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File Nos. 333-90541
811-7769
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17
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)
Charles F. Cronin, 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:
___ immediately upon filing pursuant to paragraph (b) of Rule 485
___ on (date) 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"). No filing fee is
submitted as a filing fee is not required for this type of filing. The Rule
24f-2 Notice for the issuer's fiscal year ended December 31, 1999 was filed on
or before March 30, 2000.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall become effective in accordance with section 8(a) of the Securities Act of
1933 or until this Registration Statement shall become effective on such date or
dates as the Commission, acting pursuant to said section 8(a), may determine.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
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FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
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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 Investment Companies
6........................Charges and Deductions
7........................Description of the Contract--The Accumulation Phase
8........................Electing the Annuity Date; Description of Annuity Payout Options; Variable Annuity
Benefit Payments
9........................Death Benefit
10.......................Payments; Computation of Values; Distribution
11.......................Surrender and Withdrawals; Withdrawals after the Annuity Date
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
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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 2 variable annuity contract issued by Allmerica Financial Life Insurance
and Annuity Company (in all jurisdictions except New York) and First Allmerica
Financial Life Insurance Company (in New York). 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 PRINCIPAL. THE CONTRACT MAY NOT BE AVAILABLE IN ALL STATES.
A Statement of Additional Information dated , 2000 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 Annuity Client Services at 1-800-782-8380.
The Table of Contents of the Statement of Additional Information is listed on
page 3 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).
The Variable Account, known as Separate Account KG is subdivided into
Sub-Accounts. Each Sub-Account offered as an investment option under this
contract invests exclusively in shares of one of the following portfolios:
<TABLE>
<S> <C>
KEMPER VARIABLE SERIES SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A)
Kemper Aggressive Growth Portfolio Scudder 21st Century Growth Portfolio
Kemper Technology Growth Portfolio Scudder International Portfolio
KVS Dreman Financial Services Portfolio Scudder Global Discovery Portfolio
Kemper Small Cap Growth Portfolio Scudder Capital Growth Portfolio
Kemper Small Cap Value Portfolio Scudder Growth and Income Portfolio
KVS Dreman High Return Equity Portfolio
Kemper International Portfolio THE ALGER AMERICAN FUND
Kemper New Europe Portfolio Alger American Leveraged AllCap Portfolio
Kemper Global Blue Chip Portfolio Alger American Balanced Portfolio
Kemper Growth Portfolio
Kemper Contrarian Value Portfolio DREYFUS INVESTMENT PORTFOLIOS
Kemper Blue Chip Portfolio Dreyfus MidCap Stock Portfolio
Kemper Value+Growth Portfolio
KVS Index 500 Portfolio THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
Kemper Horizon 20+ Portfolio Dreyfus Socially Responsible Growth Fund
Kemper Total Return Portfolio
Kemper Horizon 10+ Portfolio WARBURG PINCUS TRUST
Kemper High Yield Portfolio Warburg Pincus Emerging Markets Portfolio
Kemper Horizon 5 Portfolio Warburg Pincus Global Post-Venture Capital Portfolio
Kemper Strategic Income Portfolio
Kemper Investment Grade Bond Portfolio
Kemper Government Securities Portfolio
Kemper Money Market Portfolio
KVS Focused Large Cap Growth Portfolio
KVS Growth Opportunities Portfolio
KVS Growth And Income Portfolio
</TABLE>
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account. The Fixed Account
is an investment option that pays an interest rate guaranteed for one year from
the time a payment is received. Another investment option, the Guarantee Period
Accounts, offers fixed rates of interest for specified periods. 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.)
THIS ANNUITY IS NOT A BANK DEPOSIT OR OBLIGATION; 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 IN THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED , 2000
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We offer a variety of fixed and variable annuity contracts. They may offer
features, including investment options, fees and/or charges that are different
from those in the contracts offered by this Prospectus. The contracts may be
offered through different distributors. Upon request, your financial
representative can show you information regarding other annuity contracts
offered by the Company. You can also contact us directly to find out more about
these annuity contracts.
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TABLE OF CONTENTS
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SPECIAL TERMS............................................... 5
SUMMARY OF FEES AND EXPENSES................................ 7
SUMMARY OF CONTRACT FEATURES................................ 13
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND THE
UNDERLYING INVESTMENT COMPANIES............................ 18
INVESTMENT OBJECTIVES AND POLICIES.......................... 19
PERFORMANCE INFORMATION..................................... 22
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE....... 24
A. Payments............................................. 24
B. Computation of Values................................ 24
The Accumulation Unit............................... 25
Net Investment Factor............................... 25
C. Right to Cancel...................................... 25
D. Transfer Privilege................................... 26
Asset Allocation Model Reallocations................ 26
Automatic Transfers (Dollar Cost Averaging)......... 27
Automatic Account Rebalancing....................... 27
E. Surrender and Withdrawals............................ 28
Systematic Withdrawals.............................. 28
Life Expectancy Distributions....................... 29
F. Death Benefit........................................ 29
Standard Death Benefit.............................. 29
Optional Enhanced Death Benefit Rider............... 30
Payment of the Death Benefit Prior to the Annuity
Date................................................ 30
G. The Spouse of the Owner as Beneficiary............... 31
H. Assignment........................................... 31
ANNUITIZATION -- THE PAYOUT PHASE........................... 32
A. Electing the Annuity Date............................ 32
B. Choosing the Annuity Payout Option................... 32
Fixed Annuity Payout Options........................ 33
Variable Annuity Payout Options..................... 33
C. Description of Annuity Payout Options................ 33
D. Variable Annuity Benefit Payments.................... 34
The Annuity Unit.................................... 34
Determination of the First Annuity Benefit
Payment............................................. 34
Determination of the Number of Annuity Units........ 35
Dollar Amount of Subsequent Variable Annuity Benefit
Payments............................................ 35
Payment of Annuity Benefit Payments................. 35
E. Transfers of Annuity Units........................... 35
F. Withdrawals After the Annuity Date................... 36
Calculation of Proportionate Reduction.............. 37
Calculation of Present Value........................ 38
Deferral of Withdrawals............................. 39
G. Reversal of Annuitization............................ 39
H. NORRIS Decision...................................... 39
CHARGES AND DEDUCTIONS...................................... 40
A. Variable Account Deductions.......................... 40
Mortality and Expense Risk Charge................... 40
Administrative Expense Charge....................... 40
Other Charges....................................... 40
B. Contract Fee......................................... 41
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C. Optional Rider Charge................................ 41
D. Premium Taxes........................................ 41
E. Transfer Charge...................................... 42
GUARANTEE PERIOD ACCOUNTS................................... 43
FEDERAL TAX CONSIDERATIONS.................................. 45
A. General.............................................. 45
The Company......................................... 45
Diversification Requirements........................ 45
Investor Control.................................... 45
B. Qualified and Non-Qualified Contracts................ 46
C. Taxation of the Contract in General.................. 46
Withdrawals Prior to Annuitization.................. 46
Withdrawals After Annuitization..................... 46
Annuity Payouts After Annuitization................. 47
Penalty on Distribution............................. 47
Assignments or Transfers............................ 47
Nonnatural Owners................................... 47
Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations............ 48
D. Tax Withholding...................................... 48
E. Individual Retirement Annuities...................... 48
STATEMENTS AND REPORTS...................................... 48
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 48
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 50
VOTING RIGHTS............................................... 50
DISTRIBUTION................................................ 50
LEGAL MATTERS............................................... 51
FURTHER INFORMATION......................................... 51
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT...... A-1
APPENDIX B -- THE MARKET VALUE ADJUSTMENT................... B-1
APPENDIX C -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND
PAYMENT WITHDRAWALS........................................ C-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY............................. 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY.................................................... 3
SERVICES.................................................... 3
UNDERWRITERS................................................ 3
ANNUITY BENEFIT PAYMENTS.................................... 4
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING)
PROGRAM.................................................... 4
PERFORMANCE INFORMATION..................................... 5
FINANCIAL STATEMENTS........................................ F-1
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SPECIAL TERMS
ACCUMULATED VALUE: the total dollar amount of all values in the Sub-Accounts,
the Fixed Account and the Guarantee Period Accounts credited to the Contract on
any day before the Annuity Date.
ACCUMULATION UNIT: a measure used to calculate the value of a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract whose life is used to determine
the duration of annuity benefit payments involving a life contingency. Joint
Annuitants are permitted and, unless otherwise indicated, any reference to
Annuitant shall include Joint Annuitants.
ANNUITY BENEFIT PAYMENT CHANGE FREQUENCY: the frequency (monthly, quarterly,
semi-annually or annually) that changes due to investment performance will be
reflected in the dollar value of an annuity benefit payment under a variable
annuity payout option.
ANNUITY DATE: the date specified in the Contract or a date elected later by the
Owner to begin annuity benefit payments. This date must be at least one year
after the Issue Date and may not be later than the Owner's (or youngest Joint
Owner's) 99th birthday.
ANNUITY UNIT: a measure used to calculate annuity benefit payments under a
variable payout option.
ANNUITY VALUE: the value of the amount applied under an annuity payout option.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to either Allmerica Financial Life Insurance and Annuity Company or
First Allmerica Financial Life Insurance Company.
CONTRACT YEAR: a period of twelve consecutive months starting on the Contract's
Issue Date or on any anniversary of the Issue Date.
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 with annuity benefit payments
that are fixed in amount and guaranteed throughout the annuity benefit payment
period.
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.
GUARANTEE PERIOD ACCOUNT: an account that 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.
ISSUE DATE: the date the Contract is issued and the date that is used to
determine Contract days, Contract months, Contract years and Contract
anniversaries.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
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OWNER (YOU): the person, persons (Joint Owners) or entity entitled to exercise
the rights and privileges under this Contract. 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 Warburg
Pincus Trust.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any applicable Contract fee, rider charges and Market Value
Adjustment.
UNDERLYING PORTFOLIO (OR PORTFOLIOS): an investment portfolio of KVS, Scudder
VLIF, Alger, Dreyfus Investment Portfolios, Dreyfus Socially Responsible Growth
Fund or Warburg Pincus Trust in which a Sub-Account invests.
VALUATION DATE: a day on which the 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, and on such other days (other than a day
during which no payment, withdrawal or surrender of a Contract was received)
when there is a sufficient degree of trading in an Underlying Portfolio's
portfolio securities such that the current unit value of the Sub-Accounts may be
affected materially.
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 the assets are not chargeable with
liabilities arising out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying
in amount in accordance with the investment experience of certain of the
Underlying Portfolios.
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SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will incur directly or indirectly
under the Kemper Gateway Advisor 2 Contract. The purpose of the following tables
is to help you understand these various charges. The tables show (1) charges
under the Contract, (2) annual expenses of the Sub-Accounts, and (3) annual
expenses of the Portfolios during the accumulation phase. 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" under CHARGES AND
DEDUCTIONS.
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CHARGE
(1) CONTRACT CHARGES: ------
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None
TRANSFER CHARGE:
The Company currently does not 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 CHARGE:
If the Enhanced Death Benefit Rider is elected, 1/12th of
the annual charge will be deducted pro-rata on a monthly
basis at the end of each Contract month. The charge for
this Rider on an annual basis as a percentage of
Accumulated Value is:
5% Enhanced Death Benefit Rider With Annual Step-Up: 0.25%
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as a percentage of average daily net
assets)
Mortality and Expense Risk Charge: 0.40%
Administrative Expense Charge: 0.15%
------
Total Annual Expenses: 0.55%
*The fee may be lower in some jurisdictions. See Contract
Specifications for specific charge.
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(3) ANNUAL UNDERLYING PORTFOLIO EXPENSES: Total expenses of the Underlying
Portfolios are not fixed or specified under the terms of the Contract and will
vary from year to year. The levels of fees and expenses also vary among the
Underlying Portfolios. The following table shows the expenses of the Underlying
Portfolios as a percentage of average net assets for the year ended
December 31, 1999, as adjusted for any material changes.
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TOTAL PORTFOLIO
MANAGEMENT FEE EXPENSES
(AFTER ANY OTHER EXPENSES (AFTER ANY FEE
FEE REDUCTIONS/ (AFTER ANY WAIVERS/ REDUCTIONS/WAIVERS/
UNDERLYING PORTFOLIO VOLUNTARY WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
-------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C>
Kemper Aggressive Growth Portfolio*............ 0.00% 0.95% 0.95%(2)
Kemper Technology Growth Portfolio*............ 0.51% 0.44% 0.95%(2)
KVS Dreman Financial Services Portfolio........ 0.70% 0.29% 0.99%(2)
Kemper Small Cap Growth Portfolio.............. 0.65% 0.06% 0.71%
Kemper Small Cap Value Portfolio............... 0.75% 0.09% 0.84%(1)
KVS Dreman High Return Equity Portfolio........ 0.75% 0.11% 0.86%(2)
Kemper International Portfolio................. 0.75% 0.19% 0.94%
Kemper New Europe Portfolio.................... 0.00% 1.12% 1.12%(2)
Kemper Global Blue Chip Portfolio.............. 0.00% 1.56% 1.56%(2)
Kemper Growth Portfolio........................ 0.60% 0.06% 0.66%
Kemper Contrarian Value Portfolio.............. 0.75% 0.05% 0.80%(1)
Kemper Blue Chip Portfolio..................... 0.65% 0.06% 0.71%(1)
Kemper Value+Growth Portfolio.................. 0.75% 0.08% 0.83%(1)
KVS Index 500 Portfolio**...................... 0.16% 0.39% 0.55%(2)
Kemper Horizon 20+ Portfolio................... 0.60% 0.18% 0.78%(1)
Kemper Total Return Portfolio.................. 0.55% 0.06% 0.61%
Kemper Horizon 10+ Portfolio................... 0.60% 0.12% 0.72%(1)
Kemper High Yield Portfolio.................... 0.60% 0.07% 0.67%
Kemper Horizon 5 Portfolio..................... 0.60% 0.16% 0.76%(1)
Kemper Strategic Income Portfolio.............. 0.65% 0.28% 0.93%(3)
Kemper Investment Grade Bond Portfolio......... 0.60% 0.05% 0.65%(1)
Kemper Government Securities Portfolio......... 0.55% 0.08% 0.63%
Kemper Money Market Portfolio.................. 0.50% 0.04% 0.54%
KVS Focused Large Cap Growth Portfolio***...... 0.00% 1.15% 1.15%(2)
KVS Growth Opportunities Portfolio**........... 0.00% 1.15% 1.15%(2)
KVS Growth And Income Portfolio***............. 0.00% 1.15% 1.15%(2)
Scudder 21st Century Growth Portfolio.......... 0.00% 1.50% 1.50%(4)
Scudder International Portfolio................ 0.85% 0.18% 1.03%
Scudder Global Discovery Portfolio............. 0.60% 0.65% 1.25%(4)
Scudder Capital Growth Portfolio............... 0.46% 0.03% 0.49%
Scudder Growth and Income Portfolio............ 0.47% 0.08% 0.55%
Alger American Leveraged AllCap Portfolio...... 0.85% 0.08%(5) 0.93%
Alger American Balanced Portfolio.............. 0.75% 0.18% 0.93%
Dreyfus MidCap Stock Portfolio................. 0.75% 0.71% 1.46%(6)
Dreyfus Socially Responsible Growth Fund....... 0.75% 0.04% 0.79%
Warburg Pincus Emerging Markets Portfolio...... 0.00% 1.40% 1.40%(7)
Warburg Pincus Global Post-Venture Capital
Portfolio..................................... 1.07% 0.33% 1.40%(7)
</TABLE>
*These portfolios commenced operations on May 1, 1999, 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 annualized. Actual expenses may be greater or less than shown.
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***These portfolios commenced operations on October 29, 1999, therefore "other
expenses" are 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, 2000, to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the following described portfolios to the amounts set forth after
the portfolio names: KVS Dreman High Return Equity (formerly Kemper-Dreman High
Return Equity) (0.87%), Kemper Value+Growth (0.84%), Kemper Contrarian Value
(0.80%), Kemper Small Cap Value (0.84%), Kemper Horizon 5 (0.97%), Kemper
Horizon 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 at or lower than
these expense limits, after the benefit of any custodial credits, as reflected
in the table.
(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,
2000, to limit their respective fees and to reimburse other expenses to the
extent necessary to limit total operating expenses of the KVS Focused Large Cap
Growth, KVS Growth And Income, KVS Growth Opportunities, KVS Index 500 (formerly
Kemper Index 500), Kemper Aggressive Growth, Kemper Technology Growth, KVS
Dreman Financial Services (formerly Kemper-Dreman Financial Services), Kemper
New Europe (formerly Kemper International Growth and Income), and Kemper Global
Blue Chip Portfolios of KVS to the amounts set forth in the Total Portfolio
Expenses column of the table above. Without taking into effect these expense
caps, for the Kemper Aggressive Growth, Kemper Technology Growth, KVS Dreman
Financial Services, Kemper New Europe, Kemper Global Blue Chip, KVS Index 500,
KVS Growth Opportunities, KVS Growth And Income, and KVS Focused Large Cap
Growth Portfolios of KVS, management fees are estimated to be 0.75%, 0.75%,
0.75%, 1.00%, 1.00%, 0.45%, 0.95%, 0.95%, and 0.95%, respectively. Other
expenses are estimated to be 1.91%, 0.44%, 0.29%, 3.30%, 2.47%, 0.39%, 1.65%,
1.63%, and 6.54%, respectively; and total operating expenses would have been
2.66%, 1.19%, 1.04%, 4.30%, 3.47%, 0.84%, 2.60%, 2.58%, and 7.49%, respectively.
In addition, for the Kemper New Europe and Kemper Global Blue Chip Portfolios,
the investment manager has agreed to limit its management fees to 0.70% and
0.85%, respectively, of such portfolios for one year, commencing May 1, 2000.
(3)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,
2000, to limit their respective fees and to reimburse other expenses to the
extent necessary to limit total operating expenses of Kemper Strategic Income
Portfolio (formerly Kemper Global Income) to 1.05%. The Management Fee,
reflected in the above table, has been restated to reflect a fee reduction
effective May 1, 2000 and the Other Expenses reflect actual expenses for the
past fiscal year.
(4)The investment manager for the Scudder 21st Century Growth Portfolio and
Scudder Global Discovery Portfolio has agreed, for the period from May 1, 2000
through April 30, 2001, to maintain the expenses at 1.50% and 1.25%,
respectively, of the Portfolio's average daily net assets. Without taking into
effect these expense caps, the management fees would be 0.875% and 0.975%,
respectively, other expenses are estimated to be 1.02% and 0.65%, respectively,
and total operating expenses are estimated to be 1.90% and 1.63%, respectively.
(5)Included in "Other Expenses" of the Alger American Leveraged AllCap Portfolio
is 0.01% of interest expense.
(6)The Dreyfus Corporation, the Dreyfus MidCap Stock Portfolio's investment
advisor, has voluntarily agreed to waive receipt of its fees and/or assume the
expenses of the portfolio so that total expenses (excluding taxes, brokerage
commissions, extraordinary expenses, interest expenses and commitment fees on
borrowings) do not exceed 1.00%. Total portfolio expenses prior to waivers
and/or reimbursements by the investment advisor, total 1.46%, annualized, at
December 31, 1999.
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(7)The investment adviser of the Warburg Pincus Emerging Markets Portfolio and
Warburg Pincus Global Post-Venture Capital Portfolio has voluntarily agreed to
waive or reimburse a portion of the management fees and/or other expenses
resulting in a reduction of total expenses. Absent any waiver or reimbursement,
the Management Fee, Other Expenses and Total Portfolio Expenses would have been
1.25%, 1.88% and 3.13% for the Warburg Pincus Emerging Markets Portfolio and
1.25%, 0.33% and 1.58% for the Warburg Pincus Global Post-Venture Capital
Portfolio, respectively, for the year ended December 31, 1999.
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 and further assumes that the voluntary expense
limitations and the Underlying Portfolio expenses listed above remain the same
in each of the 1, 3, 5, and 10-year intervals. As required by rules of the
Securities and Exchange Commission ("SEC"), the Contract fee is reflected in the
examples by a method designed 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
0.03%, and the amount of the Contract fee is assumed to be $0.30 in the
examples. The Contract fee is only deducted when the Accumulated Value is less
than $75,000. Because the expenses of the Underlying Portfolios differ, separate
examples are used to illustrate the expenses incurred by an Owner on an
investment in the various Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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<PAGE>
(1) At the end of the applicable time period, you would have paid the following
expenses on a $1,000 investment, assuming a 5% annual return on assets, and no
Riders.
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth Portfolio......................... $16 $49 $ 84 $183
Kemper Technology Growth Portfolio......................... $16 $49 $ 84 $183
KVS Dreman Financial Services Portfolio.................... $16 $50 $ 86 $188
Kemper Small Cap Growth Portfolio.......................... $13 $41 $ 71 $157
Kemper Small Cap Value Portfolio........................... $15 $45 $ 78 $171
KVS Dreman High Return Equity Portfolio.................... $15 $46 $ 79 $174
Kemper International Portfolio............................. $16 $48 $ 83 $182
Kemper New Europe Portfolio................................ $17 $54 $ 93 $202
Kemper Global Blue Chip Portfolio.......................... $22 $67 $115 $248
Kemper Growth Portfolio.................................... $13 $40 $ 69 $151
Kemper Contrarian Value Portfolio.......................... $14 $44 $ 76 $167
Kemper Blue Chip Portfolio................................. $13 $41 $ 71 $157
Kemper Value+Growth Portfolio.............................. $14 $45 $ 78 $170
KVS Index 500 Portfolio.................................... $12 $36 $ 63 $139
Kemper Horizon 20+ Portfolio............................... $14 $43 $ 75 $165
Kemper Total Return Portfolio.............................. $12 $38 $ 66 $145
Kemper Horizon 10+ Portfolio............................... $13 $42 $ 72 $158
Kemper High Yield Portfolio................................ $13 $40 $ 69 $152
Kemper Horizon 5 Portfolio................................. $14 $43 $ 74 $162
Kemper Strategic Income Portfolio.......................... $15 $48 $ 83 $181
Kemper Investment Grade Bond Portfolio..................... $13 $39 $ 68 $150
Kemper Government Securities Portfolio..................... $12 $39 $ 67 $148
Kemper Money Market Portfolio.............................. $12 $36 $ 62 $137
KVS Focused Large Cap Growth Portfolio..................... $18 $55 $ 94 $205
KVS Growth Opportunities Portfolio......................... $18 $55 $ 94 $205
KVS Growth And Income Portfolio............................ $18 $55 $ 94 $205
Scudder 21st Century Growth Portfolio...................... $21 $65 $112 $242
Scudder International Portfolio............................ $16 $51 $ 88 $192
Scudder Global Discovery Portfolio......................... $19 $58 $100 $216
Scudder Capital Growth Portfolio........................... $11 $34 $ 60 $132
Scudder Growth and Income Portfolio........................ $12 $36 $ 63 $139
Alger American Leveraged AllCap Portfolio.................. $15 $48 $ 83 $181
Alger American Balanced Portfolio.......................... $15 $48 $ 83 $181
Dreyfus MidCap Stock Portfolio............................. $21 $64 $110 $238
Dreyfus Socially Responsible Growth Fund................... $14 $44 $ 76 $166
Warburg Pincus Emerging Markets Portfolio.................. $20 $62 $107 $232
Warburg Pincus Global Post-Venture Capital Portfolio....... $20 $62 $107 $232
</TABLE>
11
<PAGE>
(2) At the end of the applicable time period, you would have paid the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and
election at issue of the 5% Enhanced Death Benefit Rider With Annual Step-Up.
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth Portfolio......................... $18 $56 $ 97 $211
Kemper Technology Growth Portfolio......................... $18 $56 $ 97 $211
KVS Dreman Financial Services Portfolio.................... $19 $58 $ 99 $215
Kemper Small Cap Growth Portfolio.......................... $16 $49 $ 84 $185
Kemper Small Cap Value Portfolio........................... $17 $53 $ 91 $199
KVS Dreman High Return Equity Portfolio.................... $17 $54 $ 92 $201
Kemper International Portfolio............................. $18 $56 $ 96 $209
Kemper New Europe Portfolio................................ $20 $62 $106 $229
Kemper Global Blue Chip Portfolio.......................... $24 $75 $128 $274
Kemper Growth Portfolio.................................... $15 $47 $ 82 $179
Kemper Contrarian Value Portfolio.......................... $17 $52 $ 89 $194
Kemper Blue Chip Portfolio................................. $16 $49 $ 84 $185
Kemper Value+Growth Portfolio.............................. $17 $53 $ 91 $198
KVS Index 500 Portfolio.................................... $14 $44 $ 76 $167
Kemper Horizon 20+ Portfolio............................... $16 $51 $ 88 $192
Kemper Total Return Portfolio.............................. $15 $46 $ 79 $174
Kemper Horizon 10+ Portfolio............................... $16 $49 $ 85 $186
Kemper High Yield Portfolio................................ $15 $48 $ 82 $180
Kemper Horizon 5 Portfolio................................. $16 $50 $ 87 $190
Kemper Strategic Income Portfolio.......................... $18 $56 $ 96 $208
Kemper Investment Grade Bond Portfolio..................... $15 $47 $ 81 $178
Kemper Government Securities Portfolio..................... $15 $46 $ 80 $176
Kemper Money Market Portfolio.............................. $14 $44 $ 76 $166
KVS Focused Large Cap Growth Portfolio..................... $20 $62 $107 $232
KVS Growth Opportunities Portfolio......................... $20 $62 $107 $232
KVS Growth And Income Portfolio............................ $20 $62 $107 $232
Scudder 21st Century Growth Portfolio...................... $24 $73 $125 $268
Scudder International Portfolio............................ $19 $59 $101 $219
Scudder Global Discovery Portfolio......................... $21 $65 $112 $242
Scudder Capital Growth Portfolio........................... $14 $42 $ 73 $160
Scudder Growth and Income Portfolio........................ $14 $44 $ 76 $167
Alger American Leveraged AllCap Portfolio.................. $18 $56 $ 96 $208
Alger American Balanced Portfolio.......................... $18 $56 $ 96 $208
Dreyfus MidCap Stock Portfolio............................. $23 $72 $123 $264
Dreyfus Socially Responsible Growth Fund................... $17 $51 $ 89 $193
Warburg Pincus Emerging Markets Portfolio.................. $23 $70 $120 $257
Warburg Pincus Global Post-Venture Capital Portfolio....... $23 $70 $120 $257
</TABLE>
12
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE KEMPER GATEWAY ADVISOR 2 VARIABLE ANNUITY?
The Kemper Gateway Advisor 2 variable annuity contract ("Contract") is an
insurance contract designed to help you, the Owner, accumulate assets for your
retirement or other important financial goals on a tax-deferred basis. The
Contract may be purchased up to age 90 of the oldest Owner or, if the Owner is
not a natural person, the oldest Annuitant. 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;
- 26 KVS Portfolios, 5 Scudder VLIF Portfolios, 2 Alger Portfolios, 1
Dreyfus Investment Portfolios Portfolio, 1 Dreyfus Socially Responsible
Growth Fund Portfolio and 2 Warburg Pincus Trust Portfolios;
- a Fixed Account;
- Guarantee Period Accounts;
- Experienced professional investment advisers;
- tax deferral on earnings;
- guarantees that can protect your family;
- withdrawals during the accumulation and annuitization phases; and
- income that you can receive for life.
