annuity payments that begin within
one year of the decedent's death, different tax rules apply. See "Annuity
Payments" below. For Non-Qualified Contracts, 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 Contracts prior to
annuitization are first included in gross income to the extent Contract
Value exceeds purchase payments. Then, to the extent the Contract Value
does not exceed purchase payments, such withdrawals are treated as a non-
taxable return of principal to you. For partial withdrawals under a
Qualified Contract, 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 Contracts is generally zero, partial withdrawal
amounts will generally be fully taxed as ordinary income.
If you assign or pledge a Non-Qualified Contract, you will be treated as if
you had received the amount assigned or pledged. You will be subject to
taxation under the rules applicable to partial withdrawals or surrenders.
If you give away your Contract to anyone other than your spouse, you are
treated for income tax purposes as if you had fully surrendered the
Contract.
A special computational rule applies if we issue to you, during any
calendar year, two or more Contracts, or one or more Contracts and one or
more of our other annuity contracts. Under this rule, the amount of any
distribution includable in your gross income is determined under Section
72(e) of the Code. All of the contracts will be treated as one contract. We
believe this means the amount of any distribution under any one Contract
will be includable in gross income to the extent that at the time of
distribution the sum of the values for all the Contracts or contracts
exceeds the sum of each contract's cost basis.
Annuity Payments. We determine the non-taxable portion of each variable
annuity payment by dividing the cost basis of your values allocated to
Variable Account Value by the total number of expected payments. The
remaining portion of each payment is taxable. Such taxable portion is taxed
at ordinary income rates. For Qualified Contracts, 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.
Following any change by the payee to variable annuity payments under Option
A, other than a change of the payment day of the month where the remaining
payment length stays the same, the non-taxable portion of each payment will
be recalculated in accordance with IRS standards.
Penalty Tax. Payments received by you, Annuitants, and Designated
Beneficiaries under Contracts 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 the following amounts received:
o after the taxpayer attains age 59-1/2;
o in a series of substantially equal payments made for life or life
expectancy;
o after the death of the Contract Owner (or, where the Contract
Owner is not a human being, after the death of the Annuitant);
o if the taxpayer becomes totally and permanently disabled; or
o under a Non-Qualified Contract's annuity payment option that
provides for a series of substantially equal payments; provided
that only one purchase payment is made to the Contract, that the
Contract is not issued as a result of a Section 1035 exchange,
and that the first annuity payment begins in the first Contract
Year.
Income Tax Withholding. We are required to withhold federal income taxes on
taxable amounts paid under Contracts unless the recipient elects not to
have withholding apply. We will notify recipients of their right to elect
not to have withholding apply.
Section 1035 Exchanges. You may purchase a Non-Qualified Contract 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 our understanding that in such an event:
o the new Contract will be subject to the distribution-at-death
rules described in "Death Provisions for Non-Qualified
Contracts";
o 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 10 years prior to the distribution; and
o 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.
We base our understanding of the above principally 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 intend to meet the diversification requirements for the
Contract, as those requirements may change from time to time. If the
diversification requirements are not satisfied, the Contract will not be
treated as an annuity contract. As a consequence, income earned on a
Contract would be taxable to you in the year in which diversification
requirements were not satisfied, including previously non-taxable income
earned in prior years. As a further consequence, we could 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 your
control of the investments of a segregated asset account may cause you,
rather than us, to be treated as the owner of the assets of the account.
The regulations could impose requirements that are not reflected in the
Contract. We, however, have reserved certain rights to alter the Contract
and investment alternatives so as to comply with such regulations. Since no
regulations have 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, you are urged to consult with your tax
adviser.
Qualified Plans
The variable annuity Contract may be used with certain Qualified Plans. The
Contract includes features such as tax deferral on accumulated earnings.
Qualified Plans provide their own tax deferral benefit. Please consult a
tax advisor for information specific to your circumstances in order to
determine whether the Contract is an appropriate investment for you.
The tax rules applicable to participants in such Qualified Plans vary
according to the type of plan and the terms and conditions of the plan
itself. Therefore, we do not attempt to provide more than general
information about the use of the Contract with Qualified Plans.
Participants under such Qualified Plans, as well as Contract Owners,
Annuitants, and Designated Beneficiaries, are cautioned that the rights of
any person to any benefits under such Qualified Plans may be subject to the
terms and conditions of the plans themselves regardless of the terms and
conditions of the Contract. Following is a brief description of the
Qualified Plans and of the use of the Contract in connection with them.
Purchasers of the Contract should seek competent advice concerning the
terms and conditions of the particular Qualified Plan and use of the
Contract with that Plan.
Individual Retirement Annuities
Sections 408(b) and 408A of the Code permit eligible individuals to
contribute to an individual retirement program known as an "Individual
Retirement Annuity" and "Roth IRA", respectively. These individual
retirement annuities are subject to limitations on the amount which may be
contributed, the persons who may be eligible to contribute, 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 a
Section 408(b) Individual Retirement Annuity.
Annuity Purchases by Nonresident Aliens
The discussion above provides general information regarding federal income
tax consequences to annuity purchasers who are U.S. citizens or resident
aliens. Purchasers who are not U.S. citizens or are resident aliens will
generally be subject to U.S. federal income tax and withholding on annuity
distributions at a 30% rate, unless a lower rate applies in a U.S. treaty
with the purchaser's country. In addition, purchasers may be subject to
state premium tax, other state and/or municipal taxes, and taxes that may
be imposed by the purchaser's country of citizenship or residence.
Prospective purchasers are advised to consult with a qualified tax adviser
regarding U.S., state, and foreign taxation with respect to an annuity
purchase.
VARIABLE ACCOUNT VOTING PRIVILEGES
In accordance with our view of present applicable law, we 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. We will vote shares for which we have not received
instructions in the same proportion as we vote shares for which we have
received instructions.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation should change, and as a
result we determine that we are permitted to vote the shares of the
Eligible Funds in our own right, we may elect to do so.
You have the voting interest under a Contract prior to the Income Date. The
number of shares held in each Sub-account which are attributable to you is
determined by dividing your Variable Account Value in each Sub-account by
the net asset value of the applicable share of the Eligible Fund. The payee
has the voting interest after the Income Date under an annuity payment
option. 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.
We will determine the number of shares in which a person has a voting
interest as of the date established by the respective Eligible Fund for
determining shareholders eligible to vote at the meeting of the Fund. We
will solicit voting instructions in writing prior to such meeting in
accordance with the procedures established by the Eligible Fund.
Each person having a 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.
SALES OF THE CONTRACTS
The Contracts will be sold through the Internet Service Center we maintain
for this purpose. Keyport Financial Services Corp. ("KFSC"), our
subsidiary, serves as the principal underwriter for the Contract described
in this prospectus. 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. We may
also from time to time enter into selling agreements with other
broker/dealers who will also distribute the Contracts. Such broker/dealers
will be appropriately licensed to sell the Contracts.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account or the
Principal Underwriter are a party. We are engaged in various kinds of
routine litigation which, in our judgment, is not of material importance in
relation to our total capital and surplus.
RECORDS AND REPORTS
As presently required by the Investment Company Act of 1940 ("1940 Act")
and applicable regulations, we are responsible for maintaining all records
and accounts relating to the Variable Account. We will electronically mail
to you, at your last know e-mail address, at least semiannually after the
first Contract Year, reports containing information required by the 1940
Act or any other applicable law or regulation.
INQUIRIES BY CONTRACT OWNERS
If you have questions about your Contract, you may send an e-mail to our
Internet Service Center ([email protected]) or visit the Internet
Service Center on the world wide web at http://www.AnnuityNet.com or write
to us at Keyport Life Insurance Co., P.O. Box 691, Leesburg, VA 20178. You
may also call our Service Office at (877)569-3789.
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 4
Yield for Rydex U.S. Government Money Market Sub-account 6
Financial Statements 6
Variable Account A 7
Keyport Life Insurance Company 37
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VARIABLE ACCOUNT A
OF
KEYPORT LIFE INSURANCE COMPANY ("Keyport")
This Statement of Additional Information (SAI) is not a prospectus but it
relates to, and should be read in conjunction with, the Rydex variable
annuity prospectus dated March 15, 2000. The SAI is incorporated by
reference into the prospectus. A free copy of the prospectus is available
by writing Keyport at its Service Office P.O. Box 691, Leesburg, VA 20178
or upon e-mail request through our Internet Service Center website
(http://www.AnnuityNet.com) or by calling (877) 569-3789. The prospectus is
also available through the SEC website (http://www.sec.gov). In addition,
other information regarding the Company and the Separate Account is
available at the SEC website and through our Internet Service Center.
TABLE OF CONTENTS
Page
Keyport Life Insurance Company.........................................2
Variable Annuity Benefits..............................................2
Variable Annuity Payment Values......................................2
Re-Allocating Sub-Account Payments...................................3
Custodian..............................................................4
Principal Underwriter..................................................4
Experts................................................................4
Investment Performance.................................................4
Yield for Rydex U.S. Government Money Market Sub-Account.............6
Financial Statements...................................................6
Variable Account A...................................................7
Keyport Life Insurance Company......................................37
The date of this statement of additional information is March 15, 2000.
RA2000.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, 1998, owned, indirectly, approximately
72% of the combined voting power of the outstanding stock of LFC (with the
balance being publicly held). For additional information about Keyport, see
"Keyport and the Variable Account" in 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 the sum of all Sub-Account payments.
