<PAGE>
File Nos. 333-63089
811-7769
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 4
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13
SEPARATE ACCOUNT KG OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Name of Depositor)
440 Lincoln Street Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Mary Eldridge, Secretary
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b) of Rule 485.
---
on (date) 1999 pursuant to paragraph (b) of Rule 485
---
60 days after filing pursuant to paragraph (a)(1) of Rule 485.
---
On (date) pursuant to paragraph (a)(1) of Rule 485.
---
This post-effective amendment designates a new effective date for a
--- previously filed post-effective amendment.
VARIABLE ANNUITY CONTRACTS
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). The Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1998 was filed on or
before March 30, 1999.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
1..................................Cover Page
2..................................Special Terms
3..................................Summary of Fees and Expenses; Summary of
Contract Features
4..................................Condensed Financial Information; Performance
Information
5..................................Description of the Companies, the Variable
Accounts and the Underlying Portfolios
6..................................Charges and Deductions
7..................................Description of the Contract
8..................................Electing the Form of Annuity and the Annuity
Date; Description of Variable Annuity Payout
Options; Annuity Benefit Payments
9..................................Death Benefit
10.................................Payments; Computation of Values; Distribution
11.................................Surrender; Withdrawals; Texas Optional
Retirement Program
12.................................Federal Tax Considerations
13.................................Legal Matters
14.................................Statement of Additional Information-Table of
Contents
FORM N-4 ITEM NO CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
15.................................Cover Page
16.................................Table of Contents
17.................................General Information and History
18.................................Services
19.................................Underwriters
20.................................Underwriters
21.................................Performance Information
22.................................Annuity Benefit Payments
23.................................Financial Statements
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
KEMPER GATEWAY ADVISOR
A VARIABLE ANNUITY
<TABLE>
<S> <C>
THIS PROFILE IS A SUMMARY OF SOME OF THE
MORE IMPORTANT POINTS THAT YOU SHOULD
KNOW AND CONSIDER BEFORE PURCHASING THE
PROFILE KEMPER GATEWAY ADVISOR VARIABLE ANNUITY
JUNE 23, 1999 CONTRACT. THE CONTRACT IS MORE FULLY
AS REVISED DESCRIBED LATER IN THIS PROSPECTUS.
NOVEMBER 15, 1999 PLEASE READ THE PROSPECTUS CAREFULLY.
</TABLE>
1. KEMPER GATEWAY ADVISOR VARIABLE ANNUITY CONTRACT
The Kemper GATEWAY Advisor variable annuity contract is a contract between you
(the contract owner) and Allmerica Financial Life Insurance and Annuity Company
(for contracts issued in the District of Columbia, Puerto Rico, the Virgin
Islands and any state except Hawaii and New York) or First Allmerica Financial
Life Insurance Company (for contracts issued in Hawaii and New York). It is
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Kemper GATEWAY Advisor contract
combines the concept of professional money management with the attributes of an
annuity contract.
Kemper GATEWAY Advisor offers a customized investment portfolio with experienced
professional portfolio managers. You may allocate your payments among 17 of the
available 24 investment portfolios of the Kemper Variable Series, the 4
investment portfolios of the Scudder Variable Life Investment Fund, the 2
investment portfolios of The Alger American Fund, the one investment portfolio
of the Dreyfus Investment Portfolios, the one investment portfolio of The
Dreyfus Socially Responsible Growth Fund, Inc. and the two investment portfolios
of the Janus Aspen Series in addition to the Guarantee Period Accounts and the
Fixed Account. (The Guarantee Period Accounts and/or the Fixed Account may not
be available in certain jurisdictions.) This range of investment choices enables
you to allocate your money to meet your particular investment needs.
Like all deferred annuities, the contract has an ACCUMULATION PHASE and, if you
annuitize, an ANNUITY PAYOUT PHASE. During the ACCUMULATION PHASE you can
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make payments into the contract on any frequency. Investment and interest gains
accumulate tax-deferred. You may also withdraw money from your contract during
the ACCUMULATION PHASE; however, as with other tax-deferred investments, you pay
taxes on earnings and any pre-tax payments to the contract when you withdraw
them. A federal tax penalty may apply if you withdraw money prior to age 59 1/2.
During the ANNUITY PAYOUT PHASE you, or the payee you designate, will receive
regular annuity benefit payments from your contract, provided you annuitize.
Annuitization involves beginning a series of payments from the capital that has
built up in your contract. The amount of your annuity benefit payments during
the ANNUITY PAYOUT PHASE will, in part, be determined by your contract's growth
during the ACCUMULATION PHASE.
2. ANNUITY BENEFIT PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) periodic payments guaranteed for the annuitant's lifetime;
(2) periodic payments guaranteed for the annuitant's lifetime, but for not less
than 10 years; (3) periodic payments for the annuitant's lifetime with the
guarantee that if payments are less than the accumulated value at annuitization,
a refund of the remaining value will be paid; (4) periodic payments guaranteed
for the annuitant's lifetime and one other individual's (i.e. the beneficiary or
a joint annuitant) lifetime; (5) periodic payments guaranteed for the
annuitant's lifetime and one other individual's lifetime with the payment to the
survivor being reduced to 2/3; and (6) periodic payments guaranteed for a
specified period of 1 to 30 years. Other annuity options may be offered by the
Company.
You also need to decide if you want the annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once annuity benefit payments begin, the annuity
option cannot be changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making additional
payments into this contract. There are no limits to the frequency of additional
payments, but there are certain limitations as to amount. The initial payment
must be at least $25,000 and additional payments must be at least $100.
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4. INVESTMENT OPTIONS
You may allocate money among a total of 17 of the offered Sub-Accounts investing
in the following portfolios:
<TABLE>
<S> <C>
KVS PORTFOLIOS:
- --------------------------------------------------------------------
Kemper Aggressive Growth Kemper Index 500
Kemper Technology Growth Kemper Horizon 20+
Kemper-Dreman Financial Services Kemper Total Return
Kemper Small Cap Growth Kemper Horizon 10+
Kemper Small Cap Value Kemper High Yield
Kemper-Dreman High Return Equity Kemper Horizon 5
Kemper International Kemper Global Income
Kemper International Growth and Kemper Investment Grade Bond
Income Kemper Government Securities
Kemper Global Blue Chip Kemper Money Market
KVS Focused Large
Kemper Growth Cap Growth
Kemper Contrarian Value
Kemper Blue Chip
Kemper Value+Growth
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
THE ALGER AMERICAN FUND PORTFOLIOS:
- --------------------------------------------------------------------
Alger American Leveraged AllCap
Alger American Balanced
DREYFUS INVESTMENT PORTFOLIOS:
- --------------------------------------------------------------------
Dreyfus MidCap Stock
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
- --------------------------------------------------------------------
Dreyfus Socially Responsible Growth
JANUS ASPEN SERIES:
- --------------------------------------------------------------------
Janus Aspen Growth
Janus Aspen Growth and Income
</TABLE>
You may also allocate money to the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts let you choose from among nine different
Guarantee Periods (ranging in maturity from 2 to 10 years) during which
principal and interest rates are guaranteed. The Fixed Account guarantees
principal and a minimum rate of interest (never less than 3% compounded
annually).
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5. EXPENSES
Each year and upon surrender, a $35 contract fee is deducted from your contract.
(This fee may vary by state. See your contract for more information.) The
contract fee is waived if the value of the contract is $75,000 or more on the
date the fee is assessed. We also deduct insurance charges at a total annual
rate of 1.40% of the average daily value of your contract value allocated to the
variable investment options. The insurance charges include a mortality and
expense risk charge of 1.25% and an administrative expense charge of 0.15%.
There are also investment management fees and other portfolio operating expenses
that vary by portfolio. (In addition, if you elect any of the available optional
riders, additional expenses will apply.)
In states where premium taxes are imposed, a premium tax charge will be deducted
either when withdrawals are made or annuity payments commence. However, the
Company reserves the right to deduct the premium tax charge at the time payments
into the Contract are received.
There is currently no charge for processing investment option transfers. We
reserve the right to assess a charge, not to exceed $25, for transfers in excess
of 12 per contract year.
The following chart is designed to help you understand the charges in your
contract. Column C labeled "Total Annual Charges" shows the total of the annual
contract fee (which is represented as 0.04%) and the 1.40% insurance charges
(Column A) plus the investment charges for each portfolio (Column B). Optional
rider charges are not included. Columns D and E show you two examples of the
charges, in dollar amounts, you would pay under a contract. The examples assume
that you invest $1,000 in a portfolio earning 5% annually and that you withdraw
your money: (1) at the end of year 1 (Column D), and (2) at the end of year 10
(Column E). In Column D, the Total Annual Expenses are assessed for one year. In
Column E, the example shows the aggregate of all the annual charges assessed for
10 years. The premium tax is assumed to be 0% in both examples. The following
chart does not reflect the optional Minimum Guaranteed Annuity Payout Rider or
the optional Enhanced Death Benefit Rider charges which, if elected, would
increase Total Annual Insurance expenses.
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<PAGE>
<TABLE>
<CAPTION>
A B C D E
TOTAL
ANNUAL
EXPENSES
TOTAL TOTAL AT END OF
ANNUAL ANNUAL TOTAL -------------------
INSURANCE PORTFOLIO ANNUAL 1 10
PORTFOLIO CHARGES CHARGES CHARGES YEAR YEARS
- -------------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Kemper Aggressive Growth* 1.44% 0.95% 2.39% $24 $269
Kemper Technology Growth* 1.44% 0.95% 2.39% $24 $269
Kemper-Dreman Financial Services** 1.44% 0.99% 2.43% $24 $273
Kemper Small Cap Growth 1.44% 0.70% 2.14% $21 $244
Kemper Small Cap Value 1.44% 0.80% 2.24% $22 $254
Kemper-Dreman High Return Equity** 1.44% 0.87% 2.31% $23 $261
Kemper International 1.44% 0.93% 2.37% $24 $267
Kemper International Growth and Income** 1.44% 1.12% 2.56% $26 $286
Kemper Global Blue Chip** 1.44% 1.56% 3.00% $30 $328
Kemper Growth 1.44% 0.65% 2.09% $21 $239
Kemper Contrarian Value 1.44% 0.78% 2.22% $22 $252
Kemper Blue Chip 1.44% 0.76% 2.20% $22 $250
Kemper Value+Growth 1.44% 0.78% 2.22% $22 $252
Kemper Index 500*** 1.44% 0.55% 1.99% $20 $228
Kemper Horizon 20+ 1.44% 0.67% 2.11% $21 $241
Kemper Total Return 1.44% 0.60% 2.04% $20 $233
Kemper Horizon 10+ 1.44% 0.64% 2.08% $21 $238
Kemper High Yield 1.44% 0.65% 2.09% $21 $239
Kemper Horizon 5 1.44% 0.66% 2.10% $21 $240
Kemper Global Income 1.44% 1.05% 2.49% $25 $279
Kemper Investment Grade Bond 1.44% 0.67% 2.11% $21 $241
Kemper Government Securities 1.44% 0.66% 2.10% $21 $240
Kemper Money Market 1.44% 0.54% 1.98% $20 $227
KVS Focused Large Cap Growth**** 1.44% 1.55% 2.59% $26 $289
Scudder International 1.44% 1.05% 2.49% $25 $279
Scudder Global Discovery 1.44% 1.78% 3.22% $32 $349
Scudder Capital Growth 1.44% 0.51% 1.95% $20 $224
Scudder Growth and Income 1.44% 0.56% 2.00% $20 $229
Alger American Leveraged AllCap 1.44% 0.96% 2.40% $24 $270
Alger American Balanced 1.44% 0.92% 2.36% $24 $266
Dreyfus MidCap Stock** 1.44% 1.00% 2.44% $24 $274
Dreyfus Socially Responsible Growth 1.44% 0.80% 2.24% $22 $254
Janus Aspen Growth 1.44% 0.68% 2.12% $21 $242
Janus Aspen Growth and Income** 1.44% 1.25% 2.69% $27 $299
</TABLE>
* These portfolios commenced operations after May 1, 1999. Charges have been
estimated and annualized. The charges reflect any expense reimbursements and/or
fee waivers. For more detailed information, see the Fee Table in the Prospectus.
** These portfolios commenced operations on May 1, 1998. Charges have been
annualized. The charges reflect any expense reimbursements and/or fee waivers.
For more detailed information, see the Fee Table in the Prospectus.
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*** This portfolio commenced operations on September 1, 1999. Charges have been
estimated and annualized. The charges reflect any expense reimbursements
and/or fee waivers. For more detailed information, see the Fee Table in the
Prospectus.
**** This portfolio commenced operations on October 29, 1999. Charges have been
estimated and annualized. The charges reflect any expense reimbursements and/or
fee waivers. For more detailed information, see the Fee Table in the Prospectus.
6. TAXES
Under current tax rules you will not pay taxes until you withdraw money from
your contract. During the accumulation phase, earnings are withdrawn first and
are taxed as ordinary income. If you make a withdrawal prior to age 59 1/2, you
may be subject to a 10% federal tax penalty on the earnings. Payments during the
annuity payout phase are considered partly a return of your original investment
and partly earnings. You will be subject to income taxes on the earnings portion
of each payment. However, if your contract is funded with pre-tax or tax
deductible dollars (such as a pension or profit sharing plan contribution), then
the entire payment may be taxable.
7. WITHDRAWALS
You can make withdrawals from your contract any time during the accumulation
phase. The minimum withdrawal amount is $100.
Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of the
Guarantee Period will be subject to a market value adjustment which may increase
or decrease the value in that account. This adjustment will never impact your
original investment, nor will earnings in the GPA amount to less than an
effective annual rate of 3%.
8. PERFORMANCE
The value of your contract will vary up or down depending on the investment
performance of the Sub-Accounts investing in the underlying portfolios you
choose. The first chart below illustrates past returns on a calendar year basis
for each Sub-Account of Allmerica Financial Life Insurance and Annuity Company's
Separate Account KG based on the inception dates of each Sub-Account. The second
chart illustrates the same information for each Sub-Account of First Allmerica
Financial Life Insurance Company's Separate Account KG. Each Company offers the
same Sub-Accounts; however, Separate Account KG of Allmerica Financial Life
Insurance and Annuity Company and its Sub-Accounts have been in existence for a
longer period. The performance figures reflect the contract fee, the insurance
charges, and the investment charges and other expenses of the underlying
portfolios. They do not
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reflect the optional Minimum Guaranteed Annuity Payout Rider or the optional
Enhanced Death Benefit Rider charges which, if elected, would reduce
performance. Please note that past performance is not a guarantee of future
results.
SEPARATE ACCOUNT KG (KEMPER GATEWAY ADVISOR) OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED
DECEMBER 31
PORTFOLIO 1998 1997
- --------- --------------- --------
<S> <C> <C>
Kemper Aggressive Growth N/A N/A
Kemper Technology Growth N/A N/A
Kemper-Dreman Financial Services N/A N/A
Kemper Small Cap Growth 16.60% 32.32%
Kemper Small Cap Value -12.61% 20.03%
Kemper-Dreman High Return Equity N/A N/A
Kemper International 8.37% 7.92%
Kemper International Growth and Income N/A N/A
Kemper Global Blue Chip N/A N/A
Kemper Growth 13.38% 19.63%
Kemper Contrarian Value 17.48% 28.55%
Kemper Blue Chip 12.14% N/A
Kemper Value+Growth 18.38% 23.70%
Kemper Index 500 N/A N/A
Kemper Horizon 20+ 11.34% 18.78%
Kemper Total Return 13.42% 18.27%
Kemper Horizon 10+ 9.66% 15.13%
Kemper High Yield -0.08% 10.04%
Kemper Horizon 5 8.11% 11.11%
Kemper Global Income 9.32% N/A
Kemper Investment Grade Bond 6.31% 7.49%
Kemper Government Securities 5.42% 7.42%
Kemper Money Market 3.57% 3.72%
KVS Focused Large Cap Growth N/A N/A
Scudder International N/A N/A
Scudder Global Discovery N/A N/A
Scudder Capital Growth N/A N/A
Scudder Growth and Income N/A N/A
Alger American Leveraged AllCap N/A N/A
Alger American Balanced N/A N/A
Dreyfus MidCap Stock N/A N/A
Dreyfus Socially Responsible Growth N/A N/A
Janus Aspen Growth N/A N/A
Janus Aspen Growth and Income N/A N/A
</TABLE>
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<PAGE>
SEPARATE ACCOUNT KG (KEMPER GATEWAY ADVISOR) OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED
DECEMBER 31
PORTFOLIO 1998 1997
- --------- --------------- --------
<S> <C> <C>
Kemper Aggressive Growth N/A N/A
Kemper Technology Growth N/A N/A
Kemper-Dreman Financial Services N/A N/A
Kemper Small Cap Growth 16.61% N/A
Kemper Small Cap Value -12.60% N/A
Kemper-Dreman High Return Equity N/A N/A
Kemper International 8.38% N/A
Kemper International Growth and Income N/A N/A
Kemper Global Blue Chip N/A N/A
Kemper Growth 13.39% N/A
Kemper Contrarian Value 17.49% N/A
Kemper Blue Chip 12.15% N/A
Kemper Value+Growth 18.39% N/A
Kemer Index 500 N/A N/A
Kemper Horizon 20+ 11.35% N/A
Kemper Total Return 13.43% N/A
Kemper Horizon 10+ 9.67% N/A
Kemper High Yield -0.07% N/A
Kemper Horizon 5 8.12% N/A
Kemper Global Income 9.33% N/A
Kemper Investment Grade Bond 6.32% N/A
Kemper Government Securities 5.43% N/A
Kemper Money Market 3.55% N/A
KVS Focused Large Cap Growth N/A N/A
Scudder International N/A N/A
Scudder Global Discovery N/A N/A
Scudder Capital Growth N/A N/A
Scudder Growth and Income N/A N/A
Alger American Leveraged AllCap N/A N/A
Alger American Balanced N/A N/A
Dreyfus MidCap Stock N/A N/A
Dreyfus Socially Responsible Growth N/A N/A
Janus Aspen Growth N/A N/A
Janus Aspen Growth and Income N/A N/A
</TABLE>
9. DEATH BENEFIT
If you or a joint owner (or an annuitant in the event that the owner is a
nonnatural person) dies during the accumulation phase, we will pay the
beneficiary a death
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benefit. The death benefit is equal to the greater of: (a) the accumulated value
increased by any positive market value adjustment; or (b) gross payments,
decreased proportionately to reflect withdrawals. You may also purchase a rider
that will enhance the death benefit (see "Optional Enhanced Death Benefit Rider"
below).
10. OTHER INFORMATION
OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER (not available in all
jurisdictions): This optional rider is available for a separate monthly charge.
This rider guarantees you a minimum amount of fixed lifetime income during the
annuity payout phase, subject to certain conditions. On each contract
anniversary a minimum guaranteed annuity payout benefit base is determined. This
minimum guaranteed annuity payout benefit base (less any applicable premium
taxes) is the value that will be annuitized should you exercise the rider. In
order to exercise the rider, a fixed annuitization option involving a life
contingency must be selected. Annuitization under this rider will occur at the
guaranteed annuity purchase rates listed under the Annuity Option Tables in your
Contract. The minimum guaranteed annuity payout benefit base is equal to the
greatest of:
(a) the accumulated value increased by any positive market value adjustment, if
applicable; or
(b) the accumulated value on the effective date of the rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest accumulated value on any contract anniversary since the rider
effective date, as determined after positive adjustments have been made for
subsequent payments and any positive market value adjustment, if applicable,
and negative adjustments have been made for subsequent withdrawals.
OPTIONAL ENHANCED DEATH BENEFIT RIDER: This optional rider is available at
issue if you are under age 89 for a separate monthly charge. Under this rider:
I. If an owner (or an annuitant if the owner is a nonnatural person) dies before
the annuity date and before the oldest owner's 90th birthday, the death benefit
will be equal to the GREATEST of:
(a) the accumulated value increased by any positive market value adjustment; or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York, the 5% compounding is not available;
therefore, (b) equals gross payments decreased proportionately to reflect
withdrawals); or
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(c) the highest accumulated value on any prior contract anniversary, increased
for any positive market value adjustment and subsequent payments and
decreased proportionately for subsequent withdrawals.
The (c) value is determined on each contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior contract anniversaries, after all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next contract anniversary. The values of
(b) and (c) will be decreased proportionately if withdrawals are taken.
II. If an owner (or an annuitant if the owner is a nonnatural person) dies
before the annuity date but after the oldest owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the accumulated value increased by any positive market value adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the contract anniversary immediately prior to the oldest owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), you will receive a refund in
accordance with the terms of the contract's "Right to Examine" provision.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Kemper Money Market Portfolio, the Kemper Government
Securities Portfolio or the Fixed Account to one or more of the variable
investment options. There is no charge for this service.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
There is no charge for this service.
11. INQUIRIES
If you need more information you may contact us at 1-800-782-8380 or send
correspondence to:
Kemper Gateway Annuities
Allmerica Financial
P.O. Box 8632
Boston, Massachusetts 02266-8632
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
This Prospectus provides important information about the Kemper Gateway Advisor
variable annuity contracts issued by Allmerica Financial Life Insurance and
Annuity Company (in all jurisdictions except Hawaii and New York) and First
Allmerica Financial Life Insurance Company in New York and Hawaii. The contract
is a flexible payment tax-deferred combination variable and fixed annuity
offered on both a group and individual basis. Please read this Prospectus
carefully before investing and keep it for future reference. Annuities involve
risks including possible loss of principle.
The Variable Account, known as Separate Account KG is subdivided into
Sub-Accounts, each investing exclusively in shares of one of the following
funds:
<TABLE>
<CAPTION>
KVS PORTFOLIOS:
- ---------------
<S> <C>
Kemper Aggressive Growth Kemper Blue Chip
Kemper Technology Growth Kemper Value+Growth
Kemper-Dreman Financial Services Kemper Index 500
Kemper Small Cap Growth Kemper Horizon 20+
Kemper Small Cap Value Kemper Total Return
Kemper-Dreman High Return Equity Kemper Horizon 10+
Kemper International Kemper High Yield
Kemper International Kemper Horizon 5
Growth and Income Kemper Global Income
Kemper Global Blue Chip Kemper Investment Grade Bond
Kemper Growth Kemper Government Securities
Kemper Contrarian Value Kemper Money Market
KVS Focused Large Cap Growth
SCUDDER VLIF PORTFOLIOS:
- ------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
THE ALGER AMERICAN FUND PORTFOLIO:
- ------------------------------------
Alger American Leveraged AllCap
Alger American Balanced
THE DREYFUS SOCIALLY RESPONSIBLE
DREYFUS INVESTMENT PORTFOLIOS: GROWTH FUND, INC.:
- ------------------------------------ ------------------------------------
Dreyfus MidCap Stock Dreyfus Socially Responsible Growth
JANUS ASPEN SERIES:
- ------------------------------------
Janus Aspen Growth Janus Aspen Growth and Income
</TABLE>
THIS ANNUITY IS NOT A BANK DEPOSIT; FEDERALLY INSURED OR ENDORSED BY ANY BANK OR
GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED JUNE 23, 1999 AS REVISED NOVEMBER 15, 1999
<PAGE>
The Fixed Account is part of the Company's General Account and pays an interest
rate guaranteed for one year from the time a payment is received. The Guarantee
Period Accounts offer fixed rates of interest for specified periods ranging from
2 to 10 years. A Market Value Adjustment is applied to payments removed from a
Guarantee Period Account before the end of the specified period. The Market
Value Adjustment may be positive or negative. Payments allocated to a Guarantee
Period Account are held in the Company's Separate Account GPA (except in
California where they are allocated to the General Account.)
A Statement of Additional Information dated June 23, 1999 as revised
November 15, 1999 containing more information about this annuity is on file with
the Securities and Exchange Commission and is incorporated by reference into
this Prospectus. A copy may be obtained free of charge by calling Allmerica
Investments, Inc., at 1-800-782-8380. The Table of Contents of the Statement of
Additional Information is listed on page 5 of this Prospectus. This Prospectus
and the Statement of Additional Information can also be obtained from the
Securities and Exchange Commission's website (http://www.sec.gov).
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
SPECIAL TERMS 6
SUMMARY OF FEES AND EXPENSES 8
SUMMARY OF CONTRACT FEATURES 16
DESCRIPTION OF THE COMPANIES, THE VARIABLE
ACCOUNTS, AND THE UNDERLYING PORTFOLIOS 25
INVESTMENT OBJECTIVES AND POLICIES 27
INVESTMENT MANAGEMENT SERVICES 31
DESCRIPTION OF THE CONTRACT 35
A. Payments 35
B. Right to Cancel Individual Retirement Annuity 36
C. Right to Cancel All Other Contracts 37
D. Transfer Privilege 37
Automatic Transfers and Automatic Account Rebalancing
Options 38
E. Surrender 39
F. Withdrawals 40
Systematic Withdrawals 41
Life Expectancy Distributions 41
G. Death Benefit 42
Death of an Owner Prior to the Annuity Date 42
Optional Enhanced Death Benefit Rider 43
Payment of the Death Benefit 44
H. The Spouse of the Owner as Beneficiary 44
I. Assignment 45
J. Electing the Form of Annuity and Annuity Date 45
K. Description of Variable Annuity Payout Options 46
L. Annuity Benefit Payments 48
Determination of the First Variable Annuity Benefit
Payment 48
The Annuity Unit 49
Determination of the Number of Annuity Units 49
Dollar Amount of Subsequent Variable Annuity Benefit
Payments 49
M. Optional Minimum Guaranteed Annuity Payout Rider 50
N. NORRIS Decision 53
O. Computation of Values 53
The Accumulation Unit 53
Net Investment Factor 54
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C>
CHARGES AND DEDUCTIONS 54
A. Variable Account Deductions 55
Mortality and Expense Risk Charge 55
Administrative Expense Charge 55
Other Charges 56
B. Contract Fee 56
C. Optional Benefit Rider Charges 56
D. Premium Taxes 57
E. Transfer Charge 57
GUARANTEE PERIOD ACCOUNTS 58
FEDERAL TAX CONSIDERATIONS 61
A. Qualified and Non-Qualified Contracts 63
B. Taxation of the Contract in General 63
Withdrawals Prior to Annuitization 63
Annuity Payouts After Annuitization 63
Penalty on Distribution 64
Assignments or Transfers 64
Nonnatural Owners 65
Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations 65
C. Tax Withholding 65
D. Provisions Applicable to Qualified Employer Plans 65
Corporate and Self-Employed Pension and Profit Sharing
Plans 66
Individual Retirement Annuities 66
Tax-Sheltered Annuities 66
Texas Optional Retirement Program 67
STATEMENTS AND REPORTS 67
LOANS (QUALIFIED CONTRACTS ONLY) 67
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 68
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 69
VOTING RIGHTS 70
DISTRIBUTION 70
LEGAL MATTERS 71
YEAR 2000 COMPLIANCE 71
FURTHER INFORMATION 72
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C>
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED
ACCOUNT A-1
APPENDIX B -- PERFORMANCE INFORMATION
PERFORMANCE TABLES (ALLMERICA FINANCIAL LIFE
INSURANCE
AND ANNUITY COMPANY) B-1
APPENDIX C -- PERFORMANCE TABLES (FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY) C-1
APPENDIX D -- THE MARKET VALUE ADJUSTMENT D-1
APPENDIX E -- CONDENSED FINANCIAL INFORMATION E-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY 3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
PERFORMANCE INFORMATION 6
TAX-DEFERRED ACCUMULATION 7
FINANCIAL STATEMENTS F-1
</TABLE>
5
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the total value of all Accumulation Units in the Sub-
Accounts plus the value of all accumulations in the Fixed Account and Guarantee
Period Accounts credited to the Contract on any date before the Annuity Date.
ACCUMULATION UNIT: a unit of measure used to calculate the value of a Sub-
Account before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose continuation of life
annuity benefit payments involving life contingency depend. Joint Annuitants are
permitted and, unless otherwise indicated, any reference to Annuitant shall
include Joint Annuitants.
ANNUITY DATE: the date on which annuity benefit payments begin. This date may
not be later than the first day of the month before the Owner's 99th birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity benefit payments under the Contract.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in all jurisdictions except Hawaii and New York and exclusively
to First Allmerica Financial Life Insurance Company for contracts issued in
Hawaii and New York.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option providing for annuity benefit
payments which remain fixed in amount throughout the annuity benefit payment
period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited to a Guarantee Period Account.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
6
<PAGE>
MARKET VALUE ADJUSTMENT: a positive or negative adjustment to earnings in the
Guarantee Period Account assessed if any portion of a Guarantee Period Account
is withdrawn or transferred prior to the end of its Guarantee Period.
OWNER (OR YOU): the person, persons or entity entitled to exercise the rights
and privileges under this Contract. Joint Owners are permitted if one of the two
is an Annuitant and, unless otherwise indicated, any reference to Owner shall
include Joint Owners.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a corresponding portfolio of Kemper Variable Series ("KVS"), Scudder
Variable Life Investment Fund (Class A) ("Scudder VLIF"), The Alger American
Fund ("Alger"), Dreyfus Investment Portfolios, The Dreyfus Socially Responsible
Growth Fund, Inc. (the "Dreyfus Socially Responsible Growth Fund") or Janus
Aspen Series ("Janus Aspen").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee and Market Value Adjustment.
UNDERLYING PORTFOLIO (OR PORTFOLIOS): currently, the twenty-four Portfolios of
KVS, the four Portfolios of Scudder VLIF, the two Portfolios of The Alger
American Fund, the one Portfolio of Dreyfus Investment Portfolios, the one
Portfolio of the Dreyfus Socially Responsible Growth Fund and the two Portfolios
of Janus Aspen in which the Sub-Accounts invest.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Portfolios is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, as well as each day otherwise required.
VARIABLE ACCOUNT: Separate Account KG, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity payout option in the payout phase providing
for payments varying in amount in accordance with the investment experience of
certain of the Portfolios.
7
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Kemper Gateway
Advisor Contract. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Contract, (2) annual expenses of the Sub-Accounts, and (3) annual expenses of
the Underlying Portfolios. In addition to the charges and expenses described
below, premium taxes are applicable in some states and are deducted as described
under "D. Premium Taxes."
<TABLE>
<CAPTION>
(1) CONTRACT CHARGES: CHARGE
- --------------------- ----------
<S> <C>
SALES CHARGE IMPOSED ON PAYMENTS: NONE
SURRENDER CHARGE: NONE
TRANSFER CHARGE: None
The Company currently makes no charge for processing
transfers and guarantees that the first 12 transfers in a
Contract year will not be subject to a transfer charge.
For each subsequent transfer, the Company reserves the
right to assess a charge, guaranteed never to exceed $25,
to reimburse the Company for the costs of processing the
transfer.
ANNUAL CONTRACT FEE: $35*
The fee is deducted annually and upon surrender prior to
the Annuity Date when Accumulated Value is less than
$75,000.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly basis at the
end of each month.)
On an annual basis as a percentage of Accumulated Value,
the charge is:
Optional Minimum Guaranteed Annuity Payout Rider with a 0.25%
ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout Rider with a 0.15%
fifteen year waiting period:
Optional Enhanced Death Benefit Rider: 0.25%
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
------
Total Annual Expenses: 1.40%
</TABLE>
* This fee may vary by state. See your Contract for more information.
8
<PAGE>
(3) ANNUAL PORTFOLIO EXPENSES: The following table shows the expenses of the
Underlying Portfolios as a percentage of average net assets for the year ended
December 31, 1998. For more information concerning fees and expenses, see the
prospectuses for the Underlying Portfolios.
<TABLE>
<CAPTION>
MANAGEMENT
FEE OTHER TOTAL PORTFOLIO
(AFTER ANY EXPENSES EXPENSES (AFTER
VOLUNTARY (AFTER ANY ANY WAIVERS/
PORTFOLIO WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- --------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth*(1).... 0.67% 0.28% 0.95%
Kemper Technology Growth*(1).... 0.66% 0.29% 0.95%
Kemper-Dreman Financial
Services**(1).................. 0.02% 0.97% 0.99%
Kemper Small Cap Growth......... 0.65% 0.05% 0.70%
Kemper Small Cap Value.......... 0.75% 0.05% 0.80%(2)
Kemper-Dreman High Return
Equity**(1).................... 0.42% 0.45% 0.87%
Kemper International............ 0.75% 0.18% 0.93%
Kemper International Growth and
Income**(1).................... 0.00% 1.12% 1.12%
Kemper Global Blue Chip**(1).... 0.00% 1.56% 1.56%
Kemper Growth................... 0.60% 0.05% 0.65%
Kemper Contrarian Value......... 0.75% 0.03% 0.78%(2)
Kemper Blue Chip................ 0.65% 0.11% 0.76%(2)
Kemper Value+Growth............. 0.75% 0.03% 0.78%(2)
Kemper Index 500***............. 0.26% 0.29% 0.55%(3)
Kemper Horizon 20+.............. 0.60% 0.07% 0.67%(2)
Kemper Total Return............. 0.55% 0.05% 0.60%
Kemper Horizon 10+.............. 0.60% 0.04% 0.64%(2)
Kemper High Yield............... 0.60% 0.05% 0.65%
Kemper Horizon 5................ 0.60% 0.06% 0.66%(2)
Kemper Global Income(1)......... 0.72% 0.33% 1.05%
Kemper Investment Grade Bond.... 0.60% 0.07% 0.67%(2)
Kemper Government Securities.... 0.55% 0.11% 0.66%
Kemper Money Market............. 0.50% 0.04% 0.54%
KVS Focused Large Cap
Growth****..................... 0.58% 0.57% 1.15%(4)
Scudder International........... 0.87% 0.18% 1.05%
Scudder Global Discovery........ 0.97% 0.81% 1.78%
Scudder Capital Growth.......... 0.47% 0.04% 0.51%
Scudder Growth and Income....... 0.47% 0.09% 0.56%
Dreyfus MidCap Stock**.......... 0.75% 0.25% 1.00%(5)
Dreyfus Socially Responsible
Growth......................... 0.75% 0.05% 0.80%
Janus Aspen Growth.............. 0.65% 0.03% 0.68%(6)
Janus Aspen Growth and
Income**....................... 0.00% 1.25% 1.25%(6)
</TABLE>
9
<PAGE>
* These portfolios commenced operations after May 1, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
** These portfolios commenced operations on May 1, 1998, therefore "other
expenses" are annualized. Actual expenses may be greater or less than shown.
*** This portfolio commenced operations on September 1, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
**** This portfolio commenced operations on October 29, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
(1) Pursuant to their respective agreements with Kemper Variable Series
("KVS"), the investment manager and the accounting agent have agreed, for
the one year period commencing on May 1, 1999, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the Kemper Aggressive Growth, Kemper Technology Growth,
Kemper-Dreman Financial Services, Kemper-Dreman High Return Equity, Kemper
International Growth and Income, Kemper Global Blue Chip and Kemper Global
Income Portfolios of KVS to the levels set forth in the table above. Without
taking into effect these expense caps, for the Kemper Aggressive Growth,
Kemper Technology Growth, Kemper-Dreman Financial Services, Kemper-Dreman
High Return Equity, Kemper International Growth and Income, Kemper Global
Blue Chip and Kemper Global Income Portfolios of KVS, management fees are
estimated to be 0.75%, 0.75%, 0.75%, 0.75%, 1.00%, 1.00% and 0.75%,
respectively. Other expenses are estimated to be 0.28%, 0.29%, 0.97%, 0.45%,
18.54%, 11.32% and 0.33%, respectively; and total operating expenses are
estimated to be 1.03%, 1.04%, 1.72%, 1.20%, 19.54%, 12.32%, and 1.08%,
respectively. In addition, for the Kemper International Growth and Income
and Kemper Global Blue Chip Portfolios, the investment manager has agreed to
limit its management fee to 0.70% and 0.85%, respectively, for such
portfolios for one year from May 1, 1999.
(2) Pursuant to their respective agreements with KVS, the investment manager
and the accounting agent have agreed, for the one year period commencing on
May 1, 1999, to limit their respective fees and to reimburse other operating
expenses, in a manner communicated to the Board of the Fund, to the extent
necessary to limit total operating expenses of the following described
portfolios to the amounts set forth after the portfolio names: Kemper
Value+Growth (0.84%), Kemper Contrarian Value (0.80%), Kemper Small Cap
Value (0.84%), Kemper Horizon 5 (0.97%), Kemper Horizon
10
<PAGE>
10+ (0.83%), Kemper Horizon 20+ (0.93%), Kemper Investment Grade Bond
(0.80%), and Kemper Blue Chip (0.95%). The amounts set forth in the table
above reflect actual expenses for the past fiscal year, which were lower
than these expense limits.