WHAT HAPPENS IN THE ACCUMULATION PHASE?
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase (described below). During the accumulation
phase, you may allocate your initial payment and any additional payments to the
combination of portfolios of securities ("Underlying Portfolios") under your
Contract, to the Guarantee Period Accounts, and to the Fixed Account
(collectively "the investment options"). 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 Underlying
Portfolios and any accumulations in the Guarantee Period Accounts and the Fixed
Account. You do not pay taxes on any earnings under the Contract until 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 UPON MY DEATH DURING THE ACCUMULATION PHASE?
If you or a Joint Owner dies before the Annuity Date, a standard death benefit
will be paid to the beneficiary. (No death benefit is payable at the death of
any Annuitant except when the Owner is not a natural person.) An optional
Enhanced Death Benefit Rider is also available at issue for a separate monthly
charge. See "F. Death Benefit" under DESCRIPTION OF THE CONTRACT -- 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 one of the numerous annuity payout options available under the
Contract. You choose:
- the annuity payout option;
- the date annuity benefit payments begin but no earlier than 1 year after
the Issue Date;
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<PAGE>
- whether you want variable annuity benefit payments based on the investment
performance of the Underlying Portfolios, fixed-amount annuity benefit
payments with payment amounts guaranteed by the Company, or a combination
of fixed-amount and variable annuity benefit payments.
You may also take withdrawals during the annuity payout phase. The type of
withdrawal and the number of withdrawals that may be made each calendar year
depend upon whether the Owner annuitizes under an annuity payout option with
payments based on the life of one or more Annuitants with no guaranteed payments
(a "Life" annuity payout option), under a life annuity payout option that in
part provides for a guaranteed number of payments (a "Life With Period Certain"
or "Life With Cash Back" annuity payout option), or an annuity payout option
based on a guaranteed number of payments (a "Period Certain" annuity payout
option). Under a Life annuity payout option, the Owner may make one Payment
Withdrawal each calendar year. Under a Life with Period Certain or Life with
Cash Back annuity payout option, the Owner may make one Payment Withdrawal and
one Present Value Withdrawal in each calendar year. Under a Period Certain
annuity payout option, the Owner may make multiple Present Value Withdrawals
each calendar year. For more information, see "F. Withdrawals After the Annuity
Date" under ANNUITIZATION -- THE PAYOUT PHASE. In addition, if you choose a
variable payout option, you may transfer among the available Sub-Accounts.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company. Each Contract has an Owner (or an Owner and a
Joint Owner), an Annuitant (or an Annuitant and a Joint Annuitant) and one or
more beneficiaries. As Owner, you may:
- make payments
- choose investment allocations
- choose annuity payout options
- receive annuity benefit payments (or designate someone else to receive
annuity benefit payments)
- select the Annuitant and beneficiary.
The Annuitant is the person whose life is used to determine the duration of
annuity benefit payments involving a life contingency. There must be at least
one Annuitant at all times. If an Annuitant dies and a replacement is not named,
the Owner will become the new Annuitant. The beneficiary is the person(s) or
entity entitled to the death benefit at the death of a sole Owner prior to the
Annuity Date. In the case of the death of a Joint Owner, the surviving Joint
Owner will receive the death benefit. Under certain circumstances, the
beneficiary 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?
During the Accumulation Phase, you may make additional payments. Total payments
under the Contract can exceed $5,000,000 only with the Company's prior approval.
The number and frequency of your payments are flexible, subject only to a
$10,000 minimum for your initial payment and a $100 minimum for any additional
payments. A minimum of $1,000 is always required to establish a Guarantee Period
Account.
WHAT ARE MY INVESTMENT CHOICES?
You may choose among the Sub-Accounts investing in the Underlying Portfolios,
the Guarantee Period Accounts, and the Fixed Account.
14
<PAGE>
<TABLE>
<S> <C>
KEMPER VARIABLE SERIES SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A)
Kemper Aggressive Growth Portfolio Scudder 21st Century Growth Portfolio
Kemper Technology Growth Portfolio Scudder International Portfolio
KVS Dreman Financial Services Portfolio Scudder Global Discovery Portfolio
Kemper Small Cap Growth Portfolio Scudder Capital Growth Portfolio
Kemper Small Cap Value Portfolio Scudder Growth and Income Portfolio
KVS Dreman High Return Equity Portfolio
Kemper International Portfolio THE ALGER AMERICAN FUND
Kemper New Europe Portfolio Alger American Leveraged AllCap Portfolio
Kemper Global Blue Chip Portfolio Alger American Balanced Portfolio
Kemper Growth Portfolio
Kemper Contrarian Value Portfolio DREYFUS INVESTMENT PORTFOLIOS
Kemper Blue Chip Portfolio Dreyfus MidCap Stock Portfolio
Kemper Value+Growth Portfolio
KVS Index 500 Portfolio THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
Kemper Horizon 20+ Portfolio FUND, INC.
Kemper Total Return Portfolio Dreyfus Socially Responsible Growth Fund
Kemper Horizon 10+ Portfolio
Kemper High Yield Portfolio WARBURG PINCUS TRUST
Kemper Horizon 5 Portfolio Warburg Pincus Emerging Markets Portfolio
Kemper Strategic Income Portfolio Warburg Pincus Global Post-Venture Capital
Kemper Investment Grade Bond Portfolio Portfolio
Kemper Government Securities Portfolio
Kemper Money Market Portfolio
KVS Focused Large Cap Growth Portfolio
KVS Growth Opportunities Portfolio
KVS Growth And Income Portfolio
</TABLE>
Each Underlying Portfolio operates pursuant to different investment objectives
and this range of investment options enables you to allocate your money among
the Underlying Portfolios to meet your particular investment needs. For a more
detailed description of the Underlying 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 Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company may offer up to 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 payout 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 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.
THE GUARANTEE PERIOD ACCOUNTS ARE NOT AVAILABLE IN ALL STATES AND ARE NOT
OFFERED AFTER ANNUITIZATION.
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
15
<PAGE>
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. The initial rate in effect on the date an amount is allocated to the
Fixed Account will be guaranteed for one year from that date. For more
information about the Fixed Account, see APPENDIX A -- MORE INFORMATION ABOUT
THE FIXED ACCOUNT.
WHO ARE THE INVESTMENT ADVISERS OF THE UNDERLYING PORTFOLIOS?
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-adviser for the KVS Dreman Financial
Services Portfolio and KVS 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 KVS Index 500 Portfolio. Eagle Asset
Management, Inc. ("EAM") is the sub-adviser for the KVS Focused Large Cap Growth
Portfolio and Janus Capital Corporation ("JCC") is the sub-adviser for the KVS
Growth Opportunities and KVS Growth And Income Portfolios pursuant to sub-
advisory agreements between Scudder Kemper and EAM and JCC. 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 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. Credit Suisse Asset Management, LLC ("CSAM") is the investment adviser for
the Warburg Pincus Emerging Markets and Warburg Pincus Global Post-Venture
Capital Portfolios. Abbott Capital Management, LLC ("Abbott") provides
sub-investment advisory services for the Warburg Pincus Global Post-Venture
Capital Portfolio.
CAN I MAKE TRANSFERS AMONG THE INVESTMENT OPTIONS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Underlying Portfolios, the Guarantee Period Accounts, and the
Fixed Account. On and after the Annuity Date, if you have elected a variable
option, you may transfer only among the Sub-Accounts. You will incur no current
taxes on transfers while your money remains in the Contract. See "D. Transfer
Privilege" under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE and "E.
Transfers of Annuity Units" under ANNUITIZATION -- THE PAYOUT PHASE.
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
does not currently charge but reserves the right to assess a processing charge
guaranteed never to exceed $25.
If you authorize automatic periodic transfers (under an Asset Allocation Model
Reallocation program, Automatic Transfers program (Dollar Cost Averaging) or
Automatic Account Rebalancing program), the first automatic transfer or
rebalancing under a request counts as one transfer for purposes of the 12
transfers guaranteed to be free of a transfer charge in each Contract year. Each
subsequent automatic transfer or rebalancing under that request is without
charge and does not reduce the remaining number of transfers which may be made
free of charge in that Contract year.
WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
Before the annuity payout phase begins, you may surrender your Contract or make
withdrawals at any time. A Market Value Adjustment will apply to withdrawals
from a Guarantee Period Account prior to the expiration of the Guarantee Period.
A 10% tax penalty may apply on all amounts deemed to be earnings if you are
under age 59 1/2.
16
<PAGE>
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
cancelled. There may be a longer period in certain jurisdictions; see the "Right
to Examine" provision on the cover of your Contract.
If you cancel the Contract, you will receive the Contract's Accumulated Value
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account, plus any fees or charges that may have been deducted. However,
if required in your state or if the Contract was issued as an Individual
Retirement Annuity (IRA), you will generally receive a refund of your gross
payment(s). In certain jurisdictions this refund may be the greater of (1) your
gross payment(s) or (2) the Accumulated Value adjusted for any Market Value
Adjustment, plus any fees or charges previously deducted. See "C. Right to
Cancel" under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE.
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- You may assign your ownership to someone else, except under certain
qualified plans.
- You may change the beneficiary, unless you have designated an irrevocable
beneficiary.
- You may change your allocation of payments.
- You may make transfers among the Sub-Accounts without any tax
consequences.
- You may cancel your Contract within ten days of delivery (or longer if
required by state law).
17
<PAGE>
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS
AND THE UNDERLYING INVESTMENT COMPANIES
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, 1999, Allmerica Financial had over $17 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, 1999, First Allmerica and its
subsidiaries had over $25 billion in combined assets and over $43 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"). 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 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.
Each Sub-Account of the Variable Account invests in a corresponding investment
portfolio of Kemper Variable Series, Scudder Variable Life Investment Fund, The
Alger American Fund, Dreyfus Investment Portfolios, The Dreyfus Socially
Responsible Growth Fund, Inc. or Warburg Pincus Trust. 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.
Each Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. Each 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.
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<PAGE>
THE UNDERLYING INVESTMENT COMPANIES
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.
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.
The investment adviser for the Alger American Leveraged AllCap Portfolio and
Alger American Balanced Portfolio is Fred Alger Management, Inc. Fred Alger
Management, Inc. is located at 1 World Trade Center, Suite 9333, New York, NY
10048.
DREYFUS INVESTMENT PORTFOLIOS. The Dreyfus Investment Portfolios is a
Massachusetts business trust that commenced operations May 1, 1998. The Fund
consists of several portfolios, each a separate series of the Fund, an open-end
management investment company, known as a mutual fund. Each portfolio is
diversified. Dreyfus is located at 144 Glenn Curtiss Boulevard, Uniondale, NY
11556.
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, and commenced operations
on October 7, 1993. It 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. Dreyfus is located at
144 Glenn Curtiss Boulevard, Uniondale, NY 11556.
WARBURG PINCUS TRUST. Warburg Pincus Trust is an open-end, management
investment company registered with the SEC. It was organized as a Massachusetts
business trust on March15, 1995. Credit Suisse Asset Management, LLC ("CSAM") is
the investment adviser of the Warburg Pincus Trust. Abbott Capital Management,
LLC ("Abbott") serves as sub-investment adviser for the Global Post-Venture
Capital Portfolio with respect to the Portfolio's investments in private-equity
portfolios.
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 INVESTMENT COMPANIES MAY BE FOUND
IN THEIR RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS. PLEASE READ
THEM CAREFULLY BEFORE INVESTING. Also, the Statements of Additional Information
("SAI") of the Underlying Portfolios are available upon request. There can be no
assurance that the investment objectives of the Underlying Portfolios can be
achieved or that the value of the Contract will equal or exceed the aggregate
amount of payments made under the Contract.
KEMPER VARIABLE SERIES:
KEMPER AGGRESSIVE GROWTH PORTFOLIO -- seeks capital appreciation through the use
of aggressive investment techniques.
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<PAGE>
KEMPER TECHNOLOGY GROWTH PORTFOLIO -- seeks growth of capital.
KVS 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.
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.
KVS 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 NEW EUROPE PORTFOLIO -- seeks long-term capital appreciation by investing
in a portfolio consisting primarily of equity securities of European companies.
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.
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.
KVS 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 KVS 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 SAI).
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.
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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 STRATEGIC INCOME PORTFOLIO -- seeks high current return by investing
primarily in bonds issued by U.S. and foreign corporations and governments.
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.
KVS GROWTH OPPORTUNITIES PORTFOLIO -- seeks long-term growth of capital in a
manner consistent with the preservation of capital.
KVS GROWTH AND INCOME PORTFOLIO -- seeks long-term capital growth and current
income.
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER 21ST CENTURY GROWTH PORTFOLIO -- pursues long-term growth of capital by
investing primarily in equity securities issued by emerging growth companies.
SCUDDER INTERNATIONAL PORTFOLIO -- seeks long term growth of capital primarily
through diversified holdings of marketable foreign equity investments.
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
through a broad and flexible investment program.
SCUDDER GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of capital,
current income and growth of income.
THE ALGER AMERICAN FUND:
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO -- seeks long-term capital
appreciation. Under normal circumstances, the Portfolio invests in the equity
securities of companies of any size that demonstrate promising growth potential.
ALGER AMERICAN BALANCED PORTFOLIO -- seeks current income and long-term capital
appreciation. The Portfolio focuses on stocks of companies with growth potential
and fixed-income securities, with emphasis on income-producing securities which
appear to have some potential for capital appreciation.
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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 provide capital growth,
with current income as a secondary goal. To pursue these goals, the fund invests
primarily in the common stock of companies that, in the opinion of the fund's
management, meet traditional investment standards and conduct their business in
a manner that contributes to the enhancement of the quality of life in America.
WARBURG PINCUS TRUST:
WARBURG PINCUS EMERGING MARKETS PORTFOLIO -- seeks long-term growth of capital.
To pursue this goal, it invests in equity securities of companies located in or
conducting a majority of their business in emerging markets.
WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL PORTFOLIO -- seeks long-term growth
of capital. To pursue this goal, it invests primarily in equity securities of
U.S. and foreign companies considered to be in their post-venture capital stage
of development.
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.
If there is a material change in the investment policy of a Sub-Account or the
Underlying Portfolio in which it invests, the Owner will be notified of the
change. If the Owner has values allocated to that Sub-Account, the Company will
transfer it without charge on written request by the Owner to another
Sub-Account or to the Fixed Account. The Company must receive such written
request within 60 days of the later of (1) the effective date of the change in
the investment policy, or (2) the receipt of the notice of the Owner's right to
transfer.
PERFORMANCE INFORMATION
This Contract was first offered to the public in 2000. However, in order to help
people understand how investment performance can affect money invested in the
Sub-Accounts, the Company 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 the Tables reflect the applicable
deductions for the Contract fee, Sub-Account charges and Underlying Portfolio
charges under this Contract and also assume that the Contract is surrendered at
the end of the applicable period. The Tables do not include optional Rider
Charges. Both the total return and yield figures are based on historical
earnings and are not intended to indicate future performance. All performance
tables referenced in this section may be found in the SAI.
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 Variable Account charges, and expressed as a
percentage. The "average annual total return" represents the average annual
percentage change in the value of an investment in the Sub-Account over a given
period of time. It 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
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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 the Tables 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 0.55%, the
effect of the $35 annual Contract fee ($30 Contract fee for First Allmerica),
and the Underlying Portfolio charges which would be assessed if the investment
were completely withdrawn at the end of the specified period. The calculation is
not adjusted to reflect the deduction of any optional Rider charges.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
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; or
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, 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
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.
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DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE
A. PAYMENTS
The latest Issue Date is age 90 of the oldest Owner or, if the Owner is not a
natural person, the oldest Annuitant. The Company will issue a Contract when its
underwriting requirements are met. These requirements include receipt of the
initial payment and allocation instructions by the Company at its Principal
Office and may include the proper completion of an application; however, where
permitted by law, the Company may issue a Contract without completion of an
application. 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 applicant authorizes the Company to retain it
pending completion of all issue requirements.
Payments may be made to the Contract at any time prior to the Annuity Date, or
prior to the death of an Owner, subject to certain minimums:
- Currently the initial payment must be at least $10,000.
- 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.
Payments are to be made payable to the Company. The Company may reduce a payment
by any applicable premium tax before applying it to the Contract. The initial
net payment is credited to the Contract and allocated among the requested
investment options as of the date that all issue requirements are properly met.
The allocation instructions for the initial net payment will serve as the
allocation instructions for all future payments. You can change the allocation
instructions for future payments by notifying the Company.
You also have the option of specifying how a specific payment should be
allocated. This will not change the allocation instructions for any subsequent
payment.
For a discussion of future payments to an Automatic Transfer Program (Dollar
Cost Averaging), please see "Automatic Transfers (Dollar Cost Averaging)" below.
In order for the Owner to be able to initiate transactions over the telephone, a
properly completed authorization must be on file before telephone requests will
be honored. The policy of the Company and its agents and affiliates is that we
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. Such procedures may include, among other things, requiring some
form of personal identification prior to acting upon instructions received by
telephone. All telephone instructions are tape-recorded.
B. COMPUTATION OF VALUES
The Owner may allocate payments among the Sub-Accounts, Guarantee Period
Accounts, and the Fixed 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.
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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 together the values of each Sub-Account, and
(3) adding the amount of the accumulations in the Fixed Account and
Guarantee Period Accounts, if any.
THE ACCUMULATION UNIT. 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 payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date. 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,
and will reflect the investment performance, expenses and charges of its
Underlying Portfolios. The value of an Accumulation Unit was arbitrarily set at
$1.00 on the first Valuation Date for each Sub-Account.
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 (which may be positive or
negative) 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 0.40% 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.
C. RIGHT TO CANCEL
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by law) and receive a refund. In order to
cancel the Contract, the Owner must mail or deliver it to the Company's
Principal Office at 440 Lincoln Street, Worcester, MA 01653, or to an authorized
representative. Mailing or delivery must occur within ten days after receipt of
the Contract for cancellation to be effective.
In most states, the Company will pay the Owner the Contract's Accumulated Value
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account, plus any amounts deducted for taxes, charges or fees. However,
if the Contract was purchased as an IRA or issued in a state that requires a
full refund of the initial payment(s), the Company will provide a refund equal
to your gross payment(s). In some states, the refund may equal the greater of
(a) your gross payment(s) or (b) the Accumulated Value adjusted for any Market
Value Adjustment, plus any amounts deducted for taxes, charges or fees. At the
time the
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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.
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.
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
Prior to the Annuity Date, the Owner may transfer amounts among investment
options at any time upon written or telephone request to the Company. As
discussed in "A. Payments", a properly completed authorization form must be on
file before telephone requests will be honored. Transfer values will be based on
the Accumulated Value next computed after receipt of the transfer request.
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 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.
Currently, the Company does not charge for transfers. The first 12 transfers in
a Contract year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Contract year, the Company reserves the right to assess
a charge, guaranteed never to exceed $25, to reimburse it for the expense of
processing these additional transfers. The first automatic transfer or
rebalancing under an Asset Allocation Model Reallocation program, Automatic
Transfers (Dollar Cost Averaging) program, or Automatic Account Rebalancing
program counts as one transfer for purposes of the 12 transfers guaranteed to be
free of a transfer charge in each Contract year. Each subsequent automatic
transfer or rebalancing under that request is without charge and does not reduce
the remaining number of transfers which may be made free of charge in that
Contract year.
The Contracts are not designed for use by individuals, professional market
timing organizations, or other entities that do "market timing," programmed
transfers, frequent transfers, or transfers that are large in relation to the
total assets of an Underlying Portfolio. These and similar activities may be
disruptive to the Underlying Portfolios, and may adversely affect an Underlying
Portfolio's ability to invest effectively in accordance with its investment
objectives and policies. If it appears that there is a pattern of transfers that
coincides with a market timing strategy and/or that is disruptive to the
Underlying Portfolios, the Company reserves the right to refuse transfers or to
take other action to prevent or limit the use of such activities.
ASSET ALLOCATION MODEL REALLOCATIONS. If an Owner elects to follow an asset
allocation strategy, the Owner may preauthorize transfers in accordance with the
chosen strategy. The Company may provide administrative or other support
services to independent third parties that provide recommendations as to such
allocation strategies. However, the Company does not engage any third parties to
offer investment allocation services of any type under this Contract, does not
endorse or review any investment allocation recommendations made by such third
parties and is not responsible for the investment allocations and transfers
transacted on the Owner's behalf. The Company does not charge for providing
additional asset allocation support services. Additional information concerning
asset allocation programs for which the Company is currently providing support
services may be obtained from a registered representative or the Company.
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AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING). You may elect automatic transfers
of a predetermined dollar amount on a periodic basis from either the Fixed
Account, the Sub-Account investing in the Kemper Money Market Portfolio or the
Sub-Account investing in the Kemper Government Securities Portfolio (the "source
accounts") to one or more of the available Sub-Accounts. You may elect these
automatic transfers to one or more Sub-Accounts, subject to the following:
- the predetermined dollar amount may not be less than $100;
- the periodic basis may be monthly, quarterly, semi-annually or annually;
- automatic transfers may not be made into the selected source account,
Fixed Account, or the Guarantee Period Accounts; and
- if an automatic transfer would reduce the balance in the source account(s)
to less than $100, the entire balance will be transferred proportionately
to the chosen Sub-Accounts.
Automatic transfers from a particular source account will continue until the
earlier of:
- 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 a source account before its balance has
fallen to zero, those additional amounts will also be automatically transferred.
The original automatic transfer allocations will apply to all amounts in that
source accounts unless you provide new allocation instructions. New allocation
instructions will apply to the entire balance in the source account. If
additional amounts are allocated to a source account after its balance has
fallen to zero, automatic transfers will not begin again unless you specifically
notify the Company to do so.
To the extent permitted by law, the Company reserves the right, from time to
time, to credit an enhanced interest rate to an initial and/or subsequent
payment made to the Fixed Account, which is then used as the source account from
which to process automatic transfers. For more information see "Enhanced
Automatic Transfer (Dollar Cost Averaging) Program" in the SAI.
AUTOMATIC ACCOUNT REBALANCING. The Owner may request automatic rebalancing of
Sub-Account allocations on a monthly, quarterly, semi-annual or annual basis in
accordance with his/her specified percentage allocations. As frequently as
elected by the Owner, the Company will review the percentage allocations in the
Underlying 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 (1) the Owner's request to
terminate or change the option is received by the Company or (2) the end date
designated by the Owner when the option was elected. If a subsequent payment is
allocated in a manner different from the percentage allocation mix in effect on
the date the payment is received, on the next scheduled rebalancing date the
payment will be reallocated in accordance with the existing mix.
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. The Company reserves the right to
limit the number of Sub-Accounts that may be utilized for automatic transfers
and rebalancing, and to discontinue either option upon advance written notice.
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E. SURRENDER AND WITHDRAWALS
Before the Annuity Date, an Owner may surrender the Contract for its Surrender
Value or withdraw a portion of its Accumulated Value. In the case of surrender,
the Owner must send 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.
In the case of a withdrawal, the Owner must submit to the Principal Office a
signed, written request indicating the desired dollar amount and the investment
options from which such amount is to be withdrawn. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn. Each withdrawal must be a minimum of $100 and the
Accumulated Value of the Contract may not be reduced to less than $1,000.
A Contract fee may apply when a withdrawal is made or a Contract is surrendered.
See CHARGES AND DEDUCTIONS. In addition, amounts withdrawn from a Guarantee
Period Account prior to the end of the applicable Guarantee Period will be
subject to a Market Value Adjustment, as described under GUARANTEE PERIOD
ACCOUNTS.
Any distribution is normally payable within seven days following the Company's
receipt of the surrender or withdrawal request. 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
Company reserves the right to defer surrenders and withdrawals of amounts in
each Sub-Account in any period during which:
- 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;
- the SEC has by order permitted such suspension; or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a separate account is not
reasonably practicable.
For important tax consequences, which may result from surrender or withdrawals,
see FEDERAL TAX CONSIDERATIONS.
For information about Withdrawals after the Annuity Date, see "F. Withdrawals
After the Annuity Date" under ANNUITIZATION --THE PAYOUT PHASE.
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 periodic basis (monthly, bi-monthly, quarterly, semi-annually
or annually). Systematic withdrawals from Guarantee Period Accounts are not
available. The Owner may request:
- the withdrawal of 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 withdrawal of 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 latest of 15 days after the Issue
Date, the date the written request is received at the Principal Office, or on a
date specified by the Owner.
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The minimum amount of each automatic withdrawal is $100 and the Accumulated
Value of the Contract may not be reduced to less than $1,000. 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. (For Qualified Contracts and Contracts issued
under Section 457 Deferred Compensation Plans only.) Prior to the Annuity Date,
an Owner 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. Where the
Owner is a trust or other nonnatural person, the Owner may elect the LED option
based on the Annuitant's life expectancy.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge, based on the
Owner's life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) The numerator of the fraction is 1 (one). The denominator of the
fraction will be either:
- the remaining life expectancy of the Owner (or Owner and beneficiary), as
determined annually by the Company; or
- the prior year's life expectancy, minus one.
The resulting fraction, expressed as a percentage, is then applied to the
Accumulated Value at the beginning of the year to determine the amount to be
distributed during the year. The Owner may choose to have the applicable life
expectancy redetermined each year or use the prior year's life expectancy, minus
one. Under the Company's LED option, the amount withdrawn from the Contract
changes each year.
The Owner may elect periodic LED distributions on a monthly, bi-monthly,
quarterly, semi-annual, or annual basis. The Owner may terminate the LED option
at any time. The LED option will terminate automatically on the latest possible
Annuity Date permitted under the Contract, at which time an annuity payout
option must be selected.
The LED option may not produce annual distributions that meet the definition of
"substantially equal periodic payments" as defined under Code Section 72(t). 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 "C. Taxation of the
Contract in General" under FEDERAL TAX CONSIDERATIONS.
F. DEATH BENEFIT
A death benefit is payable if the Owner or the first of Joint Owners dies prior
to the Annuity Date. If the Owner is a natural person, no death benefit is
payable at the death of any Annuitant. If the Owner is not a natural person, a
death benefit will be paid upon the death of any Annuitant. A spousal
beneficiary may elect to continue the Contract rather than receive the death
benefit as provided under "G. The Spouse of the Owner as Beneficiary."
STANDARD DEATH BENEFIT. Unless an enhanced death benefit is elected at issue,
the standard death benefit will be paid. The standard death benefit is equal to
the greater of (a) the Contract's Accumulated Value on the Valuation Date that
the Company receives proof of death, increased by any positive Market Value
Adjustment or (b) gross payments prior to the date of death, proportionately
reduced to reflect withdrawals.
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For each withdrawal under (b) the proportionate reduction is calculated by
multiplying the standard death benefit immediately prior to the withdrawal by
the following fraction:
Amount of the withdrawal
------------------------------------------------
Accumulated Value immediately prior to the withdrawal
OPTIONAL ENHANCED DEATH BENEFIT RIDER. When applying for the Contract, an Owner
may elect the optional 5% Enhanced Death Benefit With Annual Step-Up Rider. A
separate charge for this Rider is made against the Contract's Accumulated Value
on the last day of each Contract month for the coverage provided during that
month and, if applicable, on the date the Rider is terminated. The charge is
made through a pro-rata reduction (based on relative values) of Accumulation
Units in the Sub-Accounts and dollar amounts in the Fixed and Guarantee Period
Accounts. For specific charges and more detail, see "C. Optional Rider Charge"
under CHARGES AND DEDUCTIONS.