The first payment for each Sub-Account will be determined by deducting 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 Contract'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 may increase or decrease and is determined as
follows:
o The total value of Fund shares held in the Sub-account is calculated
by multiplying the number of Fund shares owned by the Sub-account at
the beginning of the Valuation Period by the net asset value per
share of the Fund at the end of the Valuation Period (without giving
effect to any transactions occurring during the Valuation Period),
and adding any dividend or other distribution of the Fund if the
record date for such distribution occurs during the Valuation
Period; minus
o The liabilities of the Sub-account at the end of the Valuation
Period (such liabilities include daily charges imposed on the
Sub-account, and may include a tax charge factor); and the result is
divided by
o The outstanding number of Annuity Units in the Sub-account at
the beginning of the Valuation Period. The result is adjusted
by a factor to reflect the assumed annual investment rate (AIR).
The AIR for Annuity Units based on the Contract's annuity
tables is 5% per year.
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
Annuity Asset Charge) is better or worse than the assumed AIR percentage.
For example, consider what would happen if the actual annualized investment
return is 9%, 5%, 3%, or 0% between the time of the first and second
payments. With an actual 9% return, the 5% AIR payments would increase in
amount. With an actual 5% return, the 5% AIR payment would stay the same.
With an actual return of 3%, the 5% AIR payment would decrease in amount.
Finally, with an actual return of 0%, the 5% AIR payments would decrease in
amount.
Re-Allocating Sub-Account Payments
The number of Annuity Units for each Sub-Account under any variable annuity
option will remain fixed during the entire annuity payment period unless
the payee makes a written request for a change. Currently, a payee can
instruct Keyport to change the Sub-Account(s) used to determine the amount
of the variable annuity payments unlimited times every 12 months. The
payee's request must specify the percentage of the annuity payment that is
to be based on the investment performance of each Sub-Account. The
percentage for each Sub-Account, if not zero, must be at least 5% and must
be a whole number. At the end of the Valuation Period during which Keyport
receives the request, Keyport will: (a) value the Annuity Units for each
Sub-Account to create a total annuity value; (b) apply the new percentages
the payee has selected to this total value; and (c) recompute the number of
Annuity Units for each Sub-Account. This new number of units will remain
fixed for the remainder of the payment period unless the payee requests
another change.
CUSTODIAN
The custodian of the assets of the Variable Account is State Street Bank
and Trust Company a state chartered trust company. Its principal office is
at 225 Franklin Street, Boston, Massachusetts.
PRINCIPAL UNDERWRITER
The Contract and Contracts, 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, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and the financial statements of Keyport Life
Insurance Company-Variable Account A at December 31, 1998 and for each of
the two years in the period ended December 31, 1998, appearing in this
Statement of Additional Information have been audited by 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.
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: Common Stocks, represented by the Standard and Poor's
Composite Stock 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.
Average annual total return information shows the average annual
compounding percentage change applied to the value of an investment in the
Sub-account from the beginning of the measuring period to the end of that
period. This average annual total return reflects all historical investment
results, less all Sub-account and Contract charges and deductions as
required by certain regulatory rules. Average total return is not reduced
by any premium taxes. Average total return would be less if these taxes
were deducted.
In order to calculate average annual total return, we divide the change in
value of a Sub-account under a Contract surrendered on a particular date by
a hypothetical $1,000 investment in the Sub-account. We then annualize the
resulting total rate for the period to obtain the average annual
compounding percentage change during the period.
Yield for Rydex U.S. Government Money Market Sub-Account
Yield percentages for the Rydex U.S. Government Money Market Sub-Account
are calculated using the method prescribed by the Securities and Exchange
Commission. Yields reflect the deduction of the annual .90% asset-based
Contract charges. Yields do not reflect premium tax charges. The yield
would be lower if these charges were included. The following is the
standardized formula:
Yield equals: (A - B - 1) x 365
C 7
Where:
A = the Accumulation Unit value at the end of the 7-day period.
B = $0.00.
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 Rydex U.S. Government Money Market Sub-Account will
continue over an entire year.
FINANCIAL STATEMENTS
The financial statements of the Variable Account and Keyport Life Insurance
Company are included in the statement of additional information. The
consolidated financial statements of Keyport Life Insurance Company are
provided as relevant to its ability to meet its financial obligations under
the Contracts and should not be considered as bearing on the investment
performance of the assets held in the Variable Account.
The financial statements for the Variable Account do not reflect the
Contract described in the prospectus because as of the date of the
financial statements, the sale of the Contract had not yet begun.
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, 1998,
and the related statement of operations and changes in net assets for each
of the two years in the period then ended. 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 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 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, 1998 and the results of its
operations and changes in net assets for each of the two years in the
period then ended, in conformity with generally accepted accounting
principles.
Boston, Massachusetts /s/Ernst & Young LLP
March 12, 1999
KEYPORT LIFE INSURANCE COMPANY -VARIABLE ACCOUNT A
Statement of Assets and Liabilities
December 31, 1998
Assets
Investments at market value:
AIM Variable Insurance Funds, Inc.
AIM Capital Appreciation - 6B 379 shares (cost $8,974) $ 9,554
AIM Growth Fund - 6E 8,146 shares (cost $186,384) 202,010
AIM International Equity - 6F 16,572 share (cost $310,852) 325,136
Alger American Fund
Alger American Growth Portfolio - 417,273 shares
(cost $18,676,912) 22,207,260
Alger American Small Capitalization Portfolio - 196,871
shares (cost $8,130,968) 8,656,431
Alliance Variable Products Series Fund, Inc.
Alliance Global Bond Portfolio - 927,269 shares
(cost $10,847,338) 11,516,687
Alliance Premier Growth Portfolio - 1,731,558 shares
(cost $44,053,572) 53,730,245
Alliance Growth & Income - 25,632 shares (cost $503,344) 559,796
Alliance Real Estate- 12,184 shares (cost $121,561) 119,161
MFS Variable Insurance Trust
MFS Emerging Growth Series - 894,367 shares
(cost $15,706,134) 19,202,062
MFS Bond Series - 75,777 shares (cost $852,491) 862,341
MFS Research Series - 1,419,949 shares (cost $23,550,261) 27,050,035
Manning & Napier Insurance Fund, Inc.
Manning & Napier Small Cap Portfolio - 311 shares
(cost $2,986) 2,602
Manning & Napier Growth Portfolio - 38,370 shares
(cost $484,706) 456,597
Manning & Napier Equity Portfolio - 257 shares
(cost $2,687) 3,139
SteinRoe Variable Investment Trust
SteinRoe Money Market Fund - 30,900,827 shares
(cost $30,900,827) 30,900,827
SteinRoe Special Venture Fund - 458,531 shares
(cost $7,115,633) 6,245,190
SteinRoe Balanced Fund - 3,016,489 shares
(cost $47,584,545) 51,702,622
SteinRoe Mortgage Securities Fund - 2,386,633 shares
(cost $25,382,097) 25,751,769
SteinRoe Growth Stock Fund - 714,362 shares
(cost $25,625,516) 31,096,195
Liberty Variable Investment Trust
Colonial Growth and Income Fund - 3,024,919 shares
(cost $47,587,882) 49,578,423
SteinRoe Global Utilities Fund - 1,173,402 shares
(cost $14,746,249) 16,146,012
Colonial International Fund for Growth - 16,949,331
shares (cost $33,598,287) 33,898,662
Colonial Strategic Income Fund - 4,422,610 shares
(cost $50,766,366) 49,002,513
Colonial U.S. Stock Fund - 3,037,545 shares
(cost $52,955,373) 57,075,468
Colonial High Yield Securities Fund -101,476 shares
(cost $979,969) 944,743
Colonial Small Cap Value Fund - 5,363 shares
(cost $42,018) 46,067
Newport Tiger Fund - 2,731,285 shares (cost $5,050,529) 4,288,118
Liberty All-Star Equity Fund - 3,482,795 shares
(cost $14,157,767) 41,445,264
Total assets 543,024,929
Liabilities
Due to Keyport Life Insurance Company (Note 2) (26,722)
Net assets $542,998,207
Net assets
Variable annuity contracts (Note 5) $450,011,371
Annuity reserves (Note 2) 70,314,564
Retained by Keyport Life Insurance Company (Note 2) 22,672,272
Net assets $542,998,207
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
AIM Capital AIM
Appreciation - 6B* Growth - 6E *
1998 1998
Income
Dividends $ 256 $ 8,896
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 105 2,217
Net investment income
(expense) 151 6,679
Realized gain (loss) 1 186
Unrealized appreciation
(depreciation) during
the period 580 15,627
Net increase (decrease)
in net assets from
operations 732 22,492
Purchase payments from
contract owners 8,742 166,041
Transfers between accounts 80 13,477