(3) The investment manager for the Kemper Index 500 Portfolio has agreed to
limit total operating expenses of the Portfolio to 0.55%. This limitation
will be effective from the portfolio's commencement of operations through
April 30, 2000. Without taking into effect this expense cap, for the Kemper
Index 500 Portfolio, management fees would be 0.45%; other expenses are
estimated to be 0.29%; and total operating expenses are estimated to be
0.74%.
(4) The investment manager for the KVS Focused Large Cap Growth Portfolio has
agreed, for the period from October 29, 1999 through April 30, 2000, to
limit its fees and to reimburse other operating expenses to the extent
necessary to limit total operating expenses of the portfolio to the levels
set forth in the table above. Without taking into effect these expense caps,
the management fees would be 0.95%, other expenses are estimated to be 0.57%
and total operating expenses are estimated to be 1.52%.
(5) From time to time, the MidCap Stock Portfolio's investment adviser, in its
sole discretion, may waive all or part of its fees and/or voluntarily assume
certain Portfolio expenses. The expenses set forth in the above table
reflect the adviser's waiver of fees or reimbursement of expenses for
calendar year 1998. Without such waivers or reimbursements, Total Portfolio
Expenses would have been 1.89% as a percentage of assets.
(6) The expense figures shown are net of certain contractual waivers or fee
reductions by Janus Capital. Without such waivers, Management Fees, Other
Expenses and Total Portfolio Expenses for the Portfolios for the fiscal year
ended December 31, 1998 would have been 0.72%, 0.03% and 0.75%,
respectively, for the Janus Aspen Growth Portfolio; and 0.75%, 2.31% and
3.06%, respectively, for the Janus Aspen Growth and Income Portfolio. See
the prospectus and Statement of Additional Information of Janus Aspen
Series for a description of these waivers.
The Underlying Portfolio information above was provided by the Underlying
Portfolios and was not independently verified by the Company.
EXPENSE EXAMPLES. The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. As required by rules of the Securities and
Exchange Commission ("SEC"), the Contract fee is reflected in the
11
<PAGE>
examples by a method designated to show the "average" impact on an investment in
the Variable Account. The total Contract fees collected are divided by the total
average net assets attributable to the Contracts. The resulting percentage is
0.04%, and the amount of the Contract fee is assumed to be $0.40 in the
examples. The Contract fee is not deducted after annuitization. The Contract fee
is deducted only when the accumulated value is less than $75,000.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
12
<PAGE>
(1) At the end of the applicable time period, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and no
optional benefit riders:(1)
<TABLE>
<CAPTION>
1 3 5 10
UNDERLYING PORTFOLIO YEAR YEARS YEARS YEARS
- -------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $24 $74 $126 $269
Kemper Technology Growth................ $24 $74 $126 $269
Kemper-Dreman Financial Services........ $24 $75 $128 $273
Kemper Small Cap Growth................. $21 $66 $113 $244
Kemper Small Cap Value.................. $22 $69 $118 $254
Kemper-Dreman High Return............... $23 $71 $122 $261
Kemper International.................... $24 $73 $125 $267
Kemper International Growth and
Income................................. $26 $79 $134 $286
Kemper Global Blue Chip................. $30 $92 $156 $328
Kemper Growth........................... $21 $65 $111 $239
Kemper Contrarian Value................. $22 $68 $117 $252
Kemper Blue Chip........................ $22 $68 $116 $250
Kemper Value+Growth..................... $22 $68 $117 $252
Kemper Index 500........................ $20 $62 $106 $228
Kemper Horizon 20+...................... $21 $65 $112 $241
Kemper Total Return..................... $20 $63 $108 $233
Kemper Horizon 10+...................... $21 $64 $110 $238
Kemper High Yield....................... $21 $65 $111 $239
Kemper Horizon 5........................ $21 $65 $111 $240
Kemper Global Income.................... $25 $77 $131 $279
Kemper Investment Grade Bond............ $21 $65 $112 $241
Kemper Government Securities............ $21 $65 $111 $240
Kemper Money Market..................... $20 $61 $105 $227
KVS Focused Large Cap Growth............ $26 $80 $136 $289
Scudder International................... $25 $77 $131 $279
Scudder Global Discovery................ $32 $98 $167 $349
Scudder Capital Growth.................. $20 $60 $104 $224
Scudder Growth and Income............... $20 $62 $106 $229
Alger American Leveraged AllCap......... $24 $74 $126 $270
Alger American Balanced................. $24 $73 $124 $266
Dreyfus MidCap Stock.................... $24 $75 $128 $274
Dreyfus Socially Responsible Growth..... $22 $69 $118 $254
Janus Aspen Growth...................... $21 $65 $112 $242
Janus Aspen Growth and Income........... $27 $83 $141 $299
</TABLE>
13
<PAGE>
(2) At the end of the applicable time period, you would pay the following
expenses on a $1000 investment, assuming a 5% annual return on assets and
election of either an optional Enhanced Death Benefit Rider or an optional
Minimum Guaranteed Annuity Payout Rider(1) with a ten-year waiting period:
<TABLE>
<CAPTION>
1 3 5 10
UNDERLYING PORTFOLIO YEAR YEARS YEARS YEARS
- -------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $26 $ 81 $138 $294
Kemper Technology Growth................ $26 $ 81 $138 $294
Kemper-Dreman Financial Services........ $27 $ 82 $140 $298
Kemper Small Cap Growth................. $24 $ 74 $126 $269
Kemper Small Cap Value.................. $25 $ 77 $131 $279
Kemper-Dreman High Return............... $26 $ 79 $134 $286
Kemper International.................... $26 $ 80 $137 $292
Kemper International Growth and
Income................................. $28 $ 86 $147 $310
Kemper Global Blue Chip................. $33 $ 99 $168 $352
Kemper Growth........................... $23 $ 72 $123 $264
Kemper Contrarian Value................. $25 $ 76 $130 $277
Kemper Blue Chip........................ $25 $ 75 $129 $275
Kemper Value+Growth..................... $25 $ 76 $130 $277
Kemper Index 500........................ $22 $ 69 $118 $254
Kemper Horizon 20+...................... $24 $ 73 $124 $266
Kemper Total Return..................... $23 $ 71 $121 $259
Kemper Horizon 10+...................... $23 $ 72 $123 $263
Kemper High Yield....................... $23 $ 72 $123 $264
Kemper Horizon 5........................ $24 $ 72 $124 $265
Kemper Global Income.................... $27 $ 84 $143 $304
Kemper Investment Grade Bond............ $24 $ 73 $124 $266
Kemper Government Securities............ $24 $ 72 $124 $265
Kemper Money Market..................... $22 $ 69 $118 $253
KVS Focused Large Cap Growth............ $28 $ 87 $148 $313
Scudder International................... $27 $ 84 $143 $304
Scudder Global Discovery................ $35 $106 $179 $372
Scudder Capital Growth.................. $22 $ 68 $116 $250
Scudder Growth and Income............... $23 $ 69 $119 $255
Alger American Leveraged AllCap......... $27 $ 81 $139 $295
Alger American Balanced................. $26 $ 80 $137 $291
Dreyfus MidCap Stock.................... $27 $ 83 $141 $299
Dreyfus Socially Responsible Growth..... $25 $ 77 $131 $279
Janus Aspen Growth...................... $24 $ 73 $125 $267
Janus Aspen Growth and Income........... $29 $ 90 $153 $323
</TABLE>
14
<PAGE>
(3) At the end of the applicable time period, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and the
election of both an optional Enhanced Death Benefit Rider and an optional
Minimum Guaranteed Annuity Payout Rider(1) with a ten-year waiting period:
<TABLE>
<CAPTION>
1 3 5 10
UNDERLYING PORTFOLIO YEAR YEARS YEARS YEARS
- -------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $29 $ 89 $151 $318
Kemper Technology Growth................ $29 $ 89 $151 $318
Kemper-Dreman Financial Services........ $29 $ 90 $153 $322
Kemper Small Cap Growth................. $26 $ 81 $138 $294
Kemper Small Cap Value.................. $27 $ 84 $143 $304
Kemper-Dreman High Return............... $28 $ 86 $147 $310
Kemper International.................... $29 $ 88 $150 $316
Kemper International Growth and
Income................................. $31 $ 94 $159 $334
Kemper Global Blue Chip................. $35 $107 $180 $375
Kemper Growth........................... $26 $ 80 $136 $289
Kemper Contrarian Value................. $27 $ 83 $142 $302
Kemper Blue Chip........................ $27 $ 83 $141 $300
Kemper Value+Growth..................... $27 $ 83 $142 $302
Kemper Index 500........................ $25 $ 77 $131 $279
Kemper Horizon 20+...................... $26 $ 80 $137 $291
Kemper Total Return..................... $25 $ 78 $133 $284
Kemper Horizon 10+...................... $26 $ 79 $135 $288
Kemper High Yield....................... $26 $ 80 $136 $289
Kemper Horizon 5........................ $26 $ 80 $136 $290
Kemper Global Income.................... $30 $ 92 $156 $328
Kemper Investment Grade Bond............ $26 $ 80 $137 $291
Kemper Government Securities............ $26 $ 80 $136 $290
Kemper Money Market..................... $25 $ 76 $130 $278
KVS Focused Large Cap Growth............ $31 $ 94 $161 $337
Scudder International................... $30 $ 92 $156 $328
Scudder Global Discovery................ $37 $113 $191 $394
Scudder Capital Growth.................. $25 $ 75 $129 $275
Scudder Growth and Income............... $25 $ 77 $131 $280
Alger American Leveraged AllCap......... $29 $ 89 $151 $319
Alger American Balanced................. $29 $ 88 $149 $315
Dreyfus MidCap Stock.................... $29 $ 90 $153 $323
Dreyfus Socially Responsible Growth..... $27 $ 84 $143 $304
Janus Aspen Growth...................... $26 $ 80 $137 $292
Janus Aspen Growth and Income........... $32 $ 97 $165 $346
</TABLE>
(1) If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Contract.
15
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE KEMPER GATEWAY ADVISOR VARIABLE ANNUITY?
The Kemper Gateway Advisor variable annuity contract ("Contract") is an
insurance contract designed to help you accumulate assets for your retirement or
other important financial goals on a tax-deferred basis. The Contract combines
the concept of professional money management with the attributes of an annuity
contract. Features available through the Contract include:
- A customized investment portfolio;
- 24 KVS Portfolios, 4 Scudder VLIF Portfolios, 2 Alger Portfolios, 1 Dreyfus
Investment Portfolios Portfolio, 1 Dreyfus Socially Responsible Growth Fund
and 2 Janus Aspen Portfolios;
- 1 Fixed Account;
- 9 Guarantee Period Accounts;
- Experienced professional portfolio managers;
- Tax deferral on earnings;
- Guarantees that can protect your beneficiaries during the accumulation
phase;
- Income payments that you can receive for life.
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, you may
allocate, your initial payment and any additional payments you choose to make
among seventeen of the thirty portfolios of securities ("Portfolios") under your
Contract, to the Guarantee Period Accounts, and to the Fixed Account. You select
the investment options most appropriate for your investment needs. As those
needs change, you may also change your allocation without incurring any tax
consequences. Your Contract's Accumulated Value is based on the investment
performance of the Portfolios and any accumulations in the Guarantee Period and
Fixed Accounts. No income taxes are paid on any earnings under the Contract
unless you withdraw money. In addition, during the accumulation phase, your
beneficiaries receive certain protections in the event of your death. See
discussion below, "WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, you, or the payee you designate, can receive
income based on several annuity payout options. You choose the annuity payout
option and the date for annuity benefit payments to begin. You also decide
whether you want variable annuity benefit payments based on the investment
performance of certain Portfolios, fixed-amount annuity benefit payments with
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payment amounts guaranteed by the Company, or a combination of fixed-amount and
variable annuity benefit payments. Among the payout options available during the
annuity payout phase are:
- periodic payments for the Annuitant's life; periodic payments for the
Annuitant's life and the life of another person selected by you;
- periodic payments for the Annuitant's life with any remaining guaranteed
payments continuing for ten years in the event that the Annuitant dies
before the end of ten years;
- periodic payments over a specified number of years (1 to 30) - under this
option you may reserve the right to convert remaining payments to a lump-
sum payout by electing a commutable option.
An optional Minimum Guaranteed Annuity Payout Rider is available during the
accumulation phase in most jurisdictions for a separate monthly charge. See
"M. Optional Minimum Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE
CONTRACT." If elected, the Rider guarantees the Owner a minimum amount of fixed
lifetime income during the annuity payout phase, subject to certain conditions.
On each Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized should you
exercise the Rider. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rates listed under the Annuity
Option Tables in your Contract. The Minimum Guaranteed Annuity Payout Benefit
Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment, if
applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the Rider
effective date, as determined after positive adjustments have been made for
subsequent withdrawals and any positive Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal.
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WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner") and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
Hawaii and New York) or First Allmerica Financial Life Insurance Company (for
contracts issued in Hawaii and New York). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two also must be an
Annuitant), an Annuitant (or an Annuitant and a Joint Annuitant) and one or more
beneficiaries. As Owner, you make payments, choose investment allocations,
receive annuity benefit payments (or designate someone else to receive annuity
benefit payments) and select the Annuitant and beneficiary. When a Contract is
jointly owned, the consent of both Owners is required in order to exercise any
ownership rights. The Annuitant is the individual upon whose continuation of
life annuity benefit payments involving life contingency depend. An Annuitant
may be changed at any time after issue of the Contract and prior to the Annuity
Date, unless (1) the Owner is a nonnatural person or (2) you are taking life
expectancy distributions. For more information about life expectancy
distributions, see "F. Withdrawals." At all times, there must be at least one
Annuitant. If an Annuitant dies and a replacement is not named, you will become
the new Annuitant. The beneficiary is the person, persons or entity entitled to
the death benefit prior to the Annuity Date and who, under certain
circumstances, may be entitled to annuity benefit payments upon the death of an
Owner on or after the Annuity Date.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject to the minimum
and maximum payments stated in "A. Payments."
WHAT ARE MY INVESTMENT CHOICES?
You may allocate payments among the Sub-Accounts investing in the Portfolios,
the Guarantee Period Accounts, and the Fixed Account. As to the date of this
Prospectus, payments may be allocated to a maximum of seventeen Variable Sub-
Accounts during the life of the Contract and prior to the Annuity Date in
addition to the Kemper Money Market Portfolio.
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VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the following
Portfolios:
<TABLE>
<S> <C>
KVS PORTFOLIOS:
- ---------------------------------------
Kemper Aggressive Growth Kemper Value+Growth
Kemper Technology Growth Kemper Index 500
Kemper-Dreman Financial Services Kemper Horizon 20+
Kemper Small Cap Growth Kemper Total Return
Kemper Small Cap Value Kemper Horizon 10+
Kemper-Dreman High Return Equity Kemper High Yield
Kemper International Kemper Horizon 5
Kemper International Growth and
Income Kemper Global Income
Kemper Global Blue Chip Kemper Investment Grade Bond
Kemper Growth Kemper Government Securities
Kemper Contrarian Value Kemper Money Market
Kemper Blue Chip KVS Focused Large Cap Growth
SCUDDER VLIF PORTFOLIOS:
- ---------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
THE ALGER AMERICAN FUND PORTFOLIOS:
- ---------------------------------------
Alger American Leveraged AllCap
Alger American Balanced
DREYFUS INVESTMENT PORTFOLIOS:
- ---------------------------------------
Dreyfus MidCap Stock
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
- ----------------------------------------------------------------------
Dreyfus Socially Responsible Growth
JANUS ASPEN SERIES:
- ---------------------------------------
Janus Aspen Growth
Janus Aspen Growth and Income
</TABLE>
For a more detailed description of the Portfolios, see "INVESTMENT OBJECTIVES
AND POLICIES."
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account, except in California where assets are held in the
Company's General Account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the
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Guaranteed Interest Rate depends on the number of years of the Guarantee Period
selected. The Company currently makes available nine Guarantee Periods ranging
from two to ten years in duration. Once declared, the Guaranteed Interest Rate
will not change during the duration of the Guarantee Period. If amounts
allocated to a Guarantee Period Account are transferred, surrendered or applied
to any annuity option at any time other than the day following the last day of
the applicable Guarantee Period, a Market Value Adjustment will apply that may
increase or decrease the Account's value; however, this adjustment will never be
applied against your principal. In addition, earnings in the GPA after
application of the Market Value Adjustment will not be less than an effective
annual rate of 3%. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account is
guaranteed for one year from that date. For more information about the Fixed
Account see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
THE GUARANTEE PERIOD ACCOUNTS AND/OR SOME OF THE SUB-ACCOUNTS MAY NOT BE
AVAILABLE IN ALL STATES.
WHO ARE THE PORTFOLIO MANAGERS?
Scudder Kemper Investments, Inc. ("Scudder Kemper") is the investment manager of
each Portfolio of KVS and each Portfolio of Scudder VLIF. Scudder Investments
(U.K.) Limited, an affiliate of Scudder Kemper, is the sub-adviser for the
Kemper International Portfolio and the Kemper Global Income Portfolio. Dreman
Value Management, L.L.C. is the sub-advisor for the Kemper-Dreman Financial
Services Portfolio and Kemper-Dreman High Return Equity Portfolio. Scudder
Kemper is the investment manager of the Guarantee Period Accounts pursuant to an
investment advisory agreement between the Company and Scudder Kemper. Bankers
Trust Company is the sub-adviser for the Kemper Index 500 Portfolio. Eagle Asset
Management, Inc. ("EAM") is the sub-adviser for the KVS Focused Large Cap Growth
Portfolio. The investment manager for the Alger American Leveraged AllCap and
Alger American Balanced Portfolios is Fred Alger Management, Inc. The Dreyfus
Corporation serves as the investment
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adviser to the Dreyfus MidCap Stock Portfolio and the Dreyfus Socially
Responsible Growth Fund. NCM Capital Management Group, Inc. provides
sub-investment advisory services for the Dreyfus Socially Responsible Growth
Fund. Janus Capital is the investment adviser for the Janus Aspen Growth
Portfolio and Janus Aspen Growth and Income Portfolio.
CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. You will incur no current taxes on transfers while your money remains
in the Contract. You also may elect Automatic Account Rebalancing to ensure
assets remain allocated according to a desired mix or choose Automatic Dollar
Cost Averaging to gradually move money into one or more Portfolios. As of the
date of this Prospectus, transfers may be made to a maximum of seventeen
variable Sub-Accounts during the life of the Contract and prior to the Annuity
Date in addition to the Kemper Money Market Portfolio. See "D. Transfer
Privilege."
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender your Contract or make withdrawals any time before the annuity
payout phase begins. A 10% federal tax penalty may apply to all amounts deemed
to be income if you are under age 59 1/2. (A Market Value Adjustment, which may
increase or decrease the value of the account, may apply to any withdrawal made
from a Guarantee Period Account prior to the expiration of the Guarantee
Period.)
WHAT HAPPENS UPON MY DEATH DURING THE
ACCUMULATION PHASE?
If you or a Joint Owner (or an Annuitant in the event that the Owner is a
nonnatural person) should die before the Annuity Date, a death benefit will be
paid to the beneficiary. The standard death benefit will be equal to the
GREATER of:
- The Accumulated Value increased by any positive Market Value Adjustment; or
- Gross payments, decreased proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal, multiplied by the
withdrawal amount, and divided by the Accumulated Value immediately prior
to the withdrawal).
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An optional Enhanced Death Benefit Rider is available if you are under age 89
for a separate monthly charge. See "G. Death Benefit" under "DESCRIPTION OF THE
CONTRACT." Under the Enhanced Death Benefit Rider:
I. If an Owner (or an Annuitant if the Owner is a nonnatural person) dies before
the Annuity Date and before the oldest Owner's 90th birthday, the death benefit
will be equal to the GREATEST of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York the 5% compounding is not available;
therefore, (b) equals gross payments decreased proportionately to reflect
withdrawals); or
(c) the highest Accumulated Value on any prior Contract anniversary, increased
for any positive Market Value Adjustment and subsequent payments and
decreased proportionately for subsequent withdrawals.
The (c) value is determined on each Contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior Contract anniversaries, after all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next Contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an Owner (or an Annuitant if the Owner is a nonnatural person) dies
before the Annuity Date but after the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the Contract anniversary immediately prior to the oldest Owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value on a Contract anniversary or upon surrender is less
than $75,000, the Company will deduct a $35 Contract fee from your Contract.
(This fee may vary by state. See your Contract for more information.) There will
be no Contract fee if the Accumulated Value is $75,000 or more.
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Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "D. Premium Taxes."
Currently, the Company makes no charge for processing transfers. The first 12
transfers in a Contract year are guaranteed to be free of a transfer charge. For
each subsequent transfer in a Contract year, the Company reserves the right to
assess a charge which is guaranteed never to exceed $25, per transfer, to
reimburse it for the expense of processing these additional transfers.
The Company will deduct, on a daily basis, an annual mortality and expense risk
charge and administrative expense charge equal to 1.25% and 0.15%, respectively,
of the average daily net assets invested in each Portfolio. The Portfolios will
incur certain management fees and expenses described more fully in "Other
Charges" under "A. Variable Account Deductions" and in the Underlying Portfolios
prospectuses which accompany this Prospectus.
Subject to state availability, optional benefit riders are available for an
additional charge equal to an annual rate of 0.25% for a Minimum Guaranteed
Annuity Payout Rider with a ten-year waiting period, 0.15% for a Minimum
Guaranteed Annuity Payout Rider with a fifteen-year waiting period and 0.25% for
an Enhanced Death Benefit Rider, which is deducted on the last day of each month
and on the date the rider is terminated. For more information, see "G. Death
Benefit" and "M. Optional Minimum Guaranteed Annuity Payout Rider" under
"DESCRIPTION OF THE CONTRACT" and see "C. Optional Benefit Rider Charges" under
"CHARGES AND DEDUCTIONS."
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the Sub-
Accounts (plus any fees or charges that may have been deducted.) However, if
state law requires, or if your Contract was issued as an Individual Retirement
Annuity (IRA), you will generally receive a refund of your entire payment. In
certain states this refund may be the greater of (1) your entire payment or (2)
the amounts allocated to the Fixed and Guarantee Period Accounts plus the
Accumulated Value of amounts in the Sub-Accounts, plus any fees or charges
previously deducted. See "B. Right to Cancel Individual Retirement Annuity" and
"C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
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<PAGE>
- You may assign your ownership to someone else, except under certain
qualified plans; see FEDERAL TAX CONSIDERATIONS.
- You may change an Annuitant at any time after Contract issue and prior to
the Annuity Date, unless the Owner is a nonnatural person and except while
taking life expectancy distributions.
- You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- You may change your allocation of payments.
- You may make transfers among your accounts prior to the Annuity Date
without any tax consequences.
- You may cancel the Contract within ten days of delivery (or longer if
required by state law).
24
<PAGE>
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS
AND THE UNDERLYING PORTFOLIOS
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its principal office ("Principal Office") is located at
440 Lincoln Street, Worcester, MA 01653, telephone 508-855-1000. Allmerica
Financial is subject to the laws of the State of Delaware governing insurance
companies and to regulation by the Commissioner of Insurance of Delaware. In
addition, Allmerica Financial is subject to the insurance laws and regulations
of other states and jurisdictions in which it is licensed to operate. As of
December 31, 1998, Allmerica Financial had over $14 billion in assets and over
$26 billion of life insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a wholly owned subsidiary of First Allmerica Financial
Life Insurance Company which, in turn is a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica") organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries had over $27 billion in combined assets and over $48 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its present
name. First Allmerica is a wholly owned subsidiary of AFC. First Allmerica's
principal office is located at 440 Lincoln Street, Worcester, MA 01653,
telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNTS. Each Company maintains a separate investment account
called Separate Account KG (the "Variable Account") with 36 Sub-
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<PAGE>
Accounts, of which 34 are available under this Contract. The Variable Accounts
of Allmerica Financial and of First Allmerica were authorized by votes of the
Board of Directors of the Companies on June 13, 1996. Each Variable Account
meets the definition of a "separate account" under federal securities laws, and
is registered with the SEC as a unit investment trust under the 1940 Act. This
registration does not involve the supervision or management of investment
practices or policies of the Variable Accounts by the SEC.
Obligations under the contracts are obligations of the Company. The assets used
to fund the variable portions of the Contract are set aside in Sub-Accounts kept
separate from the general assets of the Company. Each Sub-Account invests in a
corresponding investment portfolio ("Portfolio") of Kemper Variable Series,
Scudder Variable Life Investment Fund, The Alger American Fund, Dreyfus
Investment Portfolios, The Dreyfus Socially Responsible Growth Fund, Inc. and
Janus Aspen Series. Each Sub-Account is administered and accounted for as part
of the general business of the Company. The income, capital gains, or capital
losses of each Sub-Account, however, are allocated to each Sub-Account, without
regard to any other income, capital gains or capital losses of the Company.
Under Delaware and Massachusetts law, the assets of the Variable Account may not
be charged with any liabilities arising out of any other business of the
Company.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. The Company also
offers other variable annuity contracts investing in the Variable Account which
are not discussed in this Prospectus. In addition, the Variable Account may
invest in other underlying portfolios which are not available to the contracts
described in this Prospectus.
KEMPER VARIABLE SERIES. Kemper Variable Series ("KVS"), is a series-type mutual
fund registered with the SEC as an open-end, management investment company.
Registration of KVS does not involve supervision of its management, investment
practices or policies by the SEC. KVS is designed to provide an investment
vehicle for certain variable annuity contracts and variable life insurance
policies. Shares of the Portfolios of KVS are sold only to insurance company
separate accounts. Scudder Kemper Investments, Inc. serves as the investment
adviser of KVS.
SCUDDER VARIABLE LIFE INVESTMENT FUND. Scudder Variable Life Investment Fund
("Scudder VLIF") is an open-end, diversified management investment company
established as a Massachusetts business trust on March 15, 1985, and registered
with the SEC under the 1940 Act. Scudder Kemper Investments, Inc. serves as the
investment adviser of Scudder VLIF.
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<PAGE>
THE ALGER AMERICAN FUND. The Alger American Fund ("Alger"), is an open-end,
diversified management investment company established as a Massachusetts
business trust on April 6, 1988 and registered with the SEC under the 1940 Act.
Fred Alger Management, Inc. is the investment manager of Alger.
DREYFUS INVESTMENT PORTFOLIOS. The Dreyfus Investment Portfolios was organized
as an investment business trust under Massachusetts law pursuant to an Agreement
and Declaration of Trust dated May 14, 1993, is registered with the SEC as an
open-end, management investment company and commenced operations May 1, 1998.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. The Dreyfus Socially
Responsible Growth Fund, Inc. (the "Dreyfus Socially Responsible Growth Fund")
was incorporated under Maryland law on July 20, 1992, commenced operations on
October 7, 1993 and is registered with the SEC as an open-end, diversified,
management investment company. The Dreyfus Corporation serves as the investment
adviser to the Dreyfus Socially Responsible Growth Fund and NCM Capital
Management Group, Inc. is the sub-advisor.
JANUS ASPEN SERIES. Janus Aspen Series ("Janus Aspen") is an open-end,
management investment company registered with the SEC. It was organized as a
Delaware business trust on May 20, 1993. Janus Capital is the investment adviser
of Janus Aspen.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Portfolios is set
forth below. More detailed information regarding the investment objectives,
restrictions and risks, expenses paid by the Underlying Portfolios and other
relevant information regarding the Underlying Portfolios may be found in their
respective prospectuses, which accompany this Prospectus. Please read them
carefully before investing. The Statements of Additional Information of the
Underlying Portfolios are available upon request.
KVS PORTFOLIOS:
KEMPER AGGRESSIVE GROWTH PORTFOLIO -- seeks capital appreciation through the use
of aggressive investment techniques.
KEMPER TECHNOLOGY GROWTH PORTFOLIO -- seeks growth of capital.
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO -- seeks long-term capital
appreciation by investing primarily in common stocks and other equity securities
of companies in the financial services industry believed by the Portfolio's
investment manager to be undervalued.
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<PAGE>
KEMPER SMALL CAP GROWTH PORTFOLIO -- seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER SMALL CAP VALUE PORTFOLIO -- seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO -- seeks to achieve a high rate of
total return.
KEMPER INTERNATIONAL PORTFOLIO -- seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of
capital and current income primarily from foreign equity securities.
KEMPER GLOBAL BLUE CHIP PORTFOLIO -- seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
KEMPER GROWTH PORTFOLIO -- seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER CONTRARIAN VALUE PORTFOLIO -- seeks to achieve a high rate of total
return from a portfolio primarily of value stocks of larger companies. This
Portfolio was formerly known as the Kemper Value Portfolio.
KEMPER BLUE CHIP PORTFOLIO -- seeks growth of capital and of income.
KEMPER VALUE+GROWTH PORTFOLIO -- seeks growth of capital through professional
management of a portfolio of growth and value stocks. A secondary objective is
the reduction of risk over a full market cycle compared to a portfolio of only
growth stocks or only value stocks.
KEMPER INDEX 500 PORTFOLIO* -- seeks to match, as closely as possible, before
expenses, the performance of the Standard & Poor's 500 Composite Stock Price
Index, (the "S& P 500 Index"), which emphasizes stocks of large U.S. companies.
* "Standard & Poor's-Registered Trademark-," "S&P-Registered Trademark-" "S&P
500-Registered Trademark-," "Standard & Poor's 500," and "500" are trademarks of
the McGraw-Hill Companies, Inc., and have been licensed for use by Scudder
Kemper Investments, Inc. The Kemper Index 500 Portfolio is not sponsored,
endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the fund. Additional
information may be found in the fund's Statement of Additional Information.
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KEMPER HORIZON 20+ PORTFOLIO -- designed for investors with approximately a
20+year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER TOTAL RETURN PORTFOLIO -- seeks a high total return, a combination of
income and capital appreciation, by investing in a combination of debt
securities and common stocks.
KEMPER HORIZON 10+ PORTFOLIO -- designed for investors with approximately a
10+year investment horizon, seeks a balance between growth of capital and
income, consistent with moderate risk.
KEMPER HIGH YIELD PORTFOLIO -- seeks to provide a high level of current income
by investing in fixed-income securities.
KEMPER HORIZON 5 PORTFOLIO -- designed for investors with approximately a five
year investment horizon, seeks income consistent with preservation of capital,
with growth of capital as a secondary objective.
KEMPER GLOBAL INCOME PORTFOLIO -- seeks to provide high current income
consistent with prudent total return asset management.
KEMPER INVESTMENT GRADE BOND PORTFOLIO -- seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities
KEMPER GOVERNMENT SECURITIES PORTFOLIO -- seeks high current return consistent
with preservation of capital from a portfolio composed primarily of U.S.
Government securities.
KEMPER MONEY MARKET PORTFOLIO -- seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in 12 months or less.
KVS FOCUSED LARGE CAP GROWTH PORTFOLIO -- seeks growth through long-term capital
appreciation.
SCUDDER VLIF PORTFOLIOS:
SCUDDER INTERNATIONAL PORTFOLIO -- seeks long term growth of capital principally
from a diversified portfolio of foreign equity securities.
SCUDDER GLOBAL DISCOVERY PORTFOLIO -- seeks above average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER CAPITAL GROWTH PORTFOLIO -- seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
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SCUDDER GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
THE ALGER AMERICAN FUND PORTFOLIOS:
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO -- seeks long-term capital
appreciation.
ALGER AMERICAN BALANCED PORTFOLIO -- seeks current income and long-term capital
appreciation.
DREYFUS INVESTMENT PORTFOLIOS:
DREYFUS MIDCAP STOCK PORTFOLIO -- seeks investment results that are greater than
the total return performance of publicly traded common stocks of medium-size
domestic companies in the aggregate, as represented by the Standard & Poor's
MidCap 400 Index.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND -- seeks to achieve the primary goal of
providing capital growth by investing principally in common stocks, or
securities convertible into common stock, of companies which, in the opinion of
the Fund's management, not only meet traditional investment standards, but also
show evidence that they conduct their business in a manner that contributes to
the enhancement of the quality of life in America. Current income is a secondary
goal.
JANUS ASPEN SERIES PORTFOLIOS:
JANUS ASPEN GROWTH PORTFOLIO -- seeks long-term growth of capital in a manner
consistent with the preservation of capital.
JANUS ASPEN GROWTH AND INCOME PORTFOLIO -- seeks long-term capital growth and
current income.
Certain Underlying Portfolios have investment objectives and/or policies similar
to those of other Underlying Portfolios. To choose the Sub-Accounts which best
meet individual needs and objectives, carefully read the Underlying Portfolio
prospectuses. In some states, insurance regulations may restrict the
availability of particular Sub-Accounts.
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<PAGE>
INVESTMENT MANAGEMENT SERVICES
KVS
Responsibility for overall management of KVS rests with the Board of Trustees
and officers of KVS. Responsibility for overall management of Scudder VLIF rests
with its Board of Trustees and officers. Scudder Kemper Investments, Inc.
("Scudder Kemper") is the investment manager of all the Portfolios available
under this Contract. Scudder Investments (U.K.) Limited, an affiliate of Scudder
Kemper, is a sub-adviser for the Kemper International Portfolio and the Kemper
Global Income Portfolio. Dreman Value Management, L.L.C. serves as the sub-
advisor for the Kemper-Dreman Financial Services Portfolio and Kemper-Dreman
High Return Equity Portfolio. Bankers Trust Company is the sub-adviser for the
Kemper Index 500 Portfolio. Eagle Asset Management, Inc. serves as sub-adviser
for the KVS Focused Large Cap Growth Portfolio.
For its services, Scudder Kemper receives a management fee, payable monthly at
the following annual rates based on the average daily net assets of each
Portfolio: Kemper Money Market (0.50%), Kemper Total Return (0.55%), Kemper High
Yield (0.60%), Kemper Growth (0.60%), Kemper Government Securities (0.55%),
Kemper International (0.75%), Kemper Small Cap Growth (0.65%), Kemper Investment
Grade Bond (0.60%), Kemper Contrarian Value (0.75%), Kemper Small Cap Value
(0.75%), Kemper Value+Growth (0.75%), Kemper Horizon 20+ (0.60%), Kemper Horizon
10+ (0.60%), Kemper Horizon 5 (0.60%), Kemper Blue Chip (0.65%), Kemper Global
Income (0.75%) and Kemper International Growth and Income (1.00%).
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<PAGE>
The following portfolios each pay Scudder Kemper an investment management fee,
payable monthly, at the following annual rates based on the average daily net
assets of each Portfolio.
<TABLE>
<S> <C>
Kemper Aggressive Growth Portfolio 0.75% for the first $250 million
Kemper Technology Growth Portfolio 0.72% for the next $750 million
Kemper-Dreman High Return Equity 0.70% for the next $1.5 billion
Portfolio
Kemper-Dreman Financial Services 0.68% for the next $2.5 billion,
Portfolio 0.65% for the next $2.5 billion,
0.64% for the next $2.5 billion,
0.63% for the next $2.5 billion,
0.62% for amounts over $12.5 billion.
Kemper Global Blue Chip Portfolio 1.00% for the first $250 million,
0.95% for the next $750 million,
0.90% for amounts over $1 billion.
Kemper Index 500 Portfolio 0.45% for the first $200 million,
0.42% for the next $550 million,
0.40% for the next $1.25 billion,
0.38% for the next $3 billion,
0.35% for amounts over $5 billion.
KVS Focused Large Cap Growth Portfolio 0.950% for the first $250 million,
0.925% for the next $250 million,
0.900% for the next $500 million,
0.875% for the next $1.5 billion,
0.850% for amounts over $2.5 billion.
</TABLE>
Scudder Kemper pays Scudder Investments (U.K.) Limited for its services as sub-
adviser for the Kemper International Portfolio and the Kemper Global Income
Portfolio a sub-advisory fee, payable monthly, at the annual rate of 0.35% of
average daily net assets of the Kemper International Portfolio and 0.30% of
average daily net assets of the Kemper Global Income Portfolio.
Scudder Kemper also pays Dreman Value Management, L.L.C. a fee for its services
to the Kemper-Dreman Financial Services Portfolio and Kemper-Dreman High Return
Equity Portfolio. A sub-advisory fee is payable monthly, at the annual rate of
0.24% of the first $250 million of each Portfolio's average daily net assets,
0.23% of average daily net assets between $250 million and $1 billion, 0.224% of
average daily net assets between $1 billion and $2.5 billion, 0.218% of average
daily net assets between $2.5 billion and $5 billion, 0.208% of average daily
net assets between $5 billion and $7.5 billion, 0.205% of average daily net
assets between $7.5 billion and $10 billion, 0.202% of average daily net assets
between $10 billion and $12.5 billion and 0.198% of each Portfolio's average
daily net assets over $12 billion.