The 5% Enhanced Death Benefit With Annual Step-Up Rider provides a death benefit
guarantee if death of an Owner (or an Annuitant if the Owner is not a natural
person) occurs before the Annuity Date. The calculation of the death benefit
depends upon whether death occurs before or after the 90th birthday.
I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is not
a natural person) dies before the Annuity Date and before his/her 90th birthday,
the death benefit is equal to the GREATEST of:
(a) the Accumulated Value on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment;
(b) gross payments, accumulated daily at an effective annual yield of 5%
from the date each payment is applied until the date of death,
proportionately reduced to reflect withdrawals (in New York, the 5% is
not available; therefore (b) equals gross payments proportionately
reduced to reflect withdrawals); or
(c) the highest Accumulated Value on any Contract anniversary date prior to
the date of death, as determined after being increased for any positive
Market Value Adjustment and subsequent payments and proportionately
reduced for subsequent withdrawals.
II. Death ON OR AFTER 90th Birthday. If an Owner (or an Annuitant if the Owner
is not a natural person) dies before the Annuity Date but on or after his/her
90th birthday, the death benefit is equal to the GREATER of:
(a) the Accumulated Value on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under Section I, that would have been
payable on the Contract anniversary prior to the deceased's 90th
birthday, increased for subsequent payments and proportionately reduced
for subsequent withdrawals.
Proportionate reductions are calculated in the same manner as described above
under "Standard Death Benefit."
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum upon receipt of due proof
of death at the Principal Office, unless the Owner has elected to apply the
proceeds to a life annuity not extending beyond the beneficiary's life
expectancy. 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 distributions over the life of the beneficiary or for a period
certain not extending beyond the beneficiary's life expectancy, with
annuity benefit payments beginning within one year from the date of
death.
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If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Kemper Money Market
Sub-Account. The excess, if any, of the death benefit over the Accumulated Value
also will be transferred to the Kemper Money Market Sub-Account. 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.
G. THE SPOUSE OF THE OWNER AS BENEFICIARY
If the sole beneficiary is the deceased Owner's spouse, he or she may, by
written request, continue the Contract in lieu of receiving payment of the death
benefit. 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
Kemper Money Market Sub-Account; and
(2) the excess, if any, of the death benefit over the Contract's Accumulated
Value also will be added to the Kemper Money Market Sub-Account.
The new Owner may also make additional payments. All other rights and benefits
provided in the Contract will continue, except that any subsequent spouse of the
new Owner, if named as beneficiary, will not be entitled to continue the
Contract when the new Owner dies.
H. ASSIGNMENT
The Contract, other than one 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.
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ANNUITIZATION -- THE PAYOUT PHASE
Subject to certain restrictions discussed below, at annuitization the Owner has
the right:
- to select the annuity payout option under which annuity benefit payments
are to be made;
- to determine whether those payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. If a variable
annuity payout option is selected, the Owner must choose an Annuity
Benefit Payment Change Frequency ("Change Frequency") and the date the
first Change Frequency will occur; and
- to select one of the available Assumed Investment Returns ("AIR") for a
variable option (see "D. Variable Annuity Benefit Payments" below for
details).
A. ELECTING THE ANNUITY DATE
Generally, annuity benefit payments under the Contract will begin on the Annuity
Date. The Annuity Date:
- may not be earlier than the first Contract Anniversary; and
- must occur on the first day of any month before the Owner's 99th birthday.
If the Owner does not select an Annuity Date, the Annuity Date will be the later
of (a) the Owner's age 85 or (b) one year after the Issue Date.
If there are Joint Owners, the age of the younger will determine the latest
possible Annuity Date. The Owner may elect to change the Annuity Date by sending
a written request to the Principal Office at least one month before the earlier
of the new Annuity Date or the currently scheduled date.
If the Annuity Date occurs when the Owner is at an advanced age, it is possible
that the Contract will not be considered an annuity for federal tax purposes. In
addition, the Internal Revenue Code ("the Code") and/or the terms of qualified
plans may impose limitations on the age at which annuity benefit payments may
commence and the type of annuity payout option that may be elected. The Owner
should carefully review the Annuity Date and the annuity payout options with
his/her tax adviser. See FEDERAL TAX CONSIDERATIONS for further information.
B. CHOOSING THE ANNUITY PAYOUT OPTION
Regardless of how payments were allocated during the accumulation phase, the
Owner may choose a variable annuity payout option, a fixed annuity payout option
or a combination fixed and variable annuity payout option. Currently, all of the
variable annuity payout options described below are available and may be funded
through all of the variable Sub-Accounts. In addition, each of the variable
annuity payout options is also available on a fixed basis. The Company may offer
other annuity payout options.
The Owner may change the annuity payout option up to one month before the
Annuity Date. If the Owner fails to choose an annuity payout option, monthly
benefit payments will be made under a variable Life with Cash Back annuity
payout option.
The annuity payout option selected must result in an initial payment of at least
$100 (a lower amount may be required in certain jurisdictions.) 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 may be made.
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FIXED ANNUITY PAYOUT OPTIONS. If the Owner selects a fixed annuity payout
option, each monthly annuity benefit payment will be equal to the first (unless
a withdrawal is made or as otherwise described under certain reduced survivor
annuity benefits.) Any portion of the Contract's Accumulated Value converted to
a fixed annuity will be held in the Company's General Account. The Contract
provides guaranteed fixed annuity rates that determine the dollar amount of the
first payment under each form of fixed annuity for each $1,000 of applied value.
These rates are based on the Annuity 2000 Mortality Table and a 3% AIR. The
Company may offer annuity rates more favorable than those contained in the
Contract. Any such rates will be applied uniformly to all Owners of the same
class. For more specific information about fixed annuity payout options, see the
Contract.
VARIABLE ANNUITY PAYOUT OPTIONS. If the Owner selects a variable annuity payout
option, he/she will receive monthly payments equal to the value of the fixed
number of Annuity Units in the chosen Sub-Account(s). The first variable annuity
benefit payment will be based on the current annuity option rates made available
by the Company at the time the variable annuity payout option is selected.
Annuity option rates determine the dollar amount of the first payment for each
$1,000 of applied value. The annuity option rates are based on the Annuity 2000
Mortality Table and a 3% AIR.
Since the value of an Annuity Unit in a Sub-Account reflects the investment
performance of the Sub-Account, the amount of each monthly annuity benefit
payment will usually vary. However, under this Contract, if the Owner elects a
variable payout option, he or she must also select a monthly, quarterly,
semi-annual or annual Change Frequency. The Change Frequency is the frequency
that changes due to the Sub-Account's investment performance will be reflected
in the dollar value of a variable annuity benefit payment. As such, the Change
Frequency chosen will determine how frequently monthly variable annuity payments
will vary. For example, if a monthly Change Frequency is in effect, payments may
vary on a monthly basis. If a quarterly Change Frequency is selected, the amount
of each monthly payment may change every three months and will be level within
each three month cycle.
At the time the Change Frequency is elected, the Owner must also select the date
the first change is to occur. This date may not be later than the length of the
Change Frequency elected. For example, if a semi-annual Change Frequency is
elected, the date of the first change may not be later than six months after the
Annuity Date. If a quarterly Change Frequency is elected, the date of the first
change may not be later than three months after the Annuity Date.
C. DESCRIPTION OF ANNUITY PAYOUT OPTIONS
The Company currently provides the following annuity payout options:
LIFE ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Payments cease with the last annuity benefit payment due prior to the
Annuitant's death.
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's
and Joint Annuitant's joint lifetimes. Upon the first death, payments will
continue for the remaining lifetime of the survivor at a previously
elected level of 100%, two-thirds or one-half of the total number of
Annuity Units.
LIFE WITH PERIOD CERTAIN ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments guaranteed for a specified number
of years and continuing thereafter during the Annuitant's lifetime. If the
Annuitant dies before all guaranteed payments have been made, the
remaining payments continue to the Owner or the Beneficiary (whichever is
applicable).
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- JOINT AND SURVIVOR ANNUITIES -- Monthly payments guaranteed for a
specified number of years and continuing during the Annuitant's and Joint
Annuitant's joint lifetimes. Upon the first death, payments continue for
the survivor's remaining lifetime at the previously elected level of 100%,
two-thirds or one-half of the Annuity Units. If the surviving Annuitant
dies before all guaranteed payments have been made, the remaining payments
continue to the Owner or the Beneficiary (whichever is applicable).
LIFE WITH CASH BACK ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Thereafter, any excess of the original applied Annuity Value, over the
total amount of annuity benefit payments made and withdrawals taken, will
be paid to the Owner or the Beneficiary (whichever is applicable).
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's
and Joint Annuitant's joint lifetimes. At the first death, payments
continue for the survivor's remaining lifetime at the previously elected
level of 100%, two-thirds or one-half of the Annuity Units. Thereafter,
any excess of the original applied Annuity Value, over the total amount of
annuity benefit payments made and withdrawals taken, will be paid to the
Owner or the Beneficiary (whichever is applicable).
PERIOD CERTAIN ANNUITY PAYOUT OPTION
Monthly annuity benefit payments for a chosen number of years ranging from five
to thirty or any other period currently offered by the Company are paid. If the
Annuitant dies before the end of the period, remaining payments will continue.
The period certain option does not involve a life contingency. In the
computation of the payments under this option, the charge for annuity rate
guarantees, which includes a factor for mortality risks, is made.
D. VARIABLE ANNUITY BENEFIT PAYMENTS
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
payout option. The value of an Annuity Unit in each Sub-Account on its inception
date was set at $1.00. The value of an Annuity Unit of a Sub-Account on any
Valuation Date thereafter is equal to the value of the Annuity Unit on the
immediately preceding Valuation Date multiplied by the product of:
(a) a discount factor equivalent to the AIR; and
(b) the Net Investment Factor of the Sub-Account funding the annuity benefit
payments for the applicable Valuation Period.
Annuity benefit payments will increase from one payment date to the next if the
annualized net rate of return during that period is greater than the AIR and
will decrease if the annualized net rate of return is less than the AIR. Where
permitted by law, the Owner may select an AIR of 3%, 5% or 7%. A higher AIR will
result in a higher initial payment. However, subsequent payments will increase
more slowly during periods when actual investment performance exceeds the AIR
and will decrease more rapidly during periods when investment performance is
less than the AIR.
DETERMINATION OF THE FIRST ANNUITY BENEFIT PAYMENT. The amount of the first
periodic variable annuity benefit payment depends on the:
- annuity payout option chosen;
- length of the annuity payout option elected;
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- age of the Annuitant;
- gender of the Annuitant (if applicable, see "H. NORRIS Decision");
- value of the amount applied under the annuity payout option;
- applicable annuity option rates based on the Annuity 2000 Mortality Table;
and
- AIR selected.
The dollar amount of the first periodic annuity benefit payment 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, (or the amount of
the death benefit, if applicable) divided by $1,000, by
(2) the applicable amount of the first monthly payment per $1,000 of value.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is then 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. The number of Annuity Units remains fixed
under all annuity payout options (except for the survivor annuity benefit
payment under the joint and two-thirds or joint and one-half option) unless the
Owner transfers among Sub-Accounts, makes a withdrawal, or units are split.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. For each
subsequent payment, the dollar amount of the variable annuity benefit payment is
determined by multiplying this fixed number of Annuity Units by the value of an
Annuity Unit on the applicable Valuation Date. The dollar amount of each
periodic variable annuity benefit payment after the first will vary with
subsequent variations in the value of the Annuity Unit of the selected
Sub-Account(s).
For an illustration of the calculation of a variable annuity benefit payment
using a hypothetical example, see "Annuity Benefit Payments" in the SAI.
PAYMENT OF ANNUITY BENEFIT PAYMENTS. The Owner will receive the annuity benefit
payments unless he/ she requests in writing that payments be made to another
person, persons, or entity. 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. Any remaining annuity benefit payments will
continue to the beneficiary in accordance with the terms of the annuity benefit
payment option selected. If there are Joint Owners on or after the Annuity Date,
upon the first Owner's 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.
If an Annuitant dies on or after the Annuity Date but before all guaranteed
annuity benefit payments have been made, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated. Unless otherwise
indicated by the Owner, the present value of any remaining guaranteed annuity
benefit payments may be paid in a single sum to the Owner. For discussion of
present value calculation, see "Calculation of Present Value" below.
E. TRANSFERS OF ANNUITY UNITS
After the Annuity Date and prior to the death of the Annuitant, the Owner may
transfer among the available Sub-Accounts upon written or telephone request to
the Company. As discussed in "A. Payments," a properly completed authorization
form must be on file before telephone requests will be honored. A designated
number of Annuity Units equal to the dollar amount of the transfer requested
will be exchanged for an
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equivalent dollar amount of Annuity Units of another Sub-Account. Transfer
values will be based on the Annuity Value next computed after receipt of the
transfer request.
Currently, the Company does not charge for transfers. The first 12 transfers in
a Contract year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Contract year, the Company reserves the right to assess
a charge, guaranteed never to exceed $25, to reimburse it for the expense of
processing transfers.
Automatic transfers (Automatic Account Rebalancing) are available during the
annuitization phase subject to the same rules described in "D. Transfer
Privilege" except that the Fixed Account is not available as a source account.
The Contracts are not designed for use by individuals, professional market
timing organizations, or other entities that do "market timing," programmed
transfers, frequent transfers, or transfers that are large in relation to the
total assets of an Underlying Portfolio. These and similar activities may be
disruptive to the Underlying Portfolios, and may adversely affect an Underlying
Portfolio's ability to invest effectively in accordance with its investment
objectives and policies. If it appears that there is a pattern of transfers that
coincides with a market timing strategy and/or that is disruptive to the
Underlying Portfolios, the Company reserves the right to refuse transfers or to
take other action to prevent or limit the use of such activities.
F. WITHDRAWALS AFTER THE ANNUITY DATE
WITHDRAWALS AFTER THE ANNUITY DATE FROM QUALIFIED AND NON-QUALIFIED CONTRACTS
MAY HAVE ADVERSE TAX CONSEQUENCES. BEFORE MAKING A WITHDRAWAL, PLEASE CONSULT
YOUR TAX ADVISOR AND SEE "C. TAXATION OF THE CONTRACT IN GENERAL -- WITHDRAWALS
AFTER ANNUITIZATION" UNDER FEDERAL TAX CONSIDERATIONS.
After the Annuity Date and prior to the death of the Annuitant, the Owner may
take withdrawals from the Contract. The Owner must submit to the Principal
Office a signed, written request indicating the desired dollar amount of the
withdrawal. The minimum amount of a withdrawal is $1,000. If the amount
requested is greater than the maximum amount that may be withdrawn at that time,
the Company will allow the withdrawal only up to the maximum amount.
The type of withdrawal and the number of withdrawals that may be made each
calendar year depend upon whether the Owner annuitizes under a life annuity
payout option with payments based on the life of one or more Annuitants with no
guaranteed payments (a "Life" annuity payout option), under a life annuity
payout option that in part provides for a guaranteed number of payments (a "Life
With Period Certain" or "Life With Cash Back" annuity payout option), or an
annuity payout option based on a guaranteed number of payments (a "Period
Certain" annuity payout option).
WITHDRAWALS UNDER LIFE ANNUITY PAYOUT OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity benefit payment multiplied
by ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity benefit payments.
WITHDRAWALS UNDER LIFE WITH PERIOD CERTAIN OR LIFE WITH CASH BACK ANNUITY PAYOUT
OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity benefit payment multiplied
by ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity benefit payments.
The Owner may make one Present Value Withdrawal in each calendar year, if there
are remaining GUARANTEED annuity benefit payments. The amount of each Present
Value Withdrawal represents a percentage of the
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present value of the remaining guaranteed annuity benefit payments. Each year a
Present Value Withdrawal is taken, the Company records the percentage of the
present value of the then remaining guaranteed annuity benefit payments that was
withdrawn. The total percentage withdrawn over the life of the Contract cannot
exceed 75%. This means that each Present Value Withdrawal is limited by the
REMAINING AVAILABLE PERCENTAGE. (For example, assume that in year three the
Owner withdraws 15% of the then current present value of the remaining
guaranteed annuity benefit payments. In year seven, the Owner withdraws 20% of
the then present value of the remaining guaranteed number of annuity benefit
payments. Through year seven the total percentage withdrawn is 35%. After year
seven, the Owner may make Present Value Withdrawal(s) of up to 40% (75% - 35%)
of the present value of any remaining guaranteed annuity benefit payments).
Under a Life with Period Certain annuity payout option or Life with Cash Back
annuity payout option, if the Annuitant is still living after the guaranteed
annuity benefit payments have been made, the number of Annuity Units or dollar
amount applied to future annuity benefit payments will be restored as if no
Present Value Withdrawal(s) had taken place. See "Calculation of Proportionate
Reduction -- Present Value Withdrawals," below.
WITHDRAWALS UNDER PERIOD CERTAIN ANNUITY PAYOUT OPTIONS
The Owner may make multiple Present Value Withdrawals in each calendar year, up
to 100% of the present value of the guaranteed annuity benefit payments.
Withdrawal of 100% of the present value of the guaranteed annuity benefit
payments will result in termination of the Contract.
The amount of each Payment Withdrawal or Present Value Withdrawal represents a
portion of the present value of the remaining annuity benefit payments or
remaining guaranteed annuity benefit payments, respectively, and proportionately
reduces the number of Annuity Units (under a variable annuity payout option) or
dollar amount (under a fixed annuity payout option) applied to future annuity
benefit payments. Because each variable annuity benefit payment is determined by
multiplying the number of Annuity Units by the value of an Annuity Unit, the
reduction in the number of Annuity Units will result in lower future variable
annuity benefit payments. See "Calculation of Proportionate Reduction," below.
CALCULATION OF PROPORTIONATE REDUCTION. Each Payment Withdrawal proportionately
reduces the number of Annuity Units applied to each future variable annuity
benefit payment or the dollar amount applied to each future fixed annuity
benefit payment. Each Present Value Withdrawal proportionately reduces the
number of Annuity Units applied to each future GUARANTEED variable annuity
benefit payment or the dollar amount applied to each future GUARANTEED fixed
annuity benefit payment. Because each variable annuity benefit payment is
determined by multiplying the number of Annuity Units by the value of an Annuity
Unit, the reduction in the number of Annuity Units will result in lower future
variable annuity benefit payments.
- PAYMENT WITHDRAWALS. Payment Withdrawals are available under Life, Life with
Period Certain, or Life with Cash Back annuity payout options. The Owner may
make one Payment Withdrawal in each calendar year.
Under a variable annuity payout option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each future
variable annuity benefit payment (determined immediately prior to the
withdrawal) by the following fraction:
Amount of the variable withdrawal
------------------------------------------------
Present value of all remaining variable annuity benefit
payments immediately prior to the withdrawal
Because each variable annuity benefit payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in the
number of Annuity Units will result in lower future variable annuity benefit
payments.
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Under a fixed annuity payout option, the proportionate reduction is calculated
by multiplying the dollar amount of each future fixed annuity benefit payment
by a similar fraction, which is based on the amount of the fixed withdrawal
and present value of remaining fixed annuity benefit payments.
- PRESENT VALUE WITHDRAWALS. Present Value Withdrawals are available under Life
with Period Certain or Life with Cash Back annuity payout options (the Owner
may make one Present Value Withdrawal in each calendar year, if there are
remaining guaranteed annuity benefit payments) and under Period Certain
annuity payout options (the Owner may make multiple Present Value Withdrawals
in each calendar year).
Under a variable annuity payout option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each future
variable guaranteed annuity benefit payment (determined immediately prior to
the withdrawal) by the following fraction:
Amount of the variable withdrawal
------------------------------------------------
Present value of remaining guaranteed variable annuity
benefit payments immediately prior to the withdrawal
Under a fixed annuity payout option, the proportionate reduction is calculated
by multiplying the dollar amount of each future fixed annuity benefit payment
by a similar fraction, which is based on the amount of the fixed withdrawal
and present value of remaining guaranteed fixed annuity benefit payments.
Because each variable annuity benefit payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in the
number of Annuity Units will result in lower variable annuity benefit payments
with respect to the guaranteed payments. Under a fixed annuity payout option,
the proportionate reduction will result in lower fixed annuity benefit
payments with respect to the guaranteed payments. However, under a Life with
Period Certain annuity payout option or Life with Cash Back annuity payout
option, if the Annuitant is still living after the guaranteed number of
annuity benefit payments has been made, the number of Annuity Units or dollar
amount of future annuity benefit payments will be restored as if no Present
Value Withdrawal(s) had taken place.
CALCULATION OF PRESENT VALUE. When a withdrawal is taken, the present value of
future annuity benefit payments is calculated based on an assumed mortality
table and a discount rate. The mortality table that is used will be equal to the
mortality table used at the time of annuitization to determine the annuity
benefit payments (currently the Annuity 2000 Mortality Table with male, female,
or unisex rates, as appropriate). The discount rate is the AIR (for a variable
annuity payout option) or the interest rate (for a fixed annuity payout option)
that was used at the time of annuitization to determine the annuity benefit
payments.
For each Payment Withdrawal, the number of years of annuity benefit payments
being valued depends upon the life expectancy of the Annuitant at the time of
the withdrawal. The life expectancy will be determined by a mortality table that
will be equal to the mortality table used at the time of annuitization to
determine the annuity benefit payments (currently the Annuity 2000 Mortality
Table).
Carefully consider the following before making a withdrawal (especially if you
are making the withdrawal under a Life with Period Certain or Life with Cash
Back annuity payout option):
- For a Payment Withdrawal, the present value calculation (including any
applicable adjustments) affects the proportionate reduction of the
remaining number of Annuity Units (under a variable annuity payout option)
or dollar amount (under a fixed annuity payout option), applied to each
future annuity benefit payment, as explained in "Calculation of
Proportionate Reduction -- Payment Withdrawals," above. There will be a
proportionate reduction in the number of Annuity Units or the dollar
amount applied to each future annuity benefit payment. This will result in
lower future annuity benefit payments, all other things being equal.
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- For a Present Value Withdrawal, the discount factor is used in determining
the maximum amount that can be withdrawn under the present value
calculation. There will be a proportionate reduction in the number of
Annuity Units or the dollar amount applied to each future guaranteed
annuity benefit payment. This will result in lower future annuity benefit
payments with respect to the guaranteed payments, all other things being
equal. See "Calculation of Proportionate Reduction -- Present Value
Withdrawals," above.
For examples comparing a Payment Withdrawal and a Present Value Withdrawal, see
APPENDIX C -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS.
DEFERRAL OF WITHDRAWALS. A withdrawal is normally payable within seven days
following the Company's receipt of the withdrawal request. However, the Company
reserves the right to defer withdrawals of amounts in each Sub-Account in any
period during which:
- 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;
- the SEC has by order permitted such suspension; or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a separate account is not
reasonably practicable.
The Company reserves the right to defer withdrawals of amounts allocated to the
Company's General Account for a period not to exceed six months.
G. REVERSAL OF ANNUITIZATION
The Owner may reverse the decision to annuitize by written request to the
Company within 90 days of the Annuity Date. Upon receipt of such request, the
Company will return the Contract to the Accumulation Phase, subject to the
following:
(1) The value applied under a fixed annuity payout option at the time of
annuitization will be treated as if it had been invested in the Fixed
Account of the Contract on that same date.
(2) The Sub-Account allocations that were in effect at the time of
annuitization will first be used for calculating the reversal. Any
transfers between variable Sub-Accounts during the Annuity Payout phase
will then be treated as transfers during the Accumulation Phase. (As a
result, the Contract's Accumulated Value after the reversal will reflect
the same Sub-Account allocations that were in effect immediately prior to
the reversal).
(3) Any annuity benefit payments paid and any withdrawals taken during the
Annuity Payout phase will be treated as a withdrawal of the Surrender
Value in the Accumulation Phase, as of the date of the payment or
withdrawal. There may be adverse tax consequences resulting from these
withdrawals. See "C. Taxation of the Contract in General" under FEDERAL
TAX CONSIDERATIONS.
If the Company learns of the Owner's decision to reverse annuitization after the
latest possible Annuity Date permitted under the Contract, the Company will
contact the Owner. The Owner must then immediately select an annuity payout
option (either the original annuity payout option or a different annuity payout
option). If the Owner does not select an annuity payout option, payments will
begin under a variable Life with Cash Back annuity payout option.
H. 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 payout 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 unisex rates.
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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.
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 mortality and expense risk charge is assessed daily at an
annual rate of 0.40% of each Sub-Account's assets. 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 lives and no matter
how long all Annuitants as a class live. 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.
This charge may not be increased. Since mortality and expense risks involve
future contingencies that 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 Administrative Expense 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 and may not be increased. The
daily Administrative Expense Charge is assessed to help defray administrative
expenses actually incurred in the administration of the Sub-Account. 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 (described below under "B. Contract Fee") 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 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 purchase 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 Underlying Portfolios.
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B. CONTRACT FEE
A $35 Contract fee (a lower fee may apply in some states) currently is deducted
during the accumulation phase, on the Contract anniversary date and upon full
surrender of the Contract if the Accumulated Value on any of these dates is less
than $75,000.
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
that 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 portion of
the charge deducted from that Sub-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 Underlying Portfolios;
investment managers or sub-advisers of the Underlying Portfolios; 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 RIDER CHARGE
Subject to state availability, the Company offers a rider that is available if
elected by the Owner at issue. A separate monthly charge is made for the Rider
through a pro-rata reduction of the Accumulated Value of the Sub-Accounts, the
Fixed Account and the Guarantee Period Accounts. The pro-rata reduction is based
on the relative value 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 for the Rider is assessed on the Accumulated Value on the
last day of each Contract month, multiplied by 1/12th of the following annual
percentage rate:
<TABLE>
<S> <C>
5% Enhanced Death Benefit With Annual Step-Up............... 0.25%
</TABLE>
For a description of the Rider, see "Optional Enhanced Death Benefit Rider"
under "F. Death Benefit," DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE,
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 a Contract at the time payments are received); or
2. the premium tax charge is deducted 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.
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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 does not assess a charge for processing transfers. The
Company guarantees that the first 12 transfers in a Contract year will be free
of a transfer charge, but reserves the right to assess a charge, guaranteed
never to exceed $25, 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 -- THE ACCUMULATION
PHASE and "E. Transfers of Annuity Units" under ANNUITIZATION -- THE PAYOUT
PHASE.
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GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of 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 this Contract or any fixed 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, Guarantee Periods ranging from two
through ten years may be available. Each Guarantee Period 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. Once an interest rate is in effect
for a Guarantee Period Account, however, the Company may not change it during
the duration of its Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%. The Guarantee Period Accounts are not available in New
York, Oregon, Maryland and Pennsylvania.
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 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 the right to apply that amount to the Kemper Money Market Sub-
Account. 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 at the
then current rate unless (1) less than $1,000 would remain in the Guarantee
Period Account on the expiration date, or (2) unless 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 Sub-Account. Where amounts have been renewed
automatically in a new Guarantee Period, the Company will give the Owner an
additional 30 days to transfer out of the Guarantee Period Account without
application of a Market Value Adjustment.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or 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 although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "F. Death Benefit." All
other transfers, withdrawals, or a surrender prior to the end of a Guarantee
Period will be subject to a Market Value Adjustment, which may increase or
decrease the value. Amounts
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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 before deduction
of any Surrender Charge by the market value factor. The market value factor for
each Guarantee Period Account is equal to:
[(1+i)/(1+j)]to the power of n/365 - 1
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.