Contract terminations
and annuity payouts - -
Other transfers to
Keyport Life Insurance
Company - -
Net increase (decrease)
in net assets from
contract transactions 8,822 179,518
Net assets at
beginning of period - -
Net assets at end
of period $ 9,554 $ 202,010
* Commenced operations May 19, 1998
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
AIM International Alger American
Equity - 6F * Growth Portfolio
1998 1998 1997
Income
Dividends $ 1,557 $ 922,815 $ 7,036
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 3,569 283,553 15,446
Net investment income
(expense) (2,012) 639,262 (8,410)
Realized gain (loss) (10) 7,907 4,303
Unrealized appreciation
(depreciation) during
the period 14,284 3,388,828 142,736
Net increase (decrease)
in net assets from
operations 12,262 4,035,997 138,629
Purchase payments from
contract owners 309,855 10,554,510 2,181,692
Transfers between accounts 3,019 8,177,650 506,725
Contract terminations and
annuity payouts - (2,990,747) (346,642)
Other transfers to
Keyport Life Insurance
Company - - (138,831)
Net increase (deacrease)
in net assets
from contract
transactions 312,874 15,741,413 2,202,944
Net assets at beginning
of period - 2,429,850 88,277
Net assets at end of
period $ 325,136 $22,207,260 $ 2,429,850
* Commenced operations May 19, 1998
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Alger American Small Alliance Global
Capitalization Portfolio Bond Portfolio
1998 1997 1998 1997
Income
Dividends $ 512,814 $ 19,970 $ 85,813 $ 46,153
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 98,963 6,420 138,776 13,195
Net investment income
(expense) 413,851 13,550 (52,963) 32,958
Realized gain (loss) (7,450) 884 2,468 (569)
Unrealized appreciation
(depreciation) during
the period 444,946 80,144 668,715 567
Net increase (decrease) in
net assets from
operations 851,347 94,578 618,220 32,956
Purchase payments from
contract owners 4,038,589 1,243,346 5,658,084 2,259,490
Transfers between
accounts 3,133,840 472,305 5,089,523 122,656
Contract terminations
and annuity payouts (1,107,934) (37,571) (1,935,854) (245,542)
Other transfers to
Keyport Life Insurance
Company - (100,030) - (119,789)
Net increase (decrease)
in net assets
from contract
transactions 6,064,495 1,578,050 8,811,753 2,016,815
Net assets at beginning
of period 1,740,589 67,961 2,086,714 36,943
Net assets at end of
period $ 8,656,431 $1,740,589 $11,516,687 $2,086,714
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Alliance Premier Alliance Growth
Growth Portfolio & Income *
1998 1997 1998
Income
Dividends $ 14,979 $ 1,673 $ -
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 676,381 23,650 6,145
Net investment income
(expense) (661,402) (21,977) (6,145)
Realized gain (loss) 318 1,545 169
Unrealized appreciation
(depreciation) during
the period 9,334,300 342,779 56,451
Net increase (decrease)
in net assets from
operations 8,673,216 322,347 50,475
Purchase payments from
contract owners 29,356,134 3,624,819 519,916
Transfers between
accounts 20,346,792 608,727 9,887
Contract terminations and
annuity payouts (8,848,981) (163,817) (20,482)
Other transfers to
Keyport Life Insurance
Company - (240,813) -
Net increase (decrease)
in net assets
from contract
transactions 40,853,945 3,828,916 509,321
Net assets at beginning
of period 4,203,084 51,821 -
Net assets at end of
period $ 53,730,245 $ 4,203,084 $ 559,796
* Commenced operations May 19, 1998
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Alliance MFS Emerging
Real Estate * Growth Series
1998 1998 1997
Income
Dividends $ - $ 43,497 $ -
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 1,308 241,758 16,111
Net investment income
(expense) (1,308) (198,261) (16,111)
Realized gain (loss) (11) (5,826) 3,701
Unrealized appreciation
(depreciation) during
during the period (2,401) 3,304,524 192,521
Net increase (decrease)
in net assets from
operations (3,720) 3,100,437 180,111
Purchase payments from
contract owners 119,542 11,148,879 2,160,760
Transfers between
accounts 3,366 5,908,917 208,009
Contract terminations and
annuity payouts (27) (3,356,215) (66,034)
Other transfers to
Keyport Life Insurance
Company - - (137,696)
Net increase (decrease)
in net assets
from contract
transactions 122,881 13,701,581 2,165,039
Net assets at beginning
of period - 2,400,044 54,894
Net assets at end of
period $ 119,161 $19,202,062 $ 2,400,044
* Commenced operations May 19, 1998
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
MFS Bond Series * MFS Research Series
1998 1998 1997
Income
Dividends $ - $ 209,197 $ -
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 9,466 324,618 37,551
Net investment income
(expense) (9,466) (115,421) (37,551)
Realized gain (loss) 69 4,725 9,594
Unrealized appreciation
(depreciation) during
during the period 9,849 3,157,773 343,416
Net increase (decrease)
in net assets from
operations 452 3,047,077 315,459
Purchase payments from
contract owners 805,355 12,688,545 5,140,002
Transfers between
accounts 56,588 9,878,627 522,262
Contract terminations and
annuity payouts (54) (4,099,205) (237,046)
Other transfers to
Keyport Life Insurance
Company - - (317,380)
Net increase (decrease)
in net assets
from contract
transactions 861,889 18,467,967 5,107,838
Net assets at beginning
of period - 5,534,991 111,694
Net assets at end of
period $ 862,341 $27,050,035 $ 5,534,991
* Commenced operations May 19, 1998
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Manning & Napier Manning & Napier
Small Cap Portfolio Growth Portfolio
1998 1997 1998
Income
Dividends $ 517 $ - $ 17,491
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 29 22 5,012
Net investment income
(expense) 488 (22) 12,479
Realized gain (loss) 3 - (7)
Unrealized appreciation
(depreciation) during
during the period (856) 348 (28,108)
Net increase (decrease)
in net assets from
operations (365) 326 (15,636)
Purchase payments from
contract owners - - 466,902
Transfers between
accounts (2,320) 2,635 5,331
Contract terminations and
annuity payouts - - -
Other transfers to
Keyport Life Insurance
Company - (309) -
Net increase (decrease)
in net assets
from contract
transactions (2,320) 2,326 472,233
Net assets at beginning
of period 5,287 2,635 -
Net assets at end of
period $ 2,602 $ 5,287 $ 456,597
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Manning & Napier SteinRoe Money
Equity Portfolio Market Fund
1998 1997 1998 1997
Income
Dividends $ 200 $ 11 $ 103,247 $ 88,861
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 34 21 1,055,552 22,431
Net investment income
(expense) 166 (10) (952,305) 66,430
Realized gain (loss) 6 - - -
Unrealized appreciation
(depreciation) during
during the period (96) 533 - -
Net increase (decrease)
in net assets from
operations 76 523 (952,305) 66,430
Purchase payments from
contract owners - - 26,805,829 4,086,249
Transfers between
accounts (2,226) 2,537 9,997,765 (248,406)
Contract terminations and
annuity payouts - - (8,183,303) (507,784)
Other transfers to
Keyport Life Insurance
Company - (309) - (185,241)
Net increase (decrease)
in net assets
from contract
transactions (2,226) 2,228 28,620,291 3,144,818
Net assets at beginning
of period 5,289 2,538 3,232,841 21,593
Net assets at end of
period $ 3,139 $ 5,289 $30,900,827 $ 3,232,841
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
SteinRoe Special SteinRoe
Venture Fund Balanced Fund
1998 1997 1998 1997
Income
Dividends $ - $ 272,821 $ - $ 562,770
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 62,279 19,873 431,783 70,541
Net investment income
(expense) (62,279) 252,948 (431,783) 492,229
Realized gain (loss) 145,327 2,563 408,403 38,346
Unrealized appreciation
(depreciation) during
during the period (699,035) (171,408) 3,944,917 173,160
Net increase (decrease)
in net assets from
operations (615,987) 84,103 3,921,537 703,735
Purchase payments from
contract owners 3,375,836 2,598,769 22,947,236 9,462,383
Transfers between
accounts 1,244,874 311,872 17,871,316 191,572
Contract terminations and
annuity payouts (445,514) (213,965) (2,320,956) (672,546)
Other transfers to
Keyport Life Insurance
Company - (153,750) - (531,642)
Net increase (decrease)
in net assets
from contract
transactions 4,175,196 2,542,926 38,497,596 8,449,767
Net assets at beginning
of period 2,685,981 58,952 9,283,489 129,987
Net assets at end of
period $6,245,190 $2,685,981 $51,702,622 $9,283,489
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
SteinRoe Mortgage SteinRoe Growth
Securities Fund Stock Fund
1998 1997 1998 1997
Income
Dividends $ - $ - $ - $ 55,649
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 250,260 39,014 268,921 18,450
Net investment income
(expense) (250,260) (39,014) (268,921) 37,199
Realized gain (loss) (21,858) 5,479 1,110,012 7,640
Unrealized appreciation
(depreciation) during
during the period 146,629 232,370 5,175,373 295,306
Net increase (decrease)
in net assets from
operations (125,489) 198,835 6,016,464 340,145
Purchase payments from
contract owners 11,312,207 4,838,331 16,066,184 1,911,470
Transfers between
Accounts 10,917,911 880,659 7,673,007 354,426
Contract terminations and
annuity payouts (1,600,632) (484,716) (1,063,029) (88,499)
Other transfers to
Keyport Life Insurance
Company - (300,709) - (137,696)
Net increase (decrease)
in net assets
from contract
transactions 20,629,486 4,933,565 22,676,162 2,039,701
Net assets at beginning
of period 5,247,772 115,372 2,403,569 23,723
Net assets at end of
period $25,751,769 $5,247,772 $31,096,195 $2,403,569
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Colonial Growth SteinRoe Global
and Income Fund Utilities Fund
1998 1997 1998 1997
Income
Dividends $ 1,866,557 $ 1,106,861 $ 253,744 $ 180,945
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 489,409 85,976 158,679 16,814
Net investment income