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<PAGE>
Scudder Kemper also pays Bankers Trust Company a sub-advisory fee for its
services to the Kemper Index 500 Portfolio. A sub-advisory fee is payable
monthly at the following annual rates:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS OF THE PORTFOLIO ANNUAL SUB-ADVISER FEE RATE
- ----------------------------------------- ---------------------------
<S> <C>
$0-$200 million 0.08%
$200 million-$750 million 0.05%
On the balance over $750 million 0.025%
</TABLE>
Scudder Kemper also pays Eagle Asset Management, Inc. a sub-advisory fee for its
services based on the average daily net assets of the KVS Focused Large Cap
Growth Portfolio, payable monthly at the following annual rates:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS OF THE PORTFOLIO ANNUAL SUB-ADVISER FEE RATE
- ----------------------------------------- ---------------------------
<S> <C>
$0-$50 million 0.45%
$50 million-$300 million 0.40%
On the balance over $300 million 0.30%
</TABLE>
SCUDDER VLIF
For its investment management services to the Scudder Global Discovery, Scudder
Growth and Income, Scudder International and Scudder Capital Growth Portfolios,
Scudder Kemper receives compensation monthly at the following annual rates for
each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder Global Discovery 0.975%
Scudder Growth and Income 0.475%
Scudder International 0.875% for the first
$500,000,000
0.725% over $500,000,000
Scudder Capital Growth 0.475% for the first
$500,000,000
0.450% for the next $500,000,000
0.425% over $1,000,000,000
</TABLE>
For more information, see the KVS and Scudder VLIF prospectuses and SAIs.
THE ALGER AMERICAN FUND
Under a management agreement, Fred Alger Management, Inc. receives an annual fee
of 0.85% and 0.75%, respectively, from the Alger American Leveraged AllCap and
Alger American Balanced Portfolios based on each Portfolio's average daily net
assets. This fee is computed daily and paid monthly.
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<PAGE>
DREYFUS INVESTMENT PORTFOLIOS
A management fee is payable monthly to The Dreyfus Corporation at the annual
rate of 0.75% of the Dreyfus MidCap Stock Portfolio's average daily net assets.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
A management fee is payable monthly to The Dreyfus Corporation and a sub-
investment advisory fee is payable monthly to NCM Capital Management
Group, Inc. at the aggregate annual rate of 0.75% of the value of the Dreyfus
Socially Responsible Growth Fund's average daily net assets.
JANUS ASPEN SERIES
Janus Capital receives a monthly advisory fee for the Janus Aspen Growth
Portfolio and Janus Aspen Growth and Income Portfolio based on the following
schedule (expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
- ------------------- -----------
<S> <C>
First $300 Million........... .75%
Next $200 Million............ .70%
Over $500 Million............ .65%
</TABLE>
However, Janus Capital has agreed to reduce each of the above Portfolios'
advisory fees to the extent that such fee exceeds the effective rate of a fund
managed by Janus Capital with similar investment objectives and policies.
Management fee waivers and/or reimbursements may be in effect for certain or all
of the Underlying Portfolios. Also see "Annual Underlying Portfolio Expenses"
under the SUMMARY OF FEES AND EXPENSES section.
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<PAGE>
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company issues a Contract when its underwriting requirements, which include
receipt of the initial payment and allocation instructions by the Company at its
Principal Office, are met. These requirements may also include the proper
completion of an application; however, where permitted, the Company may issue a
Contract without completion of an application for certain classes of annuity
contracts.
Payments are to be made payable to the Company. A net payment is equal to the
payment received less the amount of any applicable premium tax. The initial net
payment will be credited to the Contract and allocated among the requested
accounts as of the date that all issue requirements are properly met. If all
issue requirements are not completed within five business days of the Company's
receipt of the initial payment, the payment will be returned immediately unless
the Owner specifically consents to the holding of it pending completion of the
outstanding issue requirements. Subsequent payments will be credited as of the
Valuation Date received at the Principal Office on the basis of the next
accumulation unit value determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date,
subject to certain minimums. Currently, the initial payment must be at least
$25,000. Each subsequent payment must be at least $100. The minimum allocation
to a Guarantee Period Account is $1,000. If less than $1,000 is allocated to a
Guarantee Period Account, the Company reserves the right to apply that amount to
the Kemper Money Market Portfolio.
From time to time, where permitted by law, the Company may credit amounts to
Contracts when Contracts are sold to individuals or groups of individuals in a
manner that reduces sales expenses. The Company will consider factors such as
the following: (1) the size and type of group or class, and the persistency
expected from that group or class; (2) the total amount of payments to be
received and the manner in which payments are remitted; (3) the purpose for
which the Contracts are being purchased and whether that purpose makes it likely
that costs and expenses will be reduced; (4) other transactions where sales
expenses are likely to be reduced; or (5) the level of commissions paid to
selling broker-dealers or certain financial institutions with respect to
Contracts within the same group or class (for example, broker-dealers who offer
this Contract in connection with financial planning services offered on a fee
for service basis). The Company may also credit amounts to Contracts where
either the Owner or the Annuitant on the issue date is within the following
classes of individuals ("eligible persons"): employees and registered
representatives of any broker-dealer which has entered into a Sales Agreement
with the Company to sell the Contract; employees of the Company, its affiliates
or subsidiaries; officers, directors, trustees and employees
35
<PAGE>
of any of the Portfolios, investment managers or sub-advisers; and the spouses
of and immediate family members residing in the same household with such
eligible persons. "Immediate family members" means children, siblings, parents
and grandparents.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. As
of the date of this Prospectus, payments may be allocated to a maximum of
seventeen variable Sub-Accounts during the life of the Contract and prior to the
Annuity Date in addition to the Kemper Money Market Portfolio. There are no
restrictions on the number of times the Fixed Account and the Guarantee Period
Accounts may be used over the life of the Contract.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
be honored. The Company will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone may include requirements that callers on
behalf of an Owner identify themselves by name and identify the Annuitant by
name, date of birth and social security number or PIN number. All transfer
instructions by telephone are tape-recorded.
B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased or to the
Company's Principal Office at 440 Lincoln Street, Worcester, MA 01653. Mailing
or delivery must occur on or before ten days after receipt of the Contract for
cancellation to be effective.
Within seven days the Company will provide a refund equal to the gross
payment(s) received. In some states, however, the refund may equal the greater
of (a) gross payments or (b) any amounts allocated to the Fixed Account and the
Guarantee Period Accounts plus the Accumulated Value of amounts allocated to the
Variable Account plus any amounts deducted under the Contract or by the
Portfolios for taxes, charges or fees. At the time the Contract is issued, the
"Right
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<PAGE>
to Examine" provision on the cover of the Contract will specifically indicate
whether the refund will be equal to gross payments or equal to the greater of
(a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO CANCEL ALL OTHER CONTRACTS
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay to the Owner an amount equal to the sum of (1) the
difference between the payment paid, including fees, and any amount allocated to
the Variable Account, and (2) the Accumulated Value of amounts allocated to the
Variable Account as of the date the request is received. If the Contract was
purchased as an IRA or issued in a state that requires a full refund of the
initial payment(s), the IRA cancellation right described above will be used. At
the time the Contract is issued, the "Right to Examine" provision on the cover
of the Contract will specifically indicate what the refund will be and the time
period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, an Owner may transfer amounts among
accounts subject to the seventeen variable Sub-Account restriction discussed in
"A. Payments." Transfer values will be based on the Accumulation Value next
computed after receipt of the transfer request. The Company will make transfers
pursuant to written or telephone requests. As discussed in "A. Payments," a
properly completed authorization form must be on file before telephone requests
will be honored.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Kemper Money
Market Portfolio. Transfers from a Guarantee Period Account prior to the
expiration of the Guarantee Period will be subject to a Market Value Adjustment.
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<PAGE>
The Owner may authorize an independent third party to transact allocations and
transfers in accordance with an asset allocation strategy or other investment
strategy. The Company may provide administrative or other support services to
these independent third parties, however, the Company does not engage any third
parties to offer allocation or other investment services under this Contract,
does not endorse or review any allocation or transfer recommendations and is not
responsible for the investment results of such allocations or transfers
transacted on the Owner's behalf. In addition, the Company reserves the right to
discontinue services or limit the number of Portfolios that it may provide such
services for as well as to restrict such transactions altogether when exercised
by a market timing firm or any other third party authorized to initiate
allocations, transfers or exchanges on behalf of multiple Contract owners. The
Company does not charge the Owner for providing additional support services.
As indicated above, the Company reserves the right to restrict transfer
privileges when exercised by a market timing firm or any other third party
authorized to initiate allocations, transfers or exchanges on behalf of multiple
Contract owners, if the execution of such transfers may disadvantage or
potentially impair the contract rights of other contract owners. The Company
may, among other things, not accept (1) the transfer or exchange instructions of
any agent acting under a power of attorney on behalf of more than one Contract
owner, or (2) the transfer or exchange instructions of individual Contract
owners who have executed pre-authorized transfer or exchange forms which are
submitted by market timing firms or other third parties on behalf of more than
one Contract owner at the same time.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Sub-Account investing in the Kemper Money
Market Portfolio or the Kemper Government Securities Portfolio, or from the
Fixed Account (the source account) to one or more of the Sub-Accounts. Automatic
transfers may not be made into the Fixed Account, the Guarantee Period Accounts
or, if applicable, the Portfolio being used as the source account. If an
automatic transfer would reduce the balance in the source account to less than
$100, the entire balance will be transferred proportionately to the chosen
Portfolios. Automatic transfers will continue until the amount in the source
account on a transfer date is zero or the Owner's request to terminate the
option is received by the Company. If additional amounts are allocated to the
source account after its balance has fallen to zero, this option will not
restart automatically, and the Owner must provide a new request to the Company.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments which are deposited into the Fixed Account and which use the
Fixed
38
<PAGE>
Account as the source account for the payment from which to process automatic
transfers. For more information see APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
specified percentage allocations. As frequently as requested, the Company will
review the percentage allocations in the Portfolios and, if necessary, transfer
amounts to ensure conformity with the designated percentage allocation mix. If
the amount necessary to re-establish the mix on any scheduled date is less than
$100, no transfer will be made. Automatic Account Rebalancing will continue
until the Owner's request to terminate or change the option is received by the
Company. As such, subsequent payments allocated in a manner different from the
percentage allocation mix in effect on the date the payment is received will be
reallocated in accordance with the existing mix on the next scheduled date
unless the Owner's timely request to change the mix or terminate the option is
received by the Company.
The Company reserves the right to limit the number of Sub-Accounts that may be
used for automatic transfers and rebalancing, and to discontinue either option
upon advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Contract year under a
request, count as one transfer for purposes of the 12 transfers guaranteed to be
free of a transfer charge in each Contract year. Currently, Dollar Cost
Averaging and Automatic Account Rebalancing may not be in effect simultaneously.
Either option may be elected at no additional charge when the Contract is
purchased or at a later date.
E. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Accumulated Value adjusted for any Market Value Adjustment
("Surrender Value") less applicable tax withholding. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The Surrender Value will be calculated based
on the Contract's Accumulated Value as of the Valuation Date on which the
request and the Contract are received at the Principal Office.
The Contract fee will be deducted upon surrender of the Contract.
After the Annuity Date, only Contracts annuitized under a commutable period
certain annuity option may be surrendered. The amount payable is the commuted
value of any unpaid annuity benefit payments, computed on the basis of the
assumed interest rate incorporated in such annuity benefit payments.
39
<PAGE>
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has, by order, permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of Portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The Company reserves the right to defer surrenders and withdrawals of amounts
allocated to the Company's Fixed Account and Guarantee Period Accounts for a
period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "FEDERAL TAX CONSIDERATIONS," "Tax-Sheltered Annuities" and
"Texas Optional Retirement Program."
Where an Owner who is a trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Contract to
other contracts issued by the Company and owned by the trustee. Any such
reallocation will be at the unit values for the Sub-Accounts as of the Valuation
Date on which a written, signed request is received at the Principal Office.
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must submit a signed, written request for withdrawal, satisfactory to
the Company, to the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. Amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment against the remaining value, as described under "GUARANTEE
PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a Sub-
Account will result in cancellation of a number of units equivalent in value to
the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
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<PAGE>
Each withdrawal must be in a minimum amount of $100. Except in New York where no
specific balance is required, no withdrawal will be permitted if the Accumulated
Value remaining under the Contract would be reduced to less than $1,000.
Withdrawals will be paid in accordance with the time limitations described under
"E. Surrender."
After the Annuity Date, only a Contract under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see "FEDERAL TAX
CONSIDERATIONS," "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100. If elected at the time of
purchase, the Owner must designate in writing the specific dollar amount of each
withdrawal and the percentage of this amount which should be taken from each
designated Sub-Account and/or the Fixed Account. Systematic withdrawals then
will begin on the date indicated on the application. If elected after the issue
date, the Owner may elect, by written request, a specific dollar amount and the
percentage of this amount to be taken from each designated Sub-Account and/or
the Fixed Account, or the Owner may elect to withdraw a specific percentage of
the Accumulated Value calculated as of the withdrawal dates, and may designate
the percentage of this amount which should be taken from each account. The first
withdrawal will take place on the date the written request is received at the
Principal Office or, if later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals may be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date, an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to the Company's life expectancy distribution ("LED") option
by returning a properly signed LED request form to the Principal Office.
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<PAGE>
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under contracts
issued in Hawaii and New York, the LED option will terminate automatically on
the maximum Annuity Date permitted under the Contract, at which time an Annuity
Option must be selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn based on the Owner's then life expectancy (or
the joint life expectancy of the Owner and a beneficiary.) The numerator of the
fraction is 1 (one) and the denominator of the fraction is the remaining life
expectancy of the Owner, as determined annually by the Company. The resulting
fraction, expressed as a percentage, is applied to the Accumulated Value at the
beginning of the year to determine the amount to be distributed during the year.
Under the Company's LED option, the amount withdrawn from the Contract changes
each year, because life expectancy changes each year that a person lives. For
example, actuarial tables indicate that a person age 70 has a life expectancy of
16 years, but a person who attains age 86 has a life expectancy of another 6.5
years. Where the Owner is a trust or other nonnatural person, the Owner may
elect the LED option based on the Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Contract and may be subject to a 10% federal
tax penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contract in General."
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. DEATH BENEFIT
In the event that an Owner or (in the event the Owner is a nonnatural person) an
Annuitant dies prior to the Annuity Date, the Company will pay the beneficiary a
death benefit, except when a spousal beneficiary chooses to continue the
Contract as provided below in "H. The Spouse of the Owner as Beneficiary."
DEATH OF AN OWNER PRIOR TO THE ANNUITY DATE. Upon the death of an Owner (or an
Annuitant if the Owner is a nonnatural person), a death benefit will be paid.
The standard death benefit will be equal to the GREATER of (a) the Accumulated
Value under the Contract increased by any positive Market Value Adjustment; or
(b) gross payments, decreased proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the
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<PAGE>
death benefit under this option immediately prior to the withdrawal multiplied
by the withdrawal amount and divided by the Accumulated Value immediately prior
to the withdrawal).
OPTIONAL ENHANCED DEATH BENEFIT RIDER. At the time of application for the
Contract, the Owner, if under age 89, may elect an optional Enhanced Death
Benefit Rider. Under the Enhanced Death Benefit Rider:
I. If an Owner (or an Annuitant if the Owner is a nonnatural person) dies before
the Annuity Date and before the oldest Owner's 90th birthday, the death benefit
will be equal to the GREATEST of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York the 5% compounding is not available;
therefore, (b) equal gross payments decreased proportionately to reflect
withdrawals); or
(c) the highest Accumulated Value on any prior Contract anniversary, increased
for any positive Market Value Adjustment and subsequent payments and
decreased proportionately for subsequent withdrawals.
The (c) value is determined on each Contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior Contract anniversaries, after all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next Contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an Owner (or an Annuitant if the Owner is a nonnatural person) dies
before the Annuity Date but after the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the Contract anniversary immediately prior to the oldest Owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
A separate charge is deducted for the optional Enhanced Death Benefit Rider. On
the last day of each month and on the date the Rider is terminated, a charge
equal
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to 1/12th of an annual rate of 0.25% is made against the Accumulated Value of
the Contract at that time. The charge is deducted in arrears through a pro-rata
reduction (based on relative values) of Accumulation Units in the Sub-Accounts,
of dollar amounts in the Fixed Account, and of dollar amounts in the Guarantee
Period Accounts.
PAYMENT OF THE DEATH BENEFIT. The death benefit generally will be paid to the
beneficiary in one sum within seven business days of the receipt of due proof of
death at the Principal Office unless the Owner has specified a death benefit
annuity option. Instead of payment in one sum, the beneficiary may, by written
request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Kemper Money Market Portfolio. The excess, if any, of the death benefit
over the Accumulated Value also will be transferred to the Sub-Account investing
in the Kemper Money Market Portfolio. The beneficiary may, by written request,
effect transfers and withdrawals during the deferral period and prior to
annuitization under (2), but may not make additional payments. The death benefit
will reflect any earnings or losses experienced during the deferral period. If
there are multiple beneficiaries, the consent of all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. The spouse will then become the Owner and Annuitant subject to the
following: (1) any value in the Guarantee Period Accounts will be transferred to
the Sub-Account investing in the Kemper Money Market Portfolio and (2) the
excess, if any, of the death benefit over the Contract's Accumulated Value also
will be transferred to the Sub-Account investing in the Kemper Money Market
Portfolio. Additional payments may be made. All other rights and benefits
provided in the Contract will continue, except that any subsequent spouse of
such new Owner will not be entitled to continue the Contract upon such new
Owner's death.
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I. ASSIGNMENT
The Contract, other than those sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and prior to
the death of an Owner (see "FEDERAL TAX CONSIDERATIONS"). The Company will not
be deemed to have knowledge of an assignment unless it is made in writing and
filed at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay to the
assignee, in one sum, that portion of the Surrender Value of the Contract to
which the assignee appears to be entitled. The Company will pay the balance, if
any, in one sum to the Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
J. ELECTING THE FORM OF ANNUITY AND ANNUITY DATE
The Owner selects the Annuity Date. To the extent permitted by state law, the
Annuity Date may be the first day of any month (1) before the Owner's 85th
birthday, if the Owner's age on the issue date of the Contract is 75 or under;
or (2) within ten years from the issue date of the Contract and before the
Owner's 90th birthday, if the Owner's age on the issue date is between 76 and
90. The Owner may elect to change the Annuity Date by sending a request to the
Principal Office at least one month before the Annuity Date. To the extent
permitted by state law, the new Annuity Date must be the first day of any month
occurring before the Owner's 99th birthday. In no event will the maximum
annuitization age exceed 99. If there are Joint Owners, the age of the younger
will determine the Annuity Date. The Internal Revenue Code ("the Code") and the
terms of qualified plans impose limitations on the age at which annuity benefit
payments may commence and the type of annuity option selected. See "FEDERAL TAX
CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity payout option under which annuity benefit payments are to be
made, and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the Accounts
selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account, and the annuity benefit payments will be fixed
in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
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Under a variable annuity payout option, a payment to the Owner, or the payee the
Owner designates, equal to the value of the fixed number of Annuity Units in the
Sub-Accounts is made monthly, quarterly, semi-annually or annually. Since the
value of an Annuity Unit in a Sub-Account will reflect the investment
performance of the Sub-Account, the amount of each annuity benefit payment will
vary.
The annuity payout option selected must produce an initial payment of at least
$50 (a lower amount may be required in some states). The Company reserves the
right to increase this minimum amount. If the annuity payout option selected
does not produce an initial payment which meets this minimum, a single payment
will be made. Once the Company begins making annuity benefit payments, the Owner
cannot make withdrawals or surrender the annuity benefit, except where the Owner
has elected a commutable period certain option. Beneficiaries entitled to
receive remaining payments under either a commutable or noncommutable "period
certain" may elect instead to receive a lump sum settlement. See "K. Description
of Variable Annuity Payout Options."
If the Owner does not elect an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
If an owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity payout option after annuitization, the Company may permit such
owner to exchange the fixed contract for a Contract offered in this Prospectus.
The proceeds of the fixed contract will be applied towards the variable annuity
option desired by the owner. The number of Annuity Units under the option will
be calculated using the Annuity Unit values as of the 15th of the month
preceding the Annuity Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Contract.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company currently provides the variable annuity payout options described
below. Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Kemper Investment Grade Bond, Kemper Value+Growth,
Kemper Horizon 10+ and Kemper Horizon 5 Portfolios. The Company also provides
these same options funded through the Fixed Account (fixed-amount annuity
option). Regardless of how payments were allocated during the accumulation
period, any of the variable annuity payout options or the fixed-amount payout
options may be selected, or any of the variable annuity
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payout options may be selected in combination with any of the fixed-amount
annuity payout options. Other annuity options may be offered by the Company. IRS
regulations may not permit certain of the available annuity options when used in
connection with certain qualified Contracts.
If the Owner (or, if there are Joint Owners, the surviving Joint Owner) dies on
or after the Annuity Date, the beneficiary will become the Owner of the contract
and receive any remaining annuity benefit payments in accordance with the terms
of the annuity benefit payment option selected prior to the Annuity Date. If
there are Joint Owners on or after the Annuity Date, upon the first Owner death,
any remaining annuity benefit payments will continue to the surviving Joint
Owner in accordance with the terms of the annuity benefit payment option
selected prior to the Annuity Date.
If the Owner selects an annuity payout option which provides for the
continuation of payments after the death of an Annuitant, upon the death of an
Annuitant on or after the Annuity Date, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the Annuitant with the
guarantee that if the Annuitant should die before the guaranteed number of
payments have been made, the remaining guaranteed payments will continue to be
paid.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT
ONLY. This variable annuity is payable during the Annuitant's life. It would be
possible under this option for the Owner to receive only one annuity benefit
payment if the Annuitant dies prior to the due date of the second annuity
benefit payment, two annuity benefit payments if the Annuitant dies before the
due date of the third annuity benefit payment, and so on. Payments will
continue, however, during the lifetime of the Annuitant, no matter how long he
or she lives.
UNIT FUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically during
the lifetime of the Annuitant with the guarantee that if the Annuitant dies and
(1) exceeds (2) then periodic variable annuity benefit payments will continue
until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value at annuitization
divided by the dollar amount of the first payment, and
Where: (2) is the number of payments paid prior to the death of the Annuitant.
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JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
during the joint lifetime of the Annuitant and another individual (i.e. the
beneficiary or a Joint Annuitant), and then continues thereafter during the
lifetime of the survivor. The amount of each payment during the lifetime of the
survivor is based on the same number of Annuity Units which applied during their
joint lifetime. There is no minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable during the joint lifetime of the Annuitant and one other individual
(i.e., the beneficiary or a Joint Annuitant), and then continues thereafter
during the lifetime of the survivor. The amount of each periodic payment during
the lifetime of the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during their joint lifetime. There is no minimum
number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30 and may be commutable or
noncommutable. If the Annuitant dies before the end of the period, remaining
payments will continue to be paid. This option may be commutable, that is, the
Owner reserves the right to receive a lump sum in place of installments, or it
becomes noncommutable. The Owner must reserve this right at the time benefits
begin.
It should be noted that the period certain option does not involve a life
contingency. In computing payments under this option, the Company deducts a
charge for annuity rate guarantees, which includes a factor for mortality risks.
Although not contractually required to do so, the Company currently follows a
practice of permitting persons receiving payments under a period certain option
to elect to convert to a variable annuity involving a life contingency. The
Company may discontinue or change this practice at any time, but not with
respect to election of the option made prior to the date of any change in this
practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of the possible
adverse tax consequences of selecting a period certain option.
L. ANNUITY BENEFIT PAYMENTS
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "N. NORRIS Decision" below) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Contract provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Owners of the same class.
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The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- - For life annuity options and noncommutable period certain options of ten years
or more (six or more years under New York Contracts), the dollar amount is
determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if
any) divided by $1,000, by (2) the applicable amount of the first monthly
payment per $1,000 of value.
- - For commutable period certain options and any period certain option of less
than ten years (less than six years under New York Contracts), the dollar
amount is determined by multiplying (1) the Surrender Value less premium
taxes, if any, applied under that option (after application of any Market
Value Adjustment and less premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value.
- - For a death benefit annuity, the annuity value will be the amount of the death
benefit.
The first periodic annuity benefit payment is based upon the Accumulated Value
as of a date not more than four weeks preceding the date that the first annuity
benefit payment is due. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account initially was set at
$1.00. The value of an Annuity Unit under a Sub-Account on any Valuation Date
thereafter is equal to the value of such unit on the immediately preceding
Valuation Date, multiplied by the net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Contract.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected Sub-Account(s). The
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dollar amount of each subsequent variable annuity benefit payment is determined
by multiplying the fixed number of Annuity Units (derived from the dollar amount
of the first payment, as described above) with respect to a Sub-Account by the
value of an Annuity Unit of that Sub-Account on the applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "M.
Optional Minimum Guaranteed Annuity Payout Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
Subject to state availability, an optional Minimum Guaranteed Annuity Payout
Rider is available for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed lifetime income during the
annuity payout phase, subject to the conditions described below. On each
Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized if the Rider is
exercised. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rate of 3 1/2%. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
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compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any prior Contract anniversary since
the Rider effective date, as determined after positive adjustments have
been made for subsequent payments and any positive Market Value
Adjustment, if applicable, and negative adjustments have been made for
subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Contract
issue or at any time thereafter, however, if the Rider is not elected within
thirty days after Contract issue or within thirty days after a Contract
anniversary date, the effective date of the Rider will be the following
Contract anniversary date.
- - The Owner may not elect a Rider with a ten-year waiting period if at the time
of election the Annuitant has reached his or her 87th birthday. The Owner may
not elect a Rider with a fifteen-year waiting period if at the time of
election the Annuitant has reached his or her 82nd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider within
thirty days after any Contract anniversary following the expiration of a ten
or fifteen-year waiting period from the effective date of the Rider.
- - The Owner may only annuitize under a fixed annuity payout option involving a
life contingency as provided under "K. Description of Variable Annuity Payout
Options."
- - The Owner may only annuitize at the guaranteed annuity purchase rates listed
under the Annuity Option Tables in the Contract.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider prior
to the seventh Contract anniversary after the effective date of the
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Rider, unless such termination occurs on or within thirty days after any
Contract anniversary and in conjunction with the repurchase of a Minimum
Guaranteed Annuity Payout Rider with a waiting period of equal or greater
length at its then current price, if available.
- - After the seventh Contract anniversary from the effective date of the Rider
the Owner may terminate the Rider at any time.
- - The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of a
Contract anniversary.
- - Other than in the event of a repurchase, once terminated the Rider may not be
purchased again.
- - The Rider will terminate upon surrender of the Contract or the date that a
death benefit is payable if the Contract is not continued under "H. The Spouse
of the Owner as Beneficiary" (see "DESCRIPTION OF THE CONTRACT").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider based on a variety of
assumptions, including varying rates of return on the value of the Contract
during the accumulation phase, annuity payout periods, annuity payout options
and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed rates
of return are for purposes of illustration only and are not intended as a
representation of past or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Owner age 60 (at issue) and exercise of a Minimum Guaranteed Annuity Payout
Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With Payments Guaranteed For 10 Years. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that wold be received under the Minimum Guaranteed Annuity Payout Rider. The
minimum guaranteed benefit base amounts are the values that will be annuitized.
Minimum guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
CONTRACT MINIMUM MINIMUM
ANNIVERSARY AT GUARANTEED GUARANTEED ANNUAL
EXERCISE BENEFIT BASE INCOME(1)
- -------------- ------------ -----------------
<S> <C> <C>
10 $162,889 $12,153
15 $207,892 $17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed for 10 Years are available. See "K. Description
of Variable Annuity Payout Options."
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The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
Note: Adding the Minimum Guaranteed Annuity Payout Rider after the issue date or
resetting or repurchasing the benefit will impact the Program to Protect
Principal and Provide Growth Potential offered under the GPA Accounts since the
Minimum Guaranteed Annuity Payout Rider charges are deducted on a pro-rata basis
from all accounts including the GPA Accounts. (See "Program to Protect Principal
and Provide Growth Potential" under "GUARANTEE PERIOD ACCOUNTS.")
N. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex non-guaranteed current annuity option rates, or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
O. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received in good order at the Company's
Principal Office. The number of Accumulation Units resulting from each payment
will remain fixed unless changed by a subsequent split of Accumulation Unit
value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account,
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and will reflect the investment performance, expenses and charges of its
Underlying Portfolios. The value of an Accumulation Unit at inception was set at
$1.00 on the first Valuation Date for each Sub-Account.
Allocations to the Guarantee Period Accounts and the Fixed Account are not
converted into Accumulation Units, but are credited interest at a rate
periodically set by the Company. See "GUARANTEE PERIOD ACCOUNTS" and APPENDIX A,
"MORE INFORMATION ABOUT THE FIXED ACCOUNT."
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and
(3) adding the amount of the accumulations in the Fixed Account and Guarantee
Period Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.15% on an annual basis of the
daily value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of an Accumulation Unit calculation using
a hypothetical example see the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Portfolios are described in the prospectuses and SAIs of the
Underlying Portfolios.
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A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The charge is imposed during both the accumulation phase and the
annuity payout phase. The mortality risk arises from the Company's guarantee
that it will make annuity benefit payments in accordance with annuity rate
provisions established at the time the Contract is issued for the life of the
Annuitant (or in accordance with the annuity payout option selected), no matter
how long the Annuitant (or other individual) lives and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity payout phase on all Contracts, including those that do not involve a
life contingency, even though the Company does not bear direct mortality risk
with respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
The Company intends to recoup commissions and other sales expenses through
profits from the Company's General Account, which may include amounts derived
from mortality and expense risk charges.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation phase and the
annuity payout phase. The daily administrative expense charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given Contract and
the amount of expenses actually attributable to that Contract.
Deductions for the Contract fee (see "B. Contract Fee" below) and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
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limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
OTHER CHARGES. Because the Sub-Accounts hold shares of the Underlying
Portfolios, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying
Portfolios. The prospectuses and SAIs of the Underlying Portfolios contain
additional information concerning expenses of the Portfolios.
B. CONTRACT FEE
A $35 Contract fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$75,000. (This fee may vary by state. See your Contract for more information.)
Where Contract value has been allocated to more than one account, a percentage
of the total Contract fee will be deducted from the value in each account. The
portion of the charge deducted from each account will be equal to the percentage
which the value in that account bears to the Accumulated Value under the
Contract. The deduction of the Contract fee from a Sub-Account will result in
cancellation of a number of Accumulation Units equal in value to the percentage
of the charge deducted from that account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
class of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries;
officers, directors, trustees and employees of any of the Portfolios; investment
managers or Sub-Advisers; and the spouses of and immediate family members
residing in the same household with such eligible persons. "Immediate family
members" means children, siblings, parents and grandparents.
C. OPTIONAL BENEFIT RIDER CHARGES
Subject to state availability, the Company offers optional benefit riders that
may be elected by the Owner. A separate monthly charge is made for each rider
selected. On the last day of each month and on the date the rider is terminated,
a charge equal to 1/12th of the applicable annual rate (see table below) is made
against the Accumulated Value of the Contract at that time. The charge is made
through a pro-rata reduction of the Accumulated Value of the Sub-Accounts, the
Fixed Account and the Guarantee Period Accounts (based on the relative value
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that the Accumulation Units of the Sub-Accounts, the dollar amounts in the Fixed
Account and the dollar amounts in the Guarantee Period Accounts bear to the
total Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with ten-year
waiting period...................................... 0.25%
Minimum Guaranteed Annuity Payout Rider with fifteen-
year waiting period................................. 0.15%
Enhanced Death Benefit Rider......................... 0.25%
</TABLE>
For a description of the Enhanced Death Benefit Rider, see "G. Death Benefit"
and for a description of the Minimum Guaranteed Annuity Payout Rider, see "M.
Optional Minimum Guaranteed Annuity Payout Rider," under "DESCRIPTION OF THE
CONTRACT," above.
D. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. The Company makes a
charge for state and municipal premium taxes, when applicable, and deducts the
amount paid as a premium tax charge. The current practice of the Company is to
deduct the premium tax charge in one of two ways:
1. if the premium tax was paid by the Company when payments were received, the
premium tax charge is deducted on a pro-rata basis when withdrawals are
made, upon surrender of the Contract, or when annuity benefit payments begin
(the Company reserves the right instead to deduct the premium tax charge for
these Contracts at the time the payments are received); or
2. the premium tax charge is deducted in total when annuity benefit payments
begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law. If no amount for premium tax was deducted
at the time the payment was received, but subsequently tax is determined to be
due prior to the Annuity Date, the Company reserves the right to deduct the
premium tax from the Contract value at the time such determination is made.
E. TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25,
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for each subsequent transfer in a Contract year to reimburse it for the expense
of processing transfers. For more information, see "D. Transfer Privilege" under
"DESCRIPTION OF THE CONTRACT."
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Fixed Account are not
registered as an investment company under the provisions of the Securities Act
of 1933 (the "1933 Act") or the 1940 Act. Accordingly, the staff of the SEC has
not reviewed the disclosures in this Prospectus relating to the Guarantee Period
Accounts or the Fixed Account. Nevertheless, disclosures regarding the Guarantee
Period Accounts and the Fixed Account of the Contract or any benefits offered
under these accounts may be subject to the provisions of the 1933 Act relating
to the accuracy and completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there currently are nine Guarantee
Periods available under the Contract with durations of two, three, four, five,
six, seven, eight, nine and ten years. Each Guarantee Period Account established
for the Owner is accounted for separately in a non-unitized segregated account,
except in California where it is accounted for in the Company's General Account.
Each Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period. Owners may
allocate net payments or make transfers from any of the Sub-Accounts, the Fixed
Account or an existing Guarantee Period Account to establish a new Guarantee
Period Account at any time prior to the Annuity Date. Transfers from a Guarantee
Period Account on any date other than on the day following the expiration of
that Guarantee Period will be subject to a Market Value Adjustment. The Company
establishes a separate investment account each time the Owner allocates or
transfers amounts to a Guarantee Period Account except that amounts allocated to
the same Guarantee Period on the same day will be treated as one Guarantee
Period Account. The minimum that may be allocated to establish a Guarantee
Period Account is $1,000. If less than $1,000 is allocated, the Company reserves
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the right to apply that amount to the Sub-Account investing in the Kemper Money
Market Portfolio. The Owner may allocate amounts to any of the Guarantee Periods
available.
At least 45 days (but not more than 75 days) prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration unless
(1) less than $1,000 would remain in the Guarantee Period Account on its
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Sub-Account investing in the Kemper Money
Market Portfolio. Where amounts have been renewed automatically in a new
Guarantee Period, it is the Company's current practice to give the Owner an
additional 30 days to transfer out of the Guarantee Period Account without
application of a Market Value Adjustment. This practice may be discontinued or
changed at the Company's discretion. Under contracts issued in New York, the
Company will transfer monies out of the Guarantee Period Account without
application of a Market Value Adjustment if the Owner's request is received
within ten days of the renewal date.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit. However a positive Market Value
Adjustment, if any, will increase the value of the death benefit when based on
the Contract's Accumulated Value. See "G. Death Benefit." A Market Value
Adjustment will apply to all other transfers, withdrawals or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account by
the market value factor. The market value factor for each Guarantee Period
Account is equal to:
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[(1+i)/(1+j)] to the power of n/365-1
<TABLE>
<S> <C>
where: i is the Guaranteed Interest Rate expressed as a decimal
(for example 3% = 0.03) being credited to the current
Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a
decimal, for a Guarantee Period with a duration equal to the
number of years remaining in the current Guarantee Period,
rounded to the next higher number of whole years. If that
rate is not available, the Company will use a suitable rate
or index allowed by the Department of Insurance; and
n is the number of days remaining from the Valuation Date to
the end of the current Guarantee Period.
</TABLE>
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX D, "THE MARKET VALUE
ADJUSTMENT."
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals
(including withdrawals made as part of a pro rata deduction for charges on a
Minimum Guaranteed Annuity Payout Rider purchased or repurchased after issue),
in order to ensure that on the last day of the Guarantee Period it will equal
the amount of the entire initial payment. The required amount then will be
allocated to the pre-selected Guarantee Period Account and the remaining balance
to the other investment options selected by the Owner in accordance with the
procedures described in "A. Payments."