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 is also affected by the minimum guaranteed rate of 3%. 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 B -- 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
will then compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that the value in the Guarantee Period Account on the last day of the
Guarantee Period 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" under
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE.
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 Withdrawals" under DESCRIPTION OF THE CONTRACT -- THE
ACCUMULATION PHASE. 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 from or added to the amount withdrawn.
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FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, 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. In
addition, this discussion does not address state or local tax consequences that
may be associated with the Contract.
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.
A. GENERAL
THE COMPANY. 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 was 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.
DIVERSIFICATION REQUIREMENTS. The IRS has issued regulations under Section
817(h) of the Code relating to the diversification requirements for variable
annuity and variable life insurance contracts. 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 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.
INVESTOR CONTROL. 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
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<PAGE>
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.
B. 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 408 or 408A 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,
depending on 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 "E. Individual Retirement Annuities" below.
C. TAXATION OF THE CONTRACT IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owner" 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 will be taxed on the annual increase in 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. 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.
WITHDRAWALS AFTER ANNUITIZATION. A withdrawal from a qualified or non-qualified
contract may create significant adverse tax consequences. It is possible that
the Internal Revenue Service may take the view that when withdrawals (other than
annuity payments) are taken during the annuity payout phase of the Contract, all
amounts received by the taxpayer are taxable at ordinary income rates as amounts
"not received as an annuity." In addition, such amounts may be taxable to the
recipient without regard to the Owner's investment in the Contract or any
investment gain that might be present in the current Annuity Value.
For example, assume that a Contract owner with a Contract Value of $100,000 of
which $90,000 is comprised of investment in the Contract and $10,000 is
investment gain, makes a withdrawal of $20,000 during the annuity payout phase.
Under this view, the Contract owner would pay income taxes on the entire $20,000
amount in that tax year. For some taxpayers, such as those under age 59 1/2,
additional tax penalties may also apply.
OWNERS OF QUALIFIED AND NON-QUALIFIED CONTRACTS SHOULD CONSIDER CAREFULLY THE
TAX IMPLICATIONS OF ANY WITHDRAWAL REQUESTS AND THEIR NEED FOR CONTRACT FUNDS
PRIOR TO THE EXERCISE OF THE WITHDRAWAL RIGHT. CONTRACT OWNERS SHOULD ALSO
CONTACT THEIR TAX ADVISER PRIOR TO MAKING WITHDRAWALS.
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ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments begin 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 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. If the annuitant dies
before cost basis 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); or
- 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 payee.
The requirement of "substantially equal" periodic payments 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 is also 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 later of the Owner's age 59 1/2 or five years,
will subject the Owner to the 10% penalty tax on the prior distributions.
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, 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
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.
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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.
D. 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.
E. INDIVIDUAL RETIREMENT ANNUITIES
Federal income taxation of assets held inside an individual retirement annuity
and of earnings on those assets is deferred until distribution of plan benefits
begin. As such, it is not necessary to purchase a variable annuity contract
solely to obtain its tax deferral feature. However, other features offered under
this Contract and described in the Prospectus -- such as the minimum guaranteed
death benefit, the guaranteed fixed annuity rates and the wide variety of
investment options -- may make this Contract a suitable investment for your
individual retirement annuity.
Sections 408 and 408A 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 Sections 408 and 408A
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 "C. Right to
Cancel."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) 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.
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
frequently 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 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.
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
48
<PAGE>
any Underlying Portfolio no longer are available for investment or if, in the
Company's judgment, further investment in any Underlying Portfolio should become
inappropriate in view of the purposes of the Variable Account or the affected
Sub-Account, the Company may withdraw the shares of that Underlying 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
Underlying 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.
Shares of the Underlying Portfolios also are issued to variable accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Underlying 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 funds should be established for variable life and
variable annuity separate accounts, the Company will bear the attendant
expenses.
The Company reserves the right, subject to compliance with applicable law, 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,
(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, and
(7) to combine with other Sub-Accounts or other Separate Accounts of the
Company.
If any of these substitutions or changes are made, the Company may endorse the
Contract to reflect the substitution or change, and will notify Owners of all
such changes. In no event will the changes described above be made without
notice to Owners in accordance with the 1940 Act.
49
<PAGE>
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, and 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 (or any laws, regulations or rules of any
jurisdiction in which the Company is doing business), including but not limited
to requirements for annuity contracts and retirement plans under the Code and
pertinent regulations or any state statute or regulation. Any such changes will
apply uniformly to all Contracts that are affected. Owners will be given written
notice of such changes.
VOTING RIGHTS
The Company will vote Underlying 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
Underlying 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 that are received. The
Company also will vote shares in a Sub-Account that it owns and which are not
attributable to Contracts 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 Underlying Portfolio. During the
accumulation period, the number of Underlying 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
Underlying Portfolio share. During the annuity payout phase, the number of
Underlying 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 Underlying Portfolio share. Ordinarily, the
Owner's voting interest in the Underlying 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 which are registered under the Securities and
Exchange Act of 1934 and members of the National Association of Securities
Dealers, Inc. ("NASD"). The Contract also is offered through Allmerica
Investments, Inc., which is the principal underwriter and distributor of the
Contracts. Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653,
is a registered broker-dealer, a member of the NASD and an indirectly wholly
owned subsidiary of First Allmerica.
The Company does not pay commissions to broker-dealers which sell the Contract.
However, an independent broker-dealer may assess an advisory fee as compensation
for his or her services. To the extent permitted by NASD rules, promotional
incentives or payments may be provided to such broker-dealers 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.
The Company intends to recoup the cost of promotional and other sales expenses
through profits from the Company's General Account, which may include amounts
derived from mortality and risk charges.
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.
50
<PAGE>
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 Separate
Account.
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, D.C., upon payment of the SEC's prescribed fees.
51
<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 annuity 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 a
separate account. 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%
annually compounded daily. Additional "Excess Interest" may or may not be
credited at the sole discretion of the Company.
SALES RESTRICTIONS. Certain states may impose restrictions on payments and
transfers to the Fixed Account.
A-1
<PAGE>
APPENDIX B
THE MARKET VALUE ADJUSTMENT
MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](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.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.10)](2555/365)-1
= (.98182)(7)-1
= -.12054
The market value adjustment = the market value factor multiplied by the withdrawal
= -.12054 x $62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.07)](2555/365)-1
= (1.00935)(7)-1
= .06728
The market value adjustment = market value factor multiplied by the withdrawal
= .06728 x $62,985.60
= $4,237.90
</TABLE>
*Uncapped is a straight application of the Market Value Adjustment formula when
the value produced is less than the cap.
B-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.11)](2555/365)-1
= (.97297)(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%
= Maximum (-.17454 x $62,985.60 or -$8,349.25)
= Maximum (-$10,992.38 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 5.00% or 0.05
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.05)](2555/365)-1
= (1.02857)(7)-1
= .21798
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
= Minimum of (.21798 x $62,985.60 or $8,349.25)
= Minimum of ($13,729.78 or $8,349.25)
= $8,349.25
</TABLE>
*Capped takes into account the excess interest part of the Market Value
Adjustment formula when the value produced is greater than the cap.
B-2
<PAGE>
APPENDIX C
EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS
Assume in the examples below that a 65-year-old male annuitizes his contract
exactly two years after the Issue Date. The annuitization amount is $250,000.
Further assume that he selects a variable Life with Period Certain annuity
payout option of Single Life with Payments Guaranteed for 10 Years, an Assumed
Investment Return ("AIR") of 3%, and an annual Change Frequency. Assume that the
Annuity Value purchases 1,370 Annuity Units and the first monthly annuity
benefit payment is equal to $1,370. The following examples assume a net return
of 8% (gross return of 8.65 %).
PRESENT VALUE WITHDRAWALS
EXAMPLE 1. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the tenth contract year (eighth year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09
Rate used in Present Value Determination = 3% (3% AIR)
Present Value of Future Guaranteed Annuity Benefit Payments = $65,849.08
Maximum Present Value Withdrawal Amount = $49,386.81 ($65,849.08 X 75%)
Annuity Units after withdrawal = 342.50 (1,370 X (1 -
(49,386.81/65,849.08)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment after withdrawal = $477.27
PAYMENT WITHDRAWALS
EXAMPLE 2. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the tenth contract year (eighth year of the Annuity
Payout phase).
Last Monthly Annuity Benefit Payment = $1,820.71
Withdrawal Amount = $18,207.10 (10 X 1,820.71)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09
Rate used in Present Value Determination = 3% (3% AIR)
Present Value of Future Annuity Benefit Payments = $268,826.18
Annuity Units after withdrawal = 1,272.71 (1,370 X (1 -
(18,207.10/268,826.18)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment after withdrawal = $1,779.80
C-1
<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 THE UNDERLYING PORTFOLIOS
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE KEMPER GATEWAY ADVISOR 2 PROSPECTUS OF SEPARATE
ACCOUNT KG DATED _____ ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED
FROM ANNUITY CLIENT SERVICES, FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653,
TELEPHONE 1-800-782-8380.
DATED _______
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <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
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM........... 4
PERFORMANCE INFORMATION............................................... 7
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, 1999, the Company and
its subsidiaries had over $25 billion in combined assets and over $43 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. The Company is 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 in 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, 37 Sub-Accounts of the Variable Account are available under the
Kemper Gateway Advisor 2 contract. (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 Alger
American Fund ("Alger') or Warburg Pincus Trust, open-end, registered
management investment companies.
Twenty-six different portfolios of KVS are available under the Contract: the
Kemper Aggressive Growth Portfolio, Kemper Technology Growth Portfolio, KVS
Dreman Financial Services Portfolio (formerly Kemper-Dreman Financial Services
Portfolio), Kemper Small Cap Growth Portfolio, Kemper Small Cap Value Portfolio,
KVS Dreman High Return Equity Portfolio (formerly 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, KVS Index 500 Portfolio (formerly Kemper Index 500
Portfolio), Kemper Horizon 20+ Portfolio, Kemper
2
<PAGE>
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 KVS Growth Opportunities Portfolio,
KVS Growth And Income Portfolio and KVS Focused Large Cap Growth Portfolio.
Five portfolios of Scudder VLIF are available under the Contract: the Scudder
21st Century Growth Portfolio, 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 Alger are available under the Contract: the Alger American
Leveraged AllCap Portfolio and the Alger American Balanced Portfolio. Two
portfolios of Warburg Pincus Trust are available under the Contract: the
Warburg Pincus Emerging Markets Portfolio and the Warburg Pincus Global
Post-Venture Capital 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
contracts, 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 contracts 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, 1999 and
1998 and for each of the three years in the period ended December 31, 1999, and
the financial statements of Separate Account KG of the Company as of December
31, 1999 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
3
<PAGE>
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, 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. 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 1.0% 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.
The Company intends to recoup the cost of promotional and other sales expenses
through profits from the Company's general account, which may include investment
earnings on amounts allocated to accumulate on a fixed basis in excess of the
interest credited on fixed accumulations by the Company, and the profit, if any,
from the mortality and expense risk charge.
The aggregate amounts of commissions paid to Allmerica Investments for sales of
all contracts funded by Separate Account KG (including contracts not described
in the Prospectus) for the years 1997, 1998 and 1999 were $97,905, $1,218,883
and $1,213,957.
No commissions will be paid for sales of Contract A3030-99. However, a
representative of Allmerica Investments or an independent broker-dealer may
assess an advisory fee as compensation for his or her services.
No commissions were retained by Allmerica Investments for sales of all contracts
funded by Separate Account KG (including contracts not described in the
Prospectus) for the years 1997, 1998 and 1999.
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:
4
<PAGE>
<TABLE>
<S> <C> <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 0.55% per annum)............ 0.000015
(6) Net Investment Rate (4) - (5).................................... 0.000320
(7) Net Investment Factor 1.000000 + (6)............................. 1.000320
(8) Accumulation Unit Value -- Current Period (1) x (7).............. $ 1.135363
</TABLE>
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
$1.134603.
The method for determining the amount of annuity benefit payments is described
in detail under "Variable 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 Owner 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
Accumulated 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 $44.80 ($44,800 divided by $1,000) multiplied by $6.57, or
$294.34.
Next, assume that the Annuity Unit Value for the assumed investment return of
3.0% 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 3.0% assumed investment
return 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 payment is 1.000190. Multiplying this factor by
.999919 (the one-day adjustment factor for the assumed investment return of 3.0%
per annum) produces a factor of 1.000109. 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 $1.105121 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
$1.105121, which produces a current monthly payment of $295.71.
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAMS. To the extent
permitted by law, the Company reserves the right to offer Enhanced Automatic
Transfer Program(s) from time to
5
<PAGE>
time. If you elect to participate, the Company will credit an enhanced interest
rate to payments made to the Enhanced Automatic Transfer Program. Eligible
payments:
- must be new payments to the Contract, including the initial payment,
- must be allocated to the Fixed Account, which will be the source account,
- must be automatically transferred out of the Fixed Account to one or more
Sub- Accounts over a specified time period and
- will receive the enhanced rate while they remain in the Fixed Account.
You may be able to establish more than one Enhanced Automatic Transfer
Program.
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 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
"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:
P(1 + T) to the power of (n) = ERV
6
<PAGE>
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 assets
of the Sub-Account. This charge is 0.55% 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 include the deduction of the $30 annual
Contract fee.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF UNDERLYING PORTFOLIO*
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
UNDERLYING FOR YEAR 10 YEARS
SUB-ACCOUNT INVESTING IN PORTFOLIO ENDED (OR SINCE
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/99 5 YEARS INCEPTION IF LESS)
-------------------- -------------- -------- ------- ------------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth
Portfolio....................... 5/3/99 N/A N/A 39.11%
Kemper Technology Growth
Portfolio....................... 5/3/99 N/A N/A 76.72%
KVS Dreman Financial Services
Portfolio....................... 5/4/98 -5.58% N/A -4.90%
Kemper Small Cap Growth
Portfolio....................... 5/2/94 33.81% 28.20% 25.27%
Kemper Small Cap Value
Portfolio....................... 5/1/96 2.23% N/A 2.84%
KVS Dreman High Return Equity
Portfolio....................... 5/4/98 -11.66% N/A -5.81%
Kemper International
Portfolio....................... 1/6/92 44.90% 17.53% 13.78%
Kemper New Europe Portfolio...... 5/5/98 13.45% N/A 1.83%
Kemper Global Blue Chip
Portfolio....................... 5/5/98 26.00% N/A 13.23%
Kemper Growth Portfolio.......... 12/9/83 36.36% 24.68% 18.28%
Kemper Contrarian Value
Portfolio....................... 5/1/96 -10.71% N/A 13.77%
Kemper Blue Chip Portfolio....... 5/1/97 24.54% N/A 18.32%
Kemper Value+Growth Portfolio.... 5/1/96 15.87% N/A 20.35%
KVS Index 500 Portfolio.......... 9/1/99 N/A N/A 8.94%
Kemper Horizon 20+ Portfolio..... 5/1/96 8.65% N/A 15.22%
Kemper Total Return Portfolio.... 4/6/82 14.17% 17.80% 12.68%
Kemper Horizon 10+ Portfolio..... 5/1/96 7.78% N/A 12.44%
Kemper High Yield Portfolio...... 4/6/82 1.58% 8.54% 10.01%
Kemper Horizon 5 Portfolio....... 5/1/96 4.28% N/A 9.45%
Kemper Strategic Income
Portfolio....................... 5/1/97 -6.38% N/A 2.17%
Kemper Investment Grade Bond
Portfolio....................... 5/1/96 -2.61% N/A 4.36%
Kemper Government Securities
Portfolio....................... 9/3/87 0.12% 6.86% 6.52%
Kemper Money Market Portfolio.... 4/6/82 4.26% 4.59% 4.41%
KVS Focused Large Cap Growth
Portfolio....................... 10/29/99 N/A N/A 27.69%
KVS Growth Opportunities
Portfolio....................... 10/29/99 N/A N/A 15.78%
KVS Growth And Income Portfolio.. 10/29/99 N/A N/A 14.29%
Scudder 21st Century Growth
Portfolio....................... 5/3/99 N/A N/A 74.86%
Scudder International Portfolio.. 5/1/87 53.65% 19.89% 12.62%
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Scudder Global Discovery
Portfolio....................... 5/1/96 64.96% N/A 24.64%
Scudder Capital Growth
Portfolio....................... 7/16/85 34.48% 27.74% 17.37%
Scudder Growth and Income
Portfolio....................... 5/2/94 5.21% 18.29% 16.88%
Alger American Leveraged AllCap
Portfolio....................... 1/25/95 77.11% N/A 45.59%
Alger American Balanced
Portfolio....................... 9/5/89 28.48% 22.91% 13.17%
Dreyfus MidCap Stock Portfolio... 5/1/98 10.20% N/A 4.14%
Dreyfus Socially Responsible
Growth Fund..................... 10/7/93 29.36% 27.94% 23.42%
Warburg Pincus Emerging Markets
Portfolio....................... 12/31/97 80.40% N/A 21.77%
Warburg Pincus Global
Post-Venture Capital Portfolio.. 9/30/96 62.04% N/A 21.63%
</TABLE>
* Normally, an additional table would be included that illustrates the
performance of the Sub-Accounts for the one, five, and ten year periods or
since the inception of the Sub-Accounts. This table has been omitted since
the Sub-Accounts are new.
YIELD AND EFFECTIVE YIELD - THE KEMPER MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Kemper Money
Market Sub-Account for the seven-day period ended December 31, 1999:
<TABLE>
<S> <C>
Yield N/A
Effective Yield N/A
</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
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 Kemper Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
Effective Yield = [(base period return + 1) to the power of (365/7)] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
TAX-DEFERRED ACCUMULATION
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS AND
TAX-DEFERRED EARNINGS
---------------------
---------------------
TAXABLE LUMP SUM AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- --------------------
8
<PAGE>
<TABLE>
<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: 0.40% 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.
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company and for its Separate Account KG.
9
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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 (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States 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
Boston, Massachusetts
February 1, 2000
<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) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 954.5 $1,969.5 $1,980.4
Universal life and investment product
policy fees.............................. 359.3 296.6 237.3
Net investment income...................... 503.1 593.9 619.5
Net realized investment gains.............. 100.3 60.9 76.3
Other income............................... 107.3 100.0 81.5
-------- -------- --------
Total revenues......................... 2,024.5 3,020.9 2,995.0
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 1,056.3 1,803.0 1,763.9
Policy acquisition expenses................ 240.9 449.6 421.8
Sales practice litigation.................. -- 31.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Restructuring costs........................ -- 9.0 --
Other operating expenses................... 346.3 419.7 404.0
-------- -------- --------
Total benefits, losses and expenses.... 1,643.5 2,712.3 2,643.6
-------- -------- --------
Income from continuing operations before
federal income taxes.......................... 381.0 308.6 351.4
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 88.7 74.6 74.4
Deferred................................... 4.3 (15.4) 14.2
-------- -------- --------
Total federal income tax expense....... 93.0 59.2 88.6
-------- -------- --------
Income from continuing operations before
minority interest............................. 288.0 249.4 262.8
Minority interest.......................... (39.9) (55.0) (79.4)
-------- -------- --------
Income from continuing operations.............. 248.1 194.4 183.4
(Loss) income from operations of discontinued
business (less applicable income taxes
(benefit) of $(10.1), $(7.0) and $8.9 for the
years ended December 31, 1999, 1998 and 1997,
respectively) (17.2) (13.5) 16.6
Loss on disposal of group life and health
business, including provision of $72.2 for
operating losses during phase-out period for
the year ended December 31, 1999 (less
applicable income tax benefit of $16.4) (30.5) -- --
-------- -------- --------
Net income..................................... $ 200.4 $ 180.9 $ 200.0
======== ======== ========
</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, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$3,721.6 and $7,520.8)............................ $ 3,660.7 $ 7,683.9
Equity securities at fair value (cost of $27.9 and
$253.1)........................................... 51.4 397.1
Mortgage loans...................................... 521.2 562.3
Policy loans........................................ 170.5 154.3
Real estate and other long-term investments......... 177.0 163.1
--------- ---------
Total investments............................... 4,580.8 8,960.7
--------- ---------
Cash and cash equivalents............................. 279.3 504.0
Accrued investment income............................. 73.3 141.0
Deferred policy acquisition costs..................... 1,219.5 1,161.2
Reinsurance receivable on unpaid losses, benefits and
unearned premiums................................... 480.3 1,136.4
Deferred federal income taxes......................... 18.1 19.4
Premiums, accounts and notes receivable............... 81.0 510.5
Other assets.......................................... 199.6 530.6
Closed Block assets................................... 772.3 803.1
Separate account assets............................... 17,629.6 13,697.7
--------- ---------
Total assets.................................... $25,333.8 $27,464.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,825.0 $ 2,802.2
Outstanding claims, losses and loss adjustment
expenses.......................................... 218.8 2,815.9
Unearned premiums................................... 6.6 843.2
Contractholder deposit funds and other policy
liabilities....................................... 2,025.5 2,637.0
--------- ---------
Total policy liabilities and accruals........... 5,075.9 9,098.3
--------- ---------
Expenses and taxes payable............................ 512.0 681.9
Reinsurance premiums payable.......................... 17.9 50.2
Trust instruments supported by funding obligations.... 50.6 --
Short-term debt....................................... -- 221.3
Closed Block liabilities.............................. 842.1 872.0
Separate account liabilities.......................... 17,628.9 13,691.5
--------- ---------
Total liabilities............................... 24,127.4 24,615.2
--------- ---------
Minority interest..................................... -- 532.9
Commitments and contingencies (Notes 16 and 21)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,001 shares issued and outstanding... 5.0 5.0
Additional paid-in capital............................ 569.0 444.0
Accumulated other comprehensive (loss) income......... (14.9) 169.2
Retained earnings..................................... 647.3 1,698.3
--------- ---------
Total shareholder's equity...................... 1,206.4 2,316.5
--------- ---------
Total liabilities and shareholder's equity...... $25,333.8 $27,464.6
========= =========
</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) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 444.0 453.7 392.4
Capital contribution from parent........... 125.0 -- 61.3
Loss on change of interest-Allmerica P&C... -- (9.7) --
-------- -------- --------
Balance at end of period................... 569.0 444.0 453.7
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 169.2 209.3 131.4
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities.......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes........................... 105.0 28.9 (59.8)
Minority interest........................ 31.8 13.4 (33.2)
-------- -------- --------
Distribution of subsidiaries (Note 3)...... (22.7) -- --
-------- -------- --------
(184.1) (40.1) 77.9
-------- -------- --------
Balance at end of period................... (14.9) 169.2 209.3
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,698.3 1,567.4 1,367.4
Net income................................. 200.4 180.9 200.0
Dividend to shareholder.................... -- (50.0) --
Distribution of subsidiaries (Note 3)...... (1,251.4) -- --
-------- -------- --------
Balance at end of period................... 647.3 1,698.3 1,567.4
-------- -------- --------
Total shareholder's equity............. $1,206.4 $2,316.5 $2,235.4
======== ======== ========
</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) 1999 1998 1997
------------- ------- ------- ------
<S> <C> <C> <C>
Net income.................................. $ 200.4 $ 180.9 $200.0
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes.......................... 105.0 28.9 (59.8)
Minority interest....................... 31.8 13.4 (33.2)
Distribution of subsidiaries (Note 3)... (22.7) -- --
------- ------- ------
Other comprehensive (loss) income... (184.1) (40.1) 77.9
------- ------- ------
Comprehensive (loss) income................. $ (16.3) $ 140.8 $277.9
======= ======= ======
</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) 1999 1998 1997
------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.4 $ 180.9 $ 200.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 39.9 55.0 79.4
Net realized gains.................. (100.9) (62.7) (77.8)
Net amortization and depreciation... 31.5 20.7 31.6
Deferred federal income taxes....... 20.7 (15.4) 14.2
Sales practice litigation expense... -- 31.0 --
Loss from exiting reinsurance
pools............................. -- 25.3 --
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)
Loss from disposal of group life and
health business................... 30.5 -- --
Change in deferred acquisition
costs............................. (181.6) (185.8) (189.7)
Change in premiums and notes
receivable, net of reinsurance
payable........................... (41.8) 56.7 (15.1)
Change in accrued investment
income............................ 8.3 0.8 7.1
Change in policy liabilities and
accruals, net..................... (15.6) 168.1 (134.9)
Change in reinsurance receivable.... (46.3) (115.4) 27.2
Change in expenses and taxes
payable........................... 79.4 (3.3) 49.4
Separate account activity, net...... 5.5 (48.5) --
Other, net.......................... 18.5 (63.8) 20.4
--------- --------- ---------
Net cash provided by (used in)
operating activities.......... 48.5 13.3 (141.3)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and
maturities of available-for-sale
fixed maturities.................. 2,801.0 1,715.2 2,892.9
Proceeds from disposals of equity
securities........................ 422.9 285.3 162.7
Proceeds from disposals of other
investments....................... 30.3 120.8 116.3
Proceeds from mortgages matured or
collected......................... 131.2 171.2 204.7
Purchase of available-for-sale fixed
maturities........................ (2,227.3) (2,374.5) (2,596.0)
Purchase of equity securities....... (78.9) (119.9) (67.0)
Purchase of other investments....... (140.6) (274.4) (175.0)
Capital expenditures................ (29.2) (22.3) (15.3)
Purchase of minority interest in
Citizens Corporation.............. -- (195.9) --
Distribution of subsidiaries........ (202.2) -- --
Other investing activities, net..... -- 26.7 1.3
--------- --------- ---------
Net cash provided by (used in)
investing activities.......... 707.2 (667.8) 524.6
--------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds...... 1,514.6 1,419.2 457.6
Withdrawals from contractholder
deposit funds..................... (2,037.5) (625.0) (647.1)
Change in trust agreements supported
by funding agreements............. 50.6 -- --
Change in short-term debt........... (180.9) 188.3 (5.4)
Change in long-term debt............ -- (2.6) (0.1)
Dividend paid to shareholder........ -- (50.0) (9.4)
Contribution from parent............ 36.0 -- 0.1
Subsidiary treasury stock purchased,
at cost........................... (350.0) (1.0) (140.0)
--------- --------- ---------
Net cash (used in) provided by
financing activities.......... (967.2) 928.9 (344.3)
--------- --------- ---------
Net change in cash and cash equivalents..... (211.5) 274.4 39.0
Net change in cash held in the Closed
Block...................................... (13.2) 15.7 (1.0)
Cash and cash equivalents, beginning of
period..................................... 504.0 213.9 175.9
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 279.3 $ 504.0 $ 213.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.1 $ 7.3 $ 3.6
Income taxes paid....................... $ 24.0 $ 135.3 $ 66.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC" or the "Company") is
organized as a stock life insurance company, and is a wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC").
Prior to July 1, 1999, the consolidated financial statements of FAFLIC included
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 services), Allmerica Property and
Casualty Companies, Inc. ("Allmerica P&C") (an 85.0%-owned non-insurance holding
company), and various other non-insurance subsidiaries.
Effective July 1, 1999, AFC made certain changes to its corporate structure
(Note 3). These changes included the transfer of the Company's ownership of
Allmerica P&C and its subsidiaries, as well as several other non-insurance
subsidiaries from the Company to AFC. In exchange, AFC contributed capital to
the Company and agreed to maintain the Company's statutory surplus at specified
levels during the following 6 years. Comparability between current and prior
period financial statements and footnotes has been significantly impacted by the
Company's divestiture of these subsidiaries during 1999, as disclosed in Note 3.