(expense) 1,377,148 1,020,885 95,065 164,131
Realized gain (loss) 56,210 1,229 17,820 14,318
Unrealized appreciation
(depreciation) during
during the period 1,591,420 415,501 1,289,332 111,657
Net increase (decrease)
in net assets from
operations 3,024,778 1,437,615 1,402,217 290,106
Purchase payments from
contract owners 21,519,326 10,591,566 7,058,523 2,094,656
Transfers between
accounts 16,633,854 521,716 6,141,991 305,113
Contract terminations and
annuity payouts (2,946,314) (814,237) (821,372) (217,417)
Other transfers to
Keyport Life Insurance
Company (18,401) (650,196) (2,232) (135,226)
Net increase (decrease)
in net assets
from contract
transactions 35,188,465 9,648,849 12,376,910 2,047,126
Net assets at beginning
of period 11,346,779 260,315 2,364,653 27,421
Net assets at end of
period $49,560,022 $11,346,779 $16,143,780 $2,364,653
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Colonial International Colonial Strategic
Fund for Growth Income Fund
1998 1997 1998 1997
Income
Dividends $ 127,229 $ 403,055 $ 2,985,885 $ 422,411
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 326,216 73,074 483,306 65,183
Net investment income
(expense) (198,987) 329,981 2,502,579 357,228
Realized gain (loss) 1,670 (1,137) (1,086) 1,156
Unrealized appreciation
(depreciation) during
during the period 1,116,168 (807,565) (1,746,749) 2,913
Net increase (decrease)
in net assets from
operations 918,851 (478,721) 754,744 361,297
Purchase payments from
contract owners 14,230,002 9,865,737 22,100,729 9,201,396
Transfers between
accounts 10,942,976 1,900,319 20,425,398 697,296
Contract terminations and
annuity payouts (2,278,286) (758,352) (3,326,987) (908,548)
Other transfers to
Keyport Life Insurance
Company (639) (577,952) - (518,675)
Net increase (decrease)
in net assets
from contract
transactions 22,894,053 10,429,752 39,199,140 8,471,469
Net assets at beginning
of period 10,085,119 134,088 9,048,629 215,863
Net assets at end of
period $33,898,023 $10,085,119 $49,002,513 $ 9,048,629
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Colonial U.S. Colonial High Yield
Stock Fund Securities Fund *
1998 1997 1998
Income
Dividends $ 2,277,895 $ 930,220 $ 43,741
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 556,819 77,827 10,850
Net investment income
(expense) 1,721,076 852,393 32,891
Realized gain (loss) 102,275 12,679 158
Unrealized appreciation
(depreciation) during
during the period 3,613,148 514,911 (35,226)
Net increase (decrease)
in net assets from
operations 5,436,499 1,379,983 (2,177)
Purchase payments from
contract owners 27,320,953 8,438,980 1,001,169
Transfers between
accounts 16,723,140 1,833,702 (17,492)
Contract terminations and
annuity payouts (2,966,899) (621,133) (36,757)
Other transfers to
Keyport Life Insurance
Company (4,860) (605,245) (47)
Net increase
in net assets
from contract
transactions 41,072,334 9,046,304 946,873
Net assets at beginning
of period 10,561,775 135,488 -
Net assets at end of
period $ 57,070,608 $ 10,561,775 $ 944,696
* Commenced operations May 19, 1998
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Colonial Small Cap
Value Fund * Newport Tiger Fund
1998 1998 1997
Income
Dividends $ 438 $ 80,691 $ 14,295
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 506 48,602 18,422
Net investment income
(expense) (68) 32,089 (4,127)
Realized gain (loss) 121 12,183 (22,847)
Unrealized appreciation
(depreciation) during
during the period 4,049 (310,542) (450,812)
Net increase (decrease)
in net assets from
operations 4,102 (266,270) (477,786)
Purchase payments from
contract owners 38,722 1,541,776 2,256,281
Transfers between
accounts 3,243 1,412,702 372,400
Contract terminations and
annuity payouts - (474,114) (54,826)
Other transfers to
Keyport Life Insurance
Company (12) - (118,554)
Net increase (decrease)
in net assets
from contract
transactions 41,953 2,480,364 2,455,301
Net assets at beginning
of period - 2,074,024 96,509
Net assets at end of
Period $ 46,055 $ 4,288,118 $ 2,074,024
* Commenced operations May 19, 1998
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Liberty All-Star Equity Fund
1998 1997
Income
Dividends $ 173,281 $ 21,113
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 235,064 913
Net investment income
(expense) (61,783) 20,200
Realized gain (loss) 152,083 -
Unrealized appreciation
(depreciation) during
during the period 5,074,612 145,370
Net increase (decrease)
in net assets from
operations 5,164,912 165,570
Purchase payments from
contract owners 11,242,834 722,965
Transfers between
accounts 7,882,616 21,357,812
Contract terminations and
annuity payouts (3,871,455) (15,331)
Other transfers to
Keyport Life Insurance
Company (531) (1,204,659)
Net increase (decrease)
in net assets from
contract transactions 15,253,464 20,860,787
Net assets at beginning
of period 21,026,357 -
Net assets at end of
Period $ 41,444,733 $ 21,026,357
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Total Total
1998 1997
Income
Dividends $ 9,730,740 $ 4,133,844
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 6,170,180 620,934
Net investment income
(expense) 3,560,560 3,512,910
Realized gain (loss) 1,985,866 78,884
Unrealized appreciation
(depreciation) during
during the period 39,528,512 1,564,447
Net increase (decrease)
in net assets from
operations 45,074,938 5,156,241
Purchase payments from
contract owners 262,402,420 82,678,892
Transfers between
accounts 180,475,852 30,924,337
Contract terminations and
annuity payouts (52,695,117) (6,454,006)
Other transfers to
Keyport Life Insurance
Company (26,722) (6,174,702)
Net increase (decrease)
in net assets from contract
transactions 390,156,433 100,974,521
Net assets at beginning
of period 107,766,836 1,636,074
Net assets at end of
period $ 542,998,207 $ 107,766,836
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements
December 31, 1998
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 three contracts: Keyport
Advisor Variable Annuity, Keyport Advisor Vista Variable Annuity and
Manning & Napier Variable Annuity, distinguished principally by the level
of expenses, surrender charges, and eligible fund options. The three
contracts and their respective eligible fund options are as follows:
Keyport Advisor Variable Annuity Keyport Advisor Vista Variable Annuity
Alger American Fund: AIM:
Alger American Growth Portfolio AIM Capital Appreciation Fund
Alger American Small AIM Growth Fund
Capitalization Portfolio AIM International Equity Fund
MFS Variable Insurance Trust: MFS Variable Insurance Trust:
MFS Emerging Growth Series MFS Emerging Growth Series
MFS Research Series MFS Research Series
MFS Bond Series
SteinRoe Variable Investment SteinRoe Variable Investment
Trust (SRVIT): Trust (SRVIT):
SteinRoe Money Market Fund SteinRoe Money Market Fund
SteinRoe Special Venture Fund SteinRoe Special Venture Fund
SteinRoe Balanced Fund SteinRoe Balanced Fund
SteinRoe Mortgaged Securities SteinRoe Growth Stock Fund
Fund
SteinRoe Growth Stock Fund
Liberty Variable Investment Liberty Variable Investment
Trust (LVIT): Trust (LVIT):
Colonial Growth and Income Fund Colonial Growth and Income Fund
SteinRoe Global Utilities Fund SteinRoe Global Utilities Fund
Colonial International Fund Colonial Strategic Income Fund
for Growth
Colonial Strategic Income Fund Colonial U.S. Stock Fund
Colonial U.S. Stock Fund Liberty All-Star Equity Fund
Newport Tiger Fund Colonial Small Cap Value Fund
Liberty All-Star Equity Fund Colonial High Yield Securities Fund
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
1. Organization (continued)
Alliance Variable Products Alliance Variable Products
Series Fund, Inc: Series Fund, Inc:
Alliance Global Bond Portfolio Alliance Global Bond Portfolio
Alliance Premier Growth Portfolio Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
Alliance Real Estate Portfolio
Manning & Napier Variable Annuity
Manning & Napier Insurance Fund, SteinRoe Variable Investment
Inc: Trust (SRVIT):
Manning & Napier Small Cap SteinRoe Money Market Fund
Portfolio
Manning & Napier Equity Portfolio
Manning & Napier Moderate Growth
Portfolio
Manning & Napier Growth Portfolio
Manning & Napier Maximum Horizon
Portfolio
Manning & Napier Bond Portfolio
On November 15, 1997, the fund names for Cash Income Fund, Capital
Appreciation Fund, Managed Assets Fund, Mortgage Securities Income Fund and
Managed Growth Stock Fund were changed to SteinRoe Money Market Fund,
SteinRoe Special Venture Fund, SteinRoe Balanced Fund, SteinRoe Mortgage
Securities Fund and SteinRoe Growth Stock Fund, respectively. Also on
November 15, 1997, the fund names for Colonial-Keyport Growth and Income
Fund, Colonial-Keyport Utilities Fund, Colonial-Keyport International Fund
for Growth, Colonial-Keyport U.S. Stock Fund, Colonial-Keyport Strategic
Income Fund and Newport-Keyport Tiger Fund were changed to Colonial Growth
and Income Fund, SteinRoe Global Utilities Fund, Colonial International
Fund for Growth, Colonial U.S. Stock Fund, Colonial Strategic Income Fund
and Newport Tiger Fund, respectively.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
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. Certain prior year
amounts have been reclassified to conform to the current year's
presentation.
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.
Annuity reserves are computed for contracts in the income stage according
to the 1983a Individual Annuity Mortality Table. The assumed investment
rate is either 3.0%, 4.0%, 5.0% or 6.0% unless the annuitant elects
otherwise, in which case the rate may vary from 3.0% to 6.0%, as regulated
by the laws of the respective states. The mortality risk is fully borne by
the Company and may result in additional amounts being transferred into the
Variable Account by the Company.