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WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, unless made at the end of the
Guarantee Period; and (2) the Company reserves the right to defer payments of
amounts withdrawn from a Guarantee Period Account for up to six months from the
date it receives the withdrawal request. If deferred for 30 days or more, the
Company will pay interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Contract, on withdrawals
or surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, or beneficiary depends upon a variety of factors. The following
discussion is based upon the Company's understanding of current federal income
tax laws as they are interpreted as of the date of this Prospectus. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
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The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract
and therefore, the income on the Contract, for any taxable year of the Owner,
would be treated as ordinary income received or accrued by the Owner. It is
anticipated that the Underlying Portfolios in this Contract will comply with the
current diversification requirements. In the event that future IRS regulations
and/or rulings would require Contract modifications in order to remain in
compliance with the diversification standards, the Company will make reasonable
efforts to comply, and it reserves the right to make such changes as it deems
appropriate for that purpose.
In addition, traditionally in order for a variable annuity contract to qualify
for tax deferral, the Company, and not the variable contract owner, must be
considered to be the owner for tax purposes of the assets in the segregated
asset account underlying the variable annuity contract. In certain
circumstances, however, variable annuity contract owners may now be considered
the owners of these assets for federal income tax purposes. Specifically, the
IRS has stated in published rulings that a variable annuity contract owner may
be considered the owner of segregated account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations do not provide guidance governing the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the contract owner), rather than the
insurance company, to be treated as the owner of the assets in the account. This
announcement also states that guidance would be issued by way of regulations or
rulings on the "extent to which policyholders may direct their investments to
particular sub-accounts without being treated as owners of the underlying
assets." As of the date of this Prospectus, no such guidance has been issued.
The Company therefore additionally reserves the right to modify the Contract as
necessary in order to attempt to prevent a contract owner from being considered
the owner of a pro rata share of the assets of the segregated asset account
underlying the variable annuity contracts.
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A. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary according to whether they are made from a qualified contract or a
non-qualified contract. For more information on the tax provisions applicable to
qualified Contracts, see "D. Provisions Applicable to Qualified Employer Plans."
B. TAXATION OF THE CONTRACT IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owners" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner may be taxed on the annual increase in the Accumulated Value. The
Owner should consult tax and financial advisors for more information. This
section governs the taxation of annuities. The following discussion concerns
annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
contract" is the total of all payments to the Contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-
qualified deferred annuity contracts issued by the same insurance company to the
same owner during a single calendar year be treated as one contract in
determining taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the investment in the Contract bears to
the
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expected return under the Contract. The portion of the payment in excess of this
excludable amount is taxable as ordinary income. Once all the investment in the
Contract is recovered, the entire payment is taxable to the Owner, whether or
not the Owner is receiving the payments. If an Owner dies before the total
investment in the Contract is recovered, a deduction for the difference is
allowed on the Owner's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the owner (or, if the owner is not an
individual, the death of the primary annuitant, as defined in the Code) or, in
the case of the owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the Owner. This requirement is met when the owner elects to have
distributions made over the owner's life expectancy, or over the joint life
expectancy of the owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the owner's age 59 1/2 or five years, will subject
the owner to the 10% penalty tax on the prior distributions. In addition to the
exceptions above, the penalty tax will not apply to withdrawals from a qualified
contract made to an employee who has terminated employment after reaching age
55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under any LED-type option prior to age 59 1/2. Subsequent Private Letter
Rulings, however, have treated LED-type withdrawal programs as effectively
avoiding the 10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
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upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified employer plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan
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may be subject to that plan's terms and conditions irrespective of the terms and
conditions of any annuity contract used to fund such benefits. As such, the
following is simply a general description of various types of qualified plans
that may use the Contract. Before purchasing any annuity contract for use in
funding a qualified plan, more specific information should be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to the Owner of a
non-qualified Contract. Individuals purchasing a qualified Contract should
carefully review any such changes or limitations which may include restrictions
to ownership, transferability, assignability, contributions and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: this term covers all IRAs permitted
under Section 408(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to cancel the Contract as described
in this Prospectus. See "B. Right to Cancel Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
IRAs. Employer contributions that may be made to such plans are larger than the
amounts that may be contributed to regular IRAs, and may be deductible to the
employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which
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are tax exempt under Section 501(c)(3) of the Code are excludable from the gross
income of such employees to the extent that total annual payments do not exceed
the maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA Contract after
December 31, 1988, may not begin before the employee attains age 59 1/2,
separates from service, dies or becomes disabled. In the case of hardship, an
Owner may withdraw amounts contributed by salary reduction, but not the earnings
on such amounts. Even though a distribution may be permitted under these
rules (e.g., for hardship or after separation from service), it may be subject
to a 10% penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA Contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Portfolios. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting the Contract Value. (Certain transactions
made under recurring payment plans such as Dollar Cost Averaging may in the
future be confirmed quarterly rather than by immediate confirmations.) The Owner
should review the information in all statements carefully. All errors or
corrections must be reported to the Company immediately to assure proper
crediting to the Contract. The Company will assume that all transactions are
accurately reported on confirmation statements and quarterly/annual statements
unless the Owner notifies the Principal Office in writing within 30 days after
receipt of the statement.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
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<PAGE>
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated to the Kemper Money Market Portfolio
instead.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Portfolio no longer are available for investment or if in the Company's judgment
further investment in any Portfolio should become inappropriate in view of the
purposes of the Variable Account or the affected Sub-Account, the Company may
redeem the shares of that Portfolio and substitute shares of another registered
open-end management company. The Company will not substitute any shares
attributable to a Contract interest in a Sub-Account without notice to the Owner
and prior approval of the SEC and state insurance authorities, to the extent
required by the 1940 Act or other applicable law. The Variable Account may, to
the extent permitted by law, purchase other securities for other contracts or
permit a conversion between contracts upon request by an Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
portfolio or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.
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<PAGE>
Shares of the Portfolios also are issued to separate accounts of other insurance
companies which issue variable life contracts ("mixed funding"). Shares of the
Portfolios also are issued to other unaffiliated insurance companies ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life owners or variable annuity
owners. Although the Company and the Underlying Portfolios do not currently
foresee any such disadvantages to either variable life insurance owners or
variable annuity owners, the Company and the trustees of the Underlying
Portfolios intend to monitor events in order to identify any material conflicts
between such Owners and to determine what action, if any, should be taken in
response thereto. If the trustees were to conclude that separate portfolios
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change, and will notify Owners of all such changes. If the Company deems it to
be in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration no longer is required, or may be combined with
other sub-accounts or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law and to
the provisions of the Participation Agreements to (1) transfer assets from the
Variable Account or Sub-Account to another of the Company's variable accounts or
sub-accounts having assets of the same class, (2) to operate the Variable
Account or any Sub-Account as a management investment company under the 1940 Act
or in any other form permitted by law, (3) to deregister the Variable Account
under the 1940 Act in accordance with the requirements of the 1940 Act, (4) to
substitute the shares of any other registered investment company for the
Portfolio shares held by a Sub-Account, in the event that Portfolio shares are
unavailable for investment, or if the Company determines that further investment
in such Portfolio shares is inappropriate in view of the purpose of the Sub-
Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the Sub-
Accounts. In no event will the changes described be made without notice to
Owners in accordance with the 1940 Act.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered. The Company also reserves the right to
make any change to provisions of the Contract to comply with, or give Owners the
benefit of, any federal or state statute, rule or regulation, including but not
69
<PAGE>
limited to requirements for annuity contracts and retirement plans under the
Code. Any such changes will apply uniformly to all Contracts that are affected.
You will be given written notice of such changes.
VOTING RIGHTS
The Company will vote Portfolio shares held by each Sub-Account in accordance
with instructions received from Owners. Each person having a voting interest in
a Sub-Account will be provided with proxy materials of the Portfolio, together
with a form with which to give voting instructions to the Company. Shares for
which no timely instructions are received will be voted in proportion to the
instructions which are received. The Company also will vote shares in a Sub-
Account that it owns and which are not attributable to the Contract in the same
proportion. If the 1940 Act or any rules thereunder should be amended, or if the
present interpretation of the 1940 Act or such rules should change, and as a
result the Company determines that it is permitted to vote shares in its own
right (whether or not such shares are attributable to the Contract) the Company
reserves the right to do so.
The number of votes which an Owner may cast will be determined by the Company as
of the record date established by the Portfolio. During the accumulation phase,
the number of Portfolio shares attributable to each Owner will be determined by
dividing the dollar value of the Accumulation Units of the Sub-Account credited
to the Contract by the net asset value of one Portfolio share. During the
annuity payout phase, the number of Portfolio shares attributable to each Owner
will be determined by dividing the reserve held in each Sub-Account for the
Owner's variable annuity by the net asset value of one Portfolio share.
Ordinarily, the Owner's voting interest in the Portfolio will decrease as the
reserve for the variable annuity is depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers, including representatives of Allmerica
Investments, Inc. (the Principal Underwriter) which are registered under the
Securities Exchange Act of 1934 and are members of the National Association of
Securities Dealers, Inc. ("NASD").
The Company pays commissions, not to exceed 1.0% of payments, to broker-dealers
which sell the Contract, plus ongoing annual compensation of up to 1.0% of
Contract value. To the extent permitted by NASD rules, promotional incentives or
payments also may be provided to such broker-dealers based on sales volumes, the
assumption of wholesaling functions, or other sales-related
70
<PAGE>
criteria. Additional payments may be made for other services not directly
related to the sale of the Contract, including the recruitment and training of
personnel, production of promotional literature, and similar services.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-782-8380.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
has completed the process of modifying or replacing existing software and
believes that this action will resolve the Year 2000 issue. However, should
there be serious unanticipated interruptions from unknown sources, the Year 2000
issue could have a material adverse impact on the operations of the Company.
Specifically, the Company could experience, among other things, an interruption
in its ability to collect and process premiums, process claim payments,
safeguard and manage its invested assets, accurately maintain policyholder
information, accurately maintain accounting records, and perform customer
service. Any of these specific events, depending on duration, could have a
material adverse impact on the results of operations and the financial position
of the Company.
The Company is engaged in formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issue. The Company's
total Year 2000 project cost and estimates to complete the project include the
estimated costs and time associated with the Company's involvement on a third
party's Year 2000 program, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on
71
<PAGE>
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company does not believe that it has material exposure to contingencies related
to the Year 2000 issue for the products it has sold. Although the Company does
not believe that there is a material contingency associated with the Year 2000
issue, there can be no assurance that exposure for material contingencies will
not arise.
The cost of the Year 2000 project is being expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $59
million related to the assessment, plan development and substantial completion
of the Year 2000 project through June 30, 1999. The total remaining cost of the
project is estimated between $10-$20 million
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
72
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the Contract and the Fixed Account may be subject to the provisions
of the 1933 Act concerning the accuracy and completeness of statements made in
this Prospectus. The disclosures in this APPENDIX A have not been reviewed by
the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to separate
accounts. Allocations to the Fixed Account become part of the assets of the
Company, and are used to support insurance and annuity obligations. A portion or
all of net payments may be allocated to accumulate at a fixed rate of interest
in the Fixed Account. Such net amounts are guaranteed by the Company as to
principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due to
the limitations outlined above, the monies will be allocated to the Kemper Money
Market Portfolio.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (Dollar Cost Averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company. The Company reserves the right
to extend the period of time that the enhanced rate will apply. For more
information, contact your financial representative or call 1-800-782-8380
A-1
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
The Contract was first offered to the public in January 1999. The Company,
however, may advertise "total return" and "average annual total return"
performance information based on (1) the periods that the Sub-Accounts have been
in existence and (2) the periods that the Underlying Portfolios have been in
existence. Performance results in Tables 1A and 2A for all periods shown below
are calculated with all charges assumed to be those applicable to the Contract,
the Sub-Accounts and the Underlying Portfolios. Both the total return and yield
figures are based on historical earnings and are not intended to indicate future
performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The average annual total return represents the average annual percentage change
in the value of an investment in a Sub-Account over a given period of time.
Average annual total return represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Kemper Money Market Portfolio
refers to the income generated by an investment in the Sub-Account over a seven-
day period (which period will be specified in the advertisement). This income is
then "annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Portfolio other than the Kemper Money
Market Portfolio refers to the annualized income generated by an investment in
the Sub-Account over a specified 30-day or one-month period. The yield is
calculated by assuming that the income generated by the investment during that
30-day or one-month period is generated each period over a 12-month period and
is shown as a percentage of the investment.
Quotations of average annual total return as shown in Table 1A of Appendix B and
C are calculated in the manner prescribed by the SEC and show the percentage
rate of return of a hypothetical initial investment of $1,000 for the most
recent one, five and ten year period or for a period covering the time the Sub-
Account has been in existence, if less than the prescribed periods. The
calculation is adjusted to reflect the deduction of the annual Sub-Account asset
charge of
B-1
<PAGE>
1.40%, the Underlying Portfolio charges and an annual Contract fee. The
calculation has not been adjusted to reflect the deduction of the optional
Minimum Guaranteed Annuity Payout Rider or the optional Enhanced Death Benefit
Rider charge which, if elected, would reduce performance.
The performance shown in Table 2A of Appendix B and C is calculated in exactly
the same manner as that in Table 1A; however, the period of time is based on the
Underlying Portfolios' lifetime, which may predate the Sub-Accounts' inception
dates. These performance calculations are based on the assumption that the Sub-
Account corresponding to the applicable Underlying Portfolio was actually in
existence throughout the stated period and that the contractual charges and
expenses during that period were equal to those currently assessed under the
Contract.
Allmerica Financial Life Insurance and Annuity Company performance tables can be
found in Appendix B. First Allmerica Financial Life Insurance Company
performance tables can be found in Appendix C.
For more detailed information about these performance calculations, including
actual formulas, see the Statement of Additional Information.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING PORTFOLIO IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity variable accounts or other investment
products tracked by Lipper, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect
B-2
<PAGE>
deductions for administrative and management costs and expenses. In addition,
relevant broad-based indices and performance from independent sources may be
used to illustrate the performance of certain Contract features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
B-3
<PAGE>
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/98 SUB-ACCOUNT
- -------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Kemper Aggressive Growth.......... N/A N/A N/A
Kemper Technology Growth.......... N/A N/A N/A
Kemper-Dreman Financial
Services......................... 5/4/98 N/A -3.24%
Kemper Small Cap Growth........... 12/4/96 16.60% 22.54%
Kemper Small Cap Value............ 11/13/96 -12.61% 3.28%
Kemper-Dreman High Return Equity.. 5/4/98 N/A 1.78%
Kemper International.............. 11/13/96 8.37% 8.54%
Kemper International Growth and
Income........................... 5/5/98 N/A -9.80%
Kemper Global Blue Chip........... 5/12/98 N/A -1.26%
Kemper Growth..................... 12/4/96 13.38% 15.53%
Kemper Contrarian Value........... 11/13/96 17.48% 23.31%
Kemper Blue Chip.................. 5/1/97 12.14% 13.68%
Kemper Value+Growth............... 11/29/96 18.38% 18.88%
Kemper Index 500.................. N/A N/A N/A
Kemper Horizon 20+................ 12/5/96 11.34% 14.14%
Kemper Total Return............... 11/29/96 13.42% 14.15%
Kemper Horizon 10+................ 12/23/96 9.66% 12.28%
Kemper High Yield................. 11/13/96 -0.08% 5.49%
Kemper Horizon 5.................. 12/23/96 8.11% 9.56%
Kemper Global Income.............. 5/1/97 9.32% 6.63%
Kemper Investment Grade Bond...... 12/12/96 6.31% 6.83%
Kemper Government Securities...... 12/4/96 5.42% 5.77%
Kemper Money Market............... 11/20/96 3.57% 3.58%
KVS Focused Large Cap Growth...... N/A N/A N/A
Scudder International............. 5/6/98 N/A -1.58%
Scudder Global Discovery.......... 5/6/98 N/A -4.60%
Scudder Capital Growth............ 5/11/98 N/A 5.72%
Scudder Growth and Income......... 5/1/98 N/A -6.30%
Alger American Leveraged AllCap... N/A N/A N/A
Alger American Balanced........... N/A N/A N/A
Dreyfus MidCap Stock.............. N/A N/A N/A
Dreyfus Socially Responsible
Growth........................... N/A N/A N/A
Janus Aspen Growth................ N/A N/A N/A
Janus Aspen Growth and Income..... N/A N/A N/A
</TABLE>
B-4
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
<TABLE>
<CAPTION>
UNDERLYING 10 YEARS
PORTFOLIO FOR YEAR (OR SINCE
SUB-ACCOUNT INVESTING IN INCEPTION ENDED 5 INCEPTION
UNDERLYING PORTFOLIO DATE 12/31/98 YEARS IF LESS)
- -------------------- ---------- --------------- ------ --------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth......... N/A N/A N/A N/A
Kemper Technology Growth......... N/A N/A N/A N/A
Kemper-Dreman Financial
Services........................ 5/4/98 N/A N/A -3.24%
Kemper Small Cap Growth.......... 5/2/94 16.60% N/A 22.37%
Kemper Small Cap Value........... 5/1/96 -12.61% N/A 2.11%
Kemper-Dreman High Return
Equity.......................... 5/4/98 N/A N/A 1.78%
Kemper International............. 1/6/92 8.37% 7.19% 8.87%
Kemper International Growth and
Income.......................... 5/5/98 N/A N/A -9.80%
Kemper Global Blue Chip.......... 5/5/98 N/A N/A -3.14%
Kemper Growth.................... 12/9/83 13.38% 15.00% 16.34%
Kemper Contrarian Value.......... 5/1/96 17.48% N/A 23.43%
Kemper Blue Chip................. 5/1/97 12.14% N/A 13.68%
Kemper Value+Growth.............. 5/1/96 18.38% N/A 20.92%
Kemper Index 500................. N/A N/A N/A N/A
Kemper Horizon 20+............... 5/1/96 11.34% N/A 16.68%
Kemper Total Return.............. 4/6/82 13.42% 11.26% 12.49%
Kemper Horizon 10+............... 5/1/96 9.66% N/A 13.16%
Kemper High Yield................ 4/6/82 -0.08% 6.56% 8.61%
Kemper Horizon 5................. 5/1/96 8.11% N/A 10.40%
Kemper Global Income............. 5/1/97 9.32% N/A 6.63%
Kemper Investment Grade Bond..... 5/1/96 6.31% N/A 6.08%
Kemper Government Securities..... 9/3/87 5.42% 5.11% 6.74%
Kemper Money Market.............. 4/6/82 3.57% 3.42% 3.83%
KVS Focused Large Cap Growth..... N/A N/A N/A N/A
Scudder International............ 5/1/87 16.55% 8.64% 10.27%
Scudder Global Discovery......... 5/1/96 14.65% N/A 11.14%
Scudder Capital Growth........... 7/16/85 21.35% 16.71% 15.14%
Scudder Growth and Income........ 5/2/94 5.24% N/A 18.35%
Alger American Leveraged
AllCap.......................... 1/25/95 55.62% N/A 37.39%
Alger American Balanced.......... 9/5/89 29.67% 14.78% 10.48%
Dreyfus MidCap Stock............. 5/1/98 N/A N/A -3.57%
Dreyfus Socially Responsible
Growth.......................... 10/7/93 27.46% 20.61% 21.15%
Janus Aspen Growth............... 9/13/93 33.72% 19.60% 19.06%
Janus Aspen Growth and Income.... 5/1/98 N/A N/A 18.56%
</TABLE>
B-5
<PAGE>
APPENDIX C
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/98 SUB-ACCOUNT
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth.......... N/A N/A N/A
Kemper Technology Growth.......... N/A N/A N/A
Kemper-Dreman Financial
Services......................... 10/27/98 N/A 12.58%
Kemper Small Cap Growth........... 10/16/97 16.61% 12.16%
Kemper Small Cap Value............ 11/18/97 -12.60% -11.14%
Kemper-Dreman High Return Equity.. 10/12/98 N/A 15.19%
Kemper International.............. 10/16/97 8.38% 0.83%
Kemper International Growth and
Income........................... 12/9/98 N/A 3.51%
Kemper Global Blue Chip........... 11/17/98 N/A 4.09%
Kemper Growth..................... 10/16/97 13.39% 8.49%
Kemper Contrarian Value........... 10/14/97 17.49% 15.53%
Kemper Blue Chip.................. 5/1/97 12.15% 13.69%
Kemper Value+Growth............... 10/14/97 18.39% 11.11%
Kemper Index 500.................. N/A N/A N/A
Kemper Horizon 20+................ 10/16/97 11.35% 7.47%
Kemper Total Return............... 11/17/97 13.43% 13.28%
Kemper Horizon 10+................ 11/25/97 9.67% 10.31%
Kemper High Yield................. 10/16/97 -0.07% 0.27%
Kemper Horizon 5.................. 11/10/97 8.12% 8.69%
Kemper Global Income.............. 5/1/97 9.33% 6.64%
Kemper Investment Grade Bond...... 12/11/97 6.32% 6.39%
Kemper Government Securities...... 12/11/97 5.43% 5.53%
Kemper Money Market............... 12/29/97 3.55% 3.56%
KVS Focused Large Cap Growth...... N/A N/A N/A
Scudder International............. 8/28/98 N/A 9.82%
Scudder Global Discovery.......... N/A N/A N/A
Scudder Capital Growth............ 10/28/98 N/A 17.05%
Scudder Growth and Income......... 8/28/98 N/A 10.14%
Alger American Leveraged AllCap... N/A N/A N/A
Alger American Balanced........... N/A N/A N/A
Dreyfus MidCap Stock.............. N/A N/A N/A
Dreyfus Socially Responsible
Growth........................... N/A N/A N/A
Janus Aspen Growth................ N/A N/A N/A
Janus Aspen Growth and Income..... N/A N/A N/A
</TABLE>
C-1
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
<TABLE>
<CAPTION>
UNDERLYING 10 YEARS
PORTFOLIO FOR YEAR (OR SINCE
SUB-ACCOUNT INVESTING IN INCEPTION ENDED 5 INCEPTION
UNDERLYING PORTFOLIO DATE 12/31/98 YEARS IF LESS)
- -------------------- ---------- --------------- ------ --------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth......... N/A N/A N/A N/A
Kemper Technology Growth......... N/A N/A N/A N/A
Kemper-Dreman Financial
Services........................ 5/4/98 N/A N/A -3.23%
Kemper Small Cap Growth.......... 5/2/94 16.61% N/A 22.38%
Kemper Small Cap Value........... 5/1/96 -12.60% N/A 2.10%
Kemper-Dreman High Return
Equity.......................... 5/4/98 N/A N/A 1.79%
Kemper International............. 1/6/92 8.38% 7.20% 8.88%
Kemper International Growth and
Income.......................... 5/5/98 N/A N/A -9.78%
Kemper Global Blue Chip.......... 5/5/98 N/A N/A -3.11%
Kemper Growth.................... 12/9/83 13.39% 15.01% 16.35%
Kemper Contrarian Value.......... 5/1/96 17.49% N/A 23.43%
Kemper Blue Chip................. 5/1/97 12.15% N/A 13.69%
Kemper Value+Growth.............. 5/1/96 18.39% N/A 20.93%
Kemper Index 500................. N/A N/A N/A N/A
Kemper Horizon 20+............... 5/1/96 11.35% N/A 16.69%
Kemper Total Return.............. 4/6/82 13.43% 11.27% 12.50%
Kemper Horizon 10+............... 5/1/96 9.67% N/A 13.17%
Kemper High Yield................ 4/6/82 -0.07% 6.57% 8.62%
Kemper Horizon 5................. 5/1/96 8.12% N/A 10.41%
Kemper Global Income............. 5/1/97 9.33% N/A 6.64%
Kemper Investment Grade Bond..... 5/1/96 6.32% N/A 6.09%
Kemper Government Securities..... 9/3/87 5.43% 5.12% 6.75%
Kemper Money Market.............. 4/6/82 3.55% 3.43% 3.84%
KVS Focused Large Cap Growth..... N/A N/A N/A N/A
Scudder International............ 5/1/87 16.56% 8.65% 10.28%
Scudder Global Discovery......... 5/1/96 N/A N/A N/A
Scudder Capital Growth........... 7/16/85 21.40% 16.73% 15.15%
Scudder Growth and Income........ 5/2/94 5.25% N/A 18.36%
Alger American Leveraged
AllCap.......................... 1/25/95 55.62% N/A 37.39%
Alger American Balanced.......... 9/5/89 29.67% 14.78% 10.48%
Dreyfus MidCap Stock............. 5/1/98 N/A N/A -3.55%
Dreyfus Socially Responsible
Growth.......................... 10/7/93 27.48% 20.63% 21.17%
Janus Aspen Growth............... 9/13/93 33.74% 19.62% 19.08%
Janus Aspen Growth and Income.... 5/1/98 N/A N/A 18.58%
</TABLE>
C-2
<PAGE>
APPENDIX D
THE MARKET VALUE ADJUSTMENT
MARKET VALUE ADJUSTMENT - The following are examples of how the market value
adjustment works:
The market value factor is: [(1+i)/(1+j)] to the power of n/365-1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.10)] to the power of 2555/365-1
= (.98182) to the power of 7-1
= -1.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
= -.12054 X $62,985.60
= -$7,592.11
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.07)] to the power of 2555/365-1
= (1.0093) to the power of 7-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694 X $62,985.60
= $4,216.26
D-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.11)] to the power of 2555/365-1
= (.97297) to the power of 7-1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the negative of the excess
interest earned over 3%
= Minimum of (-.17454X$62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)7-1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the excess interest earned over
3%
= Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
D-2
<PAGE>
APPENDIX E
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ----------- ------- ------ -----
<S> <C> <C> <C>
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.969 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 12,487 N/A N/A
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.309 0.989 1.000
End of Period.................................. 1.528 1.309 0.989
Number of Units Outstanding at End of Period (in
thousands)........................................ 34,993 16,339 210
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.227 1.022 1.000
End of Period.................................. 1.074 1.227 1.022
Number of Units Outstanding at End of Period (in
thousands)........................................ 49,408 29,597 314
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 1.019 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 45,758 N/A N/A
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.100 1.019 1.000
End of Period.................................. 1.194 1.100 1.019
Number of Units Outstanding at End of Period (in
thousands)........................................ 46,830 30,789 360
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.903 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 2,218 N/A N/A
</TABLE>
E-1
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ----------- ------- ------ -----
<S> <C> <C> <C>
KEMPER GLOBAL BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.989 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 2,382 N/A N/A
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.191 0.995 1.000
End of Period.................................. 1.352 1.191 0.995
Number of Units Outstanding at End of Period (in
thousands)........................................ 56,608 24,186 370
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.332 1.036 1.000
End of Period.................................. 1.566 1.332 1.036
Number of Units Outstanding at End of Period (in
thousands)........................................ 90,048 53,634 317
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.105 0 N/A
End of Period.................................. 1.241 1.105 N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 49,320 13,179 N/A
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.213 0.981 1.000
End of Period.................................. 1.438 1.213 0.981
Number of Units Outstanding at End of Period (in
thousands)........................................ 64,931 30,946 197
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.183 0.995 1.000
End of Period.................................. 1.318 1.183 0.995
Number of Units Outstanding at End of Period (in
thousands)........................................ 19,538 7,768 226
</TABLE>
E-2
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ----------- ------- ------ -----
<S> <C> <C> <C>
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.164 0.984 1.000
End of Period.................................. 1.321 1.164 0.984
Number of Units Outstanding at End of Period (in
thousands)........................................ 85,265 31,284 353
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.154 1.002 1.000
End of Period.................................. 1.267 1.154 1.002
Number of Units Outstanding at End of Period (in
thousands)........................................ 28,551 10,199 39
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.123 1.020 1.000
End of Period.................................. 1.124 1.123 1.020
Number of Units Outstanding at End of Period (in
thousands)........................................ 132,619 64,934 941
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.114 1.002 1.000
End of Period.................................. 1.206 1.114 1.002
Number of Units Outstanding at End of Period (in
thousands)........................................ 19,335 7,888 53
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.019 0 N/A
End of Period.................................. 1.115 1.019 N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 2,760 1,317 N/A
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.079 1.003 1.000
End of Period.................................. 1.148 1.079 1.003
Number of Units Outstanding at End of Period (in
thousands)........................................ 29,010 8,255 22
</TABLE>
E-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ----------- ------- ------ -----
<S> <C> <C> <C>
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.067 0.993 1.000
End of Period.................................. 1.126 1.067 0.993
Number of Units Outstanding at End of Period (in
thousands)........................................ 28,997 7,815 498
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.042 1.004 1.000
End of Period.................................. 1.080 1.042 1.004
Number of Units Outstanding at End of Period (in
thousands)........................................ 28,692 15,760 1,904
SCUDDER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.986 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 4,592 N/A N/A
SCUDDER GLOBAL DISCOVERY PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.955 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 2,770 N/A N/A
SCUDDER CAPITAL GROWTH PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 1.059 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 4,396 N/A N/A
SCUDDER GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.938 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 11,424 N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
E-4
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997
- ----------- ----- -----
<S> <C> <C>
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.127 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 51 N/A
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.985 0
End of Period........................................... 1.150 0.985
Number of Units Outstanding at End of Period (in
thousands)................................................. 232 18
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.003 0
End of Period........................................... 0.878 1.003
Number of Units Outstanding at End of Period (in
thousands)................................................. 707 52
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.153 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 450 N/A
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.932 0
End of Period........................................... 1.012 0.932
Number of Units Outstanding at End of Period (in
thousands)................................................. 377 48
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.036 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 5 N/A
KEMPER GLOBAL BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.042 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 50 N/A
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.973 0
End of Period........................................... 1.105 0.973
Number of Units Outstanding at End of Period (in
thousands)................................................. 512 16
</TABLE>
E-5
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997
- ----------- ----- -----
<S> <C> <C>
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.014 0
End of Period........................................... 1.193 1.014
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,914 174
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.105 0
End of Period........................................... 1.241 1.105
Number of Units Outstanding at End of Period (in
thousands)................................................. 931 43
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.960 0
End of Period........................................... 1.138 0.960
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,081 125
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.980 0
End of Period........................................... 1.092 0.980
Number of Units Outstanding at End of Period (in
thousands)................................................. 35 5
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.014 0
End of Period........................................... 1.151 1.014
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,222 42
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.016 0
End of Period........................................... 1.115 1.016
Number of Units Outstanding at End of Period (in
thousands)................................................. 789 21
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.004 0
End of Period........................................... 1.005 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 2,121 75
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.017 0
End of Period........................................... 1.101 1.017
Number of Units Outstanding at End of Period (in
thousands)................................................. 643 81
</TABLE>
E-6
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997
- ----------- ----- -----
<S> <C> <C>
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.019 0
End of Period........................................... 1.115 1.019
Number of Units Outstanding at End of Period (in
thousands)................................................. 26 11
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.004 0
End of Period........................................... 1.069 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 404 21
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.004 0
End of Period........................................... 1.060 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 971 21
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.000 0
End of Period........................................... 1.037 1.000
Number of Units Outstanding at End of Period (in
thousands)................................................. 772 5
SCUDDER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.099 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 201 N/A
SCUDDER GLOBAL DISCOVERY PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 0 N/A
SCUDDER CAPITAL GROWTH PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.172 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 143 N/A
SCUDDER GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.103 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 411 N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
E-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT KG
INVESTING IN SHARES OF KEMPER VARIABLE SERIES, SCUDDER
VARIABLE LIFE INVESTMENT FUND, DREYFUS INVESTMENT
PORTFOLIOS, THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
FUND, INC., JANUS ASPEN SERIES AND THE ALGER AMERICAN FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE KEMPER GATEWAY ADVISOR PROSPECTUS FOR SEPARATE ACCOUNT
KG DATED MAY 1, 1999 AS REVISED NOVEMBER 15, 1999 ("THE PROSPECTUS"). THE
PROSPECTUS MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES, FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY, INC., 440 LINCOLN STREET, WORCESTER,
MASSACHUSETTS 01653, TELEPHONE 1-800-782-8380.
DATED MAY 1, 1999 AS REVISED NOVEMBER 15, 1999
FAFLIC KEMPER GATEWAY ADVISOR
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
GENERAL INFORMATION AND HISTORY..............................................2
TAXATION OF THE CONTRACTS, THE VARIABLE ACCOUNT AND
THE COMPANY..............................................................3
SERVICES.....................................................................3
UNDERWRITERS.................................................................3
ANNUITY BENEFIT PAYMENTS.....................................................4
PERFORMANCE INFORMATION......................................................5
FINANCIAL STATEMENTS.......................................................F-1
</TABLE>
GENERAL INFORMATION AND HISTORY
Separate Account KG (the "Variable Account") is a separate investment account of
First Allmerica Financial Life Insurance Company (the "Company") authorized by
vote of its Board of Directors on June 13, 1996. The Company, organized under
the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998, the Company and its subsidiaries
had over $27 billion in combined assets and over $48 billion in life insurance
in force. Effective October 16, 1995, the Company converted from a mutual life
insurance company, known as State Mutual Life Assurance Company of America, to a
stock life insurance company and adopted its present name. At that time, the
Company became a wholly owned subsidiary of Allmerica Financial Corporation
("AFC"). The Company's principal office (the "Principal Office") is located at
440 Lincoln Street, Worcester, Massachusetts 01653, telephone 508-855-1000.
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
Currently, 34 Sub-Accounts of the Variable Account are available under Contract
Form 3027-98 (the "Contract"). Each Sub-Account invests in a corresponding
investment portfolio of Kemper Variable Series ("KVS"), Scudder Variable Life
Investment Fund ("Scudder VLIF"), Dreyfus Investment Portfolios, The Dreyfus
Socially Responsible Growth Fund, Inc., the Janus Aspen Series ("Janus Aspen"),
or The Alger American Fund ("Alger'), open-end, registered management investment
companies.
Twenty-four different portfolios of KVS are available under the Contract: the
Kemper Aggressive Growth Portfolio, Kemper Technology Growth Portfolio,
Kemper-Dreman Financial Services Portfolio, Kemper Small Cap Growth Portfolio,
Kemper Small Cap Value Portfolio, Kemper-Dreman High Return Equity Portfolio,
Kemper International Portfolio, Kemper International Growth and Income
Portfolio, Kemper Global Blue Chip Portfolio, Kemper Growth Portfolio, Kemper
Contrarian Value Portfolio, Kemper Blue Chip Portfolio, Kemper Value+Growth
Portfolio, Kemper Index 500 Portfolio, Kemper Horizon 20+ Portfolio, Kemper
Total Return Portfolio, Kemper Horizon 10+ Portfolio, Kemper High Yield
Portfolio, Kemper Horizon 5 Portfolio, Kemper Global Income Portfolio, Kemper
Investment Grade Bond Portfolio, Kemper Government Securities Portfolio, Kemper
Money Market Portfolio and KVS Focused Large Cap Growth Portfolio. Four
portfolios of
2
<PAGE>
Scudder VLIF are available under the Contract: the Scudder International
Portfolio, Scudder Global Discovery Portfolio, Scudder Capital Growth Portfolio,
and Scudder Growth and Income Portfolio. One portfolio of Dreyfus Investment
Portfolios is available under the Contract: the Dreyfus MidCap Stock Portfolio.
One portfolio of The Dreyfus Socially Responsible Growth Fund, Inc. is available
under the Contract: the Dreyfus Socially Responsible Growth Fund. Two portfolios
of Janus Aspen are available under the Contract: the Janus Aspen Growth
Portfolio and the Janus Aspen Growth and Income Portfolio. Two portfolios of
Alger are available under the Contract: the Alger American Leveraged AllCap
Portfolio and the Alger American Balanced Portfolio (together, the "Underlying
Portfolios"). Each Underlying Portfolio available under the Contract has its own
investment objectives and certain attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any other
taxes that may become payable in the future in connection with the Contract or
the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Underlying Portfolio shares owned by the Sub-Accounts are held
on an open account basis. A Sub-Account's ownership of Underlying Portfolio
shares is reflected on the records of the Underlying Portfolio and is not
represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, and
the financial statements of Separate Account KG of the Company as of December
31, 1998 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica Investments, the Company and the Variable Account. Allmerica
Investments distributes the Contract on a best-efforts basis. Allmerica
Investments, Inc., 440 Lincoln Street,
3
<PAGE>
Worcester, Massachusetts 01653, was organized in 1969 as a wholly owned
subsidiary of First Allmerica, and presently is indirectly wholly owned by First
Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
contracts.