The Closed Block (Note 1B) assets and liabilities at December 31, 1999 and 1998
are presented in the consolidated balance sheets as single line items. The
contribution from the Closed Block is included in the consolidated statements of
income in other income. Unless specifically stated, all disclosures contained
herein supporting the consolidated financial statements at December 31, 1999,
1998 and 1997, and the years then ended exclude the Closed Block related
amounts. All significant intercompany accounts and transactions have been
eliminated.
On or about December 3, 1998, the Company acquired all of the outstanding common
stock of Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary
of The Hanover Insurance Company ("Hanover"), a wholly-owned subsidiary of
Allmerica P&C) that it did not already own in exchange for cash of $195.9
million (Note 4). 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.
Prior to the July 1, 1999 changes in AFC's corporate structure, minority
interest relates to the Company's investment in Allmerica P&C and its only
significant subsidiary, Hanover. Hanover's wholly-owned subsidiary is Citizens
Corporation, the holding company for 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,
F-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Commonwealth of
Massachusetts Insurance Commissioner ("the Insurance 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 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.
Debt securities and marketable equity 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 as a separate
component of shareholders' 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.
F-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there were 2 properties remaining in the Company's real
estate portfolio, both of which are being actively marketed. These assets are
carried at 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 the
foreign currency exchange risk associated with investment securities 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 associated with funding agreements
are accounted for using the fair value method, with changes in fair value
reported in other operating income consistent with the underlying hedged trust
obligation liability. 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
F-9
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
F-10
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 6.0%
for life insurance and 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, variable universal life and variable annuities 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 variable annuities include a reserve for
benefit claims in excess of a guaranteed minimum fund value.
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.
Premiums for property and casualty 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 ("GICs"),
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 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 include annuity benefit claims in excess of a
guaranteed minimum fund value, and 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, with 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
F-11
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (including certain non-insurance operations)
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.
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, 2000. 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 of 1998, 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
F-12
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
adoption of this statement did not have a material effect on the results of
operations or financial position of the Company.
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 (See Note 15).
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement
No. 130 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 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, resulting primarily from the reporting of Discontinued Operations
as disclosed in Note 2.
2. DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company approved a plan to exit its group
life and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). 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 the discontinued segment, including its reinsurance pool business,
have been reported in the Consolidated Statements of Income as discontinued
operations 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 Opinion No. 30"). In the third quarter of 1999,
the operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior years. On
October 6, 1999, the Company entered into an agreement with Great-West Life and
Annuity Insurance Company of Denver,
F-13
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which provides for the sale of the Company's EBS business effective March 1,
2000. The Company has recorded a $30.5 million loss, net of taxes, on the
disposal of its group life and health business. Subsequent to the June 30, 1999
measurement date, operations from the discontinued business generated losses of
approximately $8.7 million, net of taxes.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At December 31,
1999, the discontinued segment had assets of approximately $531.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $482.5 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $361.1 million, $398.5 million, and $389.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
3. REORGANIZATION OF AFC CORPORATE STRUCTURE
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes included transfer of the Company's ownership of Allmerica P&C and
all of its subsidiaries, as well as certain other non-insurance subsidiaries,
from FAFLIC to AFC, referred to as the "distribution of subsidiaries". The
Company retained its ownership of its primary insurance subsidiary, AFLIAC and
certain broker dealer and investment management and advisory subsidiaries. AFC
contributed capital to FAFLIC in the amount of $125.0 million, consisting of
cash and securities of $36.0 million and $89.0 million, respectively, and agreed
to maintain the Company's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 requires the prior approval of the Commonwealth of Massachusetts
Insurance Commissioner. This transaction was approved by the Commissioner on
May 24, 1999.
The equity of the subsidiaries transferred from FAFLIC on July 1, 1999 was
$1,274.1 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million, including cash and cash equivalents of $202.2
million, and total revenue of $1,196.5 million.
The Company's consolidated results of operations in 1999 include $107.2 million
of net income associated with these subsidiaries through June 30, 1999. The
unaudited pro forma information below presents consolidated results of
operations as if the reorganization had occurred at the beginning of 1998.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the Company had the transfer occurred
at the beginning of 1998, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
Revenue..................................................... $828.0 $750.2
====== ======
Net realized capital (losses) gains included in revenue..... (11.8) 19.6
====== ======
Income from continuing operations before taxes.............. 192.1 141.2
Income taxes................................................ 51.2 41.2
------ ------
Net income from continuing operations....................... $140.9 100.0
(Loss) from operations of discontinued business (less
applicable income taxes (benefit) of $(10.4), $(7.0) and
$8.9 for the years ended December 31, 1999, 1998 and 1997,
respectively............................................... (17.2) (13.5)
</TABLE>
F-14
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
(Loss) on disposal of group life and health business,
including provision of $72.2 for operating losses during
phase-out period for the tear ended December 31, 1999 (less
applicable income tax benefit of $16.4).................... (30.5) --
------ ------
Net income.................................................. $ 93.2 $ 86.5
====== ======
</TABLE>
4. ACQUISITION OF MINORITY INTEREST OF CITIZENS CORPORATION
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 Corporation 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..................................................... $3,006.6 $2,977.1
======== ========
Net realized capital gains included in revenue.............. $ 58.1 $ 71.6
======== ========
Income before taxes and minority interest................... 293.4 332.5
Income taxes................................................ (54.2) (82.4)
Minority Interest:
Equity in earnings........................................ (42.6) (64.1)
-------- --------
Net income.................................................. $ 196.6 $ 186.0
======== ========
</TABLE>
5. OTHER SIGNIFICANT TRANSACTIONS
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated reinsurer. The
reinsurance agreement provides accident year coverage for the three years 1999
to 2001 for the Company's property and casualty business, and is subject to
cancellation or commutation annually at the Company's option. The program covers
losses and allocated loss adjustment
F-15
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expenses, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual and aggregate
coverage limits for losses and allocated LAE are $150.0 million and $300.0
million, respectively. The effect of this agreement on results of operations in
each reporting period is based on losses and allocated LAE ceded, reduced by a
sliding scale premium of 50.0-67.0% depending on the size of the loss, and
increased by a ceding commission of 20.0% of ceded premium. In addition, net
investment income is reduced for amounts credited to the reinsurer. Prior to the
AFC corporate reorganization, the Company recognized a net benefit of $16.9
million as a result of this agreement, based on year-to-date and annual
estimates of losses and allocated loss adjustment expenses for accident year
1999.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the segment consolidated its property and casualty 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 $9.0 million,
in the fourth quarter of 1998.
Approximately $4.8 million of this loss relates to severance and other employee
related costs resulting from the elimination of 306 positions, of which 207 and
106 employees had been terminated as of December 31, 1999 and 1998,
respectively. In addition, lease cancellations and contract terminations
resulted in losses of approximately $2.5 million and $1.7 million, respectively.
The Company made payments of approximately $4.2 million and $0.1 million through
June 30, 1999 and in 1998, respectively, 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, relating to the Company's reinsurance pool business. These pools
consist primarily of the Company'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.
This loss is reported in 1999 as part of the discontinued operations of the
Company.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on substantially all of 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 1999, 1998 and 1997, Allmerica P&C redeemed 8,662.7, 3,289.5 and 5,735.3
shares, respectively, of its issued and outstanding common stock owned by AFC
for $350.0 million, $125.0 million and $195.0 million, respectively, thereby
increasing the Company's total ownership to 84.5% as of June 30, 1999. The
increases in the Company's ownership of Allmerica P&C through June 30, 1999, and
for 1998 and 1997 were 14.5%, 4.3% and 6.3%, respectively. The 1999 transaction
consisted of cash and cash equivalents. 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 recognized as a purchase. Total
consideration of approximately $798.1 million
F-16
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
6. 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>
1999
-------------------------------------------
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....... $ 62.6 $ 1.0 $ 0.5 $ 63.1
States and political subdivisions....... 13.5 0.1 0.1 13.5
Foreign governments..................... 80.0 2.1 0.1 82.0
Corporate fixed maturities.............. 3,206.5 63.2 116.9 3,152.8
Mortgage-backed securities.............. 359.0 1.3 11.0 349.3
-------- ------ ------ --------
Total fixed maturities.................. $3,721.6 $ 67.7 $128.6 $3,660.7
======== ====== ====== ========
Equity securities....................... $ 27.9 $ 24.7 $ 1.2 $ 51.4
======== ====== ====== ========
</TABLE>
<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>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-17
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1999, the amortized cost and market value of these assets on deposit in New York
were $196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $18.3 million and
$105.4 million were on deposit with various state and governmental authorities
at December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
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>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 224.4 $ 225.7
Due after one year through five years....................... 1,324.0 1,328.4
Due after five years through ten years...................... 1,409.1 1,369.9
Due after ten years......................................... 764.1 736.7
-------- --------
Total....................................................... $3,721.6 $3,660.7
======== ========
</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>
1999
Net appreciation, beginning of year......................... $ 79.0 $ 90.2 $169.2
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (254.4) (122.3) (376.7)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 78.5 -- 78.5
Provision for deferred federal income taxes and minority
interest................................................... 72.1 64.7 136.8
Distribution of subsidiaries (See Note 3)................... (5.6) (17.1) (22.7)
------ ------ ------
(109.4) (74.7) (184.1)
------ ------ ------
Net appreciation, end of year............................... $(30.4) $ 15.5 $(14.9)
====== ====== ======
</TABLE>
F-18
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
(1) Includes net (depreciation) appreciation on other investments of $(1.1)
million, $0.8 million, and $1.8 million, in 1999, 1998, and 1997, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans 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 $533.6 million and $582.7 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $5.8 million and $11.5
million at December 31, 1999 and 1998, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there were 2 properties remaining in the Company's
real estate portfolio which are being actively marketed. 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 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
F-19
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $301.5 $304.4
Residential............................................... 50.3 52.8
Retail.................................................... 92.2 108.5
Industrial/warehouse...................................... 83.6 110.0
Other..................................................... 11.8 18.5
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
Geographic region:
South Atlantic............................................ $132.2 $136.1
Pacific................................................... 133.6 155.1
East North Central........................................ 62.5 80.5
Middle Atlantic........................................... 50.3 61.2
West South Central........................................ 90.8 54.7
New England............................................... 40.7 60.7
Other..................................................... 29.3 45.9
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows: 2000
-- $108.1 million; 2001 -- $33.9 million; 2002 -- $27.5 million; 2003 -- $40.6
million; 2004 -- $76.4 million; and $234.7 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 1999, 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>
1999
Mortgage loans.............................................. $11.5 $(2.4) $ 3.3 $ 5.8
===== ===== ===== =====
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
===== ===== ===== =====
</TABLE>
F-20
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific 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 $18.0 million and $22.0 million, with
related reserves of $0.8 million and $6.0 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $21.0 million, $26.1 million
and $30.8 million, with related interest income while such loans were impaired
of $2.1 million, $3.2 million and $3.2 million as of December 31, 1999, 1998 and
1997, 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") and other funding agreements. 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. 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 was $37.1 million and $92.7
million at December 31, 1999 and 1998, respectively. The notional amounts of the
contracts represent the extent of the Company's investment but not 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 $36.8 million and $92.5 million
at December 31, 1999 and 1998, respectively.
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 losses were $0.9 million and $1.8 million in 1999 and 1998,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
the Company are realized immediately. There was $0.1 million of gains realized
on ineffective hedges in 1998. There were no gains or losses in 1999 and 1997.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- --------- --------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 92.7 $ -- $(33.0)
New contracts............................................... 947.0 1,117.5 (0.2)
Contracts terminated........................................ (1,002.6) (1,024.8) 33.2
--------- --------- ------
Contracts outstanding, end of year.......................... $ 37.1 $ 92.7 $ --
========= ========= ======
</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.
Additionally, in 1999, the Company entered into a foreign
F-21
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
currency swap contract to hedge foreign currency exposure on specific fixed rate
funding agreements. Interest and principal related to foreign fixed income
securities and liabilities 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 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 $(4.7) million and $1.2 million at December 31, 1999 and 1998,
respectively. Changes in the fair value of contracts hedging fixed income
securities are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Changes in fair value of contracts hedging fixed
rate funding agreements are reported as other operating income, consistent with
the underlying hedged liability. The net decrease in other operating income
related to these contracts was $2.6 million in 1999. 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 1999, 1998 and 1997. 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 1999 or 1998.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ----- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 42.6 $42.6 $ 47.6
New contracts............................................... 52.9 -- 5.0
Contracts expired........................................... (24.0) -- (10.0)
------ ----- ------
Contracts outstanding, end of year.......................... $ 71.5 $42.6 $ 42.6
====== ===== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at
December 31, 1999 are $8.3 million in 2000, $52.9 million in 2001 and $10.3
million thereafter. There are no expected maturities of such foreign currency
swap contracts in 2002, 2003 and 2004.
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. 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, 1999 and 1998 were net payables of
$4.2 million and $3.9 million, respectively. The Company does not require
collateral or other security to support financial instruments with credit risk.
F-22
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The decrease in net
investment income related to interest rate swap contracts was $7.0 million, $2.8
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The fair value of interest rate swap contracts outstanding was
$33.1 million and $(28.3) million at December 31, 1999 and 1998, 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 hedged transaction. The Company had
no deferred gain or loss on interest rate swap contracts in 1999 or 1998.
A reconciliation of the notional amount of interest rate swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $1,112.6 $ 244.1 $ 5.0
New contracts............................................... 905.4 873.5 244.7
Contracts terminated........................................ (888.5) -- --
Contracts expired........................................... (80.0) (5.0) (5.6)
Distribution of subsidiaries (Note 3)....................... (23.6) -- --
-------- -------- ------
Contracts outstanding, end of year.......................... $1,025.9 $1,112.6 $244.1
======== ======== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1999 are $44.0 million in 2000, $43.1 million in 2001, $83.5 million in 2002,
$536.0 million in 2003, and $319.3 million in 2004. There are no expected
maturities of such interest rate swap contracts thereafter.
G. OTHER SWAP CONTRACTS
The Company enters into insurance portfolio-linked and credit default swap
contracts for investment purposes. 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 insurance
portfolio-linked swap contracts is the inability of the counterparty to meet its
obligation. Under the terms of the credit default swap contracts, 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 its
counterparties and the underlying companies in default swap contracts, 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, 1999, was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.3) million and
$(0.1) million at December 31, 1999 and 1998, respectively. The net amount
receivable or payable under insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net (decrease) increase
in realized investment gains related to these contracts was $(0.2) million, $1.0
million and $(1.4) million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $0.4 million and $0.2 million for
the years ended December 31, 1999 and 1998, respectively. There was no net
investment income recognized in 1997.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------ -------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 255.0 $ 15.0 $ 58.6
New contracts............................................... 50.0 266.3 192.1
Contracts expired........................................... (115.0) (26.3) (211.6)
Contracts terminated........................................ -- -- (24.1)
------- ------ -------
Contracts outstanding, end of year.......................... $ 190.0 $255.0 $ 15.0
======= ====== =======
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1999 are
as follows: $140.0 million in 2000 and $50.0 million in 2001. There are no
expected maturities of such other swap contracts in 2002, 2003, 2004 and
thereafter.
H. OTHER
At December 31, 1999 and 1998, FAFLIC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
7. 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) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $415.7 $509.6 $523.3
Mortgage loans.............................................. 45.5 57.6 57.1
Equity securities........................................... 1.7 7.2 10.5
Policy loans................................................ 12.7 11.9 10.9
Real estate and other long-term investments................. 14.4 7.0 31.5
Short-term investments...................................... 26.6 15.6 9.9
------ ------ ------
Gross investment income..................................... 516.6 608.9 643.2
Less investment expenses.................................... (13.5) (15.0) (23.7)
------ ------ ------
Net investment income....................................... $503.1 $593.9 $619.5
====== ====== ======
</TABLE>
At December 31, 1999, the company had fixed maturities with a carrying value of
$1.0 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. 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 on non-accrual status at December 31, 1998. The effect of
non-accruals, compared with amounts that would have been recognized in
F-24
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accordance with the original terms of the investments, was a reduction in net
income by $1.4 million in 1999, and had no impact in 1998 and 1997.
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 $18.8 million, $28.7 million and $40.3 million at
December 31, 1999, 1998 and 1997, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $2.5 million, $3.3 million and $3.9 million in
1999, 1998 and 1997, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $3.3 million and $4.2
million in 1999, 1998 and 1997, respectively.
There were no mortgage loans which were non-income producing for the year ended
December 31, 1999. There were, however, fixed maturities with a carrying value
of $0.3 million which were non-income producing for the year ended December 31,
1999.
Included in other long-term investments is income from limited partnerships of
$6.6 million in 1999, losses of $6.3 million in 1998, and income of $7.6 million
in 1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ -----
<S> <C> <C> <C>
Fixed maturities............................................ $(52.0) $(11.6) $14.2
Mortgage loans.............................................. 2.5 8.8 (1.2)
Equity securities........................................... 141.3 63.7 53.5
Real estate and other....................................... 8.5 -- 9.8
------ ------ -----
Net realized investment gains............................... $100.3 $ 60.9 $76.3
====== ====== =====
</TABLE>
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>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
------------- ------------- ------ ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $1,480.5 $ 9.2 $ 27.1
Equity securities........................................... 421.2 149.0 7.6
1998
Fixed maturities............................................ $ 979.2 $ 17.9 $ 11.3
Equity securities........................................... 258.7 72.8 9.0
1997
Fixed maturities............................................ $1,870.7 $ 27.0 $ 15.9
Equity securities........................................... 144.9 55.5 1.2
</TABLE>
F-25
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. OTHER COMPREHENSIVE (LOSS) INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the Consolidated Statements of Comprehensive (Loss)
Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- ------
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period,
(includes $22.7 resulting from the distribution of
subsidiaries in 1999, net of taxes (benefit) and minority
interest of $(103.3) million, $(20.8) million and $123.7
million in 1999, 1998 and 1997, respectively).............. $ (121.9) $ (6.8) $115.5
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes and minority interest
of $33.5 million, $21.5 million and $30.7 million in 1999,
1998 and 1997, respectively)............................... (62.2) 33.3 37.6
-------- -------- ------
Other comprehensive (loss) income........................... $ (184.1) $ (40.1) $ 77.9
======== ======== ======
</TABLE>
8. 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 $31.1 million and $(27.1) million
at December 31, 1999 and 1998, respectively. In addition, the Company held
futures contracts with a carrying value of $(0.9) million and $(1.8) million at
December 31, 1999 and 1998, respectively. The fair value of these contracts was
$36.8 million and $92.5 million at December 31, 1999 and 1998, respectively.
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.
F-26
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is
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. Liabilities under individual fixed
annuity contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
All other liabilities are based on surrender values.
TRUST INSTRUMENTS SUPPORTED BY FUNDING OBLIGATIONS
Fair values 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.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value.
F-27
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 279.3 $ 279.3 $ 504.0 $ 504.0
Fixed maturities.......................................... 3,660.7 3,660.7 7,683.9 7,683.9
Equity securities......................................... 51.4 51.4 397.1 397.1
Mortgage loans............................................ 521.2 521.9 562.3 587.1
Policy loans.............................................. 170.5 170.5 154.3 154.3
-------- -------- -------- --------
$4,683.1 $4,683.8 $9,301.6 $9,326.4
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,316.0 $1,341.4 $1,791.8 $1,830.8
Supplemental contracts without life contingencies......... 48.8 48.8 37.3 37.3
Dividend accumulations.................................... 88.1 88.1 88.4 88.4
Other individual contract deposit funds................... 48.4 48.2 61.6 61.1
Other group contract deposit funds........................ 602.9 583.5 700.4 704.0
Individual fixed annuity contracts........................ 1,092.5 1,057.1 1,110.6 1,073.6
Trust instruments supported by funding obligations........ 50.6 49.6 -- --
Short-term debt........................................... -- -- 221.3 221.3
-------- -------- -------- --------
$3,247.3 $3,216.7 $4,011.4 $4,016.5
======== ======== ======== ========
</TABLE>
F-28
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income in 1999, 1998
and 1997 is a net pre-tax contribution from the Closed Block of $13.8 million,
$10.4 million and $9.1 million, respectively. Summarized financial information
of the Closed Block as of December 31, 1999 and 1998 and for the periods ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $387.4
and $399.1
respectively)........................................... $372.9 $414.2
Mortgage loans............................................ 136.3 136.0
Policy loans.............................................. 201.1 210.9
Cash and cash equivalents................................. 22.6 9.4
Accrued investment income................................. 14.0 14.1
Deferred policy acquisition costs......................... 13.1 15.6
Other assets.............................................. 12.3 2.9
------ ------
Total assets................................................ $772.3 $803.1
====== ======
Liabilities
Policy liabilities and accruals........................... $835.2 $862.9
Other liabilities......................................... 6.9 9.1
------ ------
Total liabilities........................................... $842.1 $872.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Revenues
Premiums and other income................................. $ 52.1 $ 55.4 $ 58.3
Net investment income..................................... 53.8 53.3 53.4
Realized investment (loss) gain........................... (0.6) 0.1 1.3
------ ------ ------
Total revenues.............................................. 105.3 108.8 113.0
------ ------ ------
Benefits and expenses
Policy benefits........................................... 88.9 95.0 100.5
Policy acquisition expenses............................... 2.5 2.7 3.0
Other operating expenses.................................. 0.1 0.7 0.4
------ ------ ------
Total benefits and expenses................................. 91.5 98.4 103.9
------ ------ ------
Contribution from the Closed Block.......................... $ 13.8 $ 10.4 $ 9.1
====== ====== ======
</TABLE>
F-29
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block........................ $ 13.8 $ 10.4 $ 9.1
Change in:
Deferred policy acquisition costs, net.................. 2.5 2.6 2.9
Premiums and other receivables.......................... -- 0.3 --
Policy liabilities and accruals......................... (13.1) (13.5) (11.6)
Accrued investment income............................... 0.1 - 0.2
Deferred taxes.......................................... -- 0.1 (5.1)
Other assets............................................ (8.3) 2.4 (2.9)
Expenses and taxes payable.............................. (2.9) (2.9) (2.0)
Other, net.............................................. 0.8 (0.1) (1.2)
------- ------- -------
Net cash used in operating activities..................... (7.1) (0.7) (10.6)
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 139.0 83.6 161.6
Purchases of investments................................ (128.5) (106.5) (161.4)
Other, net.............................................. 9.8 7.9 11.4
------- ------- -------
Net cash provided by (used in) investing activities....... 20.3 (15.0) 11.6
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 13.2 (15.7) 1.0
Cash and cash equivalents, beginning of year................ 9.4 25.1 24.1
------- ------- -------
Cash and cash equivalents, end of year...................... $ 22.6 $ 9.4 $ 25.1
======= ======= =======
</TABLE>
There were no valuation allowances on mortgage loans in the Closed Block at
December 31, 1999, 1998 or 1997, 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.
10. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
Short-term
Commercial paper.......................................... $ -- $ 41.3
Borrowings under bank credit facility..................... -- 150.0
Repurchase agreements..................................... -- 30.0
------ ------
Total short-term debt....................................... $ -- $221.3
====== ======
</TABLE>
F-30
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, there was no commercial
paper outstanding.
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. These borrowings were repaid in February
1999.
The company utilizes repurchase agreements to finance certain transactions and
had approximately $30 million in such agreements outstanding at December
31,1998. There were no repurchase agreements outstanding at December 31, 1999.
In 1999, there was no interest expense related to borrowings under the credit
agreement. Interest expense related to borrowings under the credit agreement was
approximately $0.7 million and $2.8 million in 1998 and 1997, respectively. All
interest expense is recorded in other operating expenses.
In October, 1995, AFC issued Senior Debentures with a face value of $200.0
million, pay interest at a rate of 7 5/8%, and mature on October 16, 2025. The
primary source of cash for repayment of the debt by AFC is dividends from FAFLIC
and Allmerica P&C.
11. 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) on continuing operations in the consolidated statements of income is
shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $88.7 $ 74.6 $74.4
Deferred.................................................. 4.3 (15.4) 14.2
----- ------ -----
Total....................................................... $93.0 $ 59.2 $88.6
===== ====== =====
</TABLE>
The federal income taxes attributable to the consolidated results of continuing
operations are different from the amounts determined by multiplying income
before federal income taxes by the statutory 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) 1999 1998 1997
------------- -------- ------ ------
<S> <C> <C> <C>
Expected federal income tax expense on continuing
operations................................................ $133.9 $107.9 $122.9
Tax-exempt interest....................................... (24.2) (38.9) (37.9)
Dividend received deduction............................... -- (5.1) (3.2)
Changes in tax reserve estimates.......................... (8.7) 2.3 7.8
Tax credits............................................... (8.5) (8.5) (2.7)
Other, net................................................ 0.5 1.5 1.7
------ ------ ------
Federal income tax expense on continuing operations......... $ 93.0 $ 59.2 $ 88.6
====== ====== ======
</TABLE>
F-31
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) 1999 1998
------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards......................................... $ -- $ (16.8)
Loss reserve discounting.................................. (283.5) (406.6)
Deferred acquisition costs................................ 355.7 345.8
Employee benefit plans.................................... (52.0) (45.3)
Investments, net.......................................... (19.5) 121.7
Bad debt reserve.......................................... -- (1.8)
Litigation reserve........................................ (6.0) (10.9)
Discontinued operations................................... (11.7) --
Other, net................................................ (1.1) (5.5)
------- -------
Deferred tax asset, net..................................... $ (18.1) $ (19.4)
======= =======
</TABLE>
Gross deferred income tax assets totaled $515.8 million and $486.9 millions at
December 31, 1999 and 1998, respectively. Gross deferred income tax liabilities
totaled $497.7 million and $467.5 million at December 31, 1999 and 1998,
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, 1999 there are no available
alternative minimum tax credit carryforwards.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Services ("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 1994. 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.
12. PENSION PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple benefit plans to employees and agents of these affiliated
Companies, including retirement plans. The salaries of employees and agents
covered by these plans and the expenses of these plans are charged to the
affiliated Companies in accordance with an intercompany cost sharing agreement.
F-32
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1999, 1998 and 1997 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) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.3 $ 19.0 $ 19.9
Interest cost............................................... 26.5 25.5 23.5
Expected return on plan assets.............................. (38.9) (34.9) (31.2)
Recognized net actuarial loss............................... 0.4 0.4 0.1
Amortization of transition asset............................ (1.4) (1.8) (1.9)
Amortization of prior service cost.......................... (2.2) (1.7) (2.0)
------- ------- -------
Net periodic pension cost................................. $ 3.7 $ 6.5 $ 8.4
======= ======= =======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.7
million of the net periodic pension cost was allocated to the distributed
subsidiaries.
The following table summarizes the status of the plan. At December 31, 1999 and
1998 the plans' assets exceeded their projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year......... $ 414.2 $ 370.4
Service cost -- benefits earned during the year........... 19.3 19.0
Interest cost............................................. 26.5 25.5
Actuarial (gains) losses.................................. (44.4) 20.4
Benefits paid............................................. (22.9) (21.1)
------- -------
Projected benefit obligation at end of year............. 392.7 414.2
------- -------
</TABLE>
F-33
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- -------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year............ 441.6 395.5
Actual return on plan assets.............................. 51.9 67.2
Benefits paid............................................. (22.9) (21.1)
Fair value of plan assets at end of year................ 470.6 441.6
Funded status of the plan................................. 77.9 27.4
Unrecognized transition obligation........................ (21.6) (23.9)
Unamortized prior service cost............................ (12.0) (11.0)
Unrecognized net actuarial gains.......................... (101.6) (54.9)
------- -------
Net pension liability................................... $ (57.3) $ (62.4)
======= =======
</TABLE>
As a result of AFC's merger with Allmerica P&C in 1997, certain pension
liabilities were reduced to reflect their fair value as of the merger date.
