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File Nos
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Initial Registration
SEPARATE ACCOUNT KGC OF FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Secretary and Counsel
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.
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On pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a)(1) of Rule 485.
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On pursuant to paragraph (a)(1) of Rule 485.
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VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is being
registered under the Securities Act of 1933. The $500 filing fee required by
said rule is paid herewith.
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
Form N-4 Item No Caption in Prospectus
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1 . . . . . . . . . . . . . Cover Page
2 . . . . . . . . . . . . . "Special Terms"
3 . . . . . . . . . . . . . "Summary"; "Annual and Transaction Expenses"
4 . . . . . . . . . . . . . Condensed Financial Information
5 . . . . . . . . . . . . . "Description of the Company, the Variable Account
and the Kemper Investor Fund."
6 . . . . . . . . . . . . . "Charges and Deductions"
7 . . . . . . . . . . . . . "The Variable Annuity Policies"
8 . . . . . . . . . . . . . "The Variable Annuity Policies"
9 . . . . . . . . . . . . . "Death Benefit"
10. . . . . . . . . . . . . "Purchase Payments:; "Computation of Policy Values
and Annuity Payments"
11. . . . . . . . . . . . . "Surrender"; "Withdrawal"
12. . . . . . . . . . . . . "Federal Tax Considerations"
13. . . . . . . . . . . . . "Legal Matters"
14. . . . . . . . . . . . . "Table of Contents of the Statement of Additional
Information"
Form N-4 Item No. Caption in Statement of Additional Information
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15. . . . . . . . . . . . . "Cover Page"
16. . . . . . . . . . . . . "Table of Contents"
17. . . . . . . . . . . . . "General Information and History"
18. . . . . . . . . . . . . "Services"
19. . . . . . . . . . . . . "Underwriters"
20. . . . . . . . . . . . . "Underwriters"
21. . . . . . . . . . . . . "Performance Information"
22. . . . . . . . . . . . . "Annuity Payments"
23. . . . . . . . . . . . . "Financial Statements"
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SUBJECT TO SEC REVIEW
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
This prospectus describes interests under flexible payment deferred variable
and fixed annuity contracts, known as the Kemper Gateway Custom contract, issued
either on a group basis or as individual contracts by First Allmerica Financial
Life Insurance Company ("Company") to individuals and businesses in connection
with retirement plans which may or may not qualify for special federal income
tax treatment. (For information about the tax status when used with a particular
type of plan, see "FEDERAL TAX CONSIDERATIONS.") Participation in a group
contract will be accounted for by the issuance of a certificate describing the
individual's interest under the group contract. Participation in an individual
contract will be evidenced by the issuance of an individual contract.
Certificates and individual contracts are collectively referred to herein as the
"Contracts." The following is a summary of information about these Contracts.
More detailed information can be found under the referenced captions in this
Prospectus.
Contract values may accumulate on a variable basis in the separate account
known as Separate Account KGC (the "Variable Account"). The assets of the
Variable Account are divided into Sub-Accounts, each investing exclusively in
shares of one of the following Portfolios of Kemper Investors Fund ("KINF"):
<TABLE>
<S> <C>
MONEY MARKET PORTFOLIO INVESTMENT GRADE BOND PORTFOLIO
TOTAL RETURN PORTFOLIO VALUE PORTFOLIO
HIGH YIELD PORTFOLIO SMALL CAP VALUE PORTFOLIO
GROWTH PORTFOLIO VALUE+GROWTH PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO HORIZON 20+ PORTFOLIO
INTERNATIONAL PORTFOLIO HORIZON 10+ PORTFOLIO
SMALL CAP GROWTH PORTFOLIO HORIZON 5 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 and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period, if
held for the entire Guarantee Period. If removed prior to the end of the
Guarantee Period the value may be increased or decreased by a Market Value
Adjustment. Amounts allocated to the Guarantee Period Accounts in the
accumulation phase are held in the Company's Separate Account GPA.