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions, not to exceed 1.0% of purchase payments, to entities
which sell the Contract. To the extent permitted by NASD rules, promotional
incentives or payments also may be provided to such entities based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contract, including the recruitment and training of
personnel, production of promotional literature and similar services. A
Promotional Allowance of 0.40% of total payments is paid to Kemper Distributors,
Inc. for administrative and support services with respect to the distribution of
the Contract; however, Kemper Distributors, Inc. may direct the Company to pay a
portion of said allowance to broker-dealers who provide support services
directly.
Commissions paid by the Company do not result in any charge to Owners or to the
Variable Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus.
No commissions were paid to Allmerica Investments, Inc. during 1997 and 1998.
Sales of these contracts began in 1997.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period.................................$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period.....................................$5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses............................$1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2).............0.000335
(5) Annual Charge (one-day equivalent of 1.40% per annum)..................................0.000039
(6) Net Investment Rate (4) - (5)..........................................................0.000296
(7) Net Investment Factor 1.000000 + (6)....................................................1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7)...................................$1.135336
</TABLE>
4
<PAGE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity benefit payments is described
in detail under "Determination of the First and Subsequent Annuity Benefit
Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example: Assume
an Annuitant has 40,000 Accumulation Units in a Variable Account, and that the
value of an Accumulation Unit on the Valuation Date used to determine the amount
of the first variable annuity benefit payment is $1.120000. Therefore, the
Accumulation Value of the Contract is $44,800 (40,000 x $1.120000). Assume also
that the Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax, the first monthly
payment would be 44.800 multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum
for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment, the number of Annuity Units represented by that payment
is determined to be 267.5818. The value of this same number of Annuity Units
will be paid in each subsequent month under most options. Assume further that
the net investment factor for the Valuation Period applicable to the next
annuity benefit payment is 1.000190. Multiplying this factor by .999906 (the
one-day adjustment factor for the assumed interest rate of 3.5% per annum)
produces a factor of 1.000096. This then is multiplied by the Annuity Unit value
on the immediately preceding Valuation Date (assumed here to be $1.105000). The
result is an Annuity Unit value of $1.105106 for the current monthly payment.
The current monthly payment then is determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 267.5818 times $1.105106,
which produces a current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both commutable
and noncommutable period certain annuity options. A commutable option gives the
Annuitant the right to exchange any remaining payments for a lump sum payment
based on the commuted value. The Commuted Value is the present value of
remaining payments calculated at 3.5% interest. The determination of the
Commuted Value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the Accumulated Value. Assume this
results in 250.0000 Annuity Units. Assume the Commuted Value is requested with
60 monthly payments remaining and a current Annuity Unit Value of $1.200000.
Based on these assumptions, the dollar amount of remaining payments would be
$300 a month for 60 months. The present value at 3.5% of all remaining payments
would be $16,560.72.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on various
topics of interest to Owners and prospective Owners. These topics
5
<PAGE>
may include the relationship between sectors of the economy and the economy as a
whole and its effect on various securities markets, investment strategies and
techniques (such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparisons
between the Contract and the characteristics of and market for such financial
instruments. Total return data and supplemental total return information may be
advertised based on the period of time that an Underlying Portfolio and an
underlying Sub-Account have been in existence, even if longer than the period of
time that the Contract has been offered. The results for any period prior to a
Contract being offered will be calculated as if the Contract had been offered
during that period of time, with all charges assumed to be those applicable to
the Contract.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Account's asset charge.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). The quotations are
computed by finding the average annual compounded rates of return over the
specified periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at
the end of the specified period
The calculation of Total Return includes the annual charges against the asset of
the Sub-Account. This charge is 1.40% on an annual basis. The calculation of
ending redeemable value assumes (1) the Contract was issued at the beginning of
the period, and (2) a complete surrender of the Contract at the end of the
period.
The calculations of Total Return reflect the deduction of the $30 annual
Contract fee.
YIELD AND EFFECTIVE YIELD -- THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1998:
<TABLE>
<S> <C>
Yield 3.01%
Effective Yield 3.06%
</TABLE>
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
6
<PAGE>
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
TAX-DEFERRED ACCUMULATION
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
<TABLE>
<CAPTION>
AFTER-TAX CONTRIBUTIONS AND
TAX-DEFERRED EARNINGS
-----------------------------------
-----------------------------------
TAXABLE LUMP SUM AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- ---------------- -----------------------
<S> <C> <C> <C>
Years 10 $107,946 $86,448 $81,693
Years 20 233,048 165,137 133,476
Years 30 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract with a conventional savings plan. Contributions
to the non-qualified annuity contract and the conventional savings plan are made
after tax. Only the gain in the non-qualified annuity contract will be subject
to income tax in a taxable lump sum withdrawal. The chart assumes a 37.1%
federal marginal tax rate and an 8% annual return. The 37.1% federal marginal
tax is based on a marginal tax rate of 36%, representative of the target market,
adjusted to reflect a decrease of $3 of itemized deductions for each $100 of
income over $117,950. Tax rates are subject to change as is the tax-deferred
treatment of the Contract. Income on non-qualified annuity contracts is taxed as
ordinary income upon withdrawal. A 10% tax penalty may apply to early
withdrawals. See "Federal Income Taxes" in the Prospectus.
The chart does not reflect the following charges and expenses under the
Contract: 1.25% for mortality and expense risk; 0.15% administration charges;
and $30 annual Contract fee. The tax-deferred accumulation would be reduced if
these charges were reflected. No implication is intended by the use of these
assumptions that the return shown is guaranteed in any way or that the return
shown represents an average or expected rate of return over the period of the
Contract. (IMPORTANT -- THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.)
Unlike savings plans, contributions to non-qualified annuity contracts provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a non-qualified annuity contract (and you have
many different options on how you receive your funds), they are subject to
income tax. At the time of receipt, if the person receiving the monies is
retired, not working or has additional tax exemptions, these monies may be taxed
at a lesser rate.
7
<PAGE>
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company and for its Separate Account KG.
8
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of First Allmerica Financial Life Insurance Company and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 18 and Note 20,
which are as of March 19, 1999 and April 1, 1999, respectively
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums................................................ $2,303.9 $2,311.0 $2,236.3
Universal life and investment product policy fees....... 296.6 237.3 197.2
Net investment income................................... 613.7 641.8 670.8
Net realized investment gains........................... 62.6 76.5 66.8
Other income............................................ 142.6 117.6 108.4
-------- -------- --------
Total revenues...................................... 3,419.4 3,384.2 3,279.5
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment
expenses.............................................. 2,050.2 2,004.6 1,957.0
Policy acquisition expenses............................. 452.8 425.1 470.1
Sales practice litigation............................... 31.0 -- --
Loss from exiting reinsurance pools..................... 25.3 -- --
Loss from cession of disability income business......... -- 53.9 --
Restructuring costs..................................... 13.0 -- --
Other operating expenses................................ 559.0 523.7 503.2
-------- -------- --------
Total benefits, losses and expenses................. 3,131.3 3,007.3 2,930.3
-------- -------- --------
Income before federal income taxes.......................... 288.1 376.9 349.2
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current................................................. 67.6 83.3 96.8
Deferred................................................ (15.4) 14.2 (15.7)
-------- -------- --------
Total federal income tax expense.................... 52.2 97.5 81.1
-------- -------- --------
Income before minority interest............................. 235.9 279.4 268.1
Minority interest....................................... (55.0) (79.4) (74.6)
-------- -------- --------
Net income.................................................. $ 180.9 $ 200.0 $ 193.5
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$7,520.8 and $6,992.8)................................. $ 7,683.9 $ 7,253.5
Equity securities at fair value (cost of $253.1 and
$341.1)................................................ 397.1 479.0
Mortgage loans.......................................... 562.3 567.5
Real estate............................................. 20.4 50.3
Policy loans............................................ 154.3 141.9
Other long-term investments............................. 142.7 148.3
--------- ---------
Total investments................................... 8,960.7 8,640.5
--------- ---------
Cash and cash equivalents................................. 504.0 213.9
Accrued investment income................................. 141.0 141.8
Deferred policy acquisition costs......................... 1,161.2 965.5
--------- ---------
Reinsurance receivables:
Future policy benefits.................................. 322.6 307.1
Outstanding claims, losses and loss adjustment
expenses............................................... 652.2 626.7
Other................................................... 161.6 106.4
--------- ---------
Total reinsurance receivables....................... 1,136.4 1,040.2
--------- ---------
Deferred federal income taxes............................. 19.4 --
Premiums, accounts and notes receivable................... 510.5 554.4
Other assets.............................................. 530.6 373.0
Closed Block assets....................................... 803.1 806.7
Separate account assets................................... 13,697.7 9,755.4
--------- ---------
Total assets........................................ $27,464.6 $22,491.4
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.................................. $ 2,802.2 $ 2,598.5
Outstanding claims, losses and loss adjustment
expenses............................................... 2,815.9 2,825.0
Unearned premiums....................................... 843.2 846.8
Contractholder deposit funds and other policy
liabilities............................................ 2,637.0 1,852.7
--------- ---------
Total policy liabilities and accruals............... 9,098.3 8,123.0
--------- ---------
Expenses and taxes payable................................ 681.9 662.6
Reinsurance premiums payable.............................. 50.2 37.7
Short-term debt........................................... 221.3 33.0
Deferred federal income taxes............................. -- 12.9
Long-term debt............................................ -- 2.6
Closed Block liabilities.................................. 872.0 885.6
Separate account liabilities.............................. 13,691.5 9,749.7
--------- ---------
Total liabilities................................... 24,615.2 19,507.1
--------- ---------
Minority interest......................................... 532.9 748.9
Commitments and contingencies (Notes 13 and 18)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares authorized,
500,000 shares issued and outstanding................... 5.0 5.0
Additional paid-in capital................................ 444.0 453.7
Accumulated other comprehensive income.................... 169.2 209.3
Retained earnings......................................... 1,698.3 1,567.4
--------- ---------
Total shareholder's equity.......................... 2,316.5 2,235.4
--------- ---------
Total liabilities and shareholder's equity.......... $27,464.6 $22,491.4
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................................ $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period.......................... 453.7 392.4 392.4
Contributed from parent................................. -- 61.3 --
Loss on change of interest -- Allmerica P&C............. (9.7) -- --
-------- -------- --------
Balance at end of period................................ 444.0 453.7 392.4
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period.......................... 209.3 131.4 153.0
Appreciation (depreciation) during the period:
Net (depreciation) appreciation on available-for-sale
securities............................................ (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal income taxes... 28.9 (59.8) 11.8
Minority interest....................................... 13.4 (33.2) 1.7
-------- -------- --------
(40.1) 77.9 (21.6)
-------- -------- --------
Balance at end of period................................ 169.2 209.3 131.4
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period.......................... 1,567.4 1,367.4 1,173.9
Net income.............................................. 180.9 200.0 193.5
Dividend to shareholder................................. (50.0) -- --
-------- -------- --------
Balance at end of period................................ 1,698.3 1,567.4 1,367.4
-------- -------- --------
Total shareholder's equity.......................... $2,316.5 $2,235.4 $1,896.2
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $180.9 $200.0 $193.5
------ ------ ------
Other comprehensive income:
Net (depreciation) appreciation on available-for-sale
securities.............................................. (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal income taxes..... 28.9 (59.8) 11.8
Minority interest......................................... 13.4 (33.2) 1.7
------ ------ ------
Other comprehensive income.............................. (40.1) 77.9 (21.6)
------ ------ ------
Comprehensive income...................................... $140.8 $277.9 $171.9
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 180.9 $ 200.0 $ 193.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest................................... 55.0 79.4 74.6
Net realized gains.................................. (62.7) (77.8) (66.8)
Net amortization and depreciation................... 20.7 31.6 44.7
Deferred federal income taxes....................... (15.4) 14.2 (15.7)
Loss from exiting reinsurance pools................. 25.3 -- --
Sales practice litigation expense................... 31.0 -- --
Payment related to exiting reinsurance pools........ (30.3) -- --
Loss from cession of disability income business..... -- 53.9 --
Payment related to cession of disability income
business............................................ -- (207.0) --
Change in deferred acquisition costs................ (185.8) (189.7) (73.9)
Change in premiums and notes receivable, net of
reinsurance payable................................. 56.7 (15.1) (16.8)
Change in accrued investment income................. 0.8 7.1 16.7
Change in policy liabilities and accruals, net...... 168.1 (134.9) (184.3)
Change in reinsurance receivable.................... (115.4) 27.2 123.8
Change in expenses and taxes payable................ (3.3) 49.4 26.0
Separate account activity, net...................... (48.5) -- 5.2
Other, net.......................................... (63.8) 20.4 38.5
--------- --------- ---------
Net cash provided by (used in) operating
activities.......................................... 13.3 (141.3) 165.5
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities.................... 1,929.1 2,892.9 3,985.8
Proceeds from disposals of equity securities............ 285.3 162.7 228.7
Proceeds from disposals of other investments............ 120.8 116.3 99.3
Proceeds from mortgages matured or collected............ 171.2 204.7 176.9
Purchase of available-for-sale fixed maturities......... (2,588.4) (2,596.0) (3,771.1)
Purchase of equity securities........................... (119.9) (67.0) (90.9)
Purchase of other investments........................... (274.4) (175.0) (168.0)
Capital expenditures.................................... (0.7) (15.3) (12.8)
Purchase of minority interest in Citizens Corporation... (195.9) -- --
Other investing activities, net......................... 5.1 1.3 4.3
--------- --------- ---------
Net cash (used in) provided by investing
activities.......................................... (667.8) 524.6 452.2
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit
funds.................................................. 1,419.2 457.6 268.7
Withdrawals from contractholder deposit funds........... (625.0) (647.1) (905.0)
Change in short-term debt............................... 188.3 (5.4) 10.4
Change in long-term debt................................ (2.6) (0.1) (0.1)
Dividend paid to parent................................. (50.0) -- --
Dividends paid to minority shareholders................. -- (9.4) (3.9)
Additional paid-in capital.............................. -- 0.1 --
Subsidiary treasury stock purchased, at cost............ (1.0) (140.0) (42.0)
--------- --------- ---------
Net cash provided by (used in) financing
activities.......................................... 928.9 (344.3) (671.9)
--------- --------- ---------
Net change in cash and cash equivalents..................... 274.4 39.0 (54.2)
Net change in cash held in the Closed Block................. 15.7 (1.0) (6.5)
Cash and cash equivalents, beginning of period.............. 213.9 175.9 236.6
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 504.0 $ 213.9 $ 175.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 7.3 $ 3.6 $ 18.6
Income taxes paid........................................... $ 133.5 $ 66.3 $ 72.0
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of First Allmerica Financial Life
Insurance Company ("FAFLIC", or the "Company"), a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"), include the accounts of its wholly
owned life insurance subsidiary Allmerica Financial Life Insurance and Annuity
Company ("AFLIAC"), its non-insurance subsidiaries (principally brokerage and
investment advisory subsidiaries), and Allmerica Property and Casualty
Companies, Inc. ("Allmerica P&C") (a 70.06%-owned non-insurance holding
company). The Closed Block (Note 1B) assets and liabilities at December 31, 1998
and 1997, and its results of operations subsequent to demutualization are
presented in the consolidated financial statements as single line items. Unless
specifically stated, all disclosures contained herein supporting the
consolidated financial statements at December 31, 1998 and 1997, and the years
then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
On December 3, 1998, the Company acquired all of the outstanding common stock of
Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary of
Hanover, a wholly owned subsidiary of Allmerica P&C) that it did not already own
in exchange for cash of $195.9 million (Note 3). The acquisition has been
recognized as a purchase. The minority interest acquired totaled $158.5 million.
A total of $40.8 million representing the excess of the purchase price over the
fair values of the net assets acquired, net of deferred taxes, has been
allocated to goodwill and is being amortized over a 40-year period.
Allmerica P&C and a wholly owned subsidiary of AFC merged on July 16, 1997.
Through the merger, AFC acquired all of the outstanding common stock of
Allmerica P&C that it did not already own in exchange for cash and stock. The
merger has been accounted for as a purchase. A total of $90.6 million,
representing the excess of the purchase price over the fair values of the net
assets acquired, net of deferred taxes, has been allocated to goodwill and is
being amortized over a 40-year period. Additional information pertaining to the
merger agreement is included in Note 2, significant transactions.
Minority interest relates to the Company's investment in Allmerica P&C and its
only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's wholly owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
The Company established and began operating a closed block (the "Closed Block")
for the benefit of the participating policies included therein, consisting of
certain individual life insurance participating policies, individual deferred
annuity contracts and supplementary contracts not involving life contingencies
which were in force as of FAFLIC's demutualization on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts. Unless the Commissioner consents to an earlier
termination, the Closed Block will continue to be in effect until the date none
of the Closed Block policies are in force. FAFLIC allocated to the Closed Block
assets in an amount that is expected to produce cash flows which, together with
future revenues from the Closed Block Business, are reasonably sufficient to
support the Closed Block Business, including provision for payment of policy
benefits, certain future expenses and taxes and for
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
continuation of policyholder dividend scales payable in 1994 so long as the
experience underlying such dividend scales continues. The Company expects that
the factors underlying such experience will fluctuate in the future and
policyholder dividend scales for Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets as measured on a GAAP basis
represent the expected future post-tax income from the Closed Block which may be
recognized in income over the period the policies and contracts in the Closed
Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at the inception of the Closed
Block, the expected income would be recognized in income for that period.
Further, any excess of the actual income over the expected income would also be
recognized in income to the extent that the aggregate expected income for all
prior periods exceeded the aggregate actual income. Any remaining excess of
actual income over expected income would be accrued as a liability for
policyholder dividends in the Closed Block to be paid to the Closed Block
policyholders. This accrual for future dividends effectively limits the actual
Closed Block income recognized in income to the Closed Block income expected to
emerge from operation of the Closed Block as determined at inception.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), the Company is required to classify its investments into
one of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company adopted a plan to dispose of all real estate assets by
the end of 1998. As of December 31, 1998, there were 7 properties remaining in
the Company's real estate portfolio, all of which are being actively marketed.
As a result of the plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less costs of disposal.
Depreciation is not recorded on these assets while they are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, swap contracts and interest rate futures contracts. These
instruments involve credit risk and also may be subject to risk of loss due to
interest rate fluctuation. The Company evaluates and monitors each financial
instrument individually and, when appropriate, obtains collateral or other
security to minimize losses.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Default swap contracts entered into
for investment purposes are accounted for using the fair value method, with
changes in fair value, if any, reported in realized investment gains and losses
in earnings. Premium paid to the Company on default swap contracts is reported
in net investment income in earnings. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings. Any
ineffective swaps or futures hedges are recognized currently in realized
investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products, variable
annuities and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits from investment yields, mortality,
surrender charges and expense margins over the expected life of the contracts.
This amortization is reviewed annually and adjusted retrospectively when the
Company revises its estimate of current or future gross profits to be realized
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from this group of products, including realized and unrealized gains and losses
from investments. Acquisition costs related to fixed annuities and other life
insurance products are deferred and amortized, generally in proportion to the
ratio of annual revenue to the estimated total revenues over the contract
periods based upon the same assumptions used in estimating the liability for
future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, the Company
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 7 1/4%
for life insurance and 2 1/2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges.
Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE incurred
but not reported. These liabilities are determined using case basis evaluations
and statistical analyses and represent estimates of the ultimate cost of all
losses incurred but not paid. These estimates are continually reviewed and
adjusted as necessary; such adjustments are reflected in current operations.
Estimated amounts of salvage and subrogation on unpaid property and casualty
losses are deducted from the liability for unpaid claims.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include investment
related products such as guaranteed investment contracts, deposit administration
funds and immediate participation guarantee funds and consist of deposits
received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.
K. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life company taxable income. Prior to the merger on July 16,
1997, Allmerica P&C and its subsidiaries filed a separate United States federal
income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("Statement
No. 109"). These differences result primarily from loss and LAE reserves, policy
reserves, policy acquisition expenses, and unrealized appreciation or
depreciation on investments.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $12.4 million through December 31, 1998. The adoption of SOP 98-1 did not
have a material effect on the results of operations or financial position for
the three months ended March 31, 1998.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance on when a liability should be recognized for guaranty
fund and other assessments and how to measure the liability. This statement
allows for the discounting of the liability if the amount and timing of the cash
payments are fixed and determinable. In addition, it provides criteria for when
an asset may be recognized for a portion or all of the assessment liability or
paid assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations. (Note 12)
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement No.
130 which establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and other events and
circumstances from non-owner sources. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement No. 130 for the first quarter of 1998, which resulted primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
On December 3, 1998 Citizens Acquisition Corporation, a wholly owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 million representing the excess of the purchase price over the fair values
of the net assets acquired, net of deferred taxes, has been allocated to
goodwill and is being amortized over a 40-year period.
The Company's consolidated results of operations include minority interest in
Citizens prior to December 3, 1998. The unaudited pro forma information below
presents consolidated results of operation as if the acquisition had occurred at
the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,405.1 $3,366.3
======== ========
Net realized capital gains included in revenue.............. $ 59.8 $ 71.8
======== ========
Income before taxes and minority interest................... 272.9 358.0
Income taxes................................................ (47.2) (91.3)
Minority Interest:
Equity in earnings...................................... (42.6) (64.1)
-------- --------
Net income.................................................. $ 183.1 $ 202.6
======== ========
</TABLE>
On October 29, 1998, the Company announced that had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the Company, in its Corporate Risk Management Services segment, has exited its
accident and health assumed reinsurance pool business, as well as its
administrative services only business. Additionally, it has commenced the
closing of nearly half of its nationwide Corporate Risk Management Services'
sales offices, eliminated certain staff and discontinued certain automation
initiatives. In addition to the aforementioned initiatives in the Corporate Risk
Management Services segment, the Property and Casualty segment is consolidating
its field support activities from fourteen regional branches into three hub
locations. As a result of the Company's restructuring initiative, it recognized
a pretax loss of $13.0 million, in the fourth quarter of 1998. Approximately
$5.5 million of this loss relates to severance and other employee related costs
resulting from the elimination of 339 positions, of which 129 employees had
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been terminated as of December 31, 1998. In addition, contract terminations and
lease cancellations resulted in losses of approximately $4.1 million and $3.4
million, respectively. During 1998, the Company made payments of approximately
$1.6 million related to this restructuring initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, of which $19.7 million relating to the Company's accident and health
assumed reinsurance pool business has been utilized as of December 31, 1998.
These pools consist primarily of the Corporate Risk Management Services
segment's assumed stop loss business, small group managed care pools, long-term
disability and long-term care pools, student accident and special risk business.
The agreement is consistent with management's decision to exit this line of
business, which the Company expects to run-off over the next three years. As a
result of this transaction, the Company recognized a $25.3 million pre-tax loss
in the third quarter of 1998.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on its results of operations or financial position.
In 1998 and 1997, Allmerica P&C redeemed 3,289.5 and 5,735.3 shares,
respectively, of its issued and outstanding common stock owned by AFC for $125.0
million and $195.0 million, respectively, thereby increasing FAFLIC's ownership
of Allmerica P&C by 4.3% and 6.3%, respectively. The 1998 transaction consisted
of $124.0 million of securities and $1.0 million of cash. The 1997 transaction
consisted of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C and a wholly owned subsidiary of AFC was consummated
on July 16, 1997. Through the merger, AFC acquired all of the outstanding common
stock of Allmerica P&C that FAFLIC did not already own in exchange for cash of
$425.6 million and approximately 9.7 million shares of AFC stock valued at
$372.5 million. At consummation of this transaction AFC owned 59.5% through
FAFLIC and 40.5% directly.
The merger has been accounted for as a purchase. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million funded a portion of the acquisition of
the 24.2 million publicly-held shares of Allmerica P&C pursuant to the merger on
July 16, 1997.
The Company's consolidated results of operations include minority interest in
Allmerica P&C prior to July 16, 1997. The unaudited pro forma information below
presents consolidated results of operations as if the merger and issuance of
Capital Securities had occurred at the beginning of 1996 and reflects
adjustments which include interest expense related to the assumed financing of a
portion of the cash consideration paid and amortization of goodwill.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the merger
and issuance of Capital Securities occurred at the beginning of 1996, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,362.7 $3,246.4
======== ========
Net realized capital gains included in revenue.............. $ 63.0 $ 46.7
======== ========
Income before taxes and minority interest................... 353.0 311.6
Income taxes................................................ (89.6) (68.7)
Minority Interest:
Equity in earnings...................................... (75.5) (67.3)
-------- --------
Net income.................................................. $ 187.9 $ 175.6
======== ========
</TABLE>
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and
agency securities................................ $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions................. 2,408.9 83.0 5.2 2,486.7
Foreign governments............................... 107.9 7.7 4.5 111.1
Corporate fixed maturities........................ 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities........................ 517.9 11.5 2.8 526.6
-------- ------ ------ --------
Total fixed maturities............................ $7,520.8 $282.0 $118.9 $7,683.9
======== ====== ====== ========
Equity securities................................. $ 253.1 $151.1 $ 7.1 $ 397.1
======== ====== ====== ========
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and
agency securities................................ $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions................. 2,200.6 78.3 3.1 2,275.8
Foreign governments............................... 110.8 8.5 2.2 117.1
Corporate fixed maturities........................ 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities........................ 374.5 9.7 2.0 382.2
-------- ------ ------ --------
Total fixed maturities............................ $6,992.8 $281.1 $ 20.4 $7,253.5
======== ====== ====== ========
Equity securities................................. $ 341.1 $141.9 $ 4.0 $ 479.0
======== ====== ====== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1998, the amortized cost and market value of assets on deposit in New York were
$268.5 million and $284.1 million, respectively. At December 31, 1997, the
amortized cost and market value of assets on deposit were $276.8 million and
$291.7 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.4 million and $105.1 million were on
deposit with various state and governmental authorities at December 31, 1998 and
1997, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 384.7 $ 391.5
Due after one year through five years....................... 2,309.4 2,341.2
Due after five years through ten years...................... 2,173.3 2,199.6
Due after ten years......................................... 2,653.4 2,751.6
-------- --------
Total....................................................... $7,520.8 $7,683.9
======== ========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------- --------------- -------- --------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 993.3 $18.2 $11.9
Equity securities........................................... $ 276.4 $76.3 $ 9.6
1997
Fixed maturities............................................ $1,894.8 $27.6 $16.2
Equity securities........................................... $ 145.5 $55.8 $ 1.3
1996
Fixed maturities............................................ $2,432.8 $19.3 $30.5
Equity securities........................................... $ 228.1 $56.1 $ 1.3
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year........................ $122.6 $ 86.7 $209.3
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................ (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens...................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest.................................................. 38.7 (11.6) 27.1
------ ------ ------
(43.6) 3.5 (40.1)
------ ------ ------
Net appreciation, end of year.............................. $ 79.0 $ 90.2 $169.2
====== ====== ======
1997
Net appreciation, beginning of year........................ $ 71.3 $ 60.1 $131.4
------ ------ ------
Net appreciation (depreciation) on available-for-sale
securities................................................ 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C............................................. 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest.................................................. (65.9) (27.1) (93.0)
------ ------ ------
51.3 26.6 77.9
------ ------ ------
Net appreciation, end of year.............................. $122.6 $ 86.7 $209.3
====== ====== ======
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
<S> <C> <C> <C>
1996
Net appreciation, beginning of year........................ $108.7 $ 44.3 $153.0
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................ (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest.................................................. 33.6 (20.1) 13.5
------ ------ ------
(37.4) 15.8 (21.6)
------ ------ ------
Net appreciation, end of year.............................. $ 71.3 $ 60.1 $131.4
====== ====== ======
</TABLE>
(1) Includes net appreciation on other investments of $0.8 million, $1.8
million, and $0.6 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Mortgage loans.............................................. $562.3 $567.5
Real estate held for sale................................... 20.4 50.3
------ ------
Total mortgage loans and real estate........................ $582.7 $617.8
====== ======
</TABLE>
Reserves for mortgage loans were $11.5 million and $20.7 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there were 7 properties
remaining in the Company's portfolio, which are being actively marketed. As a
result of the plan, during 1997 real estate assets with a carrying amount of
$54.7 million were written down to the estimated fair value less cost of
disposal of $50.3 million, and a net realized investment loss of $4.4 million
was recognized. Depreciation is not recorded on these assets while they are held
for disposal. There were no non-cash investing activities, including real estate
acquired through foreclosure of mortgage loans, in 1998 and 1997. During 1996,
non-cash investing activities included real estate acquired through foreclosure
of mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Property type:
Office building........................................... $304.4 $265.1
Residential............................................... 52.8 66.6
Retail.................................................... 108.5 132.8
Industrial/warehouse...................................... 110.0 107.2
Other..................................................... 18.5 66.8
Valuation allowances...................................... (11.5) (20.7)
------ ------
Total....................................................... $582.7 $617.8
====== ======
Geographic region:
South Atlantic............................................ $136.1 $173.4
Pacific................................................... 155.1 152.8
East North Central........................................ 80.5 102.0
Middle Atlantic........................................... 61.2 73.8
West South Central........................................ 54.7 34.9
New England............................................... 60.7 46.9
Other..................................................... 45.9 54.7
Valuation allowances...................................... (11.5) (20.7)
------ ------
Total....................................................... $582.7 $617.8
====== ======
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $84.7 million; 2000 -- $131.6 million; 2001 -- $33.9 million; 2002 -- $28.4
million; 2003 -- $42.5 million; and $241.2 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1998
Mortgage loans................................... $20.7 $(6.8) $ 2.4 $11.5
===== ===== ===== =====
1997
Mortgage loans................................... $19.6 $ 2.5 $ 1.4 $20.7
Real estate...................................... 14.9 6.0 20.9 --
----- ----- ----- -----
Total........................................ $34.5 $ 8.5 $22.3 $20.7
===== ===== ===== =====
1996
Mortgage loans................................... $33.8 $ 5.5 $19.7 $19.6
Real estate...................................... 19.6 -- 4.7 14.9
----- ----- ----- -----
Total........................................ $53.4 $ 5.5 $24.4 $34.5
===== ===== ===== =====
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $20.9 million to the investment valuation allowance related to
real estate in 1997 primarily reflect write downs to the estimated fair value
less costs to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $22.0 million and $30.5 million, with
related reserves of $6.0 million and $13.8 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $26.1 million, $30.8 million
and $50.4 million, with related interest income while such loans were impaired
of $3.2 million, $3.2 million and $5.8 million as of December 31, 1998, 1997 and
1996, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. Futures contract
activity increased significantly in 1998 due to the increase in sale of GICs.
The Company's exposure to credit risk under futures contracts is limited to the
margin deposited with the broker. The Company only trades futures contracts with
nationally recognized brokers, which the Company believes have adequate capital
to ensure that there is minimal danger of default. The Company does not require
collateral or other securities to support financial instruments with credit
risk.
The notional amount of futures contracts outstanding at December 31, 1998 was
$92.7 million. There were no futures contracts outstanding at December 31, 1997.
The notional amounts of the contracts represent the extent of the Company's
investment but not the future cash requirements, as the Company generally
settles open positions prior to maturity. The maturity of all futures contracts
outstanding is less than one year. The fair value of futures contracts
outstanding was $92.5 million at December 31, 1998.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. Deferred
hedging gains (losses) were $(1.8) million in 1998. There were no deferred
hedging gains or losses in 1997. Gains and losses on hedge contracts that are
deemed ineffective by the Company are realized immediately. There were
$0.1 million of gains realized on ineffective hedges in 1998. There was no gain
or loss in 1997 or 1996.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- --------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ -- $(33.0) $ 74.7
New contracts............................................... 1,117.5 (0.2) (1.1)
Contracts terminated........................................ (1,024.8) 33.2 (106.6)
--------- ------ -------
Contracts outstanding, end of year.......................... $ 92.7 $-- $ (33.0)
========= ====== =======
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities. Interest
and principal related to foreign fixed income securities payable in foreign
currencies, at current exchange rates, are exchanged for the equivalent payment
in U.S dollars translated at a specific currency exchange rate. The primary risk
associated with these transactions is
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the inability of the counterparty to meet its obligation. The Company regularly
assesses the financial strength of its counterparties and generally enters into
forward or swap agreements with counterparties rated "A" or better by nationally
recognized rating agencies. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange, as indicated by the fair value of the contract. The fair values
of the foreign currency swap contracts outstanding were $1.2 million and
$1.3 million at December 31, 1998 and 1997, respectively. Changes in the fair
value of contracts are reported as an unrealized gain or loss, consistent with
the underlying hedged security. The Company does not require collateral or other
security to support financial instruments with credit risk.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1998, 1997 and 1996. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gain or loss on foreign
currency swap contracts in 1998 or 1997.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $42.6 $ 47.6 $ 69.4
New contracts............................................... -- 5.0 --
Contracts expired........................................... -- (10.0) (21.8)
----- ------ ------
Contracts outstanding, end of year.......................... $42.6 $ 42.6 $ 47.6
===== ====== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at December
31, 1998 are $24.0 million in 1999, $8.3 million in 2000 and $10.3 million
thereafter. There are no expected maturities of such foreign currency swap
contracts in 2001, 2002 and 2003.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. Under these swap contracts,
the Company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated on an agreed-upon notional
principal amount. The use of interest rate swap contracts increased during 1998
due to the increase in floating rate GIC liabilities. As with foreign currency
swap contracts, the primary risk associated with these transactions is the
inability of the counterparty to meet its obligation. The Company regularly
assesses the financial strength of its counterparties and generally enters into
forward or swap agreements with counterparties rated "A" or better by nationally
recognized rating agencies. Because the underlying principal of swap contracts
is not exchanged, the Company's maximum exposure to counterparty credit risk is
the difference in payments exchanged, which at December 31, 1998 was a net
payable of $3.9 million. The Company does not require collateral or other
security to support financial instruments with credit risk.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(2.8)
million, $(0.4) million and $0.6 million for the years ended December 31, 1998,
1997, and 1996, respectively. The fair value of interest rate swap contracts
outstanding were $(28.3) million and $(2.3) million at December 31, 1998 and
1997, respectively. Changes in the fair value of contracts are reported as an
unrealized gain or loss, consistent with the underlying hedged security. Any
gain or loss on the termination of interest rate swap contracts accounted for as
hedges are deferred and recognized with the gain or loss on the
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
hedged transaction. The Company had no deferred gain or loss on interest rate
swap contracts in 1998 or 1997. A reconciliation of the notional amount of
interest rate swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 244.1 $ 5.0 $ 17.5
New contracts............................................... 873.5 244.7 5.0
Contracts expired........................................... (5.0) (5.6) (17.5)
-------- ------ ------
Contracts outstanding, end of year.......................... $1,112.6 $244.1 $ 5.0
======== ====== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1998 is $44.0 million in 2000, $234.5 million in 2002, $810.5 million in 2003
and $23.6 million thereafter. There are no expected maturities of interest rate
contracts in 1999 or 2001.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked and insurance portfolio-linked
swap contracts for investment purposes. Under the security return-linked
contracts, the Company agrees to exchange cash flows according to the
performance of a specified security or portfolio of securities. Under the
insurance portfolio-linked swap contracts, the Company agrees to exchange cash
flows according to the performance of a specified underwriter's portfolio of
insurance business. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1998, was not material to the Company.
The Company does not require collateral or other security to support financial
instruments with credit risk.
In 1998, the Company also entered into credit default swap agreements. Under the
terms of these agreements, the Company assumes the default risk of a specific
high credit quality issuer in exchange for a stated annual premium. In the case
of default, the Company will pay the counterparty par value for a pre-determined
security of the issuer. The primary risk associated with these transactions is
the default risk of the underlying companies. The Company regularly assesses the
financial strength of the underlying companies and generally enters into default
swap agreements for companies rated "A" or better by nationally recognized
rating agencies.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.1) million at
December 31, 1998 and 1997. The net amount receivable or payable under
security-returned-linked and insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net increase (decrease)
in realized investment gains related to these contracts was $1.1 million in 1998
and $(1.6) million in 1997. There were no realized investment gains or losses on
other swap contracts recognized in 1996.
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.2 million in 1998. There was no
investment income recognized in 1997 and 1996.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 15.0 $ 58.6 $--
New contracts............................................... 266.3 192.1 58.6
Contracts expired........................................... (26.3) (211.6) --
Contracts terminated........................................ -- (24.1) --
------ ------- -----
Contracts outstanding, end of year.......................... $255.0 $ 15.0 $58.6
====== ======= =====
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1998 are
as follows: $115.0 million in 1999, $115.0 million in 2000 and $25.0 million in
2001. There are no expected maturities of such other swap contracts in 2002 or
2003.