Amounts due to Keyport Life Insurance Company represent mortality and
expense risk charges earned by the Company in 1998 but not transferred to
the Company until January 1999.
The net assets retained by the Company represent seed money shares invested
in certain sub-accounts required to commence operations. The seed money is
stated at market value (shares multiplied by net asset value per share).
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.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
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. For the Contact series Keyport Advisor Employee, the
effective annual rate for daily deductions for the assumption of mortality
and expense risk is 0.35%; no other charges apply.
Keyport Advisor Vista Variable Annuity
There are no deductions made from purchase payments for sales charges at
the time of purchase. There are also no contingent deferred sales charges
or distribution charges. Daily deductions are made from each sub-account
for administrative charges incurred by the Company at an effective annual
rate of 0.15% of contract value. A daily deduction is also made from each
sub-account for assumption of mortality and expense risk at an effective
annual rate of 1.25% 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. Liberty Advisory Services Corporation (formerly
Keyport Advisory Services Corporation), a wholly-owned subsidiary of the
Company, is the investment advisor to the LVIT. Colonial Management
Associates, Inc., an affiliate of the Company, is the investment sub-
advisor to the LVIT. Keyport Financial Services Corp., a wholly-owned
subsidiary of the Company, is the principal underwriter for SRVIT and LVIT.
The investment advisors' compensation is derived from the mutual funds.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
5. Unit Values
A summary of the accumulation unit values at December 31, 1998 and 1997 and
the accumulation units and dollar value outstanding at December 31, 1998
are as follows:
1997 1998
UNIT UNIT
VALUE VALUE UNITS DOLLARS
AIM Capital Appreciation-6B
Keyport Advisor $ - $11.091130 861.4364 $ 9,554
AIM Growth-6E
Keyport Advisor - 11.815758 17,096.6941 202,010
AIM International Equity-6F
Keyport Advisor - 9.997160 32,522.8614 325,136
Alger American Growth Portfolio
Keyport Advisor 12.277190 17.928398 1,103,432.8049 19,782,782
Employee 12.187513 17.983223 1,914.4441 34,428
Alger American Small Capitalization
Portfolio
Keyport Advisor 11.133567 12.685024 650,319.3977 8,249,317
Employee 11.771178 13.551674 432.3430 5,859
Alliance Global Bond Portfolio
Keyport Advisor 9.811315 11.041874 915,526.8212 10,109,132
Employee - 11.181656 383.4832 4,288
Alliance Premier Growth Portfolio
Keyport Advisor 13.462574 19.645990 2,327,577.4645 45,727,564
Employee 12.945664 19.088868 2,958.3078 56,471
Alliance Growth and Income
Keyport Advisor - 10.894009 51,385.6475 559,796
Alliance Real Estate
Keyport Advisor - 9.019247 13,211.8612 119,161
MFS Emerging Growth Series
Keyport Advisor 11.680929 15.454973 1,086,256.0143 16,788,057
Employee 12.487521 16.694809 619.5099 10,343
MFS Bond Series
Keyport Advisor - 10.239799 84,214.6343 862,341
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
5. Unit Values (continued)
1997 1998
UNIT UNIT
VALUE VALUE UNITS DOLLARS
MFS Research Series
Keyport Advisor $11.834080 $14.399988 1,664,674.5376 $ 23,971,293
Employee 11.567760 14.223009 3,123.5295 44,426
Manning & Napier Small Cap Portfolio
Keyport Advisor 12.088643 10.699340 243.1847 2,602
Manning & Napier Growth Portfolio
Keyport Advisor - 12.379316 36,883.8781 456,597
Manning & Napier Equity Portfolio
Keyport Advisor 12.774188 13.198760 237.8007 3,139
SteinRoe Money Market Fund
Keyport Advisor 13.780309 14.283805 1,742,448.8501 24,888,800
Employee 12.034296 12.604414 6,213.5562 78,318
SteinRoe Special Venture Fund
Keyport Advisor 31.085014 25.351276 223,806.7602 5,673,787
Employee 18.887039 15.564461 391.6231 6,095
SteinRoe Balanced Fund
Keyport Advisor 24.497018 27.188237 1,446,829.6572 39,336,748
Employee 16.476867 18.478127 807.1616 14,915
SteinRoe Mortgage Securities Fund
Keyport Advisor 17.874172 18.825527 1,211,091.8612 22,799,443
Employee 12.883061 13.710621 1,058.3586 14,511
SteinRoe Growth Stock Fund
Keyport Advisor 35.538075 44.828835 546,511.6514 24,499,481
Employee 22.305278 28.430479 3,262.4030 92,752
Colonial Growth and Income Fund
Keyport Advisor 19.353674 21.211314 2,102,020.4011 44,586,615
Employee 20.146127 22.310588 1,194.7965 26,657
SteinRoe Global Utilities Fund
Keyport Advisor 15.358133 17.923199 806,561.9426 14,456,170
Employee - 18.759647 164.3084 3,082
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
5. Unit Values (continued)
1997 1998
UNIT UNIT
VALUE VALUE UNITS DOLLARS
Colonial International Fund for Growth
Keyport Advisor $ 9.659572 $10.761067 2,761,741.6836 $ 29,719,287
Employee 10.293313 11.586890 2,057.0416 23,835
Colonial Strategic Income Fund
Keyport Advisor 13.615795 14.237231 3,092,643.1072 44,030,674
Employee 14.021213 14.814437 636.8757 9,435
Colonial U.S. Stock Fund
Keyport Advisor 20.780533 24.622292 2,060,242.3319 50,727,888
Employee 21.635681 25.903402 1,321.7928 34,239
Colonial High Yield Securities
Keyport Advisor - 9.631230 102,633.1246 988,483
Colonial Small Cap Value Fund
Keyport Advisor - 8.575210 5,370.6959 46,055
Newport Tiger Fund
Keyport Advisor 8.525525 7.866774 521,030.1518 4,098,826
Employee 8.765513 8.172929 4,469.8347 36,532
Liberty All-Star Equity Fund
Keyport Advisor 10.063176 11.777423 1,394,638.6613 16,425,249
Employee 10.075780 11.915401 5,807.4774 69,198
26,038,832.7658 $450,011,371
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
6. Purchases and Sales of Securities
The cost of shares purchased and proceeds from shares sold by the Variable
Account during 1998 are shown below:
Purchases Sales
AIM Capital Appreciation - 6B $ 8,997 $ 24
AIM Growth - 6E 192,343 6,147
AIM International Equity - 6F 312,571 1,709
Alger American Growth Portfolio 17,182,815 941,072
Alger American Small Capitalization
Portfolio 6,829,586 451,269
Alliance Global Bond Portfolio 9,182,811 543,827
Alliance Premier Growth Portfolio 42,254,206 2,302,476
Alliance Growth and Income 528,772 25,596
Alliance Real Estate 121,919 347
MFS Emerging Growth Series 14,777,330 1,411,705
MFS Bond Series 863,244 10,821
MFS Research Series 19,677,337 1,642,172
Manning & Napier Small Cap Portfolio 3,009 18
Manning & Napier Growth Portfolio 485,786 1,073
Manning & Napier Equity Portfolio 2,711 23
SteinRoe Money Market Fund 41,383,620 10,152,019
SteinRoe Special Venture Fund 11,879,516 5,284,823
SteinRoe Balanced Fund 66,781,830 17,269,655
SteinRoe Mortgage Securities Fund 29,604,372 4,154,248
SteinRoe Growth Stock Fund 41,670,295 17,341,072
Colonial Growth and Income Fund 50,228,069 2,430,114
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
6. Purchases and Sales of Securities (continued)
Purchases Sales
SteinRoe Global Utilities Fund $ 15,439,356 $ 817,592
Colonial International Fund for Growth 30,809,137 598,224
Colonial Strategic Income Fund 51,823,162 1,328,497
Colonial U.S. Stock Fund 56,526,340 2,993,719
Colonial High Yield Securities 1,013,502 33,691
Colonial Small Cap Value Fund 47,532 5,635
Newport Tiger Fund 6,191,798 474,299
Liberty All-Star Equity Fund 15,682,517 1,542,053
$ 531,504,483 $ 71,763,920
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
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. The 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.
8. Year 2000 (Unaudited)
The Variable Account, like other business organizations and individuals,
would be adversely affected if the Company's computer systems and those of
its service providers do not properly process and calculate date related
information and data from and after January 1, 2000. Many of these systems
are not presently Year 2000 compliant. These systems use programs that were
designed and developed without considering the impact of the upcoming
change in the century. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company's business, financial condition and
results of operations could be materially and adversely affected by the
failure of the Company's systems and applications (and those operated by
third parties interfacing with the Company's systems and applications) to
properly operate or manage these dates.
In addressing the Year 2000 issue, the Company has completed an inventory
of its computer programs and assessed its Year 2000 readiness. The
Company's computer programs include internally developed programs, third-
party purchased programs and third-party custom developed programs. For
programs which were identified as not being Year 2000 ready, the Company
has implemented a remedial plan which includes repairing or replacing the
programs and appropriate testing for Year 2000. The remediation plan is
substantially complete and is currently in the final testing phase. The
Company also identified its non-information technology systems with respect
to Year 2000 issues. The Company initiated remediation efforts in this
area and expects to complete this phase during 1999.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements (continued)
8. Year 2000 (Unaudited) (continued)
In addition, the Company has initiated communication with significant
financial institutions, distributors, suppliers and others with which it
does business to determine the extent to which the Company's systems are
vulnerable by the failure of others to remediate their own Year 2000
issues. The Company has received feedback from such parties and is in the
process of independently confirming information received from other parties
with respect to their year 2000 issues. The Company is developing, and will
continue to develop, contingency plans for dealing with any adverse effects
that become likely in the event the Company's remediation plans are not
successful or third parties fail to remediate their own Year 2000 issues.