These pension liabilities were reduced by $8.9 million and $10.3 million in 1999
and 1998, respectively, which reflects fair value, net of applicable
amortization.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.75% and 6.5% in 1999 and 1998, respectively, and the
assumed long-term rate of return on plan assets was 9.0% in both 1999 and 1998.
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 796,462 shares and 973,262
shares of AFC Common Stock at December 31, 1999 and 1998, respectively, with a
market value of $44.3 million and $56.3 million at December 31, 1999 and 1998,
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 1999, 1998 and
1997, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expense related to this plan was $5.9 million, $5.6
million and $3.3 million in 1999, 1998 and 1997, respectively. In 1999,
subsequent to the AFC corporate reorganization, approximately $1.4 million of
the 401(k) expense was allocated to the distributed subsidiaries. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The plan expense in 1999, 1998 and 1997 was $3.1 million, $3.0
million and $2.8 million, respectively.
On January 1, 1998, substantially all of the defined benefit and defined
contribution 401(k) plans previously provided by the affiliated Companies 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.
13. OTHER POSTRETIREMENT BENEFIT PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple postretirement medical and death benefit plans to employees,
agents and retirees of these affiliated Companies. The costs of these plans are
charged to the affiliated Companies in accordance with an intercompany cost
sharing agreement.
F-34
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 plans' funded status reconciled with amounts recognized in the Company's
Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 84.0 $ 71.8
Service cost................................................ 2.9 3.1
Interest cost............................................... 4.6 5.1
Actuarial (gains) losses.................................... (21.2) 7.6
Benefits paid............................................... (3.5) (3.6)
------- -------
Accumulated postretirement benefit obligation at end of
year.................................................... 66.8 84.0
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status of the plan................................... (66.8) (84.0)
Unamortized prior service cost.............................. (9.8) (12.9)
Unrecognized net actuarial (gains) losses................... (13.8) 7.5
------- -------
Accumulated postretirement benefit costs.................. $ (90.4) $ (89.4)
======= =======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 2.9 $ 3.1 $ 3.0
Interest cost............................................... 4.6 5.1 4.6
Recognized net actuarial loss (gain)........................ 0.1 0.1 (0.1)
Amortization of prior service cost.......................... (2.3) (2.4) (2.7)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.3 $ 5.9 $ 4.8
====== ====== ======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.1
million of the net periodic postretirement cost was allocated to the distributed
subsidiaries.
As a result of AFC's merger with Allmerica P&C in 1997, certain postretirement
liabilities were reduced to reflect their fair value as of the merger date.
These postretirement liabilities were reduced by $4.6 million and $5.4 million
in 1999 and 1998, respectively, which reflects fair value, net of applicable
amortization.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1999, health care costs were assumed to increase 6.0% in 2000,
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
F-35
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
one percentage point in each year would increase the accumulated postretirement
benefit obligation at December 31, 1999 by $4.1 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1999 by $0.6 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, 1999 by $3.6
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 6.5% at December 31, 1999 and
1998, respectively. 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 postretirement medical and death
benefits plans previously provided by the affiliated Companies 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.
14. DIVIDEND RESTRICTIONS
Massachusetts and Delaware have enacted laws governing the payment of dividends
to stockholders by insurers. These laws affect the dividend paying ability of
FAFLIC and AFLIAC, respectively.
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 1999 and 1997, no dividends were
declared by FAFLIC to AFC. During 1998, FAFLIC paid dividends of $50.0 million
to AFC. As of July 1, 1999, FAFLIC's ownership of Allmerica P&C, as well as
several non-insurance subsidiaries, was transferred from FAFLIC to AFC. Under an
agreement with the Commissioner, any dividend from FAFLIC to AFC for years 2000
and 2001 would require the prior approval of the Commissioner and may require
AFC to make additional capital contributions to FAFLIC.
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 1999, 1998 or 1997. During 2000, AFLIAC could pay dividends of
$34.3 million to FAFLIC without prior approval.
F-36
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SEGMENT INFORMATION
The Company offers Asset Accumulation financial products and services. Prior to
the AFC corporate reorganization, the Company offered financial products and
services in two major areas: Risk Management and Asset Accumulation. Within
these broad areas, the Company conducted business principally in three operating
segments. These segments were Risk Management, Allmerica Financial Services and
Allmerica Asset Management. In accordance with Statement No. 131, the separate
financial information of each segment is presented 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 Company's reportable segments is included below.
In 1999, the Company reorganized its Property and Casualty business and
Corporate Risk Management Services operations within the Risk Management
segment. Under the new structure, the Risk Management segment manages its
business through five distribution channels identified as Hanover North, Hanover
South, Citizens Midwest, Allmerica Voluntary Benefits and Allmerica Specialty.
During the second quarter of 1999, the Company approved a plan to exit its group
life and health business, consisting of its EBS business, its AGU business and
its reinsurance pool business. Results of operations from this business,
relating to both the current and the prior periods, have been segregated and
reported as a component of discontinued operations in the Consolidated
Statements of Income. Operating results from this business were previously
reported in the Allmerica Voluntary Benefits and Allmerica Specialty
distribution channels. Prior to 1999, results of the group life and health
business were included in the Corporate Risk Management Services segment, while
all other Risk Management business was reflected in the Property and Casualty
segment.
The Risk Management segment's property and casualty business is offered
primarily through the Hanover North, Hanover South and Citizens Midwest
distribution channels utilizing the Company's independent agent network
primarily in the Northeast, Midwest and Southeast United States, maintaining a
strong regional focus. Allmerica Voluntary Benefits focuses on worksite
distribution, which offers discounted property and casualty products through
employer sponsored programs, and affinity group property and casualty business.
Allmerica Specialty offers special niche property and casualty products in
selected markets. On July 1, 1999, AFC made certain changes to its corporate
structure as discussed in Note 3. As a result, FAFLIC distributed its interest
in the property and casualty business after that date.
The 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 GICs such as the
traditional GIC, synthetic GIC and other funding agreements. Funding agreements
are investment contracts issued to institutional buyers, such as money market
funds, corporate cash management programs and securities lending collateral
programs, which typically have short maturities and periodic interest rate
resets based on an index such as LIBOR. 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. As a result of the aforementioned change in the AFC corporate structure,
FAFLIC distributed its ownership of certain investment advisory business as of
July 1, 1999.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt, Capital
Securities and corporate overhead expenses. Corporate overhead
F-37
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expenses reflect costs not attributable to a particular segment, such as those
generated by certain officers and directors, Corporate Technology, Corporate
Finance, Human Resources and the Legal department.
Management evaluates the results of the aforementioned segments based on a
pre-tax and minority interest basis. Segment income is determined by adjusting
net income for net realized investment gains and losses, net gains and losses on
disposals of businesses, discontinued operations, 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 segment income
enhances understanding of the Company's results of operations by highlighting
net income attributable to the normal, recurring operations of the business.
However, 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) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management........................................... $1,075.2 $2,220.8 $2,227.3
Asset Accumulation
Allmerica Financial Services............................ 797.0 721.2 713.9
Allmerica Asset Management.............................. 144.5 121.7 91.1
-------- -------- --------
Subtotal............................................ 941.5 842.9 805.0
-------- -------- --------
Corporate................................................. 0.4 2.3 4.7
Intersegment revenues..................................... (0.8) (7.6) (11.5)
-------- -------- --------
Total segment revenues including Closed Block........... 2,016.3 3,058.4 3,025.5
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block........................... (92.1) (98.4) (102.6)
Change in mortality................................... -- -- (4.2)
Net realized gains.................................... 100.3 60.9 76.3
-------- -------- --------
Total revenues............................................ $2,024.5 $3,020.9 $2,995.0
======== ======== ========
</TABLE>
F-38
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
Segment income (loss) before income taxes and minority interest:
<S> <C> <C> <C>
Risk Management............................................. $ 85.1 $ 149.7 $ 174.2
Asset Accumulation
Allmerica Financial Services.............................. 207.1 169.0 134.6
Allmerica Asset Management................................ 21.3 23.7 18.4
-------- -------- --------
Subtotal.............................................. 228.4 192.7 153.0
-------- -------- --------
Corporate................................................... (38.6) (45.2) (44.6)
Segment income before income taxes and minority interest... 274.9 297.2 282.6
Adjustments to segment income:
Net realized investment gains, net of amortization........ 106.1 52.2 78.5
Sales practice litigation expense......................... -- (31.0) --
Gain from change in mortality assumptions................. -- -- 47.0
Loss on cession of disability income business............. -- -- (53.9)
Restructuring costs....................................... -- (9.0) --
Other items............................................... -- (0.8) (2.8)
-------- -------- --------
Income before taxes and minority interest................... $ 381.0 $ 308.6 $ 351.4
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998 1999 1998
------------- --------- --------- ------------ ------------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
<S> <C> <C> <C> <C>
Risk Management............................... $ 542.0 $ 6,216.8 $ 6.0 $ 167.5
Asset Accumulation
Allmerica Financial Services................ 23,410.7 19,407.3 1,213.1 993.1
Allmerica Asset Management.................. 1,381.1 1,810.9 0.4 0.6
--------- --------- --------- ---------
Subtotal................................ 24,791.8 21,218.2 1,213.5 993.7
Corporate................................... -- 29.6 -- --
--------- --------- --------- ---------
Total..................................... $25,333.8 $27,464.6 $ 1,219.5 $ 1,161.2
========= ========= ========= =========
</TABLE>
16. LEASE COMMITMENTS
Rental expenses for operating leases, including those related to the
discontinued operations of the Company, amounted to $22.2 million, $34.9 million
and $33.6 million in 1999, 1998 and 1997, respectively. These expenses relate
primarily to building leases of the Company. At December 31, 1999, future
minimum rental payments under non-cancelable operating leases were approximately
$39.9 million, payable as follows: 2000 - $14.1 million; 2001 -- $12.7 million;
2002 -- $8.1 million; 2003 -- $3.6 million, and $1.4 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 2000.
F-39
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REINSURANCE
In the normal course of business, the Company seeks to reduce the losses 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 Statement of Financial
Accounting Standards 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.
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated insurer (See Note 5).
Prior to the AFC corporate reorganization, the Company was subject to
concentration of risk with respect to this reinsurance agreement, which
represented 10% or more of the Company's reinsurance business. Net premiums
earned and losses and loss adjustment expenses ceded under this agreement in
1999 were $21.9 million and $35.0 million, respectively. In addition, 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"). Prior to the AFC corporate reorganization, both CAR and MCCA
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company ceded 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 1999, 1998 and 1997 were
$20.4 million and $21.4 million, $34.3 million and $38.1 million, and $32.3
million and $28.2 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1999, 1998 and 1997 of $1.8
million and $30.6 million, $3.7 million and $18.0 million, and $9.8 million and
$(0.8) 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-40
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................... $ 53.5 $ 51.4 $ 55.9
Assumed................................................... 0.7 0.7 0.6
Ceded..................................................... (50.0) (47.8) (29.1)
-------- -------- --------
Net premiums................................................ $ 4.2 $ 4.3 $ 27.4
======== ======== ========
Property and casualty premiums written:
Direct.................................................... $1,089.0 $1,970.4 $2,068.5
Assumed................................................... 27.3 58.8 103.1
Ceded..................................................... (135.4) (74.1) (179.8)
-------- -------- --------
Net premiums................................................ $ 980.9 $1,955.1 $1,991.8
======== ======== ========
Property and casualty premiums earned:
Direct.................................................... $1,047.3 $1,966.8 $2,046.1
Assumed................................................... 30.3 64.5 102.0
Ceded..................................................... (127.3) (66.1) (195.1)
-------- -------- --------
Net premiums................................................ $ 950.3 $1,965.2 $1,953.0
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 391.9 $ 359.5 $ 397.4
Assumed................................................... 0.1 0.3 0.4
Ceded..................................................... (39.2) (49.5) (79.4)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses.................................................. $ 352.8 $ 310.3 $ 318.4
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................... $ 805.6 $1,588.2 $1,464.9
Assumed................................................... 25.9 62.7 101.2
Ceded..................................................... (128.0) (158.2) (120.6)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses.................................................. $ 703.5 $1,492.7 $1,445.5
======== ======== ========
</TABLE>
F-41
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $1,161.2 $ 965.5 $ 822.7
Acquisition expenses deferred............................... 419.2 638.2 614.3
Amortized to expense during the year........................ (240.9) (449.6) (472.6)
Adjustment for discontinued operations...................... 3.4 ( 0.2) --
Adjustment to equity during the year........................ 39.3 7.3 (11.1)
Adjustment due to distribution of subsidiaries.............. (162.7) -- --
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...................................... $1,219.5 $1,161.2 $ 965.5
======== ======== ========
</TABLE>
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.
19. 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
$601.3 million and $568.0 million at December 31, 1999 and 1998, respectively.
Accident and health claim liabilities were re-estimated for all prior years and
were increased by $51.2 million and $14.6 million in 1999 and 1998,
respectively. The increase in 1999 resulted from the Company's reserve
strengthening primarily in the EBS and reinsurance pool business. The 1998
increase also resulted from the Company's reserve strengthening, primarily in
the assumed reinsurance and stop loss only business.
F-42
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,597.3 $2,615.4 $2,744.1
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year.......... 795.6 1,609.0 1,564.1
Decrease in provision for insured events of prior years... (96.1) (127.2) (127.9)
-------- -------- --------
Total incurred losses and LAE............................... 699.5 1,481.8 1,436.2
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................... 342.1 871.9 775.1
Losses and LAE attributable to insured events of prior
years................................................... 424.2 643.0 732.1
-------- -------- --------
Total payments 766.3 1,514.9 1,507.2
Change in reinsurance recoverable on unpaid losses.......... 44.3 15.0 (50.2)
Distribution of subsidiaries................................ (2,574.8) -- --
Other (1)................................................... -- -- (7.5)
-------- -------- --------
Reserve for losses and LAE, end of year..................... $ -- $2,597.3 $2,615.4
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the reserves have been re-estimated for all prior
accident years and were decreased by $96.1 million, $127.2 million and $127.9
million in 1999, 1998 and 1997, respectively, reflecting increased favorable
development on reserves for both losses and loss adjustment expenses.
Favorable development on prior years' loss reserves was $52.0 million, $58.9
million, and $87.2 million prior to the AFC corporate reorganization in 1999 and
for the years ended December 31, 1998 and 1997, respectively. Favorable
development on prior year's loss adjustment expense reserves was $44.1 million,
$68.3 million, and $40.7 million prior to the AFC corporate reorganization in
1999 and for the years ended December 31, 1998 and 1997, respectively. The
increase in favorable development 1998 is primarily attributable to claims
process improvement initiatives taken by the Company. The Company has lowered
claim settlement costs through increased utilization of in-house attorneys and
consolidation of claim offices.
This favorable development reflects the Company's 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 Risk Management segment, the
exposure to environmental liabilities is relatively small and therefore its
reserves are relatively small compared to other types of liabilities. Due to the
AFC corporate reorganization, the Company had no exposure for this item at
December 31, 1999. Loss and LAE reserves related to environmental damage and
toxic tort liability, included in the reserve for losses and LAE, were $49.9
million and $53.1 million, net of reinsurance of $14.2 million and $15.7 million
in 1998 and 1997, respectively. The Company does not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Company 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,
F-43
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current law and methodologies currently available. Although these claims are not
significant, their existence gives rise to uncertainty and is discussed because
of the possibility, however remote, that they may become significant. 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.
20. MINORITY INTEREST
As a result of the Company's divestiture of certain of its subsidiaries
including its 84.5% ownership of the outstanding shares of the common stock of
Allmerica P&C effective July 1, 1999, there is no minority interest reflected on
the Consolidated Balance Sheets as of December 31, 1999. In prior years, the
Company's interest in Allmerica P&C was represented by ownership of 70.0% and
65.8% of the outstanding shares of common stock at December 31, 1998 and 1997,
respectively. Earnings and shareholder's equity attributable to minority
shareholders are included in minority interest in the consolidated financial
statements through the period ended June 30, 1999 and for the years ended
December 31, 1998 and 1997.
21. 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. The court granted preliminary approval of
the settlement on December 4, 1998. On May 19, 1999, the court issued an order
certifying the class for settlement purposes and granting final approval of the
settlement agreement. 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, 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,
F-44
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. 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.
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.
22. STATUTORY FINANCIAL INFORMATION
The Company is 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. In 1999, 49 out of 50
states have adopted the National Association of Insurance Commissioners proposed
Codification, which provides for uniform statutory accounting principles. These
principles are effective January 1, 2001. The Company is currently assessing the
impact that the adoption of Codification will have on its statutory results of
operations and financial position.
Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies........................... $322.6 $ 180.7 $ 190.3
Life and Health Companies................................. 239.0 86.4 191.2
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies (See Note 3).............. $-- $1,269.3 $1,279.6
Life and Health Companies................................. 590.1 1,164.1 1,221.3
</TABLE>
23. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
During the second quarter of 2000, AFC adopted a formal company-wide
restructuring plan. This plan is the result of a corporate initiative that began
in the fall of 1999, intended to reduce expenses and enhance revenues. As a
result of this restructuring plan, FAFLIC recognized a pre-tax restructuring
charge of $11.0 million for the quarter ended June 30, 2000. Approximately
$1.9 million of this charge relates to severance and other employee related
costs resulting from the elimination of positions. All levels of employees, from
staff to senior management, were affected by the restructuring. In addition,
approximately $9.1 million of this charge relates to other restructuring costs,
including one-time project costs.
F-45
<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 of 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, 1999, 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 accounting principles generally accepted in the United States.
These financial statements are the responsibility of First Allmerica Financial
Life Insurance Company; 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 auditing standards generally accepted in
the United States, 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, 1999 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SMALL SMALL CONTRARIAN
CAP VALUE CAP GROWTH VALUE
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 623,253 $ 760,026 $ 1,868,413
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 623,253 760,026 1,868,413
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 623,253 $ 760,026 $ 1,868,413
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 623,253 $ 760,026 $ 1,868,413
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 623,253 $ 760,026 $ 1,868,413
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 700,626 498,017 1,769,086
Net asset value per unit, December 31, 1999 ............................... $ 0.889567 $ 1.526104 $ 1.056146
<CAPTION>
INTERNATIONAL GROWTH VALUE+GROWTH
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 791,747 $ 1,977,099 $ 2,125,402
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - 2,010
------------- ------------- -------------
Total assets .......................................................... 791,747 1,977,099 2,127,412
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 791,747 $ 1,977,099 $ 2,127,412
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 791,747 $ 1,977,099 $ 2,127,412
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 791,747 $ 1,977,099 $ 2,127,412
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 544,811 1,323,440 1,627,347
Net asset value per unit, December 31, 1999 ............................... $ 1.453248 $ 1.493909 $ 1.307288
<CAPTION>
TOTAL
HORIZON 20+ RETURN HORIZON 10+
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 148,614 $ 3,513,684 $ 1,306,645
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - 7,102
------------- ------------- -------------
Total assets .......................................................... 148,614 3,513,684 1,313,747
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 148,614 $ 3,513,684 $ 1,313,747
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 148,614 $ 3,513,684 $ 1,313,747
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 148,614 $ 3,513,684 $ 1,313,747
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 126,277 2,695,999 1,102,382
Net asset value per unit, December 31, 1999 ............................... $ 1.176885 $ 1.303296 $ 1.191734
</TABLE>
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, 1999
<TABLE>
<CAPTION>
INVESTMENT
HORIZON 5 HIGH YIELD GRADE BOND
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 217,677 $ 2,819,698 $ 657,286
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... 6,277 - 6,589
------------- ------------- -------------
Total assets .......................................................... 223,954 2,819,698 663,875
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 223,954 $ 2,819,698 $ 663,875
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 223,954 $ 2,819,698 $ 663,875
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 223,954 $2,819,698 $ 663,875
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 196,739 2,786,332 643,242
Net asset value per unit, December 31, 1999 ............................... $ 1.138338 $ 1.011975 $ 1.032076
<CAPTION>
GOVERNMENT MONEY GLOBAL
SECURITIES MARKET INCOME
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 732,281 $ 2,482,718 $ 56,877
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - 5,851 -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 732,281 2,488,569 56,877
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 732,281 $ 2,488,569 $ 56,877
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 732,281 $ 2,488,569 $ 56,877
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 732,281 $ 2,488,569 $ 56,877
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 696,099 2,321,614 54,931
Net asset value per unit, December 31, 1999 ............................... $ 1.051978 $ 1.071913 $ 1.035444
<CAPTION>
DREMAN DREMAN
BLUE FINANCIAL HIGH
CHIP SERVICES RETURN EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 4,421,402 $ 286,632 $ 2,031,960
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 4,421,402 286,632 2,031,960
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 4,421,402 $ 286,632 $ 2,031,960
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 4,421,402 $ 286,632 $ 2,031,960
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 4,421,402 $ 286,632 $ 2,031,960
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 2,885,397 271,685 2,011,587
Net asset value per unit, December 31, 1999 ............................... $ 1.532337 $ 1.055018 $ 1.010128
</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, 1999
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH GLOBAL AGGRESSIVE
AND INCOME BLUE CHIP GROWTH
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 229,049 $ 393,350 $ 164,236
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 229,049 393,350 164,236
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 229,049 $ 393,350 $ 164,236
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 229,049 $ 393,350 $ 161,464
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - 2,772
------------- ------------- -------------
$ 229,049 $ 393,350 $ 164,236
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 196,468 302,138 118,504
Net asset value per unit, December 31, 1999 ............................... $ 1.165829 $ 1.301886 $ 1.385911
<CAPTION>
KVS FOCUSED
TECHNOLOGY INDEX LARGE CAP
GROWTH 500 GROWTH
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 1,103,672 $ 65,135 $ 2,562
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 1,103,672 65,135 2,562
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 1,103,672 $ 65,135 $ 2,562
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 1,103,672 $ 62,954 $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - 2,181 2,562
------------- ------------- -------------
$ 1,103,672 $ 65,135 $ 2,562
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 626,902 59,733 2,000
Net asset value per unit, December 31, 1999 ............................... $ 1.760518 $ 1.090438 $ 1.280944
<CAPTION>
KVS KVS SCUDDER
GROWTH GROWTH VLIF
OPPORTUNITIES AND INCOME INTERNATIONAL
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 2,323 $ 2,293 $ -
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - 547,396
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 2,323 2,293 547,396
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 2,323 $ 2,293 $ 547,396
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ - $ - $ 547,396
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... 2,323 2,293 -
------------- ------------- -------------
$ 2,323 $ 2,293 $ 547,396
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 2,000 2,000 326,803
Net asset value per unit, December 31, 1999 ............................... $ 1.161527 $ 1.146631 $ 1.675000
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SCUDDER SCUDDER SCUDDER ALGER
VLIF VLIF VLIF AMERICAN
GLOBAL CAPITAL GROWTH LEVERAGED
DISCOVERY GROWTH AND INCOME ALLCAP
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ................... $ - $ - $ - $ -
Investments in shares of Scudder Variable Life Investment Fund (VLIF) .. 80,932 1,324,314 898,882
Investments in shares of The Alger American Fund ........................ - - - 29,181
Investments in shares of Dreyfus Investment Portfolios .................. - - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ..................................................... - - - -
Investments in shares of Janus Aspen Series ............................. - - - -
Dividend receivable ..................................................... - - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ..................................................... - - - -
----------- ----------- ----------- -----------
Total assets ....................................................... 80,932 1,324,314 898,882 29,181
LIABILITIES: ............................................................ - - - -
----------- ----------- ----------- -----------
Net assets .......................................................... $ 80,932 $ 1,324,314 $ 898,882 $ 29,181
=========== =========== =========== ===========
Net asset distribution by category:
Variable annuity contracts ............................................ $ 80,932 $ 1,324,314 $ 898,882 $ 26,788
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................. - - - 2,393
----------- ----------- ----------- -----------
$ 80,932 $ 1,324,314 $ 898,882 $ 29,181
=========== =========== =========== ===========
Units outstanding, December 31, 1999 .................................... 57,326 847,618 779,396 24,384
Net asset value per unit, December 31, 1999 ............................. $ 1.411782 $ 1.562395 $ 1.153305 $ 1.196733
<CAPTION>
DREYFUS JANUS
ALGER DREYFUS SOCIALLY JANUS ASPEN
AMERICAN MIDCAP RESPONSIBLE ASPEN GROWTH
BALANCED STOCK GROWTH GROWTH AND INCOME
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ................... $ - $ - $ - $ - $ -
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..