H. OTHER
At December 31, 1998, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity. At December 31, 1997, FAFLIC had
no concentration of investments in a single investee exceeding 10% of
shareholder's equity, except for investments with the U.S. Treasury with a
carrying value of $262.4 million.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $530.8 $541.9 $553.8
Mortgage loans.............................................. 58.3 57.5 69.5
Equity securities........................................... 7.4 10.6 11.1
Policy loans................................................ 11.9 10.9 10.3
Real estate................................................. 7.2 20.1 40.8
Other long-term investments................................. (0.5) 12.4 19.9
Short-term investments...................................... 14.3 12.8 10.6
------ ------ ------
Gross investment income..................................... 629.4 666.2 716.0
Less investment expenses.................................... (15.7) (24.4) (45.2)
------ ------ ------
Net investment income....................................... $613.7 $641.8 $670.8
====== ====== ======
</TABLE>
At December 31, 1998, there was one mortgage loan on non-accrual status which
had an outstanding principal balance of $4.3 million. This loan was restructured
and fully impaired. There were no fixed maturities which were on non-accrual
status at December 31, 1998. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investments, had no impact in 1998 and 1997, and reduced net income by $0.5
million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $28.7 million, $40.3 million and $51.3 million at
December 31, 1998, 1997 and 1996, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $3.3 million, $3.9 million and $7.7 million in
1998, 1997 and 1996, respectively. Actual interest income on
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these loans included in net investment income aggregated $3.3 million,
$4.2 million and $4.5 million in 1998, 1997 and 1996, respectively.
There were no fixed maturities which were non-income producing for the year
ended December 31, 1998. There was one mortgage loan which was non-income
producing for the year ended December 31, 1998, which had an outstanding
principal balance of $4.3 million and was fully impaired.
Included in other long-term investments is a loss from limited partnerships of
$7.5 million in 1998, and income of $7.8 million and $13.7 million in 1997 and
1996, respectively.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $(11.8) $14.7 $(9.7)
Mortgage loans.............................................. 8.8 (1.2) (2.4)
Equity securities........................................... 66.6 53.6 54.8
Real estate................................................. 13.7 12.8 21.1
Other....................................................... (14.7) (3.4) 3.0
------ ----- -----
Net realized investment gains............................... $ 62.6 $76.5 $66.8
====== ===== =====
</TABLE>
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period, (net of
taxes and minority interest of $(20.8) million,
$123.7 million and $10.7 million in 1998, 1997 and 1996,
respectively).............................................. $ (6.8) $115.5 $ (0.7)
Less: reclassification adjustment for gains included in net
income (net of taxes and minority interest of
$21.5 million, $30.7 million and $24.2 million in 1998,
1997 and 1996, respectively)............................... 33.3 37.6 20.9
------ ------ ------
Other comprehensive income.................................. $(40.1) $ 77.9 $(21.6)
====== ====== ======
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases, may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $(27.1) million at December 31,
1998. Fair values of interest rate futures were not material at December 31,
1997.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents....................... $ 504.0 $ 504.0 $ 213.9 $ 213.9
Fixed maturities................................ 7,683.9 7,683.9 7,253.5 7,253.5
Equity securities............................... 397.1 397.1 479.0 479.0
Mortgage loans.................................. 562.3 587.1 567.5 597.0
Policy loans.................................... 154.3 154.3 141.9 141.9
-------- -------- -------- --------
$9,301.6 $9,326.4 $8,655.8 $8,685.3
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts................. $1,791.8 $1,830.8 $ 985.2 $1,004.7
Supplemental contracts without life
contingencies................................. 37.3 37.3 22.4 22.4
Dividend accumulations.......................... 88.4 88.4 87.8 87.8
Other individual contract deposit funds......... 61.6 61.1 57.9 55.7
Other group contract deposit funds.............. 700.4 704.0 714.8 715.5
Individual annuity contracts.................... 1,110.6 1,073.6 907.4 882.2
Short-term debt................................. 221.3 221.3 33.0 33.0
Long-term debt.................................. -- -- 2.6 2.6
-------- -------- -------- --------
$4,011.4 $4,016.5 $2,811.1 $2,803.9
======== ======== ======== ========
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1998, 1997
and 1996 is a net pre-tax contribution from the Closed Block of $10.4 million,
$9.1 million and $8.6 million, respectively. Summarized financial information of
the Closed Block as of December 31, 1998 and 1997 and for the period ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $399.1
and $400.1, respectively)............................... $414.2 $412.9
Mortgage loans............................................ 136.0 112.0
Policy loans.............................................. 210.9 218.8
Cash and cash equivalents................................. 9.4 25.1
Accrued investment income................................. 14.1 14.1
Deferred policy acquisition costs......................... 15.6 18.2
Other assets.............................................. 2.9 5.6
------ ------
Total assets................................................ $803.1 $806.7
====== ======
Liabilities
Policy liabilities and accruals........................... $862.9 $875.1
Other liabilities......................................... 9.1 10.4
------ ------
Total liabilities........................................... $872.0 $885.5
====== ======
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Revenues
Premiums................................................ $ 55.4 $ 58.3 $ 61.7
Net investment income................................... 53.3 53.4 52.6
Realized investment loss................................ 0.1 1.3 (0.7)
------- ------- -------
Total revenues.............................................. 108.8 113.0 113.6
Benefits and expenses
Policy benefits......................................... 95.0 100.5 101.2
Policy acquisition expenses............................. 2.7 3.0 3.2
Other operating expenses................................ 0.7 0.4 0.6
------- ------- -------
Total benefits and expenses................................. 98.4 103.9 105.0
------- ------- -------
Contribution from the Closed Block.......................... $ 10.4 $ 9.1 $ 8.6
======= ======= =======
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block...................... $ 10.4 $ 9.1 $ 8.6
Change in deferred policy acquisition costs, net........ 2.6 2.9 3.4
Change in premiums and other receivables................ 0.3 -- 0.2
Change in policy liabilities and accruals............... (13.5) (11.6) (13.9)
Change in accrued investment income..................... -- 0.2 2.3
Deferred Taxes.......................................... 0.1 (5.1) 1.0
Change in other assets.................................. 2.4 (2.9) (1.6)
Change in expenses and taxes payable.................... (2.9) (2.0) 1.7
Other, net.............................................. (0.1) (1.2) 1.4
------- ------- -------
Net cash (used in) provided by operating activities....... (0.7) (10.6) 3.1
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 83.6 161.6 188.1
Purchases of investments................................ (106.5) (161.4) (196.9)
Other, net.............................................. 7.9 11.4 12.2
------- ------- -------
Net cash provided by (used in) investing activities....... (15.0) 11.6 3.4
------- ------- -------
Net increase in cash and cash equivalents................... (15.7) 1.0 6.5
Cash and cash equivalents, beginning of year................ 25.1 24.1 17.6
------- ------- -------
Cash and cash equivalents, end of year...................... $ 9.4 $ 25.1 $ 24.1
======= ======= =======
</TABLE>
There are no valuation allowances on mortgage loans in the Closed Block at
December 31, 1998, 1997 or 1996, respectively.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Short and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Short-Term
Commercial paper........................................ $ 41.3 $32.6
Borrowings under bank credit facility................... 150.0 --
Repurchase agreements................................... 30.0 --
Other................................................... -- 0.4
------ -----
Total short-term debt....................................... $221.3 $33.0
====== =====
Long-term debt.............................................. $ -- $ 2.6
====== =====
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1998, the weighted average
interest rate for outstanding commercial paper was approximately 5.34%.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at
December 31, 1998 were $150.0 million.
During 1998 and 1996, the Company utilized repurchase agreements to finance
certain investments. The 1996 repurchase agreements were settled by the end of
1996.
In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY. Interest expense was $7.3 million, $3.6 million and $16.8 million in 1998,
1997 and 1996, respectively. Interest paid on the credit agreement was
approximately $0.7 million in 1998 and $2.8 million in 1997. Interest expense
during 1996 also included $11.0 million related to interest payments on
repurchase agreements. All interest expense is recorded in other operating
expenses.
8. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................. $ 67.6 $83.3 $ 96.8
Deferred................................................ (15.4) 14.2 (15.7)
------ ----- ------
Total....................................................... $ 52.2 $97.5 $ 81.1
====== ===== ======
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Expected federal income tax expense......................... $100.9 $131.8 $122.3
Tax-exempt interest..................................... (38.9) (37.9) (35.3)
Differential earnings amount............................ -- -- (10.2)
Dividend received deduction............................. (5.1) (3.2) (1.6)
Changes in tax reserve estimates........................ 2.3 7.8 4.7
Tax credits............................................. (8.5) (2.7)
Other, net.............................................. 1.5 1.7 1.2
------ ------ ------
Federal income tax expense.................................. $ 52.2 $ 97.5 $ 81.1
====== ====== ======
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
The deferred income tax (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards....................................... $ (16.8) $ (15.6)
Loss reserve discounting................................ (406.6) (391.6)
Deferred acquisition costs.............................. 345.8 291.8
Employee benefit plans.................................. (45.3) (48.0)
Investments, net........................................ 121.7 175.4
Bad debt reserve........................................ (1.8) (14.3)
Litigation reserve...................................... (10.9) --
Other, net.............................................. (5.5) 15.2
------- -------
Deferred tax (asset) liability, net......................... $ (19.4) $ 12.9
======= =======
</TABLE>
Gross deferred income tax assets totaled $486.9 million and $469.5 million at
December 31, 1998 and 1997, respectively. Gross deferred income tax liabilities
totaled $467.5 million and $482.4 million at December 31, 1998 and 1997,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1998, there are available alternative
minimum tax credit carryforwards of $16.8 million.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1994. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1992,1993 and 1994 for the
FAFLIC/AFLIAC consolidated group. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/ AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby the Company annually provides an allocation to each
eligible employee based on a percentage of that employee's salary, similar to a
defined contribution plan arrangement. The 1998, 1997 and 1996 allocations were
based on 7.0% of each eligible employee's salary. In addition to the cash
balance allocation, certain transition group employees, who have met specified
age and service requirements as of December 31, 1994, are eligible for a
grandfathered benefit based primarily on the employees' years of service and
compensation during their highest five consecutive plan years of employment. The
Company's policy for the plans is to fund at least the minimum amount required
by the Employee Retirement Income Security Act of 1974.
Components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.0 $ 19.9 $ 19.0
Interest cost............................................... 25.5 23.5 21.9
Expected return on plan assets.............................. (34.9) (31.2) (28.3)
Recognized net actuarial loss (gain)........................ 0.4 0.1 (0.4)
Amortization of transition asset............................ (1.8) (1.9) (1.9)
Amortization of prior service cost.......................... (1.7) (2.0) (2.3)
------ ------ ------
Net periodic pension cost................................... $ 6.5 $ 8.4 $ 8.0
====== ====== ======
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the status of the pension plan. At December 31,
1998 and 1997 the plan's assets exceeded its projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year....... $370.4 $344.2
Service cost -- benefits earned during the year......... 19.0 19.9
Interest cost........................................... 25.5 23.5
Actuarial losses........................................ 20.4 0.3
Benefits paid........................................... (21.1) (17.5)
------ ------
Projected benefit obligation at end of year............. $414.2 $370.4
====== ======
Change in plan assets:
Fair value of plan assets at beginning of year.......... $395.5 $347.8
Actual return on plan assets............................ 67.2 65.2
Benefits paid........................................... (21.1) (17.5)
------ ------
Fair value of plan assets at end of year................ 441.6 395.5
------ ------
Funded status of the plan............................... 27.4 25.1
Unrecognized transition obligation...................... (23.9) (26.2)
Unamortized prior service cost.......................... (11.0) (13.9)
Unrecognized net actuarial gains........................ (54.9) (44.9)
------ ------
Net pension liability............................... $(62.4) $(59.9)
====== ======
</TABLE>
As a result of AFC's merger with APY, certain pension liabilities were reduced
by $11.7 million in 1997, to reflect their fair value as of the purchase date.
These pension liabilities were reduced by $10.3 million in 1998, which reflects
fair value, net of applicable amortization. Determination of the projected
benefit obligations was based on a weighted average discount rate of 6.5% and
7.0% in 1998 and 1997, respectively, and the assumed long-term rate of return on
plan assets was 9.0% in both 1998 and 1997. The actuarial present value of the
projected benefit obligations was determined using assumed rates of increase in
future compensation levels ranging from 5.0% to 5.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. Plan
assets also include 973,262 shares of AFC Common Stock at both December 31, 1998
and 1997, with a market value of $56.3 million and $48.6 million at
December 31, 1998 and 1997, respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1998, 1997 and
1996, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expenses related to this plan was $5.6 million, $3.3
million and $5.5 million, in 1998, 1997 and 1996, respectively. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The Plan expense in 1998, 1997 and 1996 was $3.0 million, $2.8
million and $2.0 million, respectively.
On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The merger of benefit plans resulted in a $5.9 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC. Generally, employees become
eligible at age 55 with at least 15 years of service. Spousal coverage is
generally provided for up to two years after death of the retiree. Benefits
include hospital, major medical, and a payment at death equal to retirees' final
compensation up to certain limits. Effective January 1, 1996, the Company
revised these benefits so as to establish limits on future benefit payments and
to restrict eligibility to current employees. The medical plans have varying
copayments and deductibles, depending on the plan. These plans are unfunded.
The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at
beginning of year..................................... $ 71.8 $ 72.3
Service cost............................................ 3.1 3.0
Interest cost........................................... 5.1 4.6
Actuarial losses........................................ 7.6 (4.7)
Benefits paid........................................... (3.6) (3.4)
------ ------
Accumulated postretirement benefit obligation at end of
year.................................................. 84.0 71.8
Fair value of plan assets at end of year................ -- --
------ ------
Funded status of the plan............................... (84.0) (71.8)
Unamortized prior service cost.......................... (12.9) (15.3)
Unrecognized net actuarial losses....................... 7.5 0.8
------ ------
Accumulated postretirement benefit costs................ $(89.4) $(86.3)
====== ======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 3.1 $ 3.0 $ 3.2
Interest cost............................................... 5.1 4.6 4.6
Recognized net actuarial loss (gain)........................ 0.1 (0.1) 0.2
Amortization of prior service cost.......................... (2.4) (2.7) (3.0)
----- ----- -----
Net periodic postretirement benefit cost.................... $ 5.9 $ 4.8 $ 5.0
===== ===== =====
</TABLE>
As a result of AFC's merger with APY in 1997, certain postretirement liabilities
were reduced by $6.1 million to reflect their fair value as of the purchase
date. These postretirement liabilities were reduced by $5.4 million in 1998,
which reflects fair value, net of applicable amortization.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1998, health care costs were assumed to increase 7.0% in 1999,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1998
by $5.7 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1998 by $0.7 million.
Conversely, decreasing the assumed health care cost trend rates by one
percentage point in each year would decrease the accumulated postretirement
benefit obligation at December 31, 1998 by $5.2 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1998 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% and 7.0% at December 31, 1998 and
1997. In addition, the actuarial present value of the accumulated postretirement
benefit obligation was determined using an assumed rate of increase in future
compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the aforementioned postretirement
medical and death benefits plans were merged with the existing benefit plans of
FAFLIC. The merger of benefit plans resulted in a $3.8 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
11. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Dividends from FAFLIC and Allmerica P&C (Hanover) are the primary source of cash
flow for AFC.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. During 1998, FAFLIC paid dividends of
$50.0 million to AFC. No dividends were declared by FAFLIC to AFC during 1997 or
1996 During 1999, FAFLIC could pay dividends of $116.4 million to AFC without
prior approval of the Commissioner.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were declared by AFLIAC to FAFLIC during
1998, 1997 or 1996. During 1999, AFLIAC could pay dividends of $26.1 million to
FAFLIC without prior approval.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
Hanover declared dividends to Allmerica P&C totaling, $125.0 million, $120.0
million and $105.0 million during 1998, 1997 and 1996, respectively. During
1999, the maximum dividend and other distributions that could be paid to
Allmerica P&C by Hanover, without prior approval of the Insurance Commissioner,
is approximately $1.6 million, which considers an extraordinary dividend of
$125.0 million declared on March 12, 1998. The allowable dividend without prior
approval will increase to $126.6 million on March 12, 1999.
Pursuant to Michigan's statute, the maximum dividends and other distributions
that an insurer may pay in any twelve month period, without prior approval of
the Michigan Insurance Commissioner, is limited to the greater of 10% of
policyholders' surplus as of December 31 of the immediately preceding year or
the statutory net income less realized gains, for the immediately preceding
calendar year. Citizens Insurance paid dividends to Citizens Corporation
totaling $200.0 million and $6.3 million during 1998 and 1996, respectively. A
$180.0 million extraordinary dividend was approved by the Commissioner in 1998.
No dividends were declared by Citizens Insurance during 1997. During 1999,
Citizens Insurance can declare no dividends to Citizens Corporation without
prior approval of the Michigan Insurance Commissioner as a result of the $180.0
million extraordinary dividend declared on December 21, 1998.
12. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in four operating segments.
Effective January 1, 1998, the Company adopted Statement No. 131. Upon adoption,
the separate financial information of each segment was re-defined consistent
with the way results are regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. A
summary of the significant changes in reportable segments is included below.
The Risk Management group includes two segments: Property and Casualty and
Corporate Risk Management Services. The Property and Casualty segment includes
property and casualty insurance products, such as automobile insurance,
homeowners insurance, commercial multiple peril insurance, and workers'
compensation insurance. These products are offered by Allmerica P&C through its
operating subsidiaries, Hanover and Citizens. Substantially all of the Property
and Casualty segment's earnings are generated in Michigan and the Northeast
(Connecticut, Massachusetts, New York, New Jersey, New Hampshire, Rhode Island,
Vermont and Maine). The Corporate Risk Management Services segment includes
group life and health insurance products and services which assist employers in
administering employee benefit programs and in managing the related risks.
The Retirement and Asset Accumulation group includes two segments: Allmerica
Financial Services and Allmerica Asset Management. The Allmerica Financial
Services segment includes variable annuities, variable universal life and
traditional life insurance products distributed via retail channels as well as
group retirement products, such as defined benefit and 401(k) plans and
tax-sheltered annuities distributed to institutions. Through its Allmerica Asset
Management segment, the Company offers its customers the option of investing in
three types of GICs; the traditional GIC, the synthetic GIC and the floating
rate GIC. This segment is also a Registered Investment Advisor providing
investment advisory services, primarily to affiliates, and to other
institutions, such as insurance companies and pension plans. In addition to the
four operating segments, the Company has a Corporate segment, which consists
primarily of cash, investments, corporate debt, Capital Securities and corporate
overhead expenses. Corporate overhead expenses reflect costs not attributable to
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a particular segment, such as those generated by certain officers and directors,
Corporate Technology, Corporate Finance, Human Resources and the legal
department.
Significant changes to the Company's segmentation include a reclassification of
corporate overhead expenses from each operating segment into the Corporate
segment. Additionally, certain products (group retirement products, such as
401(k) plans and tax-sheltered annuities, group variable universal life) and
certain other non-insurance operations (telemarketing and trust services)
previously reported in the Allmerica Financial Institutional Services segment
were combined with the Allmerica Financial Services segment. Also, the Company
reclassified the GIC product line previously reported in the Allmerica Financial
Institutional Services segment into the Allmerica Asset Management segment.
Management evaluates the results of the aforementioned segments based on pre-tax
segment income. Pre-tax segment income is determined by adjusting net income for
net realized investment gains and losses, net gains and losses on disposals of
businesses, extraordinary items, the cumulative effect of accounting changes and
certain other items which management believes are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing the Company's financial performance, management
believes that the presentation of pre-tax segment income enhances its
understanding of the Company's results of operations by highlighting net income
attributable to the normal, recurring operations of the business. However,
pre-tax segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management
Property and Casualty................................... $2,204.8 $2,211.0 $2,145.8
Corporate Risk Management Services...................... 412.9 405.4 370.7
-------- -------- --------
Subtotal............................................ 2,617.7 2,616.4 2,516.5
-------- -------- --------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 721.2 709.7 700.0
Allmerica Asset Management.............................. 121.7 91.1 110.5
-------- -------- --------
Subtotal............................................ 842.9 800.8 810.5
-------- -------- --------
Corporate................................................. 2.3 5.5 5.2
Intersegment revenues..................................... (7.6) (11.6) (13.8)
-------- -------- --------
Total segment revenues including Closed Block........... 3,455.2 3,411.1 3,318.4
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block............................. (98.4) (102.6) (105.7)
Net realized gains...................................... 62.6 75.6 66.8
-------- -------- --------
Total revenues...................................... $3,419.4 $3,384.2 $3,279.5
======== ======== ========
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment income (loss) before income taxes and minority
interest:
Risk Management
Property and Casualty................................... $151.4 $172.9 $170.7
Corporate Risk Management Services...................... 7.8 27.0 28.3
------ ------ ------
Subtotal............................................ 159.2 199.9 199.0
------ ------ ------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 166.6 134.6 106.8
Allmerica Asset Management.............................. 23.7 18.4 11.5
------ ------ ------
Subtotal............................................ 190.3 153.0 118.3
------ ------ ------
Corporate................................................. (45.3) (44.6) (36.6)
------ ------ ------
Segment income before income taxes and minority
interest.............................................. 304.2 308.3 280.7
------ ------ ------
Adjustments to segment income:
Net realized investment gains, net of amortization...... 53.9 78.7 69.6
Sales practice litigation expense....................... (31.0) -- --
Loss on exiting reinsurance pools....................... (25.3)
Gain from change in mortality assumptions............... -- 47.0 --
Loss on cession of disability income business........... -- (53.9) --
Restructuring costs..................................... (13.0) -- --
Other items............................................. (.7) (3.2) (1.1)
------ ------ ------
Income before taxes and minority interest................. $288.1 $376.9 $349.2
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997 1998 1997
- ------------- --------- --------- --------- ---------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION
COSTS
<S> <C> <C> <C> <C>
Risk Management
Property and Casualty......................... $ 5,649.0 $ 5,650.4 $ 164.9 $167.2
Corporate Risk Management Services............ 567.8 619.8 2.6 2.9
--------- --------- -------- ------
Subtotal.................................. 6,216.8 6,270.2 167.5 170.1
Retirement and Asset Accumulation
Allmerica Financial Services.................. 19,407.3 15,159.2 993.1 794.5
Allmerica Asset Management.................... 1,810.9 1,035.1 0.6 0.9
--------- --------- -------- ------
Subtotal.................................. 21,218.2 16,194.3 993.7 795.4
Corporate..................................... 29.6 26.9 -- --
--------- --------- -------- ------
Total..................................... $27,464.6 $22,491.4 $1,161.2 $965.5
========= ========= ======== ======
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $34.9 million, $33.6 million and $34.9 million in 1998, 1997 and
1996, respectively. At December 31, 1998, future minimum rental payments under
non-cancelable operating leases were approximately $73.5 million, payable as
follows: 1999 -- $28.6 million; 2000 -- $21.0 million; 2001 -- $13.8 million;
2002 -- $6.9 million; and $3.2 million thereafter. It is expected that, in the
normal course of business, leases that expire will be renewed or replaced by
leases on other property and equipment; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts shown for 1999.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short Duration and Long Duration Contracts".
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1998, CAR was the only reinsurer which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1998, 1997 and 1996 were
$34.3 million and $38.1 million, $32.3 million and $28.2 million, and $38.0
million and $21.8 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1998, 1997 and 1996 of $3.7
million and $18.0 million, $9.8 million and $(0.8) million, and $50.5 million
and $(52.9) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................. $ 416.6 $ 417.4 $ 389.1
Assumed................................................. 111.9 110.7 87.8
Ceded................................................... (189.8) (170.1) (138.9)
-------- -------- --------
Net premiums................................................ $ 338.7 $ 358.0 $ 338.0
======== ======== ========
Property and casualty premiums written:
Direct.................................................. $1,969.3 $2,068.5 $2,039.7
Assumed................................................. 58.8 103.1 108.7
Ceded................................................... (74.1) (179.8) (234.0)
-------- -------- --------
Net premiums................................................ $1,954.0 $1,991.8 $1,914.4
======== ======== ========
Property and casualty premiums earned:
Direct.................................................. $1,966.8 $2,046.2 $2,018.5
Assumed................................................. 64.5 102.0 112.4
Ceded................................................... (66.1) (195.1) (232.6)
-------- -------- --------
Net premiums................................................ $1,965.2 $1,953.1 $1,898.3
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................. $ 653.6 $ 656.4 $ 606.5
Assumed................................................. 67.9 61.6 44.9
Ceded................................................... (164.0) (158.8) (77.8)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $ 557.5 $ 559.2 $ 573.6
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................. $1,588.3 $1,464.9 $1,299.8
Assumed................................................. 62.7 101.2 85.8
Ceded................................................... (158.2) (120.6) (2.2)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses................................................... $1,492.8 $1,445.5 $1,383.4
======== ======== ========
</TABLE>
15. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 965.5 $ 822.7 $ 735.7
Acquisition expenses deferred........................... 641.2 617.7 547.4
Amortized to expense during the year.................... (452.8) (476.0) (470.1)
Adjustment to equity during the year.................... 7.3 (11.1) 9.7
Adjustment for cession of disability income insurance... -- (38.6) --
Adjustment for revision of universal and variable
universal life insurance mortality assumptions........ -- 50.8 --
-------- ------- -------
Balance at end of year...................................... $1,161.2 $ 965.5 $ 822.7
======== ======= =======
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND
LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are recorded in results of operations in the year such
changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$568.0 million, $533.6 million and $471.7 million at December 31, 1998, 1997 and
1996, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were increased by $14.6 million in 1998, and decreased by
$0.2 million and $0.6 million in 1997 and 1996, respectively. The increase in
1998 resulted from the Company's reserve strengthening primarily in the assumed
reinsurance and stop loss only business.
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,615.4 $2,744.1 $2,896.0
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year........ 1,609.0 1,564.1 1,513.3
Decrease in provision for insured events of prior
years................................................. (127.2) (127.9) (141.4)
-------- -------- --------
Total incurred losses and LAE............................... 1,481.8 1,436.2 1,371.9
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................. 871.9 775.1 759.6
Losses and LAE attributable to insured events of prior
years................................................. 643.0 732.1 627.6
-------- -------- --------
Total payments.............................................. 1,514.9 1,507.2 1,387.2
-------- -------- --------
Change in reinsurance recoverable on unpaid losses.......... 15.0 (50.2) (136.6)
-------- -------- --------
Other (1)................................................... -- (7.5) --
-------- -------- --------
Reserve for losses and LAE, end of year..................... $2,597.3 $2,615.4 $2,744.1
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.2 million,
$127.9 million and $141.1 million in 1998, 1997, and 1996, respectively.
The decrease in favorable development on prior years' reserves of $0.7 million
in 1998 results from a $20.7 million decrease in favorable development at
Citizens, significantly offset by a $20.0 million increase in favorable
development at Hanover. The decrease in favorable development on prior year
reserves at Citizens in 1998, reflects a $13.8 million decrease in favorable
development, to $21.9 million, in the workers' compensation line. In addition,
favorable development in the commercial multiple peril line decreased $4.0
million, to
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$0.3 million. These declines in favorable development are partially offset by
continued favorable development on prior year reserves in the personal
automobile line due to tort reform in Michigan, which became effective July 26,
1996. The new legislation requires judges rather than juries to determine if the
minimum threshold to allow pain and suffering damage settlements has been met.
The increase in favorable development at Hanover during 1998 reflects a $20.6
million increase in favorable development on prior year reserves, to $38.0
million, in the personal automobile line, as well as a $14.9 million increase to
$12.1 million in the commercial multiple peril line. These increases are
primarily attributable to the initiatives taken by the Company over the past two
years which are expected to reduce ultimate settlement costs. These increases
are partially offset by less favorable development in the workers' compensation
line where favorable development on prior year reserves decreased
$19.2 million, to $9.6 million.
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million, in the personal automobile line
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million, in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997, reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million, and in the commercial multiple peril line where favorable
development increased $7.0 million, to $4.3 million. These increases are
partially offset by less favorable development in the personal automobile line,
where favorable development decreased $10.5 million, to $22.5 million in 1997.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $49.9
million, $53.1 million and $50.8 million, net of reinsurance of $14.2 million,
$15.7 million and $20.2 million in 1998, 1997 and 1996, respectively. The
Regional Property and Casualty subsidiaries do not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Regional Property and
Casualty subsidiaries may be required to defend such claims. The Company
estimated its ultimate liability for these claims based upon currently known
facts, reasonable assumptions where the facts are not known, current law and
methodologies currently available. Although these claims are not material, their
existence gives rise to uncertainty and is discussed because of the possibility,
however remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims are adequate. In addition, the
Company is not aware of any litigation or pending claims that may result in
additional material liabilities in excess of recorded reserves. The
environmental liability could be revised in the near term if the estimates used
in determining the liability are revised.
17. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 70.0%,
65.8% and 59.5% of the outstanding shares of common stock at December 31, 1998,
1997 and 1996, respectively. Earnings and
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shareholder's equity attributable to minority shareholders are included in
minority interest in the consolidated financial statements.
18. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement, to which the court granted preliminary
approval on December 4, 1998. A hearing was held on March 19, 1999 to consider
final approval of the settlement agreement. A decision by the court is expected
to be rendered in the near future. Accordingly, FAFLIC recognized a
$31.0 million pre-tax expense during the third quarter of 1998 related to this
litigation. Although the Company believes that this expense reflects appropriate
recognition of its obligation under the settlement, this estimate assumes the
availability of insurance coverage for certain claims, and the estimate may be
revised based on the amount of reimbursement actually tendered by AFC's
insurance carriers, if any, and based on changes in the Company's estimate of
the ultimate cost of the benefits to be provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
19. STATUTORY FINANCIAL INFORMATION
The Company and its insurance subsidiaries are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). Statutory surplus
differs from shareholder's equity reported in accordance with generally accepted
accounting principles primarily because policy acquisition costs are expensed
when incurred, investment reserves are based on different assumptions,
postretirement benefit costs are based on different assumptions and reflect a
different method of adoption, life insurance reserves are based on different
assumptions and income tax expense reflects only taxes paid or currently
payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies......................... $ 180.7 $ 190.3 $ 155.5
Life and Health Companies............................... 86.4 191.2 133.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies......................... $1,269.3 $1,279.6 $1,201.6
Life and Health Companies............................... 1,164.1 1,221.3 1,120.1
</TABLE>
20. SUBSEQUENT EVENT
On April 1, 1999, Allmerica P&C redeemed an additional 3,246.8 shares of its
issued and outstanding common stock owned by AFC for $125.0 million, thereby
increasing FAFLIC's ownership of Allmerica P&C by 4.8%. The 1999 transaction
consisted of $75.4 million of securities and $49.6 million of cash.
21. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
During the second quarter of 1999, AFC approved a plan to exit its group life
and health insurance business, consisting of its Employee Benefit Services
("EBS") business and its accident and health assumed reinsurance pool business
("reinsurance pool business"). On October 7, 1999, AFC announced that it reached
an agreement to sell its EBS business. The Company signed a purchase and sale
agreement and is scheduled to close the sale on March 1, 2000. Transition of the
business will begin immediately after the closing and will be completed in 12 to
18 months. During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of FAFLIC's group life and health insurance business, including its
reinsurance pool business, are reported in the Consolidated Statements of Income
as discontinued operations in the second quarter of 1999 in accordance with
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
No. 30"). At December 31, 1998, the businesses had assets of approximately
$480.9 million consisting primarily of invested assets, premiums and fees
receivable, and reinsurance recoverables, and liabilities of approximately
$445.3 million consisting primarily of policy liabilities. Revenues for the
discontinued operations were $398.5 million, $389.2 million, and $356.4 million
for the years ended December 31, 1998, 1997 and 1996, respectively. Net (loss)
income for the discontinued operations was ($13.3) million, $16.6 million, and
$17.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes include the transfer of FAFLIC's ownership of Allmerica P&C, as
well as several non-insurance subsidiaries, from FAFLIC to AFC. FAFLIC has
retained its ownership of AFLIAC and certain other subsidiaries. Under an
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement with the Commonwealth of Massachusetts Insurance Commissioner ("the
Commissioner"), AFC has contributed to FAFLIC capital of $125.0 million and
agreed to maintain FAFLIC's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 would require the prior approval of the Commissioner. This transaction
was approved by the Commissioner on May 24, 1999.
In 1998, the net income of the subsidiaries, which is included in FAFLIC's net
income, to be transferred from FAFLIC to AFC pursuant to the aforementioned
change in corporate structure was $95.7 million. As of December 31, 1998, the
total assets and total shareholders' equity of these subsidiaries were $4,033.0
million and $1,264.1 million, respectively.
On May 19, 1999, the Federal District Court in Worcester, Massachusetts issued
an order relating to the litigation mentioned in Note 18, above, certifying the
class for settlement purposes and granting final approval of the settlement
agreement.
Prior to the aforementioned change in AFC's corporate structure, on May 5, 1999
and May 11, 1999, Allmerica P&C redeemed 1,273.9 shares and 4,142.0 shares of
its issued and outstanding common stock owned by AFC for $50.0 million and
$175.0 million, respectively. The May 5, 1999 and May 11, 1999 transactions
consisted of cash and short-term securities. After the May 11, 1999 transaction,
FAFLIC's ownership of Allmerica P&C increased to 84.52%.