The Company expects contingency planning to be substantially complete by
June 1999. If necessary modifications and conversions are not made, or are
not timely completed, or if the systems of the companies on which the
Company's interface system relies are not timely converted, the Year 2000
issues could have a material impact on the financial condition and results
of operations of the Company. However, the Company believes that with
modifications to existing software and conversions to new software, the
Year 2000 issue will not pose significant operational problems for its
computer systems.
Report of Independent Auditors
The Board of Directors
Keyport Life Insurance Company
We have audited the consolidated balance sheet of Keyport Life Insurance
Company as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial
statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 the 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 consolidated financial
position of Keyport Life Insurance Company at December 31, 1998 and 1997,
and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/Ernst & Young LLP
Boston, Massachusetts
January 28, 1999
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31,
ASSETS 1998 1997
Cash and investments:
Fixed maturities available for sale
sale (amortized cost: 1998 -
$11,174,697; 1997 - $10,981,618) $11,277,204 $11,246,539
Equity securities (cost: 1998 -
$21,836; 1997 - $21,950) 24,649 40,856
Mortgage loans 55,117 60,662
Policy loans 578,770 554,681
Other invested assets 662,513 440,773
Cash and cash equivalents 719,625 1,162,347
Total cash and investments 13,317,878 13,505,858
Accrued investment income 160,950 165,035
Deferred policy acquisition costs 340,957 232,039
Value of insurance in force 66,636 53,298
Income taxes recoverable 31,909 22,537
Intangible assets 18,082 18,058
Receivable for investments sold 37,936 1,398
Other assets 35,345 14,777
Separate account assets 1,765,538 1,329,189
Total assets $15,775,231 $15,342,189
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $12,504,081 $12,086,076
Deferred income taxes 143,596 133,003
Payable for investments purchased
and loaned 240,440 722,116
Other liabilities 28,312 34,015
Separate account liabilities 1,723,205 1,263,958
Total liabilities 14,639,634 14,239,168
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
Retained earnings 600,396 511,796
Accumulated other comprehensive income 26,253 82,277
Total stockholder's equity 1,135,597 1,103,021
Total liabilities and
stockholder's equity $15,775,231 $15,342,189
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year ended December 31,
1998 1997 1996
Revenues:
Net investment income $ 815,226 $ 847,048 $ 790,365
Interest credited to
policyholders (562,238) (594,084) (572,719)
Investment spread 252,988 252,964 217,646
Net realized investment
gains 785 24,723 5,509
Fee income:
Surrender charges 17,487 15,968 14,934
Separate account fees 20,589 17,124 15,987
Management fees 4,760 3,261 2,613
Total fee income 42,836 36,353 33,534
Expenses:
Policy benefits (2,880) (3,924) (3,477)
Operating expenses (53,544) (49,941) (43,815)
Amortization of deferred
policy acquisition costs (69,172) (75,906) (60,225)
Amortization of value of
insurance in force (8,238) (10,490) (10,196)
Amortization of intangible
Assets (1,256) (1,128) (1,130)
Total expenses (135,090) (141,389) (118,843)
Income before income taxes 161,519 172,651 137,846
Income taxes (52,919) (59,090) (47,222)
Net income $ 108,600 $ 113,561 $ 90,624
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
Balance,
January 1, 1996 $3,015 $505,933 $307,611 $ 85,772 $ 902,331
Comprehensive income
Net income 90,624 - 90,624
Other comprehensive
income, net of tax
Net unrealized
investment losses - (12,173) (12,173)
Comprehensive income 78,451
Balance,
December 31, 1996 3,015 505,933 398,235 73,599 980,782
Comprehensive income
Net income 113,561 - 113,561
Other comprehensive
income, net of tax
Net unrealized
investment gains 8,678 8,678
Comprehensive income 122,239
Balance,
December 31, 1997 3,015 505,933 511,796 82,277 1,103,021
Comprehensive income
Net income 108,600 - 108,600
Other comprehensive
income, net of tax
Net unrealized
investment losses - (56,024) (56,024)
Comprehensive income 52,576
Dividends paid (20,000) - (20,000)
Balance,
December 31, 1998 $3,015 $505,933 $600,396 $ 26,253 $1,135,597
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31
1998 1997 1996
Cash flows from operating
activities:
Net income $ 108,600 $ 113,561 $ 90,624
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Interest credited to
policyholders 562,238 594,084 572,719
Net realized investment
gains (785) (24,723) (5,509)
Amortization of value of
insurance in force and
intangible assets 9,494 11,618 11,326
Net amortization on
investments 75,418 29,862 (29,088)
Change in deferred policy
acquisition costs (33,687) (10,252) (24,403)
Change in current and
deferred income taxes 1,112 71,919 7,263
Net change in other assets
and liabilities (53,786) 7,959 (41,012)
Net cash provided by
operating activities 668,604 794,028 581,920
Cash flows from investing
activities:
Investments purchased -
available for sale (6,789,048) (4,548,374) (4,365,399)
Investments sold -
available for sale 5,405,955 2,563,465 1,714,023
Investments matured -
available for sale 1,273,478 1,531,693 1,387,664
Increase in policy loans (24,089) (21,888) (34,467)
Decrease in mortgage loans 5,545 6,343 7,500
Other invested assets sold
(purchased), net 21,395 (48,921) (130,087)
Purchases of property and
Equipment, net (4,953) (6,213) (1,622)
Value of business acquired,
net of cash (3,999) - (30,865)
Net cash used in
investing activities (115,716) (523,895) (1,453,253)
Cash flows from financing
activities:
Withdrawals from policyholder
accounts (1,690,035) (1,320,837) (1,154,087)
Deposits to policyholder
accounts 1,224,991 950,472 2,134,504
Dividends paid (20,000) - -
Securities lending (510,566) 495,194 (119,083)
Net cash (used in) provided
by financing activities (995,610) 124,829 861,334
Change in cash and
cash equivalents (442,722) 394,962 (9,999)
Cash and cash equivalents
at beginning of year 1,162,347 767,385 777,384
Cash and cash equivalents at
end of year $ 719,625 $ 1,162,347 $ 767,385
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1998
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 savings market. These annuity products are sold through a wide
ranging network of banks, agents, and security dealers throughout the
United States.
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 Benefit Life Insurance Company
("Keyport Benefit"), Liberty Advisory Services Corp., 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
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 accumulated other
comprehensive income. The cost basis of securities is adjusted for declines
in value that are determined to be other than temporary. Realized
investment gains and losses are calculated on a first-in, first-out basis,
net of adjustments for amortization of deferred policy acquisition costs
and value of insurance in force.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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. Partnerships are
accounted for by using the equity method of accounting. Partnership
investments totaled $126.8 million and $117.3 million at December 31, 1998
and 1997, respectively.
Derivatives
The Company uses interest rate swap and cap agreements to manage its
interest rate risk and call options and futures on the Standard & Poor's
500 Composite Stock Price Index ("S&P 500 Index") to hedge its obligations
to provide returns based upon this index.
The Company utilizes interest rate swap agreements ("swap agreements") and
interest rate cap agreements ("cap agreements") to match assets more
closely to liabilities. Swap agreements are agreements to exchange with a
counterparty interest rate payments of differing character (e.g., fixed-
rate payments exchanged for variable-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate
changes. The Company currently utilizes swap agreements to reduce asset
duration and to better match interest rates earned on longer-term fixed
rate assets with interest rates credited to policyholders.
Cap agreements are agreements with a counterparty which require the payment
of a premium for the right to receive payments for the difference between
the cap interest rate and a market interest rate on specified future dates
based on an underlying principal balance (notional balance) to hedge
against rising interest rates.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Hedge accounting is applied after the Company determines that the items to
be hedged expose it to interest rate or price risk, designates the
instruments as hedges, and assesses whether the instruments reduce the
indicated risks through the measurement of changes in the value of the
instruments and the items being hedged at both inception and throughout the
hedge period. From time to time, interest rate swap agreements, cap
agreements and call options are terminated. If the terminated position was
accounted for as a hedge, realized gains or losses are deferred and
amortized over the remaining lives of the hedged assets or liabilities.
Conversely, if the terminated position was not accounted for as a hedge, or
if the assets and liabilities that were hedged no longer exist, the
position is "marked to market" and realized gains or losses are immediately
recognized in income.
The net differential to be paid or received on interest rate swap
agreements is recognized as a component of net investment income. Premiums
paid for interest rate cap agreements are deferred and amortized to net
investment income on a straight-line basis over the terms of the
agreements. The unamortized premium is included in other invested assets.
Amounts earned on interest rate cap agreements are recorded as an
adjustment to net investment income. Interest rate swap agreements and cap
agreements hedging investments designated as available for sale are
adjusted to fair value with the resulting unrealized gains and losses, net
of tax, included in accumulated other comprehensive income.
Premiums paid on call options are amortized into net investment income over
the terms of the contracts. The call options are included in other
invested assets and are carried at amortized cost plus intrinsic value, if
any, of the call options as of the valuation date. Changes in intrinsic
value of the call options are recorded as an adjustment to interest
credited to policyholders. Futures contracts are carried at fair value and
require daily cash settlement. Changes in the fair value of futures that
qualify as hedges are deferred and recognized as an adjustment to the
hedged asset or liability. Futures that do not qualify as hedges are
carried at fair value; changes in value are immediately recognized in
income.