Investments in shares of The Alger American Fund ........................ 2,116 - - - -
Investments in shares of Dreyfus Investment Portfolios .................. - 4,375 - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ..................................................... - - 2,345 - -
Investments in shares of Janus Aspen Series ............................. - - - 2,455 2,813
Dividend receivable ..................................................... - - - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ..................................................... - - - - -
--------- --------- --------- --------- ---------
Total assets ....................................................... 2,116 4,375 2,345 2,455 2,813
LIABILITIES: ............................................................ - - - - -
--------- --------- --------- --------- ---------
Net assets .......................................................... $ 2,116 $ 4,375 $ 2,345 $ 2,455 $2,813
========= ========= ========= ========= =========
Net asset distribution by category:
Variable annuity contracts ............................................ $ - $ 2,155 $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................. 2,116 2,220 2,345 2,455 2,813
--------- --------- --------- --------- ---------
$ 2,116 $ 4,375 $ 2,345 $ 2,455 $ 2,813
========= ========= ========= ========= =========
Units outstanding, December 31, 1999 .................................... 2,000 3,940 2,000 2,000 2,000
Net asset value per unit, December 31, 1999 ............................. $1.058063 $1.110152 $1.172578 $1.227452 $1.406722
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SMALL SMALL CONTRARIAN
CAP VALUE CAP GROWTH VALUE INTERNATIONAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends .................................................. $ 5,884 $ - $ 41,954 $ 5,096
------------- ------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ............................ 8,315 4,814 31,029 6,520
Administrative expense fees ................................ 997 577 3,724 782
------------- ------------- ------------- -------------
Total expenses ........................................... 9,312 5,391 34,753 7,302
------------- ------------- ------------- -------------
Net investment income (loss) ............................. (3,428) (5,391) 7,201 (2,206)
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ......... - - 139,847 54,787
Net realized gain (loss) from sales of investments ......... (8,705) 4,981 22,078 732
------------- ------------- ------------- -------------
Net realized gain (loss) ................................. (8,705) 4,981 161,925 55,519
Net unrealized gain (loss) ................................. 9,767 158,028 (455,682) 176,692
------------- ------------- ------------- -------------
Net realized and unrealized gain (loss) .................. 1,062 163,009 (293,757) 232,211
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from operations .... $ (2,366) $ 157,618 $ (286,556) $ 230,005
============= ============= ============= =============
<CAPTION>
TOTAL
GROWTH VALUE+GROWTH HORIZON 20+ RETURN HORIZON 10+
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................ $ - $ 8,337 $ 701 $ 56,894 $ 19,602
------------ ------------ ------------ ------------ ------------
EXPENSES:
Mortality and expense risk fees .......................... 13,237 19,405 1,206 30,509 13,734
Administrative expense fees .............................. 1,589 2,329 144 3,662 1,648
------------ ------------ ------------ ------------ ------------
Total expenses ......................................... 14,826 21,734 1,350 34,171 15,382
------------ ------------ ------------ ------------ ------------
Net investment income (loss) ........................... (14,826) (13,397) (649) 22,723 4,220
------------ ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ....... - 29,181 350 94,824 -
Net realized gain (loss) from sales of investments ....... 17,517 39,354 523 13,757 3,632
------------ ------------ ------------ ------------ ------------
Net realized gain (loss) ............................... 17,517 68,535 873 108,581 3,632
Net unrealized gain (loss) ............................... 415,869 199,664 7,415 207,037 66,525
------------ ------------ ------------ ------------ ------------
Net realized and unrealized gain (loss) ................ 433,386 268,199 8,288 315,618 70,157
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from operations .. $ 418,560 $ 254,802 $ 7,639 $ 338,341 $ 74,377
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
HORIZON 5 HIGH YIELD GRADE BOND SECURITIES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................................... $ 9,972 $ 232,881 $ 14,742 $ 49,369
---------- ---------- ---------- ----------
EXPENSES:
Mortality and expense risk fees ......................... 5,631 34,325 7,437 11,365
Administrative expense fees ............................. 676 4,119 892 1,363
---------- ---------- ---------- ----------
Total expenses ........................................ 6,307 38,444 8,329 12,728
---------- ---------- ---------- ----------
Net investment income (loss) .......................... 3,665 194,437 6,413 36,641
---------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ...... - - 4,914 -
Net realized gain (loss) from sales of investments ...... 26,258 (30,516) (1,524) (16,841)
---------- ---------- ---------- ----------
Net realized gain (loss) .............................. 26,258 (30,516) 3,390 (16,841)
Net unrealized gain (loss) .............................. (21,664) (156,114) (29,236) (25,985)
---------- ---------- ---------- ----------
Net realized and unrealized gain (loss) ............... 4,594 (186,630) (25,846) (42,826)
---------- ---------- ---------- ----------
Net increase (decrease) in net assets from operations.. $ 8,259 $ 7,807 $ (19,433) $ (6,185)
========== ========== ========== ==========
<CAPTION>
DREMAN DREMAN
MONEY GLOBAL BLUE FINANCIAL HIGH
MARKET INCOME CHIP SERVICES RETURN EQUITY
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................................... $ 65,507 $ 1,785 $ 9,927 $ 703 $ 12,224
------------ ------------ ------------ ------------ -------------
EXPENSES:
Mortality and expense risk fees ......................... 17,054 610 31,732 2,560 20,851
Administrative expense fees ............................. 2,046 74 3,808 308 2,502
------------ ------------ ------------ ------------ -------------
Total expenses ........................................ 19,100 684 35,540 2,868 23,353
------------ ------------ ------------ ------------ -------------
Net investment income (loss) .......................... 46,407 1,101 (25,613) (2,165) (11,129)
------------ ------------ ------------ ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ...... - 893 - - 12,224
Net realized gain (loss) from sales of investments ...... - (432) 33,064 (1,279) (68,411)
------------ ------------ ------------ ------------ -------------
Net realized gain (loss) .............................. - 461 33,064 (1,279) (56,187)
Net unrealized gain (loss) .............................. - (5,155) 622,042 (23,698) (254,638)
------------ ------------ ------------ ------------ -------------
Net realized and unrealized gain (loss) ............... - (4,694) 655,106 (24,977) (310,825)
------------ ------------ ------------ ------------ -------------
Net increase (decrease) in net assets from operations . $ 46,407 $ (3,593) $ 629,493 $ (27,142) $ (321,954)
============ ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH GLOBAL AGGRESSIVE TECHNOLOGY
AND INCOME BLUE CHIP GROWTH(a) GROWTH(a)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends .............................................. $ 75 $ 153 $ - $ -
------------- ------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................ 1,412 1,889 143 1,702
Administrative expense fees ............................ 169 227 18 205
------------- ------------- ------------- -------------
Total expenses ....................................... 1,581 2,116 161 1,907
------------- ------------- ------------- -------------
Net investment income (loss) ......................... (1,506) (1,963) (161) (1,907)
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ..... - - - -
Net realized gain (loss) from sales of investments ..... 560 736 (2) 831
------------- ------------- ------------- -------------
Net realized gain (loss) ............................. 560 736 (2) 831
Net unrealized gain (loss) ............................. 28,004 56,976 9,997 179,517
------------- ------------- ------------- -------------
Net realized and unrealized gain (loss) .............. 28,564 57,712 9,995 180,348
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from operations. $ 27,058 $ 55,749 $ 9,834 $ 178,441
============= ============= ============= =============
<CAPTION>
KVS FOCUSED KVS KVS SCUDDER
INDEX LARGE CAP GROWTH GROWTH VLIF
500(b) GROWTH(c) OPPORTUNITIES(c) AND INCOME(c) INTERNATIONAL
-------- ------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends .............................................. $ - $ - $ - $ - $ 450
-------- ------------- ---------------- -------------- -------------
EXPENSES:
Mortality and expense risk fees ........................ 63 5 5 5 4,415
Administrative expense fees ............................ 8 - - - 529
-------- ------------- ---------------- -------------- -------------
Total expenses ....................................... 71 5 5 5 4,944
-------- ------------- ---------------- -------------- -------------
Net investment income (loss) ......................... (71) (5) (5) (5) (4,494)
-------- ------------- ---------------- -------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ..... - - - - 33,560
Net realized gain (loss) from sales of investments ..... 2 - - - 17,422
-------- ------------- ---------------- -------------- -------------
Net realized gain (loss) ............................. 2 - - - 50,982
Net unrealized gain (loss) ............................. 3,242 567 328 298 128,373
-------- ------------- ---------------- -------------- -------------
Net realized and unrealized gain (loss) .............. 3,244 567 328 298 179,355
-------- ------------- ---------------- -------------- -------------
Net increase (decrease) in net assets from operations. $ 3,173 $ 562 $ 323 $ 293 $ 174,861
======== ============= ================ ============== =============
</TABLE>
(a) For the Period 5/3/99 to 12/31/99.
(b) For the Period 9/1/99 to 12/31/99.
(c) For the Period 10/29/99 to 12/31/99.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SCUDDER SCUDDER SCUDDER ALGER
VLIF VLIF VLIF AMERICAN
GLOBAL CAPITAL GROWTH LEVERAGED
DISCOVERY(d) GROWTH AND INCOME ALLCAP(e)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................ $ - $ 2,102 $ 9,234 $ -
------------ ------------ ------------ ------------
EXPENSES:
Mortality and expense risk fees .......................... 81 11,039 12,010 17
Administrative expense fees .............................. 10 1,325 1,441 2
------------ ------------ ------------ ------------
Total expenses ......................................... 91 12,364 13,451 19
------------ ------------ ------------ ------------
Net investment income (loss) ........................... (91) (10,262) (4,217) (19)
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ....... - 97,276 60,106 -
Net realized gain (loss) from sales of investments ....... 48 (22,082) (5,910) -
------------ ------------ ------------ ------------
Net realized gain (loss) ............................... 48 75,194 54,196 -
Net unrealized gain (loss) ............................... 9,807 217,533 (26,737) 2,200
------------ ------------ ------------ ------------
Net realized and unrealized gain (loss) ................ 9,855 292,727 27,459 2,200
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from operations .. $ 9,764 $ 282,465 $ 23,242 $ 2,181
============ ============ ============ ============
<CAPTION>
DREYFUS JANUS
ALGER DREYFUS SOCIALLY JANUS ASPEN
AMERICAN MIDCAP RESPONSIBLE ASPEN GROWTH AND
BALANCED(e) STOCK(f) GROWTH(f) GROWTH(f) INCOME(f)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................ $ - $ 11 $ - $ 2 $ 4
----------- ----------- ----------- ----------- -----------
EXPENSES:
Mortality and expense risk fees .......................... 3 8 7 8 8
Administrative expense fees .............................. 1 1 1 - 1
----------- ----------- ----------- ----------- -----------
Total expenses ......................................... 4 9 8 8 9
----------- ----------- ----------- ----------- -----------
Net investment income (loss) ........................... (4) 2 (8) (6) (5)
----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ....... - - 78 - -
Net realized gain (loss) from sales of investments ....... - - 1 - 1
----------- ----------- ----------- ----------- -----------
Net realized gain (loss) ............................... - - 79 - 1
Net unrealized gain (loss) ............................... 120 373 274 461 817
----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain (loss) ................ 120 373 353 461 818
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations .. $ 116 $ 375 $ 345 $ 455 $ 813
=========== =========== =========== =========== ===========
</TABLE>
(d) For the Period 10/20/99 to 12/31/99.
(e) For the Period 11/15/99 to 12/31/99.
(f) For the Period 9/21/99 to 12/31/99.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP VALUE SMALL CAP GROWTH CONTRARIAN VALUE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------- ---------------------- ------------------------
1999 1998 1999 1998 1999 1998
--------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................ $ (3,428) $ (3,617) $ (5,391) $ (1,842) $ 7,201 $ (11,079)
Net realized gain (loss) ................................ (8,705) (317) 4,981 11,151 161,925 (12,271)
Net unrealized gain (loss) .............................. 9,767 6,083 158,028 20,343 (455,682) 242,325
--------- --------- ---------- --------- ---------- ----------
Net increase (decrease) in net assets from operations ... (2,366) 2,149 157,618 29,652 (286,556) 218,975
--------- --------- ---------- --------- ---------- ----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................... 111,981 504,022 79,438 192,942 689,040 2,012,025
Withdrawals ............................................. (35,409) (29,292) (38,807) (13,874) (88,141) (36,322)
Contract benefits ....................................... - - - - (836,736) -
Contract charges ........................................ (111) (8) (113) (22) (268) (41)
Transfers between sub-accounts (including fixed account),
net ................................................... (106,701) 17,713 205,468 (22,808) (167,925) (306,540)
Other transfers from (to) the General Account ........... 35,582 73,421 90,024 62,671 275,846 218,266
Net increase (decrease) in investment by Sponsor ........ - - - - - -
--------- --------- ---------- --------- ---------- ----------
Net increase (decrease) in net assets from contract
transactions .......................................... 5,342 565,856 336,010 218,909 (128,184) 1,887,388
--------- --------- ---------- --------- ---------- ----------
Net increase (decrease) in net assets ................... 2,976 568,005 493,628 248,561 (414,740) 2,106,363
NET ASSETS:
Beginning of year ....................................... 620,277 52,272 266,398 17,837 2,283,153 176,790
--------- --------- ---------- --------- ---------- ----------
End of year ............................................. $ 623,253 $ 620,277 $ 760,026 $ 266,398 $1,868,413 $2,283,153
========= ========= ========== ========= ========== ==========
<CAPTION>
INTERNATIONAL GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................ $ (2,206) $ (1,074) $ (14,826) $ (2,851)
Net realized gain (loss) ................................ 55,519 3,422 17,517 25,340
Net unrealized gain (loss) .............................. 176,692 12,745 415,869 28,637
--------- --------- --------- ---------
Net increase (decrease) in net assets from operations ... 230,005 15,093 418,560 51,126
--------- --------- --------- ---------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................... 78,812 155,112 770,632 383,758
Withdrawals ............................................. (17,652) (494) (69,516) (951)
Contract benefits ....................................... - - - -
Contract charges ........................................ (118) (12) (204) (27)
Transfers between sub-accounts (including fixed account),
net ................................................... 23,076 35,312 241,173 12,998
Other transfers from (to) the General Account ........... 95,887 132,350 51,237 102,267
Net increase (decrease) in investment by Sponsor ........ - - - -
--------- --------- --------- ---------
Net increase (decrease) in net assets from contract
transactions .......................................... 180,005 322,268 993,322 498,045
--------- --------- --------- ---------
Net increase (decrease) in net assets ................... 410,010 337,361 1,411,882 549,171
NET ASSETS:
Beginning of year ....................................... 381,737 44,376 565,217 16,046
--------- --------- --------- ---------
End of year ............................................. $ 791,747 $ 381,737 $1,977,099 $ 565,217
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VALUE+GROWTH HORIZON 20+ TOTAL RETURN
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------- ------------------ -----------------------
1999 1998 1999 1998 1999 1998
----------- ----------- --------- -------- ----------- -----------
S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) .......................... $ (13,397) $ (7,482) $ (649) $ (238) $ 22,723 $ 3,525
Net realized gain (loss) .............................. 68,535 (823) 873 281 108,581 51,283
Net unrealized gain (loss) ............................ 199,664 117,696 7,415 1,029 207,037 58,881
----------- ----------- --------- -------- ----------- -----------
Net increase (decrease) in net assets from operations.. 254,802 109,391 7,639 1,072 338,341 113,689
----------- ----------- --------- -------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................. 879,654 966,340 115,706 31,236 1,474,233 827,904
Withdrawals ........................................... (91,231) (59,651) (32,291) (1,556) (61,107) (16,986)
Contract benefits ..................................... - - - - (1,880) (27,116)
Contract charges ...................................... (276) (14) (19) (8) (650) (20)
Transfers between sub-accounts (including fixed account),
net ................................................. (260,599) (37,468) 19,408 22 104,549 156,599
Other transfers from (to) the General Account ......... 115,033 131,568 480 2,073 253,177 310,042
Net increase (decrease) in investment by Sponsor ...... - - - - - -
----------- ----------- --------- -------- ----------- -----------
Net increase (decrease) in net assets from contract
transactions ........................................ 642,581 1,000,775 103,284 31,767 1,768,322 1,250,423
----------- ----------- --------- -------- ----------- -----------
Net increase (decrease) in net assets ................. 897,383 1,110,166 110,923 32,839 2,106,663 1,364,112
NET ASSETS:
Beginning of year ..................................... 1,230,029 119,863 37,691 4,852 1,407,021 42,909
----------- ----------- --------- -------- ----------- -----------
End of year ........................................... $2,127,412 $1,230,029 $148,614 $37,691 $3,513,684 $1,407,021
=========== =========== ========= ======== =========== ===========
<CAPTION>
HORIZON 10+ HORIZON 5 HIGH YIELD
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------- ------------------- -----------------------
1999 1998 1999 1998 1999 1998
----------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) .......................... $ 4,220 $ (3,751) $ 3,665 $ (3,342) $ 194,437 $ 32,999
Net realized gain (loss) .............................. 3,632 1,209 26,258 2,697 (30,516) (7,391)
Net unrealized gain (loss) ............................ 66,525 47,609 (21,664) 34,357 (156,114) (28,889)
----------- --------- --------- --------- ----------- -----------
Net increase (decrease) in net assets from operations.. 74,377 45,067 8,259 33,712 7,807 (3,281)
----------- --------- --------- --------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................. 373,882 687,794 50,541 543,947 786,669 1,509,922
Withdrawals ........................................... (19,906) (4,562) (55,369) (56,060) (204,805) (37,859)
Contract benefits ..................................... - - (120,103) - (1,610) -
Contract charges ...................................... (261) - (100) - (391) (24)
Transfers between sub-accounts (including fixed account),
net ................................................. (25,772) 108,163 (416,941) 17,017 (180,000) 233,044
Other transfers from (to) the General Account ......... 31,748 21,659 49,688 86,685 281,114 353,604
Net increase (decrease) in investment by Sponsor ...... - - - - - -
----------- --------- --------- --------- ----------- -----------
Net increase (decrease) in net assets from contract
transactions ........................................ 359,691 813,054 (492,284) 591,589 680,977 2,058,687
----------- --------- --------- --------- ----------- -----------
Net increase (decrease) in net assets ................. 434,068 858,121 (484,025) 625,301 688,784 2,055,406
NET ASSETS:
Beginning of year ..................................... 879,679 21,558 707,979 82,678 2,130,914 75,508
----------- --------- --------- --------- ----------- -----------
End of year ........................................... $1,313,747 $879,679 $223,954 $707,979 $2,819,698 $2,130,914
=========== ========= ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT GRADE BOND GOVERNMENT SECURITIES MONEY MARKET
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------- ---------------------- -----------------------
1999 1998 1999 1998 1999 1998
---------- --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................. $ 6,413 $ (1,076) $ 36,641 $ (391) $ 46,407 $ 5,695
Net realized gain (loss) ................................. 3,390 1,043 (16,841) 443 - -
Net unrealized gain (loss) ............................... (29,236) 9,800 (25,985) 5,941 - -
---------- --------- ---------- ----------- ----------- ----------
Net increase (decrease) in net assets from operations .... (19,433) 9,767 (6,185) 5,993 46,407 5,695
---------- --------- ---------- ----------- ----------- ----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................... 152,556 275,959 379,983 538,138 2,398,464 1,832,810
Withdrawals .............................................. (17,222) (3,684) (53,774) (25,456) (148,057) -
Contract benefits ........................................ (1,697) - - - - -
Contract charges ......................................... (60) - (19) - (197) (14)
Transfers between sub-accounts (including fixed account),
net .................................................... (15,443) (69,316) (711,359) 474,416 (627,678) (894,926)
Other transfers from (to) the General Account ............ 133,721 197,935 95,161 14,580 18,615 (147,931)
Net increase (decrease) in investment by Sponsor ......... - - - - - -
---------- --------- ---------- ----------- ----------- ----------
Net increase (decrease) in net assets from contract
transactions ........................................... 251,855 400,894 (290,008) 1,001,678 1,641,147 789,939
---------- --------- ---------- ----------- ----------- ----------
Net increase (decrease) in net assets .................... 232,422 410,661 (296,193) 1,007,671 1,687,554 795,634
NET ASSETS:
Beginning of year ........................................ 431,453 20,792 1,028,474 20,803 801,015 5,381
---------- --------- ---------- ----------- ----------- ----------
End of year .............................................. $663,875 $431,453 $ 732,281 $1,028,474 $2,488,569 $ 801,015
========== ========= ========== =========== =========== ==========
<CAPTION>
GLOBAL INCOME BLUE CHIP
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------- ------------------------
1999 1998 1999 1998
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................. $1,101 $ (9) $ (25,613) $ (4,182)
Net realized gain (loss) ................................. 461 179 33,064 1,277
Net unrealized gain (loss) ............................... (5,155) 1,671 622,042 81,902
-------- -------- ----------- -----------
Net increase (decrease) in net assets from operations .... (3,593) 1,841 629,493 78,997
-------- -------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................... 29,255 13,781 1,634,546 826,872
Withdrawals .............................................. (3,615) (1,341) (149,180) (13,980)
Contract benefits ........................................ - - (75,405) -
Contract charges ......................................... (13) - (463) (17)
Transfers between sub-accounts (including fixed account),
net .................................................... 2,629 626 604,741 33,427
Other transfers from (to) the General Account ............ 2,669 3,917 622,297 182,261
Net increase (decrease) in investment by Sponsor ......... - (21) - (21)
-------- -------- ----------- -----------
Net increase (decrease) in net assets from contract
transactions ........................................... 30,925 16,962 2,636,536 1,028,542
-------- -------- ----------- -----------
Net increase (decrease) in net assets .................... 27,332 18,803 3,266,029 1,107,539
NET ASSETS:
Beginning of year ........................................ 29,545 10,742 1,155,373 47,834
-------- -------- ----------- -----------
End of year .............................................. $56,877 $29,545 $4,421,402 $1,155,373
======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DREMAN FINANCIAL SERVICES DREMAN HIGH RETURN EQUITY
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, FROM 10/27/98* DECEMBER 31, FROM 10/12/98*
1999 TO 12/31/98 1999 TO 12/31/98
------------ ------------ -------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income (loss) ............................. $ (2,165) $ (109) $ (11,129) $ (716)
Net realized gain (loss) ................................. (1,279) 3 (56,187) 2
Net unrealized gain (loss) ............................... (23,698) 2,598 (254,638) 4,406
------------ ------------ -------------- --------------
Net increase (decrease) in net assets from operations .... (27,142) 2,492 (321,954) 3,692
------------ ------------ -------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................... 226,378 45,869 2,038,113 425,097
Withdrawals .............................................. (28,407) - (100,259) (2,428)
Contract benefits ........................................ - - - -
Contract charges ......................................... - - (54) -
Transfers between sub-accounts (including fixed account),
net .................................................... 48,505 5,200 (200,918) 22,544
Other transfers from (to) the General Account ............ 9,540 4,197 98,132 69,995
Net increase (decrease) in investment by Sponsor ......... - - - -
------------ ------------ -------------- --------------
Net increase (decrease) in net assets from contract
transactions ........................................... 256,016 55,266 1,835,014 515,208
------------ ------------ -------------- --------------
Net increase (decrease) in net assets .................... 228,874 57,758 1,513,060 518,900
NET ASSETS:
Beginning of year ........................................ 57,758 - 518,900 -
------------ ------------ -------------- --------------
End of year .............................................. $ 286,632 $ 57,758 $ 2,031,960 $ 518,900
============ ============ ============== ==============
<CAPTION>
AGGRESSIVE
INTERNATIONAL GROWTH AND INCOME GLOBAL BLUE CHIP GROWTH
YEAR ENDED PERIOD YEAR ENDED PERIOD PERIOD
DECEMBER 31, FROM 12/9/98* DECEMBER 31, FROM 11/17/98* FROM 5/3/99*
1999 TO 12/31/98 1999 TO 12/31/98 TO 12/31/99
------------ ----------- ------------- ------------- -----------
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
<S> <C> <C> <C> <C> <C>
Net investment income (loss) ............................. $ (1,506) $ (4) $ (1,963) $ (57) $ (161)
Net realized gain (loss) ................................. 560 - 736 54 (2)
Net unrealized gain (loss) ............................... 28,004 186 56,976 1,613 9,997
------------ ----------- ------------- ------------- ----------
Net increase (decrease) in net assets from operations .... 27,058 182 55,749 1,610 9,834
------------ ----------- ------------- ------------- ----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................... 201,416 5,000 239,429 52,985 -
Withdrawals .............................................. (7,821) - (12,239) (2,349) (316)
Contract benefits ........................................ - - - - -
Contract charges ......................................... - - - - -
Transfers between sub-accounts (including fixed account),
net .................................................... 3,044 - 43,068 - 152,518
Other transfers from (to) the General Account ............ 170 - 15,097 - 200
Net increase (decrease) in investment by Sponsor ......... - - - - 2,000
------------ ----------- ------------- ------------- ----------
Net increase (decrease) in net assets from contract
transactions ........................................... 196,809 5,000 285,355 50,636 154,402
------------ ----------- ------------- ------------- ----------
Net increase (decrease) in net assets .................... 223,867 5,182 341,104 52,246 164,236
NET ASSETS:
Beginning of year ........................................ 5,182 - 52,246 - -
------------ ----------- ------------- ------------- ----------
End of year .............................................. $ 229,049 $ 5,182 $ 393,350 $ 52,246 $ 164,236
============ =========== ============= ============= ==========
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
KVS FOCUSED KVS
TECHNOLOGY LARGE CAP GROWTH
GROWTH INDEX 500 GROWTH OPPORTUNITIES
PERIOD PERIOD PERIOD PERIOD
FROM 5/3/99* FROM 9/1/99* FROM 10/29/99* FROM 10/29/99*
TO 12/31/99 TO 12/31/99 TO 12/31/99 TO 12/31/99
----------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ........................... $ (1,907) $ (71) $ (5) $ (5)
Net realized gain (loss) ............................... 831 2 - -
Net unrealized gain (loss) ............................. 179,517 3,242 567 328
----------- ------------ -------------- ----------------
Net increase (decrease) in net assets from operations .. 178,441 3,173 562 323
----------- ------------ -------------- ----------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................. 131,870 45,705 - -
Withdrawals ............................................ (2,052) - - -
Contract benefits ...................................... - - - -
Contract charges ....................................... (29) - - -
Transfers between sub-accounts (including fixed account),
net .................................................. 784,978 14,257 - -
Other transfers from (to) the General Account .......... 10,662 - - -
Net increase (decrease) in investment by Sponsor ....... (198) 2,000 2,000 2,000
----------- ------------ -------------- ----------------
Net increase (decrease) in net assets from contract
transactions ......................................... 925,231 61,962 2,000 2,000
----------- ------------ -------------- ----------------
Net increase (decrease) in net assets .................. 1,103,672 65,135 2,562 2,323
NET ASSETS:
Beginning of year ...................................... - - - -
----------- ------------ -------------- ----------------
End of year ............................................ $1,103,672 $ 65,135 $ 2,562 $ 2,323
=========== ============ ============== ================
<CAPTION>
KVS
GROWTH SCUDDER
AND INCOME VLIF INTERNATIONAL
PERIOD YEAR ENDED PERIOD
FROM 10/29/99* DECEMBER 31, FROM 8/28//98*
TO 12/31/99 1999 TO 12/31/98
--------------- ------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ........................... $ (5) $ (4,494) $ (908)
Net realized gain (loss) ............................... - 50,982 10
Net unrealized gain (loss) ............................. 298 128,373 19,056
--------------- ------------- --------------
Net increase (decrease) in net assets from operations .. 293 174,861 18,158
--------------- ------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................. - 201,898 199,090
Withdrawals ............................................ - (12,459) -
Contract benefits ...................................... - - -
Contract charges ....................................... - (5) -
Transfers between sub-accounts (including fixed account),
net .................................................. - (38,480) 3,333
Other transfers from (to) the General Account .......... - 925 75
Net increase (decrease) in investment by Sponsor ....... 2,000 - -
--------------- ------------- --------------
Net increase (decrease) in net assets from contract
transactions ......................................... 2,000 151,879 202,498
--------------- ------------- --------------
Net increase (decrease) in net assets .................. 2,293 326,740 220,656
NET ASSETS:
Beginning of year ...................................... - 220,656 -
--------------- ------------- --------------
End of year ............................................ $ 2,293 $ 547,396 $ 220,656
=============== ============= ==============
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SCUDDER SCUDDER
VLIF GLOBAL DISCOVERY VLIF CAPITAL GROWTH
PERIOD YEAR ENDED PERIOD
FROM 10/20/99* DECEMBER 31, FROM 10/28/98*
TO 12/31/99 1999 TO 12/31/98
--------------------- ---------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (91) $ (10,262) $ (114)
Net realized gain (loss) ......................................... 48 75,194 5
Net unrealized gain (loss) ....................................... 9,807 217,533 8,620
--------------------- ---------------- --------------
Net increase (decrease) in net assets from operations ............ 9,764 282,465 8,511
--------------------- ---------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 6,758 933,097 8,587
Withdrawals ...................................................... (1,683) (33,995) -
Contract benefits ................................................ - (319,362) -
Contract charges ................................................. - (39) -
Transfers between sub-accounts (including fixed account), net .... 66,104 282,687 141,955
Other transfers from (to) the General Account .................... (11) 12,153 8,255
Net increase (decrease) in investment by Sponsor ................. - - -
--------------------- ---------------- --------------
Net increase (decrease) in net assets from contract transactions.. 71,168 874,541 158,797
--------------------- ---------------- --------------
Net increase (decrease) in net assets ............................ 80,932 1,157,006 167,308
NET ASSETS:
Beginning of year ................................................ - 167,308 -
--------------------- ---------------- --------------
End of year ...................................................... $ 80,932 $ 1,324,314 $ 167,308
===================== ================ ==============
<CAPTION>
ALGER
AMERICAN
SCUDDER LEVERAGED
VLIF GROWTH AND INCOME ALLCAP
YEAR ENDED PERIOD PERIOD
DECEMBER 31, FROM 8/28/98* FROM 11/15/99*
1999 TO 12/31/98 TO 12/31/99
-------------- --------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (4,217) $ 340 $ (19)
Net realized gain (loss) ......................................... 54,196 251 -
Net unrealized gain (loss) ....................................... (26,737) 29,857 2,200
-------------- --------------- --------------
Net increase (decrease) in net assets from operations ............ 23,242 30,448 2,181
-------------- --------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 618,467 355,959 15,000
Withdrawals ...................................................... (19,793) (3,012) -
Contract benefits ................................................ (325,631) - -
Contract charges ................................................. (29) - -
Transfers between sub-accounts (including fixed account), net .... 143,612 68,692 10,000
Other transfers from (to) the General Account .................... 5,838 1,089 -
Net increase (decrease) in investment by Sponsor ................. - - 2,000
-------------- --------------- --------------
Net increase (decrease) in net assets from contract transactions.. 422,464 422,728 27,000
-------------- --------------- --------------
Net increase (decrease) in net assets ............................ 445,706 453,176 29,181
NET ASSETS:
Beginning of year ................................................ 453,176 - -
-------------- --------------- --------------
End of year ...................................................... $ 898,882 $ 453,176 $ 29,181
============== =============== ==============
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-14
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DREYFUS
ALGER DREYFUS SOCIALLY
AMERICAN MIDCAP RESPONSIBLE
BALANCED STOCK GROWTH
PERIOD PERIOD PERIOD
FROM 11/15/99* FROM 9/21/99* FROM 9/21/99*
TO 12/31/99 TO 12/31/99 TO 12/31/99
---------------- ----------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................ $ (4) $ 2 $ (8)
Net realized gain (loss) ................................ - - 79
Net unrealized gain (loss) .............................. 120 373 274
---------------- ----------------- --------------
Net increase (decrease) in net assets from operations ... 116 375 345
---------------- ----------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................... - - -
Withdrawals ............................................. - - -
Contract benefits ....................................... - - -
Contract charges ........................................ - - -
Transfers between sub-accounts (including fixed account),
net ................................................... - 2,000 -
Other transfers from (to) the General Account ........... - - -
Net increase (decrease) in investment by Sponsor ........ 2,000 2,000 2,000
---------------- ----------------- --------------
Net increase (decrease) in net assets from contract
transactions .......................................... 2,000 4,000 2,000
---------------- ----------------- --------------
Net increase (decrease) in net assets ................... 2,116 4,375 2,345
NET ASSETS:
Beginning of year ....................................... - - -
---------------- ----------------- --------------
End of year ............................................. $ 2,116 $ 4,375 $ 2,345
================ ================= ==============
<CAPTION>
JANUS
JANUS ASPEN
ASPEN GROWTH
GROWTH AND INCOME
PERIOD PERIOD
FROM 9/21/99* FROM 9/21/99*
TO 12/31/99 TO 12/31/99
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................ $ (6) $ (5)
Net realized gain (loss) ................................ - 1
Net unrealized gain (loss) .............................. 461 817
------------- -------------
Net increase (decrease) in net assets from operations ... 455 813
------------- -------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................... - -
Withdrawals ............................................. - -
Contract benefits ....................................... - -
Contract charges ........................................ - -
Transfers between sub-accounts (including fixed account),
net ................................................... - -
Other transfers from (to) the General Account ........... - -
Net increase (decrease) in investment by Sponsor ........ 2,000 2,000
------------- -------------
Net increase (decrease) in net assets from contract
transactions .......................................... 2,000 2,000
------------- -------------
Net increase (decrease) in net assets ................... 2,455 2,813
NET ASSETS:
Beginning of year ....................................... - -
------------- -------------
End of year ............................................. $ 2,455 $ 2,813
============= =============
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-15
<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 thirty-six Sub-Accounts under the variable annuity contracts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
Kemper Variable Series (KVS) or Scudder Variable Life Investment Fund (Scudder
VLIF) managed by Scudder Kemper Investments, Inc. (Scudder Kemper); or of The
Alger American Fund (Alger) managed by Fred Alger Management, Inc.; or of
Dreyfus Investment Portfolios or Dreyfus Socially Responsible Growth Fund, Inc.