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and the Contractowners of Separate Account KG of First Allmerica Financial Life
Insurance Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account KG of First Allmerica Financial Life Insurance
Company at December 31, 1998, the results of each of their operations and the
changes in each of their net assets for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of First Allmerica Financial Life Insurance
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP CONTRARIAN
VALUE GROWTH VALUE* INTERNATIONAL
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Investors Fund Series........ $ 620,277 $ 266,398 $2,283,153 $ 381,737
Investments in shares of
Scudder Variable Life
Investment Fund (VLIF)....... -- -- -- --
Dividend receivable........... -- -- -- --
---------- ---------- ----------- ------------
Total assets................ 620,277 266,398 2,283,153 381,737
LIABILITIES:.................. -- -- -- --
---------- ---------- ----------- ------------
Net assets.................. $ 620,277 $ 266,398 $2,283,153 $ 381,737
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 328,799 $ 104,862 $ 681,260 $ 91,717
Non-qualified variable
annuity contracts......... 291,478 161,536 1,601,893 290,020
---------- ---------- ----------- ------------
$ 620,277 $ 266,398 $2,283,153 $ 381,737
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
Qualified units outstanding,
December 31, 1998............ 374,630 91,169 571,064 90,674
Net asset value per qualified
unit, December 31, 1998...... $0.877664 $1.150188 $ 1.192966 $1.011500
Non-qualified units
outstanding, December 31,
1998......................... 332,106 140,443 1,342,782 286,722
Net asset value per
non-qualified unit, December
31, 1998..................... $0.877664 $1.150188 $ 1.192966 $1.011500
<CAPTION>
TOTAL
GROWTH VALUE+GROWTH HORIZON 20+ RETURN
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Investors Fund Series........ $ 565,217 $1,230,029 $ 37,691 $ 1,407,021
Investments in shares of
Scudder Variable Life
Investment Fund (VLIF)....... -- -- -- --
Dividend receivable........... -- -- -- --
--------------- ----------- ----------- -----------
Total assets................ 565,217 1,230,029 37,691 1,407,021
LIABILITIES:.................. -- -- -- --
--------------- ----------- ----------- -----------
Net assets.................. $ 565,217 $1,230,029 $ 37,691 $ 1,407,021
--------------- ----------- ----------- -----------
--------------- ----------- ----------- -----------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 122,566 $ 216,115 $ 12,297 $ 369,565
Non-qualified variable
annuity contracts......... 442,651 1,013,914 25,394 1,037,456
--------------- ----------- ----------- -----------
$ 565,217 $1,230,029 $ 37,691 $ 1,407,021
--------------- ----------- ----------- -----------
--------------- ----------- ----------- -----------
Qualified units outstanding,
December 31, 1998............ 110,928 189,924 11,256 321,006
Net asset value per qualified
unit, December 31, 1998...... $ 1.104913 $ 1.137903 $ 1.092464 $ 1.151271
Non-qualified units
outstanding, December 31,
1998......................... 400,621 891,037 23,245 901,140
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.104913 $ 1.137903 $ 1.092464 $ 1.151271
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
HORIZON HIGH INVESTMENT
10+ HORIZON 5 YIELD GRADE BOND
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ 879,679 $ 707,979 $ 2,130,914 $ 431,453
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- -- -- --
---------- ---------- ----------- ----------
Total assets.............................. 879,679 707,979 2,130,914 431,453
LIABILITIES:................................ -- -- -- --
---------- ---------- ----------- ----------
Net assets................................ $ 879,679 $ 707,979 $ 2,130,914 $ 431,453
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 194,684 $ 19,238 $ 558,324 $ 79,354
Non-qualified variable annuity
contracts............................... 684,995 688,741 1,572,590 352,099
---------- ---------- ----------- ----------
$ 879,679 $ 707,979 $ 2,130,914 $ 431,453
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Qualified units outstanding, December 31,
1998....................................... 174,580 17,474 555,698 74,250
Net asset value per qualified unit, December
31, 1998................................... $1.115158 $1.100980 $ 1.004726 $1.068746
Non-qualified units outstanding, December
31, 1998................................... 614,258 625,571 1,565,192 329,450
Net asset value per non-qualified unit,
December 31, 1998.......................... $1.115158 $1.100980 $ 1.004726 $1.068746
<CAPTION>
GOVERNMENT MONEY GLOBAL BLUE
SECURITIES MARKET INCOME CHIP
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $1,028,474 $ 799,316 $ 29,545 $ 1,155,373
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- 1,699 -- --
----------- ---------- ---------- -----------
Total assets.............................. 1,028,474 801,015 29,545 1,155,373
LIABILITIES:................................ -- -- -- --
----------- ---------- ---------- -----------
Net assets................................ $1,028,474 $ 801,015 $ 29,545 $ 1,155,373
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 323,174 $ 6,712 $ -- $ 283,875
Non-qualified variable annuity
contracts............................... 705,300 794,303 29,545 871,498
----------- ---------- ---------- -----------
$1,028,474 $ 801,015 $ 29,545 $ 1,155,373
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Qualified units outstanding, December 31,
1998....................................... 304,980 6,472 -- 228,763
Net asset value per qualified unit, December
31, 1998................................... $ 1.059658 $ 1.036966 $ 1.115394 $ 1.240913
Non-qualified units outstanding, December
31, 1998................................... 665,592 765,988 26,488 702,303
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.059658 $ 1.036966 $ 1.115394 $ 1.240913
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DREMAN DREMAN INTERNATIONAL
FINANCIAL HIGH GROWTH AND GLOBAL
SERVICES RETURN INCOME BLUE CHIP
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ 57,758 $ 518,900 $ 5,182 $ 52,246
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- -- -- --
---------- ---------- ---------- ----------
Total assets.............................. 57,758 518,900 5,182 52,246
LIABILITIES:................................ -- -- -- --
---------- ---------- ---------- ----------
Net assets................................ $ 57,758 $ 518,900 $ 5,182 $ 52,246
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 25,468 $ 392,798 $ -- $ 15,462
Non-qualified variable annuity
contracts............................... 32,290 126,102 5,182 36,784
---------- ---------- ---------- ----------
$ 57,758 $ 518,900 $ 5,182 $ 52,246
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Qualified units outstanding, December 31,
1998....................................... 22,599 340,638 -- 14,838
Net asset value per qualified unit, December
31, 1998................................... $ 1.126951 $1.153125 $1.036313 $1.042072
Non-qualified units outstanding, December
31, 1998................................... 28,653 109,356 5,000 35,299
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.126951 $1.153125 $1.036313 $1.042072
<CAPTION>
VLIF VLIF VLIF
VLIF GLOBAL CAPITAL GROWTH
INTERNATIONAL DISCOVERY(A) GROWTH AND INCOME
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ -- $ -- $ -- $ --
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ 220,656 -- 167,308 453,176
Dividend receivable......................... -- -- -- --
---------- ---------- ---------- ----------
Total assets.............................. 220,656 -- 167,308 453,176
LIABILITIES:................................ -- -- -- --
---------- ---------- ---------- ----------
Net assets................................ $ 220,656 $ -- $ 167,308 $ 453,176
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 220,578 $ -- $ 39,245 $ 376,838
Non-qualified variable annuity
contracts............................... 78 -- 128,063 76,338
---------- ---------- ---------- ----------
$ 220,656 $ -- $ 167,308 $ 453,176
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Qualified units outstanding, December 31,
1998....................................... 200,632 -- 33,494 341,766
Net asset value per qualified unit, December
31, 1998................................... $1.099414 $1.000000 $1.171706 $1.102621
Non-qualified units outstanding, December
31, 1998................................... 71 -- 109,296 69,233
Net asset value per non-qualified unit,
December 31, 1998.......................... $1.099414 $1.000000 $1.171706 $1.102621
</TABLE>
(a) For the period ended 12/31/98, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP VALUE SMALL CAP GROWTH
---------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 11/18/97** TO YEAR ENDED 10/16/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends............................. $ -- $ -- $ -- $ --
Mortality and expense risk fees....... (3,230) (55) (1,644) (22)
Administrative expense fees........... (387) (6) (198) (2)
----------- ------- ----------- -------
Net investment income (loss)........ (3,617) (61) (1,842) (24)
----------- ------- ----------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors.................. 2,562 -- 15,390 --
Net realized gain (loss) from sales of
investments......................... (2,879) -- (4,239) (1)
----------- ------- ----------- -------
Net realized gain (loss).............. (317) -- 11,151 (1)
Net unrealized gain (loss)............ 6,083 581 20,343 361
----------- ------- ----------- -------
Net realized and unrealized gain
(loss)............................ 5,766 581 31,494 360
----------- ------- ----------- -------
Net increase (decrease) in net assets
from operations..................... 2,149 520 29,652 336
----------- ------- ----------- -------
CONTRACT TRANSACTIONS:
Net purchase payments................. 504,022 51,073 192,942 17,253
Withdrawals........................... (29,292) -- (13,874) --
Contract benefits..................... -- -- -- --
Contract charges...................... (8) -- (22) --
Transfers between sub-accounts
(including fixed account), net...... 17,713 -- (22,808) 10
Other transfers from (to) the General
Account............................. 73,421 679 62,671 238
Net increase (decrease) in investment
by Sponsor.......................... -- -- -- --
----------- ------- ----------- -------
Net increase (decrease) in net assets
from contract transactions.......... 565,856 51,752 218,909 17,501
----------- ------- ----------- -------
Net increase (decrease) in net
assets.............................. 568,005 52,272 248,561 17,837
NET ASSETS:
Beginning of year..................... 52,272 -- 17,837 --
----------- ------- ----------- -------
End of year........................... $620,277 $52,272 $266,398 $17,837
----------- ------- ----------- -------
----------- ------- ----------- -------
<CAPTION>
CONTRARIAN VALUE* INTERNATIONAL
---------------------------- ---------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 10/14/97** TO YEAR ENDED 10/16/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends............................. $ 2,203 $ -- $ 1,083 $ --
Mortality and expense risk fees....... (11,859) (268) (1,926) (45)
Administrative expense fees........... (1,423) (32) (231) (6)
----------- -------------- ---------- -------
Net investment income (loss)........ (11,079) (300) (1,074) (51)
----------- -------------- ---------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors.................. 8,814 -- 3,249 --
Net realized gain (loss) from sales of
investments......................... (21,085) 7 173 --
----------- -------------- ---------- -------
Net realized gain (loss).............. (12,271) 7 3,422 --
Net unrealized gain (loss)............ 242,325 5,455 12,745 693
----------- -------------- ---------- -------
Net realized and unrealized gain
(loss)............................ 230,054 5,462 16,167 693
----------- -------------- ---------- -------
Net increase (decrease) in net assets
from operations..................... 218,975 5,162 15,093 642
----------- -------------- ---------- -------
CONTRACT TRANSACTIONS:
Net purchase payments................. 2,012,025 172,282 155,112 41,764
Withdrawals........................... (36,322) (739) (494) --
Contract benefits..................... -- -- -- --
Contract charges...................... (41) -- (12) --
Transfers between sub-accounts
(including fixed account), net...... (306,540) -- 35,312 89
Other transfers from (to) the General
Account............................. 218,266 85 132,350 1,881
Net increase (decrease) in investment
by Sponsor.......................... -- -- -- --
----------- -------------- ---------- -------
Net increase (decrease) in net assets
from contract transactions.......... 1,887,388 171,628 322,268 43,734
----------- -------------- ---------- -------
Net increase (decrease) in net
assets.............................. 2,106,363 176,790 337,361 44,376
NET ASSETS:
Beginning of year..................... 176,790 -- 44,376 --
----------- -------------- ---------- -------
End of year........................... $2,283,153 $176,790 $381,737 $44,376
----------- -------------- ---------- -------
----------- -------------- ---------- -------
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GROWTH VALUE+GROWTH
---------------------------- -----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 10/16/97** TO YEAR ENDED 10/14/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 517 $ -- $ -- $ --
Mortality and expense risk fees............ (3,007) (28) (6,680) (201)
Administrative expense fees................ (361) (3) (802) (24)
----------- ------- ----------- ---------------
Net investment income (loss)............. (2,851) (31) (7,482) (225)
----------- ------- ----------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 25,852 -- 8,275 --
Net realized gain (loss) from sales of
investments.............................. (512) (1) (9,098) (19)
----------- ------- ----------- ---------------
Net realized gain (loss)................... 25,340 (1) (823) (19)
Net unrealized gain (loss)................. 28,637 44 117,696 1,063
----------- ------- ----------- ---------------
Net realized and unrealized gain
(loss)................................. 53,977 43 116,873 1,044
----------- ------- ----------- ---------------
Net increase (decrease) in net assets from
operations............................... 51,126 12 109,391 819
----------- ------- ----------- ---------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 383,758 15,681 966,340 119,828
Withdrawals................................ (951) -- (59,651) (791)
Contract benefits.......................... -- -- -- --
Contract charges........................... (27) -- (14) --
Transfers between sub-accounts (including
fixed account), net...................... 12,998 17 (37,468) --
Other transfers from (to) the General
Account.................................. 102,267 336 131,568 7
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
----------- ------- ----------- ---------------
Net increase (decrease) in net assets from
contract transactions.................... 498,045 16,034 1,000,775 119,044
----------- ------- ----------- ---------------
Net increase (decrease) in net assets...... 549,171 16,046 1,110,166 119,863
NET ASSETS:
Beginning of year.......................... 16,046 -- 119,863 --
----------- ------- ----------- ---------------
End of year................................ $565,217 $16,046 $1,230,029 $119,863
----------- ------- ----------- ---------------
----------- ------- ----------- ---------------
<CAPTION>
HORIZON 20+ TOTAL RETURN
----------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 10/31/97** TO YEAR ENDED 11/17/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 135 $ -- $ 11,965 $ --
Mortality and expense risk fees............ (333) (12) (7,535) (39)
Administrative expense fees................ (40) (1) (905) (5)
------------- ------ ----------- -------
Net investment income (loss)............. (238) (13) 3,525 (44)
------------- ------ ----------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 539 -- 53,176 --
Net realized gain (loss) from sales of
investments.............................. (258) -- (1,893) --
------------- ------ ----------- -------
Net realized gain (loss)................... 281 -- 51,283 --
Net unrealized gain (loss)................. 1,029 (83) 58,881 623
------------- ------ ----------- -------
Net realized and unrealized gain
(loss)................................. 1,310 (83) 110,164 623
------------- ------ ----------- -------
Net increase (decrease) in net assets from
operations............................... 1,072 (96) 113,689 579
------------- ------ ----------- -------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 31,236 4,681 827,904 40,859
Withdrawals................................ (1,556) -- (16,986) --
Contract benefits.......................... -- -- (27,116) --
Contract charges........................... (8) -- (20) --
Transfers between sub-accounts (including
fixed account), net...................... 22 17 156,599 --
Other transfers from (to) the General
Account.................................. 2,073 250 310,042 1,471
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------- ------ ----------- -------
Net increase (decrease) in net assets from
contract transactions.................... 31,767 4,948 1,250,423 42,330
------------- ------ ----------- -------
Net increase (decrease) in net assets...... 32,839 4,852 1,364,112 42,909
NET ASSETS:
Beginning of year.......................... 4,852 -- 42,909 --
------------- ------ ----------- -------
End of year................................ $37,691 $4,852 $1,407,021 $42,909
------------- ------ ----------- -------
------------- ------ ----------- -------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
HORIZON 10+ HORIZON 5
---------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 11/25/97** TO YEAR ENDED 11/10/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 417 $ -- $ 1,059 $ --
Mortality and expense risk fees............ (3,721) (26) (3,929) (138)
Administrative expense fees................ (447) (3) (472) (17)
----------- ------- ----------- -------
Net investment income (loss)............. (3,751) (29) (3,342) (155)
----------- ------- ----------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 1,251 -- 3,177 --
Net realized gain (loss) from sales of
investments.............................. (42) -- (480) 6
----------- ------- ----------- -------
Net realized gain (loss)................... 1,209 -- 2,697 6
Net unrealized gain (loss)................. 47,609 363 34,357 1,508
----------- ------- ----------- -------
Net realized and unrealized gain
(loss)................................. 48,818 363 37,054 1,514
----------- ------- ----------- -------
Net increase (decrease) in net assets from
operations............................... 45,067 334 33,712 1,359
----------- ------- ----------- -------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 687,794 21,224 543,947 82,180
Withdrawals................................ (4,562) -- (56,060) (861)
Contract benefits.......................... -- -- -- --
Contract charges........................... -- -- -- --
Transfers between sub-accounts (including
fixed account), net...................... 108,163 -- 17,017 --
Other transfers from (to) the General
Account.................................. 21,659 -- 86,685 --
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
----------- ------- ----------- -------
Net increase (decrease) in net assets from
contract transactions.................... 813,054 21,224 591,589 81,319
----------- ------- ----------- -------
Net increase (decrease) in net assets...... 858,121 21,558 625,301 82,678
NET ASSETS:
Beginning of year.......................... 21,558 -- 82,678 --
----------- ------- ----------- -------
End of year................................ $879,679 $21,558 $707,979 $82,678
----------- ------- ----------- -------
----------- ------- ----------- -------
<CAPTION>
HIGH YIELD INVESTMENT GRADE BOND
---------------------------- ---------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 10/16/97** TO YEAR ENDED 12/11/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 45,699 $ -- $ 988 $ --
Mortality and expense risk fees............ (11,339) (64) (1,843) (6)
Administrative expense fees................ (1,361) (8) (221) (1)
----------- ------- ---------- -------
Net investment income (loss)............. 32,999 (72) (1,076) (7)
----------- ------- ---------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- 329 --
Net realized gain (loss) from sales of
investments.............................. (7,391) (1) 714 --
----------- ------- ---------- -------
Net realized gain (loss)................... (7,391) (1) 1,043 --
Net unrealized gain (loss)................. (28,889) 444 9,800 38
----------- ------- ---------- -------
Net realized and unrealized gain
(loss)................................. (36,280) 443 10,843 38
----------- ------- ---------- -------
Net increase (decrease) in net assets from
operations............................... (3,281) 371 9,767 31
----------- ------- ---------- -------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 1,509,922 74,320 275,959 20,761
Withdrawals................................ (37,859) -- (3,684) --
Contract benefits.......................... -- -- -- --
Contract charges........................... (24) -- -- --
Transfers between sub-accounts (including
fixed account), net...................... 233,044 (132) (69,316) --
Other transfers from (to) the General
Account.................................. 353,604 949 197,935 --
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
----------- ------- ---------- -------
Net increase (decrease) in net assets from
contract transactions.................... 2,058,687 75,137 400,894 20,761
----------- ------- ---------- -------
Net increase (decrease) in net assets...... 2,055,406 75,508 410,661 20,792
NET ASSETS:
Beginning of year.......................... 75,508 -- 20,792 --
----------- ------- ---------- -------
End of year................................ $2,130,914 $75,508 $431,453 $20,792
----------- ------- ---------- -------
----------- ------- ---------- -------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES MONEY MARKET
---------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 12/31/97** TO YEAR ENDED 12/29/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 1,690 $ -- $ 8,110 $ 1
Mortality and expense risk fees............ (1,858) (6) (2,156) --
Administrative expense fees................ (223) (1) (259) --
----------- ------- ----------- ------
Net investment income (loss)............. (391) (7) 5,695 1
----------- ------- ----------- ------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 443 -- -- --
----------- ------- ----------- ------
Net realized gain (loss)................... 443 -- -- --
Net unrealized gain (loss)................. 5,941 50 -- --
----------- ------- ----------- ------
Net realized and unrealized gain
(loss)................................. 6,384 50 -- --
----------- ------- ----------- ------
Net increase (decrease) in net assets from
operations............................... 5,993 43 5,695 1
----------- ------- ----------- ------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 538,138 20,760 1,832,810 5,380
Withdrawals................................ (25,456) -- -- --
Contract benefits.......................... -- -- -- --
Contract charges........................... -- -- (14) --
Transfers between sub-accounts (including
fixed account), net...................... 474,416 -- (894,926) --
Other transfers from (to) the General
Account.................................. 14,580 -- (147,931) --
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
----------- ------- ----------- ------
Net increase (decrease) in net assets from
contract transactions.................... 1,001,678 20,760 789,939 5,380
----------- ------- ----------- ------
Net increase (decrease) in net assets...... 1,007,671 20,803 795,634 5,381
NET ASSETS:
Beginning of year.......................... 20,803 -- 5,381 --
----------- ------- ----------- ------
End of year................................ $1,028,474 $20,803 $ 801,015 $ 5,381
----------- ------- ----------- ------
----------- ------- ----------- ------
<CAPTION>
GLOBAL INCOME BLUE CHIP
------------------------------ ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 5/1/97** TO YEAR ENDED 5/1/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 255 $ -- $ 2,283 $ --
Mortality and expense risk fees............ (236) (1) (5,772) (34)
Administrative expense fees................ (28) -- (693) (5)
------------- ------- ----------- -------
Net investment income (loss)............. (9) (1) (4,182) (39)
------------- ------- ----------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 128 -- -- --
Net realized gain (loss) from sales of
investments.............................. 51 -- 1,277 --
------------- ------- ----------- -------
Net realized gain (loss)................... 179 -- 1,277 --
Net unrealized gain (loss)................. 1,671 (37) 81,902 1,023
------------- ------- ----------- -------
Net realized and unrealized gain
(loss)................................. 1,850 (37) 83,179 1,023
------------- ------- ----------- -------
Net increase (decrease) in net assets from
operations............................... 1,841 (38) 78,997 984
------------- ------- ----------- -------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 13,781 10,760 826,872 46,776
Withdrawals................................ (1,341) -- (13,980) --
Contract benefits.......................... -- -- -- --
Contract charges........................... -- -- (17) --
Transfers between sub-accounts (including
fixed account), net...................... 626 -- 33,427 --
Other transfers from (to) the General
Account.................................. 3,917 -- 182,261 54
Net increase (decrease) in investment by
Sponsor.................................. (21) 20 (21) 20
------------- ------- ----------- -------
Net increase (decrease) in net assets from
contract transactions.................... 16,962 10,780 1,028,542 46,850
------------- ------- ----------- -------
Net increase (decrease) in net assets...... 18,803 10,742 1,107,539 47,834
NET ASSETS:
Beginning of year.......................... 10,742 -- 47,834 --
------------- ------- ----------- -------
End of year................................ $29,545 $10,742 $1,155,373 $47,834
------------- ------- ----------- -------
------------- ------- ----------- -------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DREMAN DREMAN INTERNATIONAL
FINANCIAL HIGH RETURN GROWTH
SERVICES EQUITY AND INCOME
---------------- ------------- -------------
PERIOD FROM PERIOD FROM PERIOD FROM
10/27/98** TO 10/12/98** TO 12/9/98** TO
12/31/98 12/31/98 12/31/98
---------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ --
Mortality and expense risk fees............ (97) (639) (4)
Administrative expense fees................ (12) (77) --
------- ------------- ------
Net investment income (loss)............. (109) (716) (4)
------- ------------- ------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- --
Net realized gain (loss) from sales of
investments.............................. 3 2 --
------- ------------- ------
Net realized gain (loss)................... 3 2 --
Net unrealized gain (loss)................. 2,598 4,406 186
------- ------------- ------
Net realized and unrealized gain
(loss).................................. 2,601 4,408 186
------- ------------- ------
Net increase (decrease) in net assets from
operations............................... 2,492 3,692 182
------- ------------- ------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 45,869 425,097 5,000
Withdrawals................................ -- (2,428) --
Contract benefits.......................... -- -- --
Contract charges........................... -- -- --
Transfers between sub-accounts (including
fixed account), net...................... 5,200 22,544 --
Other transfers from (to) the General
Account.................................. 4,197 69,995 --
Net increase (decrease) in investment by
Sponsor.................................. -- -- --
------- ------------- ------
Net increase (decrease) in net assets from
contract transactions.................... 55,266 515,208 5,000
------- ------------- ------
Net increase (decrease) in net assets...... 57,758 518,900 5,182
NET ASSETS:
Beginning of year.......................... -- -- --
------- ------------- ------
End of year................................ $57,758 $518,900 $5,182
------- ------------- ------
------- ------------- ------
<CAPTION>
VLIF
GLOBAL VLIF CAPITAL VLIF GROWTH
BLUE CHIP INTERNATIONAL GROWTH AND INCOME
-------------- -------------- ------------- -------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
11/17/98** TO 8/28/98** TO 10/28/98** TO 8/28/98** TO
12/31/98 12/31/98 12/31/98 12/31/98
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ -- $ 1,881
Mortality and expense risk fees............ (51) (811) (102) (1,375)
Administrative expense fees................ (6) (97) (12) (166)
------- -------------- ------------- -------------
Net investment income (loss)............. (57) (908) (114) 340
------- -------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 54 10 5 251
------- -------------- ------------- -------------
Net realized gain (loss)................... 54 10 5 251
Net unrealized gain (loss)................. 1,613 19,056 8,620 29,857
------- -------------- ------------- -------------
Net realized and unrealized gain
(loss).................................. 1,667 19,066 8,625 30,108
------- -------------- ------------- -------------
Net increase (decrease) in net assets from
operations............................... 1,610 18,158 8,511 30,448
------- -------------- ------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 52,985 199,090 8,587 355,959
Withdrawals................................ (2,349) -- -- (3,012)
Contract benefits.......................... -- -- -- --
Contract charges........................... -- -- -- --
Transfers between sub-accounts (including
fixed account), net...................... -- 3,333 141,955 68,692
Other transfers from (to) the General
Account.................................. -- 75 8,255 1,089
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------- -------------- ------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 50,636 202,498 158,797 422,728
------- -------------- ------------- -------------
Net increase (decrease) in net assets...... 52,246 220,656 167,308 453,176
NET ASSETS:
Beginning of year.......................... -- -- -- --
------- -------------- ------------- -------------
End of year................................ $ 52,246 $220,656 $167,308 $453,176
------- -------------- ------------- -------------
------- -------------- ------------- -------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account KG is a separate investment account of First Allmerica
Financial Life Insurance Company (the Company), established on November 14, 1997
for the purpose of separating from the general assets of the Company those
assets used to fund certain variable annuity contracts issued by the Company.
The Company is a wholly-owned subsidiary of Allmerica Financial Corporation
(AFC). Under applicable insurance law, the assets and liabilities of Separate
Account KG are clearly identified and distinguished from the other assets and
liabilities of the Company. Separate Account KG cannot be charged with
liabilities arising out of any other business of the Company.
Separate Account KG is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account KG
currently offers twenty-four Sub-Accounts under the variable annuity contracts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
Investors Fund Series (Kemper INFS) or Scudder Variable Life Investment Fund
(Scudder VLIF) managed by Scudder Kemper Investments, Inc. (Scudder Kemper).
Kemper INFS and Scudder VLIF (the Funds) are open-end, management investment
companies registered under the 1940 Act.
Separate Account KG funds two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408 of the Internal Revenue Code (the
Code), while a non-qualified contract is one that is not purchased in connection
with one of the indicated retirement plans. The tax treatment for certain
withdrawals or surrenders will vary according to whether they are made from a
qualified contract or a non-qualified contract.
Effective May 1, 1998, Kemper Value Portfolio was renamed Kemper Contrarian
Value Portfolio.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Code and files a consolidated federal income tax
return. The Company anticipates no tax liability resulting from the operations
of Separate Account KG. Therefore, no provision for income taxes has been
charged against Separate Account KG.
SA-9
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
----------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Small Cap Value......................... 582,179 $ 613,613 $ 1.065
Small Cap Growth........................ 135,072 245,694 1.972
Contrarian Value*....................... 1,299,372 2,035,373 1.757
International........................... 224,550 368,299 1.700
Growth.................................. 191,164 536,536 2.957
Value+Growth............................ 736,139 1,111,270 1.671
Horizon 20+............................. 25,013 36,745 1.507
Total Return............................ 514,525 1,347,517 2.735
Horizon 10+............................. 631,047 831,707 1.394
Horizon 5............................... 543,850 672,114 1.302
High Yield.............................. 1,736,148 2,159,359 1.227
Investment Grade Bond................... 370,448 421,615 1.165
Government Securities................... 851,280 1,022,483 1.208
Money Market............................ 799,316 799,316 1.000
Global Income........................... 26,638 27,911 1.109
Blue Chip............................... 917,210 1,072,448 1.260
Dreman Financial Services............... 59,064 55,160 0.978
Dreman High Return Equity............... 504,496 514,494 1.029
International Growth and Income......... 5,684 4,996 0.912
Global Blue Chip........................ 53,369 50,633 0.979
VLIF International...................... 15,155 201,600 14.560
VLIF Global Discovery................... -- -- 8.040
VLIF Capital Growth..................... 6,986 158,688 23.950
VLIF Growth and Income.................. 40,390 423,319 11.220
</TABLE>
* Name changed. See Note. 1
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account 0.15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
A contract fee is currently deducted on the contract anniversary and upon
full surrender of the contract when the accumulated value is less than $50,000
on contracts issued on Form A3025-96 (Kemper Gateway Elite) and when the
accumulated value is less than $75,000 for contracts issued on Form A3027-98
(Kemper
SA-10
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Gateway Advisor). The fee is currently waived for contracts issued to and
maintained by the trustee of a 401(k) plan.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Separate Account KG, and does not receive any compensation for sales of the
contracts. Commissions are paid by the Company to registered representatives of
Allmerica Investments and to certain independent broker-dealers. The current
series of contracts have a contingent deferred sales charge and no deduction is
made for sales charges at the time of the sale. For the years ended December 31,
1998 and 1997, there were no contingent deferred sales charges applicable to
Separate Account KG.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Small Cap Value
Issuance of Units.......................... 758,617 $ 658,357 52,126 $ 51,752
Redemption of Units........................ (104,007) (92,501) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 654,610 $ 565,856 52,126 $ 51,752
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Small Cap Growth
Issuance of Units.......................... 272,058 $ 277,017 18,104 $ 17,501
Redemption of Units........................ (58,550) (58,108) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 213,508 $ 218,909 18,104 $ 17,501
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Contrarian Value*
Issuance of Units.......................... 2,153,322 $ 2,315,657 175,040 $ 172,367
Redemption of Units........................ (413,770) (428,269) (746) (739)
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,739,552 $ 1,887,388 174,294 $ 171,628
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
International
Issuance of Units.......................... 334,236 $ 326,967 47,600 $ 43,734
Redemption of Units........................ (4,440) (4,699) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 329,796 $ 322,268 47,600 $ 43,734
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Growth
Issuance of Units.......................... 497,684 $ 500,582 16,485 $ 16,034
Redemption of Units........................ (2,620) (2,537) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 495,064 $ 498,045 16,485 $ 16,034
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Value+Growth
Issuance of Units.......................... 1,088,327 $ 1,127,426 125,674 $ 119,835
Redemption of Units........................ (132,203) (126,651) (837) (791)
------------ ------------ ------------ -------------
Net increase (decrease).................. 956,124 $ 1,000,775 124,837 $ 119,044
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
* Name changed. See Note 1.
</TABLE>
SA-11
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Horizon 20+
Issuance of Units.......................... 32,532 $ 34,708 4,952 $ 4,948
Redemption of Units........................ (2,983) (2,941) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 29,549 $ 31,767 4,952 $ 4,948
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Total Return
Issuance of Units.......................... 1,317,040 $ 1,403,752 42,320 $ 42,330
Redemption of Units........................ (137,214) (153,329) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,179,826 $ 1,250,423 42,320 $ 42,330
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Horizon 10+
Issuance of Units.......................... 773,419 $ 818,896 21,224 $ 21,224
Redemption of Units........................ (5,805) (5,842) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 767,614 $ 813,054 21,224 $ 21,224
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Horizon 5
Issuance of Units.......................... 648,542 $ 682,429 82,138 $ 82,180
Redemption of Units........................ (86,777) (90,840) (858) (861)
------------ ------------ ------------ -------------
Net increase (decrease).................. 561,765 $ 591,589 81,280 $ 81,319
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
High Yield
Issuance of Units.......................... 2,309,193 $ 2,324,603 75,323 $ 75,270
Redemption of Units........................ (263,493) (265,916) (133) (133)
------------ ------------ ------------ -------------
Net increase (decrease).................. 2,045,700 $ 2,058,687 75,190 $ 75,137
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Investment Grade Bond
Issuance of Units.......................... 457,537 $ 477,324 20,708 $ 20,761
Redemption of Units........................ (74,545) (76,430) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 382,992 $ 400,894 20,708 $ 20,761
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Government Securities
Issuance of Units.......................... 1,005,478 $ 1,060,460 20,721 $ 20,760
Redemption of Units........................ (55,627) (58,782) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 949,851 $ 1,001,678 20,721 $ 20,760
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Money Market
Issuance of Units.......................... 1,817,832 $ 1,862,887 5,380 $ 5,380
Redemption of Units........................ (1,050,752) (1,072,948) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 767,080 $ 789,939 5,380 $ 5,380
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Global Income
Issuance of Units.......................... 17,964 $ 19,083 10,541 $ 10,780
Redemption of Units........................ (2,017) (2,121) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 15,947 $ 16,962 10,541 $ 10,780
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Blue Chip
Issuance of Units.......................... 923,571 $ 1,071,111 43,276 $ 46,850
Redemption of Units........................ (35,781) (42,569) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 887,790 $ 1,028,542 43,276 $ 46,850
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Dreman Financial Services
Issuance of Units.......................... 51,272 $ 55,286 -- $ --
Redemption of Units........................ (20) (20) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 51,252 $ 55,266 -- $ --
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Dreman High Return Equity
Issuance of Units.......................... 452,184 $ 517,505 -- $ --
Redemption of Units........................ (2,190) (2,297) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 449,994 $ 515,208 -- $ --
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
International Growth and Income
Issuance of Units.......................... 5,020 $ 5,020 -- $ --
Redemption of Units........................ (20) (20) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 5,000 $ 5,000 -- $ --
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Global Blue Chip
Issuance of Units.......................... 52,450 $ 53,005 -- $ --
Redemption of Units........................ (2,313) (2,369) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 50,137 $ 50,636 -- $ --
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
VLIF International
Issuance of Units.......................... 239,298 $ 244,606 -- $ --
Redemption of Units........................ (38,595) (42,108) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 200,703 $ 202,498 -- $ --
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
VLIF Capital Growth
Issuance of Units.......................... 142,810 $ 158,817 -- $ --
Redemption of Units........................ (20) (20) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 142,790 $ 158,797 -- $ --
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
VLIF Growth and Income
Issuance of Units.......................... 469,381 $ 486,819 -- $ --
Redemption of Units........................ (58,382) (64,091) -- --
------------ ------------ ------------ -------------
Net increase (decrease).................. 410,999 $ 422,728 -- $ --
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
SA-13
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the 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
income 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
the Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account KG satisfies the current
requirements of the regulations, and it intends that Separate Account KG will
continue to meet such requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Separate
Account KG during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ----------- ----------
<S> <C> <C>
Small Cap Value........................................ $ 611,576 $ 46,775
Small Cap Growth....................................... 285,582 53,125
Contrarian Value*...................................... 2,240,637 355,514
International.......................................... 328,516 4,073
Growth................................................. 524,955 3,909
Value+Growth........................................... 1,102,778 101,210
Horizon 20+............................................ 35,137 3,069
Total Return........................................... 1,446,727 139,603
Horizon 10+............................................ 815,885 5,331
Horizon 5.............................................. 663,800 72,376
High Yield............................................. 2,241,524 149,838
Investment Grade Bond.................................. 475,132 74,985
Government Securities.................................. 1,058,568 57,281
Money Market........................................... 1,868,730 1,074,793
Global Income.......................................... 19,275 2,194
Blue Chip.............................................. 1,053,372 29,012
Dreman Financial Services.............................. 55,247 90
Dreman High Return Equity.............................. 515,257 765
International Growth and Income........................ 5,000 4
Global Blue Chip....................................... 52,984 2,405
VLIF International..................................... 202,462 872
VLIF Global Discovery.................................. -- --
VLIF Capital Growth.................................... 158,783 100
VLIF Growth and Income................................. 426,988 3,920
----------- ----------
Totals............................................... $16,188,915 $2,181,244
----------- ----------
----------- ----------
</TABLE>
* Name changed. See Note 1.
SA-14
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for First Allmerica Financial Life Insurance
Company
Financial Statements for Separate Account KG of First Allmerica
Financial Life Insurance Company.
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated June 13, 1996 was previously filed on
August 9, 1996 in Registrant's Initial Registration
Statement, and is incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the Registrant NOT pursuant
to a trust indenture or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services Agreement
was previously filed on April 30, 1998 (Registration
Statement No. 811-7769) in Post-Effective Amendment
No. 3, and is incorporated by reference herein.
(b) Wholesaling Agreement was previously filed on
November 26, 1996 in Pre-Effective Amendment No. 1,
and is incorporated by reference herein.
(c) Revised commission schedule was previously filed on
December 8, 1998 in Pre-Effective Amendment No. 1,
and is incorporated by reference herein. Sales
Agreements with Commission Schedule were previously
filed on April 30, 1998 (Registration Statement No.
811-7769) in Post-Effective Amendment No. 3, and are
incorporated by reference herein.
(d) Sales Agreement with Chase was previously filed on
April 30, 1998 (Registration Statement No. 811-7769)
in Post-Effective Amendment No. 3, and is
incorporated by reference herein.
(e) General Agent's Agreement was previously filed on
April 30, 1998 (Registration Statement No. 811-7769)
in Post-Effective Amendment No. 3, and is
incorporated by reference herein.
(f) Career Agent Agreement was previously filed on April
30, 1998 (Registration Statement No. 811-7769) in
Post-Effective Amendment No. 3, and is incorporated
by reference herein.
(g) Registered Representative's Agreement was previously
filed on April 30, 1998 in (Registration Statement
No. 811-7769) in Post-Effective Amendment No. 3, and
is incorporated by reference herein.
<PAGE>
(h) Form of Indemnification Agreement with Scudder
Kemper was previously filed on April 30, 1998
(Registration Statement No. 811-7769) in
Post-Effective Amendment No. 3, and is incorporated
by reference herein.
EXHIBIT 4 Draft Contract Form 3027-98 was previously filed on
December 8, 1998 in Pre-Effective Amendment No. 1, and is
incorporated by reference herein.
EXHIBIT 5 Application Form SML1446K was previously filed on December
8, 1998 in Pre-Effective Amendment No. 1, and is
incorporated by reference herein.
EXHIBIT 6 The Depositor's Articles of Incorporation, as amended,
effective October 1, 1995 to reflect its new name, and
Bylaws were previously filed on August 16, 1996 in
Registrant's Initial Registration Statement, and are
incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) BFDS Agreements for lockbox and mailroom services
were previously filed on April 30, 1998
(Registration Statement No. 811-7769) in
Post-Effective Amendment No. 3, and are incorporated
by reference herein.
(b) Form of Scudder Services Agreement was previously
filed on April 30, 1998 (Registration Statement No.
811-7769) in Post-Effective Amendment No. 3, and is
incorporated by reference herein.
(c) Directors' Power of Attorney is filed herewith.
(d) Service Fee Agreement with Dreyfus was previously
filed on June 23, 1999 in Post-Effective Amendment
No. 2 and is incorporated by reference herein.
(e) Service Fee Agreement with Janus was previously
filed on June 23, 1999 in Post-Effective Amendment
No. 2 and is incorporated by reference herein.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable
EXHIBIT 15 (a) Participation Agreement with Kemper was previously
filed on November 6, 1996 in Pre-Effective Amendment
No.1, and is incorporated by reference herein.
(b) Form of Participation Agreement with Scudder Kemper
was previously filed on April 30, 1998 (Registration
Statement No. 811-7769) in Post-Effective Amendment
No. 3, and is incorporated by reference herein.