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.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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
spread, 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
investment gains or losses that is credited or charged directly to
accumulated other comprehensive income. Deferred policy acquisition costs
were decreased by $56.0 million and $126.9 million at December 31, 1998 and
1997, respectively, relating to 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 10 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.25%, 5.34% and 5.30% for the
years ended December 31, 1998, 1997 and 1996, 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 investment gains
or losses that is credited or charged directly to accumulated other
comprehensive income. Value of insurance in force was decreased by $10.3
million and $31.8 million at December 31, 1998 and 1997, respectively,
relating to this adjustment.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1998 is as follows (in thousands): 1999 - $11,013; 2000 -
$10,043; 2001 - $8,823; 2002 - $7,803; 2003 - $6,975 and thereafter -
$32,252.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis ranging from ten to twenty-five years.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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, 1998 and 1997, the Company also classified $42.3 million
and $65.2 million, respectively, of fixed maturities and investments in
certain mutual funds sponsored by affiliates of the Company as separate
account assets.
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
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," and are calculated as if the companies filed
their own income tax returns.
Effective July 18, 1997, due to changes in ownership of Liberty Financial,
the Company is no longer included in the consolidated federal income tax
return of Liberty Mutual. The Company will be eligible to file a
consolidated federal income tax return with Liberty Financial in 2002.
Independence Life, which until July 18, 1997, was required under federal
tax law to file its own federal income tax return, may join with Keyport in
a consolidated income tax return filing. Keyport Benefit may also join
with Keyport in a consolidated income tax filing. Liberty Advisory
Services Corporation and Keyport Financial Services Corp. must file
separate federal tax returns.
Cash Equivalents
Short-term investments having an original maturity of three months or less
are classified as cash equivalents.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Recent Accounting Changes
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of SFAS 130 had no impact on the Company's net income or
stockholder's equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in stockholder's equity, to be included in accumulated
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS 131 establishes standards for the reporting of financial information
from operating segments in annual and interim financial statements. SFAS
131 requires that financial information be reported on the basis that it is
reported internally for evaluating segment performance and deciding how to
allocate resources to segments. The adoption of SFAS 131 did not have any
effect on the Company's financial statements as management of the Company
considers its operations to be one segment.
Recent Accounting Pronouncement
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") was issued. SFAS 133 standardizes the
accounting for derivative instruments and the derivative portion of certain
other contracts that have similar characteristics by requiring that an
entity recognize those instruments at fair value. This statement also
requires a new method of accounting for hedging transactions, prescribes
the type of items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting. This statement
is effective for fiscal years beginning after June 15, 1999. Earlier
adoption is permitted. Upon adoption, the Company will be required to
record a cumulative effect adjustment to reflect this accounting change.
The Company has not completed its analysis and evaluation of the
requirements and the impact of this statement.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
2. Acquisitions
On January 2, 1998, the Company acquired the common stock of American
Benefit Life Insurance Company, renamed Keyport Benefit Life Insurance
Company on March 31, 1998, a New York insurance company, for $7.4 million.
The acquisition was accounted for as a purchase and, accordingly, operating
results are included in the consolidated financial statements from the date
of acquisition. In connection with the acquisition, the Company acquired
assets with a fair value of $9.4 million and assumed liabilities of $3.2
million. Subsequent to the acquisition, the Company made a capital
contribution to Keyport Benefit in the amount of $7.5 million.
In August 1996, the Company 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.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments
Fixed Maturities
As of December 31, 1998 and 1997, 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
December 31, 1998 Cost Gains Losses Fair Value
U.S. Treasury
securities $ 90,818 $ 3,039 $ (192) $ 93,665
Mortgage backed
securities of U.S.
government
corporations and
agencies 940,075 28,404 (2,894) 965,585
Debt securities
issued by foreign
governments 251,088 9,422 (16,224) 244,286
Corporate securities 5,396,278 185,132 (156,327) 5,425,083
Other mortgage
backed securities 2,286,585 65,158 (19,546) 2,332,197
Asset backed securities 1,941,966 25,955 (16,521) 1,951,400
Senior secured loans 267,887 1,079 (3,978) 264,988
Total fixed
maturities $11,174,697 $ 318,189 $ (215,682) $11,277,204
Gross Gross
Amortized Unrealized Unrealized
December 31, 1997 Cost Gains Losses Fair Value
U.S. Treasury
Securities $ 128,580 $ 1,107 $ (40) $ 129,647
Mortgage backed
securities of
U.S. government
corporations and
agencies 1,089,809 49,536 (1,602) 1,137,743
Debt securities
issued by foreign
governments 272,559 12,694 (4,966) 280,287
Corporate securities 4,744,208 189,387 (83,562) 4,850,033
Other mortgage
backed securities 2,325,889 81,886 (2,579) 2,405,196
Asset backed securities 2,200,689 26,178 (3,118) 2,223,749
Senior secured loans 219,884 - - 219,884
Total fixed
maturities $10,981,618 $ 360,788 $ (95,867) $11,246,539
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
At December 31, 1998 and 1997, gross unrealized gains on equity securities,
interest rate cap agreements and investments in separate accounts
aggregated $7.8 million and $27.4 million, and gross unrealized losses
aggregated $3.6 million and $6.9 million, respectively.
Net unrealized investment gains (losses) on securities included in other
comprehensive income in 1998, 1997 and 1996 include: gross unrealized gains
(losses) on securities of $(182.2) million, $73.7 million and $(64.4)
million, respectively; reclassification adjustments for realized investment
(gains) losses in net income of $3.5 million, $(31.2) million and $(7.2)
million, respectively; and adjustments to deferred policy acquisition costs
and value of insurance in force of $92.5 million, $(29.1) million and $54.2
million, respectively. The above amounts are shown before income tax
expense (benefit) of $(30.2) million, $4.7 million and $(5.2) million,
respectively.
Deferred tax liabilities for the Company's net unrealized investment gains
and losses, net of adjustment to deferred policy acquisition costs and
value of insurance in force, were $14.1 million and $44.3 million at
December 31, 1998 and 1997, 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, 1998.
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic
location.
At December 31, 1998, $1.1 billion of fixed maturities were below
investment grade.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1998 are as follows (in thousands):
Amortized Fair
December 31, 1998 Cost Value
Due in one year or less $ 334,901 $ 335,179
Due after one year through five years 2,998,421 3,005,087
Due after five years through ten years 1,638,535 1,656,238
Due after ten years 1,034,214 1,031,518
6,006,071 6,028,022
Mortgage and asset backed securities 5,168,626 5,249,182
$11,174,697 $11,277,204
Actual maturities may differ because borrowers may have the right to call
or prepay obligations.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Net Investment Income
Net investment income is summarized as follows (in thousands):
Year Ended December 31, 1998 1997 1996
Fixed maturities $ 810,521 $ 811,688 $ 737,372
Mortgage loans and other
invested assets 18,238 27,833 11,422
Policy loans 33,251 32,224 30,188
Equity securities 4,369 5,443 4,494
Cash and cash equivalents 38,269 34,449 36,138
Gross investment income 904,648 911,637 819,614
Investment expenses (17,342) (15,311) (12,708)
Amortization of options and
interest rate caps (72,080) (49,278) (16,541)
Net investment income $ 815,226 $ 847,048 $ 790,365
As of December 31, 1998, the carrying value of fixed maturity investments
that was non-income producing was $30.0 million.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
Year Ended December 31, 1998 1997 1996
Fixed maturities available for sale:
Gross gains $ 72,119 $ 42,464 $ 24,304
Gross losses (59,730) (19,146) (17,814)
Other than temporary declines in value (28,322) - -
Equity securities 14,754 (51) 1,492
Investments in separate accounts 93 7,912 (576)
Interest rate caps (2,397) - -
Other - - (208)
Gross realized investment (losses) gains (3,483) 31,179 7,198
Amortization adjustments of deferred
policy acquisition costs and value
of insurance inforce 4,268 (6,456) (1,689)
Net realized investment gains $ 785 $ 24,723 $ 5,509
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Proceeds from sales of fixed maturities available for sale were $5.4
billion, $2.6 billion and $1.7 billion, for the years ended December 31,
1998, 1997 and 1996, respectively.
4. Derivatives
Outstanding derivatives, shown in notional amounts along with their
carrying value and fair value, are as follows (in thousands):
Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1998 1997 1998 1998 1997 1997
Interest
rate swaps $2,369,000 $2,575,000 $(71,163) $(71,163) $(42,123) $(42,123)
Interest
rate cap
agreements 250,000 250,000 - - 102 102
S&P 500
Index call
Options - - 535,628 607,022 323,343 345,294
S&P 500 Index
Futures - - (604) (604) 752 752
The interest rate swap agreements expire in 1999 through 2005. The interest
rate cap agreements expire in 1999 through 2000. The call options' and
futures' maturities range from 1999 to 2002.
The Company currently utilizes swap agreements to reduce asset duration and
to better match interest rates earned on longer-term fixed rate assets with
interest credited to policyholders. Cap agreements are used to hedge
against rising interest rates. Call options and futures contracts are used
for purposes of hedging the Company's equity-indexed products. At December
31, 1998 and 1997, the Company had approximately $156.4 million and $155.0
million, respectively, of unamortized premium in call option contracts.