(Dreyfus) managed by The Dreyfus Corporation; or of Janus Aspen Series (Janus)
managed by Janus Capital. KVS, Scudder VLIF, Alger, Dreyfus and Janus (the
Funds) are open-end, management investment companies registered under the 1940
Act.
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. 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 Internal Revenue Code (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-16
<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, 1999 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 ........................... 574,459 $ 606,822 $ 1.085
Small Cap Growth .......................... 286,375 581,295 2.654
Contrarian Value .......................... 1,271,246 2,076,316 1.470
International ............................. 369,047 601,617 2.145
Growth .................................... 487,654 1,532,548 4.054
Value+Growth .............................. 1,121,324 1,806,979 1.895
Horizon 20+ ............................... 92,057 140,252 1.614
Total Return .............................. 1,218,992 3,247,143 2.882
Horizon 10+ ............................... 883,489 1,192,148 1.479
Horizon 5 ................................. 163,181 203,476 1.334
High Yield ................................ 2,459,783 3,004,257 1.146
Investment Grade Bond ..................... 596,865 676,683 1.101
Government Securities ..................... 633,149 752,276 1.157
Money Market .............................. 2,482,718 2,482,718 1.000
Global Income ............................. 57,676 60,398 0.986
Blue Chip ................................. 2,817,956 3,716,435 1.569
Dreman Financial Services ................. 310,128 307,732 0.924
Dreman High Return Equity ................. 2,266,674 2,282,192 0.896
International Growth and Income ........... 221,421 200,859 1.034
Global Blue Chip .......................... 317,894 334,761 1.237
Aggressive Growth ......................... 117,403 154,239 1.399
Technology Growth ......................... 621,090 924,155 1.777
Index 500 ................................. 59,455 61,893 1.096
KVS Focused Large Cap Growth .............. 1,995 1,995 1.284
KVS Growth Opportunities .................. 1,995 1,995 1.164
KVS Growth And Income ..................... 1,995 1,995 1.149
Scudder VLIF International ................ 26,912 399,967 20.340
Scudder VLIF Global Discovery ............. 6,141 71,125 13.180
Scudder VLIF Capital Growth ............... 45,462 1,098,162 29.130
Scudder VLIF Growth and Income ............ 82,015 895,762 10.960
Alger American Leveraged AllCap ........... 503 26,981 57.970
Alger American Balanced ................... 136 1,996 15.570
Dreyfus MidCap Stock ...................... 326 4,002 13.440
Dreyfus Socially Responsible Growth ....... 60 2,071 39.070
Janus Aspen Growth ........................ 73 1,994 33.650
Janus Aspen Growth and Income ............. 135 1,997 20.770
</TABLE>
SA-17
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and monthly 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 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), an indirect
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.
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
--------------------------------------- ----------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Small Cap Value
Issuance of Units .............. 304,992 $ 266,234 758,617 $ 658,357
Redemption of Units ............ (311,102) (260,892) (104,007) (92,501)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... (6,110) $ 5,342 654,610 $ 565,856
================== ================== ================== ==================
Small Cap Growth
Issuance of Units .............. 384,932 $ 468,374 272,058 $ 277,017
Redemption of Units ............ (118,527) (132,364) (58,550) (58,108)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... 266,405 $ 336,010 213,508 $ 218,909
================== ================== ================== ==================
Contrarian Value
Issuance of Units .............. 1,147,300 $ 1,371,820 2,153,322 $ 2,315,657
Redemption of Units ............ (1,292,060) (1,500,004) (413,770) (428,269)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... (144,760) $ (128,184) 1,739,552 $ 1,887,388
================== ================== ================== ==================
International
Issuance of Units .............. 204,952 $ 220,373 334,236 $ 326,967
Redemption of Units ............ (37,537) (40,368) (4,440) (4,699)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... 167,415 $ 180,005 329,796 $ 322,268
================== ================== ================== ==================
Growth
Issuance of Units .............. 947,293 $ 1,153,132 497,684 $ 500,582
Redemption of Units ............ (135,402) (159,810) (2,620) (2,537)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... 811,891 $ 993,322 495,064 $ 498,045
================== ================== ================== ==================
SA-18
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
---------------------------------------- ----------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Value+Growth
Issuance of Units ........................ 950,774 $ 1,118,008 1,088,327 $ 1,127,426
Redemption of Units ...................... (404,388) (475,427) (132,203) (126,651)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 546,386 $ 642,581 956,124 $ 1,000,775
================== ================== ================== ==================
Horizon 20+
Issuance of Units ........................ 131,313 $ 146,933 32,532 $ 34,708
Redemption of Units ...................... (39,537) (43,649) (2,983) (2,941)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 91,776 $ 103,284 29,549 $ 31,767
================== ================== ================== ==================
Total Return
Issuance of Units ........................ 1,854,219 $ 2,226,128 1,317,040 $ 1,403,752
Redemption of Units ...................... (380,366) (457,806) (137,214) (153,329)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 1,473,853 $ 1,768,322 1,179,826 $ 1,250,423
================== ================== ================== ==================
Horizon 10+
Issuance of Units ........................ 373,065 $ 419,354 773,419 $ 818,896
Redemption of Units ...................... (59,521) (59,663) (5,805) (5,842)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 313,544 $ 359,691 767,614 $ 813,054
================== ================== ================== ==================
Horizon 5
Issuance of Units ........................ 96,565 $ 106,841 648,542 $ 682,429
Redemption of Units ...................... (542,871) (599,125) (86,777) (90,840)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ (446,306) $ (492,284) 561,765 $ 591,589
================== ================== ================== ==================
High Yield
Issuance of Units ........................ 1,225,811 $ 1,247,608 2,309,193 $ 2,324,603
Redemption of Units ...................... (560,369) (566,631) (263,493) (265,916)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 665,442 $ 680,977 2,045,700 $ 2,058,687
================== ================== ================== ==================
Investment Grade Bond
Issuance of Units ........................ 296,332 $ 310,727 457,537 $ 477,324
Redemption of Units ...................... (56,790) (58,872) (74,545) (76,430)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 239,542 $ 251,855 382,992 $ 400,894
================== ================== ================== ==================
Government Securities
Issuance of Units ........................ 474,053 $ 500,907 1,005,478 $ 1,060,460
Redemption of Units ...................... (748,526) (790,915) (55,627) (58,782)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ (274,473) $ (290,008) 949,851 $ 1,001,678
================== ================== ================== ==================
Money Market
Issuance of Units ........................ 2,717,852 $ 2,798,037 1,817,832 $ 1,862,887
Redemption of Units ...................... (1,168,698) (1,156,890) (1,050,752) (1,072,948)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 1,549,154 $ 1,641,147 767,080 $ 789,939
================== ================== ================== ==================
SA-19
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
---------------------------------------- ----------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Global Income
Issuance of Units ........................ 37,329 $ 40,305 17,964 $ 19,083
Redemption of Units ...................... (8,886) (9,380) (2,017) (2,121)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 28,443 $ 30,925 15,947 $ 16,962
================== ================== ================== ==================
Blue Chip
Issuance of Units ........................ 2,286,891 $ 3,092,028 923,571 $ 1,071,111
Redemption of Units ...................... (332,560) (455,492) (35,781) (42,569)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 1,954,331 $ 2,636,536 887,790 $ 1,028,542
================== ================== ================== ==================
Dreman Financial Services
Issuance of Units ........................ 246,976 $ 284,711 51,272 $ 55,286
Redemption of Units ...................... (26,543) (28,695) (20) (20)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 220,433 $ 256,016 51,252 $ 55,266
================== ================== ================== ==================
Dreman High Return Equity
Issuance of Units ........................ 2,101,063 $ 2,386,987 452,184 $ 517,505
Redemption of Units ...................... (539,470) (551,973) (2,190) (2,297)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 1,561,593 $ 1,835,014 449,994 $ 515,208
================== ================== ================== ==================
International Growth and Income
Issuance of Units ........................ 198,699 $ 204,660 5,020 $ 5,020
Redemption of Units ...................... (7,231) (7,851) (20) (20)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 191,468 $ 196,809 5,000 $ 5,000
================== ================== ================== ==================
Global Blue Chip
Issuance of Units ........................ 262,638 $ 297,569 52,450 $ 53,005
Redemption of Units ...................... (10,637) (12,214) (2,313) (2,369)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 252,001 $ 285,355 50,137 $ 50,636
================== ================== ================== ==================
Aggressive Growth
Issuance of Units ........................ 118,751 $ 154,718 - $ -
Redemption of Units ...................... (247) (316) - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 118,504 $ 154,402 - $ -
================== ================== ================== ==================
Technology Growth
Issuance of Units ........................ 638,687 $ 939,973 - $ -
Redemption of Units ...................... (11,785) (14,742) - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 626,902 $ 925,231 - $ -
================== ================== ================== ==================
Index 500
Issuance of Units ........................ 59,733 $ 61,962 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 59,733 $ 61,962 - $ -
================== ================== ================== ==================
SA-20
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
---------------------------------------- ----------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
KVS Focused Large Cap Growth
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
KVS Growth Opportunities
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
KVS Growth and Income
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
Scudder VLIF International
Issuance of Units ........................ 208,707 $ 260,672 239,298 $ 244,606
Redemption of Units ...................... (82,607) (108,793) (38,595) (42,108)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 126,100 $ 151,879 200,703 $ 202,498
================== ================== ================== ==================
Scudder VLIF Global Discovery
Issuance of Units ........................ 58,939 $ 72,862 - $ -
Redemption of Units ...................... (1,613) (1,694) - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 57,326 $ 71,168 - $ -
================== ================== ================== ==================
Scudder VLIF Capital Growth
Issuance of Units ........................ 1,001,274 $ 1,239,486 142,810 $ 158,817
Redemption of Units ...................... (296,446) (364,945) (20) (20)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 704,828 $ 874,541 142,790 $ 158,797
================== ================== ================== ==================
Scudder VLIF Growth and Income
Issuance of Units ........................ 889,131 $ 1,014,730 469,381 $ 486,819
Redemption of Units ...................... (520,734) (592,266) (58,382) (64,091)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 368,397 $ 422,464 410,999 $ 422,728
================== ================== ================== ==================
Alger American Leveraged AllCap
Issuance of Units ........................ 24,384 $ 27,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 24,384 $ 27,000 - $ -
================== ================== ================== ==================
Alger American Balanced
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
SA-21
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
---------------------------------------- ---------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Dreyfus MidCap Stock
Issuance of Units ........................ 3,941 $ 4,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 3,941 $ 4,000 - $ -
================== ================== ================== ==================
Dreyfus Socially Responsible Growth
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
Janus Aspen Growth
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
Janus Aspen Growth and Income
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
</TABLE>
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.
SA-22
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
------------- --------------
<S> <C> <C>
Small Cap Value ...................... $ 261,617 $ 259,703
Small Cap Growth ..................... 451,663 121,044
Contrarian Value ..................... 1,806,575 1,787,711
International ........................ 269,933 37,347
Growth ............................... 1,101,979 123,483
Value+Growth ......................... 1,101,161 444,806
Horizon 20+ .......................... 144,808 41,823
Total Return ......................... 2,290,121 404,252
Horizon 10+ .......................... 433,663 76,854
Horizon 5 ............................ 106,964 601,860
High Yield ........................... 1,404,682 529,268
Investment Grade Bond ................ 312,010 55,417
Government Securities ................ 505,848 759,215
Money Market ......................... 2,707,035 1,023,633
Global Income ........................ 41,152 8,233
Blue Chip ............................ 2,939,029 328,106
Dreman Financial Services ............ 284,897 31,046
Dreman High Return Equity ............ 2,359,662 523,553
International Growth and Income ...... 204,262 8,959
Global Blue Chip ..................... 295,410 12,018
Aggressive Growth .................... 154,670 429
Technology Growth .................... 930,410 7,086
Index 500 ............................ 61,954 63
KVS Focused Large Cap Growth ......... 2,000 5
KVS Growth Opportunities ............. 2,000 5
KVS Growth And Income ................ 2,000 5
Scudder VLIF International ........... 289,623 108,678
Scudder VLIF Global Discovery ........ 72,833 1,756
Scudder VLIF Capital Growth .......... 1,326,658 365,103
Scudder VLIF Growth and Income ....... 1,072,996 594,643
Alger American Leveraged AllCap ...... 27,000 19
Alger American Balanced .............. 2,000 4
Dreyfus MidCap Stock ................. 4,011 9
Dreyfus Socially Responsible Growth .. 2,078 8
Janus Aspen Growth ................... 2,002 8
Janus Aspen Growth and Income ........ 2,004 9
------------- -----------
$22,976,710 $8,256,161
============= ===========
</TABLE>
SA-23
<PAGE>
PART C. OTHER INFORMATION
TEM 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 No. 333-10285/811-7769, 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) Wholesaling Agreement was previously filed on
August 9, 1996 in Registrant's Initial Registration
Statement No. 333-10285/811-7769, and is
incorporated by reference herein.
(b) Underwriting and Administrative Services Agreement
was previously filed on April 30, 1998 in
Registration Statement No. 333-10285/811-7769,
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
(c) Sales Agreements with Commission Schedule
were previously filed on April 30, 1998 in
Registration Statement No. 333-10285/811-7769,
Post-Effective Amendment No. 2, and are
incorporated by reference herein.
(d) General Agent's Agreement was previously
filed on April 30, 1998 in Registration
Statement No. 333-10285/811-7769,
Post-Effective Amendment No. 2, and
is incorporated by reference herein.
(e) Career Agent Agreement was previously filed
on April 30, 1998 in Registration Statement
No. 333-10285/811-7769, Post-Effective
Amendment No. 2, and is incorporated by
reference herein.
(f) Registered Representative's Agreement was
previously filed on April 30, 1998 in
Registration Statement No.
333-10285/811-7769, Post-Effective Amendment
No. 2, and is incorporated by reference
herein.
(g) Form of Indemnification Agreement with
Scudder Kemper was previously filed on April
30, 1998 in Registration Statement No.
333-10285/811-7769, Post-Effective Amendment
No. 2, and is incorporated by reference
herein.
<PAGE>
EXHIBIT 4 The following documents were previously filed on
November 8, 1999 in Registrant's initial Registration
Statement and are incorporated by reference herein:
(a) Draft Contract Form A3030-99;
(b) Specification Pages Form A8030-99; and
(c) Enhanced Death Benefit "EDB" Rider with 5%
Accumulation and Ratchet (Form 3263-99).
EXHIBIT 5 Application Form SML-1512KNY was previously filed on
June 14, 2000 in Pre-Effective Amendment No. 1 of
Registration Statement No. 333-90541/811-7769,
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 9,
1996 in Registrant's Initial Registration Statement
No. 333-10285/811-7769, 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 in
Registration Statement No. 333-10285/811-7769,
Post-Effective Amendment No. 2, and are
incorporated by reference herein.
(b) Directors' Power of Attorney is filed herewith.
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 Schedule for Computation of Performance Quotations
was previously filed on November 8, 1999 in
Registrant's initial Registration Statement and is
incorporated by reference herein.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Amendment to Kemper Participation Agreement was
previously filed in April 2000 in Post-Effective
Amendment No. 6 of Registration Statement
No. 333-10285/811-7769, and is incorporated by
reference herein. Participation Agreement with
Kemper was previously filed on November 6, 1996
in Registration Statement No. 333-10285/811-7769,
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 in Registration
Statement No. 333-10285/811-7769, Post-Effective
Amendment No. 2, and is incorporated by reference
herein.
(c) Participation Agreement with Dreyfus was previously
filed on June 23, 1999 in Post-Effective Amendment
No.2 of Registration Statement No. 333-63089/811-7769,
and is incorporated by reference herein.
(d) Participation Agreement with Alger was previously
filed in April 2000 in Post-Effective Amendment
No. 6 of Registration Statement No. 333-10285/811-7769,
and is incorporated by reference herein.
(e) Participation Agreement with Warburg Pincus was
previously filed in April 2000 in Post-Effective
Amendment No. 6 of Registration Statement
No. 333-10285/811-7769, and is incorporated by
reference herein.
<PAGE>
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 and Vice President 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
Mark R. Colborn Director (since 2000) and Vice President (since 1992) of First
Director and Vice President Allmerica
Charles F. Cronin Secretary (since 2000) and Counsel (since 1996) of First Allmerica;
Secretary Secretary and Counsel (since 1998) of Allmerica Financial
Corporation; Attorney (1991-1996) of Nutter, McClennen & Fish
J. Kendall Huber Director, Vice President and General Counsel of First Allmerica
Director, Vice President and (since 2000); Vice President (1999) of Promos Hotel Corporation;
General Counsel Vice President & Deputy General Counsel (1998-1999) of Legg
Mason, Inc.; Vice President and Deputy General Counsel (1995-
1998) of USF&G Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice
Director, Vice President and President (since 1991) of First Allmerica; Vice President (since
Chief Investment Officer 1998) of Allmerica Financial Investment Management Services,
Inc.; and President (since 1995) and Director (since 1996) of Allmerica
Asset Management, 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
Mark C. McGivney Vice President (since 1997) and Treasurer (since 2000) of First
Vice President and Treasurer Allmerica; Associate, Investment Banking (1996 -1997) of Merrill
Lynch & Co.; Associate, Investment Banking (1995) of Salomon
Brothers, Inc.; Treasurer (since 2000) of Allmerica Investments,
Inc., Allmerica Asset Management, Inc. and Allmerica Financial
Investment Management Services, Inc.
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of
Director, President and Chief First Allmerica
Executive Officer
Edward J. Parry, III Director and Chief Financial Officer (since 1996), Vice President
Director, Vice President, (since 1993), and Treasurer (1993 - 2000) of First Allmerica
Chief Financial Officer
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; President (since 1995) of Allmerica Financial Life
Insurance and Annuity Company; Director (since 1990) of Allmerica
Investments, Inc.; 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;
Director and Vice President Director (since 1998) of The Hanover Insurance Company; Chief
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.
Gregory D. Tranter Director and Vice President (since 2000) of First Allmerica; Vice
Director and Vice President President (since 1998) of The Hanover Insurance Company; Vice
President (1996-1998) of Travelers Property & Casualty; Director of
Geico Team (1983-1996) of Aetna Life & Casualty
</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% 100% 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial Investments Investments Investments Investments Investments
| Inc. Management Investment Services Insurance Insurance Insurance Insurance Insurance
| Company, Inc. Management Insurance Agency Inc. Agency of Agency Inc. Agency Inc. Agency Inc.
| Services, Inc. Agency, Inc. of Alabama Florida Inc. of Georgia of Kentucky of Mississippi
|
|Massachusetts Massachusetts Massachusetts Massachusetts Alabama Florida Georgia Kentucky Mississippi
|
________________________________________________________________
| | | |
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
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident and health
and Annuity Company (formerly known Worcester MA 01653 insurance, annuities, variable annuities
as SMA Life Assurance Company 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 vehicle for
Worcester MA 01653 commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. (formerly Worcester MA 01653
known as Allmerica Institutional Services,
Inc. and 440 Financial Group of
Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investments Insurance Agency 200 Southbridge Parkway Insurance Agency
Inc. of Alabama Suite 400
Birmingham, AL 35209
Allmerica Investments Insurance Agency of 14211 Commerce Way Insurance Agency
Florida, Inc. Miami Lakes, FL 33016
Allmerica Investment Insurance Agency 1455 Lincoln Parkway Insurance Agency
Inc. of Georgia Suite 300
Atlanta, GA 30346
Allmerica Investment Insurance Agency Barkley Bldg-Suite 105 Insurance Agency
Inc. of Kentucky 12700 Shelbyville Road
Louisiana, KY 40423
Allmerica Investments Insurance Agency 631 Lakeland East Drive Insurance Agency
Inc. of Mississippi Flowood, MS 39208
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
<PAGE>
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
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 casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the 3950 Priority Way Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 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, accident
Company (formerly State Mutual Life Worcester MA 01653 and health insurance company
Assurance Company of America)
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
<PAGE>
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover Lloyd's
Company, Inc. Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance Company Hanover Lloyd's Insurance Multi-line property and casualty
Company 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 casualty
Worcester MA 01605 insurance
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of August 31, 2000, there were 176 Contract holders of qualified
Contracts and 450 Contract holders of non-qualified Contracts.
As of August 31, 2000, there were no Contract Form A3030-99 Owners
since sales had not yet begun.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of First Allmerica Financial Life Insurance
Company (the Depositor) states: Each Director and each Officer of the
Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation
against all expenses actually and necessarily incurred by him in the
defense or reasonable settlement of any action, suit, or proceeding in
which he is made a party by reason of his being or having been a
Director or Officer of the Corporation, including any sums paid in
settlement or to discharge judgment, except in relation to matters as
to which he shall be finally adjudged in such action, suit or
proceeding to be liable for negligence or misconduct in the performance
of his duties as such Director or Officer; and the foregoing right of
indemnification or reimbursement shall not affect any other rights to
which he may be entitled under the Articles of Incorporation, any
statute, bylaw, agreement, vote of stockholders, or otherwise.
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, Separate
Account FUVUL, Separate Account IMO 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
<PAGE>
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
--- ------------------------------------
Margaret L. Abbott Vice President
Emil J. Aberizk, Jr Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Michael J. Brodeur Vice President Operations
Mark R. Colborn Vice President
Charles F. Cronin Secretary/Clerk
Claudia J. Eckels Vice President
Philip L. Heffernan Vice President
J. Kendall Huber Director
Mark C. McGivney Treasurer
William F. Monroe, Jr. President, Director and Chief Executive Officer
David J. Mueller Vice President, Chief Financial Officer, Financial
Operations Principal and Controller
Stephen Parker Vice President and Director
Richard M. Reilly Director and Chairman of the Board
Eric A. Simonsen Director
(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 1999. No other 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.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) The Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure
that the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
(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.
(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 Contracts 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 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 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
restrictions imposed by the Program and by Section 403(b)(11) to the
attention of potential participants.
<PAGE>
4. A signed statement acknowledging the participant's understanding of (I)
the restrictions on redemption 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 has duly caused this Pre-Effective Amendment
No. 2 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 18th day of September, 2000.
SEPARATE ACCOUNT KG OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Sheila B. St. Hilaire
---------------------------------
Sheila B. St. Hilaire
Assistant Vice President and Counsel
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective
Amendment No. 2 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 September 18, 2000
----------------------------------
Warren E. Barnes
Edward J. Parry* Director, Vice President and Chief Financial Officer
----------------------------------
Richard M. Reilly* Director and Vice President
----------------------------------
John F. O'Brien* Director, President and Chief Executive Officer
----------------------------------
Bruce C. Anderson* Director and Vice President
----------------------------------
Mark R. Colborn* Director and Vice President
----------------------------------
John P. Kavanaugh* Director, Vice President and Chief Investment Officer
----------------------------------
J. Kendall Huber* Director, Vice President and General Counsel
----------------------------------
J. Barry May* Director
----------------------------------
Robert P. Restrepo, Jr.* Director and Vice President
----------------------------------
Eric A. Simonsen* Director and Vice President
----------------------------------
Gregory D. Tranter* Director and Vice President
----------------------------------
</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 September 18, 2000 duly
executed by such persons.
/s/ Sheila B. St. Hilaire
----------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
<PAGE>
EXHIBIT TABLE
Exhibit 8(b) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