(c) Participation Agreement with Dryefus was previously
filed on June 23, 1999 in Post-Effective Amendment
No.2 and is incorporated by reference herein.
<PAGE>
(d) Participation Agreement with Janus was previously
filed on June 23, 1999 in Post-Effective Amendment
No.2 and is incorporated by reference herein.
(e) Draft Participation Agreement with Alger is filed
herewith.
ITEM 25. DIRECTORS AND EXECUTIVE OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers
is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant
Director Secretary (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998)
Vice President and of First Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since 1997) and Vice
Director and Chief Information President (since 1995) of First Allmerica; and Corporate Manager
Officer (1979 to 1995) of Digital Equipment Corporation
Mary Eldridge Secretary (since 1999) of Allmerica Financial; Secretary (since
Secretary 1999) of Allmerica Investments, Inc.; and Secretary (since 1999) of
Allmerica Financial Investment Management Services, Inc.
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice
Director, Vice President and President (since 1991) of First Allmerica; and Vice President
Chief Investment Officer (since 1998) of Allmerica Financial Investment Management Services,
Inc.
John F. Kelly Director (since 1996), Senior Vice President (since 1986), General
Director, Vice President and Counsel (since 1981) and Assistant Secretary (since 1991) of First
General Counsel Allmerica; Director (since 1985) of Allmerica Investments, Inc.;
and Director (since 1990) of Allmerica Financial Investment
Management Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and President
Director (since 1996) of The Hanover Insurance Company; and Vice President
(1993 to 1996) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director (since 1992),
Director President (since 1994) and Chief Executive Officer (since 1996) of
Citizens Insurance Company of America
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of
Director and Chairman of First Allmerica; Director (since 1989) of Allmerica Investments,
The Board Inc.; and Director and Chairman of the Board (since 1990) of
Allmerica Financial Investment Management Services, Inc.
<PAGE>
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and Vice
Director, Vice President, President and Treasurer (since 1993) of First Allmerica; Treasurer
Chief Financial Officer and (since 1993) of Allmerica Investments, Inc.; and Treasurer (since
Treasurer 1993) of Allmerica Financial Investment Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director, President and Allmerica; Director (since 1990) of Allmerica Investments, Inc.;
Chief Executive Officer and Director and President (since 1998) of Allmerica Financial
Investment Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica; Chief
Director Executive Officer (1996 to 1998) of Travelers Property & Casualty;
Senior Vice President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; Director (since 1991) of Allmerica Investments, Inc.;
and Director (since 1991) of Allmerica Financial Investment
Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since 1987) of First
Director Allmerica
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | | |
________________________________________________________________________________________________________________________________
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Financial Allmerica, Allmerica First Allmerica AFC Capital Allmerica First Sterling
Asset Profiles, Inc. Inc. Funding Financial Life Trust I Services Limited
Management, Inc. Corp. Insurance Corporation
Company
Massachusetts California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| | |
| ___________________________________________________________ ________________
| | | | |
| 100% 99.2% 100% 100%
| Advantage Allmerica Allmerica First Sterling
| Insurance Trust Financial Life Reinsurance
| Network, Inc. Company, N.A. Insurance and Company
| Annuity Company Limited
|
| Delaware Federally Chartered Delaware Bermuda
| |
| ________________________________________________________________
| | | | |
| 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial
| Inc. Management Investment Services
| Company, Inc. Management Insurance
| Services, Inc. Agency, Inc.
|
| Massachusetts Massachusetts Massachusetts Massachusetts
|
________________________________________________________________
| | | |
100% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica
Property Management Benefits, Inc. Asset
& Casualty Services, Inc. Management,
Companies, Inc. Limited
Delaware Delaware Florida Bermuda
|
________________________________________________
| | |
100% 100% 100%
The Hanover Allmerica Citizens
Insurance Financial Insurance
Company Insurance Company
Brokers, Inc. of Illinois
New Hampshire Massachusetts Illinois
|
________________________________________________________________________________________________________________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts Allmerica AMGRO
Financial Plus American Insurance Corporation Bay Insurance Financial Inc.
Benefit Insurance Insurance Management Company Alliance
Insurance Agency, Inc. Company Company, Inc. Insurance
Company Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire New Hampshire Massachusetts
| |
________________________________________________ ________________
| | | |
100% 100% 100% 100%
Citizens Citizens Citizens Lloyds Credit
Insurance Insurance Insurance Corporation
Company Company Company
of Ohio of America of the
Midwest
Ohio Michigan Indiana Massachusetts
|
_________________
|
100%
Citizens
Management
Inc.
Michigan
_______________ ---------------- ----------------
Allmerica Greendale AAM
Equity Special Equity Fund
Index Pool Placements
Fund
Massachusetts Massachusetts Massachusetts
- -------- Grantor Trusts established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
--------------- ----------------
Allmerica Allmerica
Investment Trust Securities
Trust
Massachusetts Massachusetts
- -------- Affiliated Management Investment Companies
...............
Hanover Lloyd's
Insurance
Company
Texas
- -------- Affiliated Lloyd's plan company, controlled by Underwriters
for the benefit of The Hanover Insurance Company
_______________ ________________
AAM Growth AAM High Yield
& Income Fund, L.L.C.
Fund L.P.
Delaware Massachusetts
________ L.P. or L.L.C. established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
</TABLE>
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
------------------------------------------------
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
- ---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P. 440 Lincoln Street Limited Partnership
Worcester MA 01653
Advantage Insurance Network, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
<PAGE>
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
Allmerica Financial Benefit Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, Inc. 440 Lincoln Street Insurance Broker
Worcester MA 01653
Allmerica Financial Life Insurance and 440 Lincoln Street Life insurance, accident and
Annuity Company (formerly known as Worcester MA 01653 health insurance, annuities,
SMA Life Assurance Company) variable annuities and
variable life insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment Management 440 Lincoln Street Investment advisory services
Services, Inc. Worcester MA 01653
(formerly known as Allmerica Institutional
Services, Inc. and 440 Financial Group of
Worcester, Inc.)
Allmerica Investment Management Company, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail
Worcester MA 01653 broker-dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance Agency, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
Allmerica Property & Casualty Companies, Inc. 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative
Worcester MA 01653 services provider to Allmerica
Financial Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
<PAGE>
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and
Howell MI 48843 casualty insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and
Itasca IL 60143 casualty insurance
Citizens Insurance Company of the Midwest 3950 Priority Way South Multi-line property and
Drive, Suite 200 casualty insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and
P.O. Box 342250 casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity,
Company (formerly State Mutual Life Worcester MA 01653 accident and health insurance
Assurance Company of America) company
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
Hanover Texas Insurance Management Company, 801 East Campbell Road Attorney-in-fact for Hanover
Inc. Richardson TX 75081 Lloyd's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and
Richardson TX 75081 casualty insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of September 30, 1999, there were 83 Contract holders of qualified
Contracts and 283 Contract holders of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
To the fullest extent permissible under Massachusetts General Laws, no
director shall be personally liable to the Company or any policyholder for
monetary damages for any breach of fiduciary duty as a director,
notwithstanding any provision of law to the contrary; provided, however,
that this provision shall not eliminate or limit the liability of a
director:
1. for and breach of the director's duty of loyalty to the Company
or its policyholders;
2. for acts or omissions not in good faith, or which involve
intentional misconduct or a knowing violation of law;
3. for liability, if any, imposed on directors of mutual insurance
companies pursuant to M.G.L.A. c. 156B Section 61 or M.G.L.A.
c.156B Section 62;
4. for any transactions from which the director derived an improper
personal benefit.
ITEM 29. PRINCIPAL UNDERWRITERS
a) Allmerica Investments, Inc. also acts as principal underwriter for
the following:
- VEL Account, VEL II Account, VEL Account III, Select
Account III, Inheiritage Account, Separate Accounts VA-A,
VA-B, VA-C, VA-G, VA-H, VA-K, VA-P, Allmerica Select
Separate Account II, Group VEL Account, Separate Account
KG, Separate Account KGC, Fulcrum Separate Account, Fulcrum
Variable Life Separate Account, and Allmerica Select
Separate Account of Allmerica Financial Life Insurance and
Annuity Company
- Inheiritage Account, VEL II Account, Separate Account I,
Separate Account VA-K, Separate Account VA-P, Allmerica
Select Separate Account II, Group VEL Account, Separate
Account KG, Separate Account KGC, Fulcrum Separate Account,
and Allmerica Select Separate Account of First Allmerica
Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors
and Officers of Allmerica Investments, Inc. is: 440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
<S> <C>
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Mary Eldridge Secretary
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
<PAGE>
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
</TABLE>
(c) As indicated in Part B (Statement of Additional Information) in
response to Item 20(c), there were no commissions retained by
Allmerica Investments, Inc., the principal underwriter of the
Contracts, for sales of variable contracts funded by the
Registrant in 1998. No commissions or other compensation was
received by the principal underwriter, directly or indirectly,
from the Registrant during the Registrant's last fiscal year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by
the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned Registrant hereby
undertakes to file with the Securities and Exchange Commission
("SEC") such supplementary and periodic information, documents,
and reports as may be prescribed by any rule or regulation of the
SEC heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
(b) The Registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of
Additional Information and any financial statements promptly upon
written or oral request, according to the requirements of Form
N-4.
<PAGE>
(d) Insofar as indemnification for liability arising under the 1933
Act may be permitted to Directors, Officers and Controlling
Persons of Registrant under any registration statement,
underwriting agreement or otherwise, Registrant has been advised
that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of
expenses incurred or paid by a Director, Officer or Controlling
Person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such Director, Officer or
Controlling Person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
1933 Act and will be governed by the final adjudication of such
issue.
(e) The Company hereby represents that the aggregate fees and charges
under the Policies are reasonable in relation to the services
rendered, expenses expected to be incurred, and risks assumed by
the Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of First Allmerica Financial Life
Insurance Company ("Company"), states that it is (a) relying on Rule 6c-7
under the 1940 Act with respect to withdrawal restrictions under the
Texas Optional Retirement Program ("Program") and (b) relying on the
"no-action" letter (Ref. No. IP-6-88) issued on November 28, 1988 to the
American Council of Life Insurance, in applying the withdrawal
restrictions of Internal Revenue Code Section 403(b)(11). Registrant has
taken the following steps in reliance on the letter:
1. Appropriate disclosures regarding the redemption/withdrawal
restrictions imposed by the Program and by Section 403(b)(11) have
been included in the prospectus of each registration statement
used in connection with the offer of the Company's variable
contracts.
2. Appropriate disclosures regarding the redemption/withdrawal
restrictions imposed by the Program and by Section 403(b)(11) have
been included in sales literature used in connection with the
offer of the Company's variable contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption/withdrawal restrictions imposed by the Program and by
Section 403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding
of (i) the restrictions on redemption/withdrawal imposed by the
Program and by Section 403(b)(11) and (ii) the investment
alternatives available under the employer's arrangement will be
obtained from each participant who purchases a variable annuity
contract prior to or at the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any
transfer request not so denied or limited will be effected as
expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 1st day of
November, 1999.
SEPARATE ACCOUNT KG OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Mary Eldridge
-----------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller November 1, 1999
- ----------------------
Warren E. Barnes
Edward J. Parry III* Director, Vice President, Chief Financial
- ---------------------- Officer and Treasurer
Richard M. Reilly* Director and Vice President
- ----------------------
John F. O'Brien* Director, President and Chief Executive
- ---------------------- Officer
Bruce C. Anderson* Director and Vice President
- ----------------------
Robert E. Bruce* Director, Vice President and Chief
- ---------------------- Information Officer
John P. Kavanaugh* Director, Vice President and
- ---------------------- Chief Investment Officer
John F. Kelly* Director, Senior Vice President and
- ---------------------- General Counsel
J. Barry May* Director
- ----------------------
James R. McAuliffe* Director
- ----------------------
Robert P. Restrepo, Jr.* Director and Vice President
- ----------------------
Eric A. Simonsen* Director and Vice President
- ----------------------
Director and Vice President
- ----------------------
Phillip E. Soule
</TABLE>
Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated July 1, 1999 duly executed by
such persons.
/s/ Sheila B. St. Hilaire
- ----------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-63089)
<PAGE>
EXHIBIT TABLE
Exhibit 8(c) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(e) Draft Participation Agreement with Alger
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by First Allmerica Financial Life Insurance
Company, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and with any
other regulatory agency or state authority that may so require, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director, President and Chief Executive 7/1/99
- ----------------------------- Officer
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 7/1/99
- -----------------------------
Bruce C. Anderson
/s/ Robert E. Bruce Director, Vice President and 7/1/99
- ----------------------------- Chief Information Officer
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 7/1/99
- ----------------------------- Chief Investment Officer
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President and 7/1/99
- ----------------------------- General Counsel
John F. Kelly
/s/ J. Barry May Director 7/1/99
- -----------------------------
J. Barry May
/s/ James R. McAuliffe Director 7/1/99
- -----------------------------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief Financial 7/1/99
- ----------------------------- Officer and Treasurer
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 7/1/99
- -----------------------------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 7/1/99
- -----------------------------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 7/1/99
- -----------------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director and Vice President 7/1/99
- -----------------------------
Phillip E. Soule
</TABLE>
<PAGE>
November 1, 1999
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653
RE: SEPARATE ACCOUNT KG OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FILE NO.'S: 333-63089 AND 811-7769
Gentlemen:
In my capacity as Assistant Vice President and Counsel of First Allmerica
Financial Life Insurance Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
Separate Account KG on Form N-4 under the Securities Act of 1933 and amendment
under the Investment Company Act of 1940, with respect to the Company's
qualified and non-qualified variable annuity contracts.
I am of the following opinion:
1. Separate Account KG is a separate account of the Company validly
existing pursuant to the Massachusetts Insurance Code and the
regulations issued thereunder.
2. The assets held in Separate Account KG are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The variable annuity contracts, when issued in accordance with the
Prospectus contained in the Post-Effective Amendment to the
Registration Statement and upon compliance with applicable local law,
will be legal and binding obligations of the Company in accordance with
their terms and when sold will be legally issued, fully paid and
non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment to the Registration Statement for Separate Account KG
on Form N-4 filed under the Securities Act of 1933.
Very truly yours,
/s/ John C. Donlon, Jr.
John C. Donlon, Jr.
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 4 to the Registration
Statement of Separate Account KG of First Allmerica Financial Life Insurance
Company on Form N-4 of our report dated February 2, 1999, except for paragraph 2
of Note 18 and Note 20, which are as of March 19, 1999 and April 1, 1999,
respectively, relating to the financial statements of First Allmerica Financial
Life Insurance Company, and our report dated March 26, 1999, relating to the
financial statements of Separate Account KG of First Allmerica Financial Life
Insurance Company, both of which appear in such Statement of Additional
Information. We also consent to the reference to us under the heading "Experts"
in such Statement of Additional Information.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 1999
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this _____ day of ______________ , 1999, by and
among The Alger American Fund (the "Trust"), an open-end management investment
company organized as a Massachusetts business trust, Allmerica Financial Life
Insurance and Annuity Company, a life insurance company organized as a
corporation under the laws of the State of Delaware, (the "Company"), on its own
behalf and on behalf of each segregated asset account of the Company set forth
in Schedule A, as may be amended from time to time (the "Accounts"), and Fred
Alger & Company, Incorporated, a Delaware corporation, the Trust's distributor
(the "Distributor").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Distributor desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, shares of beneficial interest in the Trust are divided into the
following series which are available for purchase by the Company for the
Accounts: Alger American Small Capitalization Portfolio, Alger American Growth
Portfolio, Alger American Income and Growth Portfolio, Alger American Balanced
Portfolio, Alger American MidCap Growth Portfolio, and Alger American Leveraged
AllCap Portfolio;
WHEREAS, the Trust has received an order from the Commission, dated
February 17, 1989 (File No. 812-7076), granting Participating Insurance
Companies and their separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the Trust to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated life
insurance companies (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and variable annuity contracts to be
issued by the Company under which the Portfolios are to be made available as
investment vehicles (the "Contracts");
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WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised;
WHEREAS, the Company desires to use shares of the Portfolios indicated on
Schedule A as investment vehicles for the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1. For purposes of this Article I, the Company shall be the Trust's agent
for the receipt from each account of purchase orders and requests for
redemption pursuant to the Contracts relating to each Portfolio, provided
that the Company notifies the Trust of such purchase orders and requests
for redemption by 9:30 a.m. Eastern time on the next following Business
Day, as defined in Section 1.3.
1.2. The Trust shall make shares of the Portfolios available to the Accounts
at the net asset value next computed after receipt of a purchase order by
the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust describing
Portfolio purchase procedures. The Company will transmit orders from time
to time to the Trust for the purchase and redemption of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the
offering of shares of any Portfolio if such action is required by law or
by regulatory authorities having jurisdiction or if, in the sole
discretion of the Trustees acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, such action
is deemed in the best interests of the shareholders of such Portfolio.
1.3. The Company shall pay for the purchase of shares of a Portfolio on behalf
of an Account with federal funds to be transmitted by wire to the Trust,
with the reasonable expectation of receipt by the Trust by 2:00 p.m.
Eastern time on the next Business Day after the Trust (or its agent)
receives the purchase order. Upon receipt by the Trust of the federal
funds so wired, such funds shall cease to be the responsibility of the
Company and shall become the responsibility of the Trust for this
purpose. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the Commission.
1.4. The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the
net asset value next computed
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after receipt by the Trust (or its agent) of the request for redemption,
as established in accordance with the provisions of the then current
prospectus of the Trust describing Portfolio redemption procedures. The
Trust shall make payment for such shares in the manner established from
time to time by the Trust. Proceeds of redemption with respect to a
Portfolio will normally be paid to the Company for an Account in federal
funds transmitted by wire to the Company by order of the Trust with the
reasonable expectation of receipt by the Company by 2:00 p.m. Eastern
time on the next Business Day after the receipt by the Trust (or its
agent) of the request for redemption. Such payment may be delayed if, for
example, the Portfolio's cash position so requires or if extraordinary
market conditions exist, but in no event shall payment be delayed for a
greater period than is permitted by the 1940 Act. The Trust reserves the
right to suspend the right of redemption, consistent with Section 22(e)
of the 1940 Act and any rules thereunder.
1.5. Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of
the Trust's Portfolios under Section 1.4 on any Business Day may be
netted against one another for the purpose of determining the amount of
any wire transfer.
1.6. Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Accounts. Portfolio Shares purchased from the Trust will be recorded in
the appropriate title for each Account or the appropriate subaccount of
each Account.
1.7. The Trust shall furnish, on or before the ex-dividend date, notice to the
Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to
receive all such income dividends and capital gain distributions as are
payable on a Portfolio's shares in additional shares of that Portfolio.
The Trust shall notify the Company of the number of shares so issued as
payment of such dividends and distributions.
1.8. The Trust shall calculate the net asset value of each Portfolio on each
Business Day, as defined in Section 1.3. The Trust shall make the net
asset value per share for each Portfolio available to the Company or its
designated agent on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best
efforts to make such net asset value per share available to the Company
by 6:30 p.m. Eastern time each Business Day.
1.9. The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their segregated asset accounts, to
the Fund Sponsor or its affiliates and to such other entities as may be
permitted by Section 817(h) of the Code, the regulations hereunder, or
judicial or administrative interpretations thereof. No shares of any
Portfolio will be sold directly to the general public. The Company agrees
that it will use Trust shares only for the purposes of funding the
Contracts through the Accounts listed in
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Schedule A, as amended from time to time.
1.10. The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding materially to those contained in
Section 2.9 and Article IV of this Agreement.
ARTICLE II.
OBLIGATIONS OF THE PARTIES
2.1. The Trust shall prepare and be responsible for filing with the Commission
and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional
information of the Trust. The Trust shall bear the costs of registration
and qualification of shares of the Portfolios, preparation and filing of
the documents listed in this Section 2.1 and all taxes to which an issuer
is subject on the issuance and transfer of its shares.
2.2. The Company shall distribute such prospectuses, proxy statements and
periodic reports of the Trust to the Contract owners as required to be
distributed to such Contract owners under applicable federal or state
law.
2.3. The Trust shall provide such documentation (including a final copy of the
Trust's prospectus as set in type or in camera-ready copy) and other
assistance as is reasonably necessary in order for the Company to print
together in one document the current prospectus for the Contracts issued
by the Company and the current prospectus for the Trust. The Trust shall
bear the expense of printing copies of its current prospectus that will
be distributed to existing Contract owners, and the Company shall bear
the expense of printing copies of the Trust's prospectus that are used in
connection with offering the Contracts issued by the Company.
2.4. The Trust and the Distributor shall provide (1) at the Trust's expense,
one copy of the Trust's current Statement of Additional Information
("SAI") to the Company and to any Contract owner who requests such SAI,
(2) at the Company's expense, such additional copies of the Trust's
current SAI as the Company shall reasonably request and that the Company
shall require in accordance with applicable law in connection with
offering the Contracts issued by the Company.
2.5. The Trust, at its expense, shall provide the Company with copies of its
proxy material, periodic reports to shareholders and other communications
to shareholders in such quantity as the Company shall reasonably require
for purposes of distributing to Contract owners.The Trust shall bear any
costs associated with the distribution of its proxy materials to existing
shareholders. The Trust, at the Company's expense, shall provide the
Company with copies of its periodic reports to shareholders and other
communications to
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shareholders in such quantity as the Company shall reasonably request for
use in connection with offering the Contracts issued by the Company. If
requested by the Company in lieu thereof, the Trust shall provide such
documentation (including a final copy of the Trust's proxy materials,
periodic reports to shareholders and other communications to
shareholders, as set in type or in camera-ready copy) and other
assistance as reasonably necessary in order for the Company to print such
shareholder communications for distribution to Contract owners.
2.6. The Company agrees and acknowledges that the Distributor is the sole
owner of the name and mark "Alger" and that all use of any designation
comprised in whole or part of such name or mark under this Agreement
shall inure to the benefit of the Distributor. Except as provided in
Section 2.5, the Company shall not use any such name or mark on its own
behalf or on behalf of the Accounts or Contracts in any registration
statement, advertisement, sales literature or other materials relating to
the Accounts or Contracts without the prior written consent of the
Distributor. Upon termination of this Agreement for any reason, the
Company shall cease all use of any such name or mark as soon as
reasonably practicable.
2.7. The Company shall furnish, or cause to be furnished, to the Trust or its
designee a copy of each Contract prospectus and/or statement of
additional information describing the Contracts, each report to Contract
owners, proxy statement, application for exemption or request for
no-action letter in which the Trust or the Distributor is named
contemporaneously with the filing of such document with the Commission.
The Company shall furnish, or shall cause to be furnished, to the Trust
or its designee each piece of sales literature or other promotional
material in which the Trust or the Distributor is named, at least five
Business Days prior to its use. No such material shall be used if the
Trust or its designee reasonably objects to such use within three
Business Days after receipt of such material.
2.8. The Company shall not give any information or make any representations or
statements on behalf of the Trust or concerning the Trust or the
Distributor in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from
the registration statement or prospectus for the Trust shares (as such
registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust,
Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the prior
written permission of the Trust, the Distributor or their respective
designees. The Trust and the Distributor agree to respond to any request
for approval on a prompt and timely basis. The Company shall adopt and
implement procedures reasonably designed to ensure that "broker only"
materials including information therein about the Trust or the
Distributor are not distributed to existing or prospective Contract
owners.
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2.9. The Trust shall use its best efforts to provide the Company, on a timely
basis, with such information about the Trust, the Portfolios and the
Distributor, in such form as the Company may reasonably require, as the
Company shall reasonably request in connection with the preparation of
registration statements, prospectuses and annual and semi-annual reports
pertaining to the Contracts.
2.10. The Trust and the Distributor shall not give, and agree that no affiliate
of either of them shall give, any information or make any representations
or statements on behalf of the Company or concerning the Company, the
Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Contracts (as such registration statement and
prospectus may be amended or supplemented from time to time), or in
materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal
process or regulatory authorities or with the prior written permission of
the Company. The Company agrees to respond to any request for approval on
a prompt and timely basis.
2.11. So long as, and to the extent that, the Commission interprets the 1940
Act to require pass-through voting privileges for Contract owners, the
Company will provide pass-through voting privileges to Contract owners
whose cash values are invested, through the registered Accounts, in
shares of one or more Portfolios of the Trust. The Trust shall require
all Participating Insurance Companies to calculate voting privileges in
the same manner and the Company shall be responsible for assuring that
the Accounts calculate voting privileges in the manner established by the
Trust. With respect to each registered Account, the Company will vote
shares of each Portfolio of the Trust held by a registered Account and
for which no timely voting instructions from Contract owners are received
in the same proportion as those shares for which voting instructions are
received. The Company and its agents will in no way recommend or oppose
or interfere with the solicitation of proxies for Portfolio shares held
to fund the Contacts without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion. The Company
reserves the right, to the extent permitted by law, to vote shares held
in any Account in its sole discretion.
2.12. The Company and the Trust will each provide to the other information
about the results of any regulatory examination relating to the Contracts
or the Trust, including relevant portions of any "deficiency letter" and
any response thereto.
2.13. No compensation shall be paid by the Trust to the Company, or by the
Company to the Trust, under this Agreement (except for specified expense
reimbursements). However, nothing herein shall prevent the parties hereto
from otherwise agreeing to perform, and arranging for appropriate
compensation for, other services relating to the Trust, the
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Accounts or both.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1. The Company represents and warrants that it is an insurance company duly
organized and in good standing under the laws of the State of Delaware
and that it has legally and validly established each Account as a
segregated asset account under such law as of the date set forth in
Schedule A, and that _________________________________, the principal
underwriter for the Contracts, is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member in good standing of the
National Association of Securities Dealers, Inc.
3.2. The Company represents and warrants that it has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act
and cause each Account to remain so registered to serve as a segregated
asset account for the Contracts, unless an exemption from registration is
available.
3.3. The Company represents and warrants that the Contracts will be registered
under the 1933 Act unless an exemption from registration is available
prior to any issuance or sale of the Contracts; the Contracts will be
issued and sold in compliance in all material respects with all
applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance law suitability
requirements.
3.4. The Trust represents and warrants that it is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and the
rules and regulations thereunder.
3.5. The Trust and the Distributor represent and warrant that the Portfolio
shares offered and sold pursuant to this Agreement will be registered
under the 1933 Act and sold in accordance with all applicable federal and
state laws, and the Trust shall be registered under the 1940 Act prior to
and at the time of any issuance or sale of such shares. The Trust shall
amend its registration statement under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of
its shares. The Trust shall register and qualify its shares for sale in
accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6. The Trust represents and warrants that the investments of each Portfolio
will comply with the diversification requirements for variable annuity,
endowment or life insurance
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contracts set forth in Section 817(h) of the Internal Revenue Code of
1986, as amended (the "Code"), and the rules and regulations thereunder,
including without limitation Treasury Regulation 1.817-5, and will notify
the Company immediately upon having a reasonable basis for believing
any Portfolio has ceased to comply or might not so comply and will
immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by
Regulation 1.817-5.
3.7. The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it
will make every effort to maintain such qualification and will notify the
Company immediately upon having a reasonable basis for believing it has
ceased to so qualify or might not so qualify in the future.
3.8. The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less than
the minimum coverage required by Rule 17g-1 or other applicable
regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3.9. The Distributor represents that it is duly organized and validly existing
under the laws of the State of Delaware and that it is registered, and
will remain registered, during the term of this Agreement, as a
broker-dealer under the Securities Exchange Act of 1934 and is a member
in good standing of the National Association of Securities Dealers, Inc.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1. The parties acknowledge that a Portfolio's shares may be made available
for investment to other Participating Insurance Companies. In such event,
the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of
all Participating Insurance Companies. A material irreconcilable conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or any
similar action by insurance, tax, or securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Portfolio are being
managed; (e) a difference in voting instructions given by variable
annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination
by the Trustees that a material irreconcilable conflict exists and of the
implications thereof.
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4.2. The Company agrees to report promptly any potential or existing conflicts
of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for and requested by the Trustees to consider any issues raised
including, but not limited to, information as to a decision by the
Company to disregard Contract owner voting instructions. All
communications from the Company to the Trustees may be made in care of
the Trust.
4.3. If it is determined by a majority of the Trustees, or a majority of the
disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of contract owners, the Company shall, in
cooperation with other Participating Insurance Companies whose contract
owners are also affected, at its own expense and to the extent reasonably
practicable (as determined by the Trustees) take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict,
which steps could include: (a) withdrawing the assets allocable to some
or all of the Accounts from the Trust or any Portfolio and reinvesting
such assets in a different investment medium, including (but not limited
to) another Portfolio of the Trust, or submitting the question of whether
or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering
to the affected Contract owners the option of making such a change; and
(b) establishing a new registered management investment company or
managed separate account.
4.4. If a material irreconcilable conflict arises because of a decision by the
Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the
Company may be required, at the Trust's election, to withdraw the
affected Account's investment in the Trust and terminate this Agreement
with respect to such Account; provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Any such withdrawal and termination must take
place within six (6) months after the Trust gives written notice that
this provision is being implemented. Until the end of such six (6) month
period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw
the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the
Trustees inform the Company in writing that the Trust has determined that
such decision has created a material irreconcilable conflict; provided,
however, that such withdrawal
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and termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Until the end of such six (6) month period, the
Trust shall continue to accept and implement orders by the Company for
the purchase and redemption of shares of the Trust.
4.6. For purposes of Section 4.3 through 4.6 of this Agreement, a majority of
the disinterested Trustees shall determine whether any proposed action
adequately remedies any material irreconcilable conflict, but in no event
will the Trust be required to establish a new funding medium for any
Contract. The Company shall not be required to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
material irreconcilable conflict. In the event that the Trustees
determine that any proposed action does not adequately remedy any
material irreconcilable conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six
(6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.
4.7. The Company shall at least annually submit to the Trustees such reports,
materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared
Funding Exemptive Order, and said reports, materials and data shall be
submitted more frequently if reasonably deemed appropriate by the
Trustees.
4.8. If and to the extent that Rule 6e-3(T) is amended, or Rule 6e-3 is
adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared
Funding Exemptive Order, then the Trust and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with Rule 6e-3(T), as amended, or Rule 6e-3, as
adopted, to the extent such rules are applicable.
ARTICLE V.
INDEMNIFICATION
5.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold
harmless the Distributor, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the Trust
within the meaning of Section 15 of the 1933
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Act (collectively, the "Indemnified Parties" for purposes of this Section
5.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company, which
consent shall not be unreasonably withheld) or expenses (including the
reasonable costs of investigating or defending any alleged loss, claim,
damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation,
or at common law or otherwise, insofar as such Losses are related to the
sale or acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the
Company on behalf of the Contracts or Accounts (or any amendment
or supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of or
are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Company by or on behalf of the Trust
for use in Company Documents or otherwise for use in connection
with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived from Trust Documents as defined in Section 5.2(a)) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as
defined in Section 5.2(a) or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately
derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Company; or
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(f) arise out of or result from the provision by the Company to the
Trust of insufficient or incorrect information regarding the
purchase or sale of shares of any Portfolio, or the failure of the
Company to provide such information on a timely basis.
5.2. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor agrees to indemnify
and hold harmless the Company and each of its directors, officers,
employees, and agents and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for the purposes of this Section 5.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Distributor, which consent
shall not be unreasonably withheld) or expenses (including the reasonable
costs of investigating or defending any alleged loss, claim, damage,
liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common
law or otherwise, insofar as such Losses are related to the sale or
acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement or prospectus for the Trust (or any
amendment or supplement thereto) (collectively, "Trust Documents"
for the purposes of this Article V), or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Distributor or the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for
use in connection with the sale of the Contracts or Trust shares;
or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived form Company Documents) or wrongful conduct of the
Distributor or persons under its control, with respect to the sale
or acquisition of the Contracts or Portfolio shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Trust; or
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(d) arise out of or result from any failure by the Distributor or the
Trust to provide the services or furnish the materials required
under the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor or the
Trust in this Agreement or arise out of or result from any other
material breach of this Agreement by the Distributor or the Trust.
5.3. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any Losses incurred or assessed against an Indemnified
Party that arise from such Indemnified Party's willful misfeasance, bad
faith or negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement.
5.4. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any claim made against an Indemnified party unless such
Indemnified Party shall have notified the other party in writing within a
reasonable time after the summons, or other first written notification,
giving information of the nature of the claim shall have been served upon
or otherwise received by such Indemnified Party (or after such
Indemnified Party shall have received notice of service upon or other
notification to any designated agent), but failure to notify the party
against whom indemnification is sought of any such claim shall not
relieve that party from any liability which it may have to the
Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5. In case any such action is brought against an Indemnified Party, the
indemnifying party shall be entitled to participate, at its own expense,
in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably
satisfactory to the party named in the action. After notice from the
indemnifying party to the Indemnified Party of an election to assume such
defense, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the indemnifying party will not be
liable to the Indemnified Party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
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ARTICLE VI.
TERMINATION
6.1. This Agreement shall terminate:
(a) at the option of any party upon 60 days advance written notice to
the other parties, unless a shorter time is agreed to by the
parties;
(b) at the option of the Trust or the Distributor if the Contracts
issued by the Company cease to qualify as annuity contracts or
life insurance contracts, as applicable, under the Code or if the
Contracts are not registered, issued or sold in accordance with
applicable state and/or federal law; or
(c) at the option of any party upon a determination by a majority of
the Trustees of the Trust, or a majority of its disinterested
Trustees, that a material irreconcilable conflict exists; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust or the Distributor by the NASD, the
SEC, or any state securities or insurance department or any other
regulatory body regarding the Trust's or the Distributor's duties
under this Agreement or related to the sale of Trust shares or the
operation of the Trust; or
(e) at the option of the Company if the Trust or a Portfolio fails to
meet the diversification requirements specified in Section 3.6
hereof; or
(f) at the option of the Company if shares of the Series are not
reasonably available to meet the requirements of the Variable
Contracts issued by the Company, as determined by the Company, and
upon prompt notice by the Company to the other parties; or
(g) at the option of the Company in the event any of the shares of the
Portfolio are not registered, issued or sold in accordance with
applicable state and/or federal law, or such law precludes the use
of such shares as the underlying investment media of the Variable
Contracts issued or to be issued by the Company; or
(h) at the option of the Company, if the Portfolio fails to qualify as
a Regulated Investment Company under Subchapter M of the Code; or
(i) at the option of the Distributor if it shall determine in its sole
judgment exercised in good faith, that the Company and/or its
affiliated companies has suffered a
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material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares
of any Portfolio and redeem shares of any Portfolio pursuant to the terms
and conditions of this Agreement for all Contracts in effect on the
effective date of termination of this Agreement.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.9 shall survive
the termination of this Agreement as long as shares of the Trust are held
on behalf of Contract owners in accordance with Section 6.2.
ARTICLE VII.
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or its Distributor:
Fred Alger Management, Inc.
30 Montgomery Street
Jersey City, NJ 07302
Attn: Gregory S. Duch
If to the Company:
ARTICLE VIII.
MISCELLANEOUS
8.1. The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
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8.2. This Agreement may be executed in two or more counterparts, each of which
taken together shall constitute one and the same instrument.
8.3. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
8.4. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York. It shall
also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the Commission
granting exemptive relief therefrom and the conditions of such orders.
Copies of any such orders shall be promptly forwarded by the Trust to the
Company.
8.5. All liabilities of the Trust arising, directly or indirectly, under this
Agreement, of any and every nature whatsoever, shall be satisfied solely
out of the assets of the Trust and no Trustee, officer, agent or holder
of shares of beneficial interest of the Trust shall be personally liable
for any such liabilities.
8.6. Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Commission,
the National Association of Securities Dealers, Inc. and state insurance
regulators) and shall permit such authorities reasonable access to its
books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and federal laws.
8.8. This Agreement shall not be exclusive in any respect.
8.9. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other
party.
8.10. No provisions of this Agreement may be amended or modified in any manner
except by a written agreement properly authorized and executed by both
parties.
8.11. Each party hereto shall, except as required by law or otherwise permitted
by this greement, treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto, and shall not disclose
such confidential information without the written consent of the affected
party unless such information has become publicly available.
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IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.
Fred Alger & Company, Incorporated
By:________________________________
Name:
Title:
The Alger American Fund
By:_________________________________
Name:
Title:
Allmerica Financial Life Insurance and
Annuity Company
By:___________________________________
Name:
Title:
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SCHEDULE A
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The Alger American Fund:
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American Income and Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Balanced Portfolio
Alger American MidCap Growth Portfolio
The Accounts:
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