Fair values for swap and cap agreements 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. Fair values for call options and futures contracts
are based on quoted market prices.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is the risk associated with counterparty
nonperformance. The Company believes that the counterparties to its swap,
cap and call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal. Futures
contracts trade on organized exchanges and, therefore, have minimal credit
risk.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
Year Ended December 31,
1998 1997 1996
Current $ 12,150 $ (48,477) $ 52,369
Deferred 40,769 107,567 (5,147)
$ 52,919 $ 59,090 $ 47,222
A reconciliation of income tax expense with the expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31,
1998 1997 1996
Expected income tax expense $ 56,532 $ 60,427 $ 48,246
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (2,152) (1,416) (1,216)
Amortization of goodwill 440 396 396
Other, net (1,901) (317) (204)
Income tax expense $ 52,919 $ 59,090 $ 47,222
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
The components of deferred federal income taxes are as follows (in
thousands):
December 31,
1998 1997
Deferred tax assets:
Policy liabilities $ 107,433 $ 124,250
Guaranty fund expense 2,115 2,795
Net operating loss carryforwards 1,780 2,111
Deferred fees 4,379 -
Other 1,318 1,205
Total deferred tax assets 117,025 130,361
Deferred tax liabilities:
Deferred policy acquisition costs (92,533) (56,331)
Value of insurance in force and
intangible assets (23,322) (18,022)
Excess of book over tax basis of
Investments (135,364) (178,697)
Separate account asset (478) (645)
Deferred loss on interest rate swaps (805) (1,792)
Other (8,119) (7,877)
Total deferred tax liabilities (260,621) (263,364)
Net deferred tax liability $ (143,596) $ (133,003)
As of December 31, 1998, the Company had approximately $5.1 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 of
Independence Life. 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 $21.5 million in 1998 and $46.9 million in 1996,
while income taxes refunded were $8.0 million in 1997.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
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. 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.
Plan assets consist principally of investments in certain mutual funds
sponsored by an affiliated company.
The following table sets forth the Plans' funded status (in thousands).
December 31,
1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $ 12,594 $ 10,559
Service cost 921 804
Interest cost 960 829
Actuarial loss 1,101 606
Benefits paid (294) (204)
Benefit obligation at end of year 15,282 12,594
Change in plan assets
Fair value of plan assets at beginning of year 7,801 6,399
Actual return on plan assets 593 901
Employer contribution 290 705
Benefits paid (294) (204)
Fair value of plan assets as end of year 8,390 7,801
Projected benefit obligation in excess of the
Plans' assets 6,892 4,793
Unrecognized net actuarial loss (2,814) (1,727)
Prior service cost not yet recognized in net
periodic pension cost (138) (160)
Accrued pension cost $ 3,940 $ 2,906
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
6. Retirement Plans (continued)
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,
1998 1997 1996
Pension cost includes the
following components:
Service cost benefits earned
during the period $ 921 $ 804 $ 717
Interest cost on projected
benefit obligation 960 829 725
Expected return on Plan assets (610) (525) (468)
Net amortization and deferred
amounts 53 23 93
Total net periodic pension cost $ 1,324 $ 1,131 $ 1,067
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:
Discount rate 6.75% 7.25% 7.50%
Rate of increase in compensation level 4.75% 5.00% 5.25%
Expected long-term rate of return on assets 9.00% 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, 1998, 1997 and 1996,
expenses related to these defined contribution plans totaled (in thousands)
$853, $702 and $590, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the estimated 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 estimated fair value of financial instruments:
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
7. Fair Value of Financial Instruments (continued)
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: With the exception of call options, the carrying
value for assets classified as other invested assets in the accompanying
balance sheets approximates their fair value. Fair values for call options
are based on market prices quoted by the counterparty to the respective
call option contract.
Cash and cash equivalents: The carrying value of cash and cash equivalents
approximates 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, December 31,
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity
securities $11,277,204 $11,277,204 $11,246,539 $11,246,539
Equity securities 24,649 24,649 40,856 40,856
Mortgage loans 55,117 56,640 60,662 63,007
Policy loans 578,770 578,770 554,681 554,681
Other invested
Assets 662,513 730,394 440,773 462,724
Cash and cash
Equivalents 719,625 719,625 1,162,347 1,162,347
Liabilities:
Policy liabilities 12,504,081 11,647,558 12,086,076 11,366,534
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
8. Quarterly Financial Data (unaudited)
The following is a tabulation of the unaudited quarterly results of
operations (in thousands):
1998 Quarters
March 31 June 30 September 30 December 31
Investment income $ 206,075 $ 200,955 $ 201,158 $ 207,038
Interest credited to
policyholders (142,136) (140,198) (143,271) (136,633)
Investment spread 63,939 60,757 57,887 70,405
Net realized investment
gains (losses) 818 (2,483) 4,112 (1,662)
Fee income 9,877 12,400 10,505 10,054
Pretax income 37,870 36,627 44,344 42,678
Net income 26,049 24,092 29,779 28,680
1997 Quarters
March 31 June 30 September 30 December 31
Investment income $ 206,515 $ 210,655 $ 210,365 $ 219,513
Interest credited to
Policyholders (147,313) (147,224) (150,875) (148,672)
Investment spread 59,202 63,431 59,490 70,841
Net realized investment
gains 12,796 2,669 4,951 4,307
Fee income 8,252 8,578 9,841 9,682
Pretax income 47,423 39,914 39,876 45,438
Net income 31,538 26,095 26,377 29,551
9. Statutory Information
The Company is domiciled in Rhode Island and prepares its statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the State of Rhode Island Insurance Department.
Statutory surplus and statutory net income differ from stockholder's equity
and net income reported in accordance with GAAP primarily because policy
acquisition costs are expensed when incurred, policy liabilities are based
on different assumptions, and income tax expense reflects only taxes paid
or currently payable. The Company's statutory surplus and net income are as
follows (in thousands):
Year Ended December 31,
1998 1997 1996
Statutory surplus $ 790,935 $ 702,610 $ 567,735
Statutory net income 95,422 107,130 40,237
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
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, 1998, 1997
and 1996. 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 $7.1 million for the year ended December 31, 1998 and $7.8 million for
the years ended December 31, 1997 and 1996. In addition, certain
affiliated companies distribute the Company's products and were paid $8.6
million, $7.2 million and $6.4 million by the Company for the years ended
December 31, 1998, 1997, and 1996, respectively.
Keyport had 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 had
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, 1998 and 1997, the amounts outstanding were $39.5 million. In
January 1999, Liberty Mutual retired the mortgage notes with a payment of
$39.7 million for all outstanding principal and interest.
Dividend payments to Liberty Financial from the Company are governed by
insurance laws that restrict the maximum amount of dividends that may be
paid without prior approval of the State of Rhode Island Insurance
Department. As of December 31, 1998, the maximum amount of dividends
(based on statutory surplus and statutory net gains from operations) which
may be paid by Keyport was approximately $59.1 million without such
approval.
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 2008. Rental expense (in thousands) amounted to $4,721,
$3,408 and $3,213 for the years ended December 31, 1998, 1997 and 1996,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 1998, the following are the minimum future rental payments
under noncancelable operating leases having remaining terms in excess of
one year (in thousands):
Year Payments
1999 $ 5,354
2000 5,311
2001 4,487
2002 4,342
2003 4,351
Thereafter 16,752
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
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 1998, 1997 and 1996, the Company was assessed $3.2 million, $5.9
million, and $10.0 million, respectively. During 1998, 1997 and 1996, the
Company recorded $1.2 million, $1.0 million, and $1.0 million,
respectively, of provisions for state guaranty fund association expense. At
December 31, 1998 and 1997, the reserve for such assessments was $6.0
million and $8.0 million, respectively.
12. Year 2000 (Unaudited)
The Company relies significantly on computer systems and applications in
its operations. Many of these systems are not presently Year 2000
compliant. These systems use programs that were designed and developed
without considering the impact of the upcoming change in the century. Any
of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The
Company's business, financial condition and results of operations could be
materially and adversely affected by the failure of the Company's systems
and applications (and those operated by third parties interfacing with the
Company's systems and applications) to properly operate or manage these
dates.
In addressing the Year 2000 issue, the Company has completed an inventory
of its computer programs and assessed its Year 2000 readiness. The
Company's computer programs include internally developed programs, third-
party purchased programs and third-party custom developed programs. For
programs which were identified as not being Year 2000 ready, the Company
has implemented a remedial plan which includes repairing or replacing the
programs and appropriate testing for Year 2000. The remediation plan is
substantially complete and is currently in the final testing phase. The
Company also identified its non-information technology systems with respect
to Year 2000 issues. The Company initiated remediation efforts in this area
and expects to complete this phase during 1999.
In addition, the Company has initiated communication with significant
financial institutions, distributors, suppliers and others with which it
does business to determine the extent to which the Company's systems are
vulnerable by the failure of others to remediate their own Year 2000
issues. The Company has received feedback from such parties and is in the
process of independently confirming information received from other parties
with respect to their year 2000 issues.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
12. Year 2000 (Unaudited) (continued)
The Company is developing, and will continue to develop, contingency plans
for dealing with any adverse effects that become likely in the event the
Company's remediation plans are not successful or third parties fail to
remediate their own Year 2000 issues. The Company expects contingency
planning to be substantially complete by June 1999. If necessary
modifications and conversions are not made, or are not timely completed, or
if the systems of the companies on which the Company's interface system
relies are not timely converted, the Year 2000 issues could have a material
impact on the financial condition and results of operations of the Company.
However, the Company believes that with modifications to existing software
and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems.