Additional information is contained in a Statement of Additional Information
dated October , 1996 ("SAI"), filed with the Securities and Exchange
Commission and incorporated herein by reference. The Table of Contents of the
SAI is on page 3 of this Prospectus. The SAI is available upon request and
without charge through Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653, 800-782-8380.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
KINF. INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
DATED OCTOBER , 1996
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TABLE OF CONTENTS
<TABLE>
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PAGE
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TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION......... 3
SPECIAL TERMS........................................................ 4
SUMMARY.............................................................. 5
ANNUAL AND TRANSACTION EXPENSES...................................... 9
PERFORMANCE INFORMATION.............................................. 12
WHAT IS AN ANNUITY?.................................................. 14
RIGHT TO REVOKE OR SURRENDER......................................... 14
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND KEMPER
INVESTORS FUND..................................................... 15
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.................... 17
VOTING RIGHTS........................................................ 17
CHARGES AND DEDUCTIONS............................................... 18
A. Annual Charges Against Variable Account Assets................... 18
B. Contract Fee..................................................... 19
C. Optional Benefit Riders.......................................... 19
D. Premium Taxes.................................................... 19
E. Contingent Deferred Sales Charge................................. 20
F. Transfer Charge.................................................. 23
DESCRIPTION OF THE CONTRACT.......................................... 24
A. Payments......................................................... 24
B. Transfer Privilege............................................... 25
C. Surrender........................................................ 25
D. Withdrawals...................................................... 26
E. Death Benefit.................................................... 26
F. The Spouse of the Contract Owner as Beneficiary.................. 28
G. Assignment....................................................... 28
H. Electing the Form of Annuity and the Annuity Date................ 28
I. Description of Variable Annuity Options.......................... 29
J. Norris Decision.................................................. 30
K. Computation of Values and Annuity Benefit Payments............... 30
GUARANTEE PERIOD ACCOUNTS............................................ 32
FEDERAL TAX CONSIDERATIONS........................................... 34
A. Qualified and Non-Qualified Contracts............................ 34
B. Taxation of the Contracts in General............................. 34
C. Tax Withholding and Penalties.................................... 35
D. Provisions Applicable to Qualified Employer Plans................ 36
Qualified Employee Pension and Profit Sharing Trusts and
E. Qualified Annuity Plans......................................... 36
F. Self-Employed Individuals........................................ 36
G. Individual Retirement Account Plans.............................. 36
H. Simplified Employee Pensions..................................... 37
I. Public School Systems and Certain Tax-Exempt Organizations....... 38
J. Texas Optional Retirement Program................................ 38
Section 457 Plans for State Governments and Tax-Exempt
K. Entities........................................................ 38
L. Non-individual Owners............................................ 38
REPORTS.............................................................. 39
LOANS (QUALIFIED CONTRACTS ONLY)..................................... 39
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT......................... 39
DISTRIBUTION......................................................... 39
LEGAL MATTERS........................................................ 40
</TABLE>
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TABLE OF CONTENTS (continued)
<TABLE>
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PAGE
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FURTHER INFORMATION.................................................. 40
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT............... 41
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT...... 42
APPENDIX C -- THE DEATH BENEFIT...................................... 44
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY...................................... 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY..................... 3
SERVICES............................................................. 3
UNDERWRITERS......................................................... 3
ANNUITY PAYMENTS..................................................... 4
PERFORMANCE INFORMATION.............................................. 6
TAX DEFFERED ACCUMULATION............................................ 8
FINANCIAL STATEMENTS................................................. 9
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE OR SOLICIT AN OFFER IN THAT STATE.
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Contract Owner's interest in a Sub-Account
before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity
benefit payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin as specified
pursuant to the Contract.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: An Annuity in the payout phase providing for annuity
benefit payments which remain fixed in an amount throughout the annuity benefit
payment period selected.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
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.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contracts invests exclusively in the shares of a corresponding
portfolio of Kemper Investors Fund.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING PORTFOLIOS: Money Market, Total Return, High Yield, Growth,
Government Securities, International, Small Cap Growth, Investment Grade Bond,
Value, Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5
Portfolios of the Kemper Investors Fund.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Portfolios is determined and unit values of the Sub-Accounts are determined.
Valuation dates currently occur on each day on which the New York Stock Exchange
is open for trading as well as each day otherwise required.
VARIABLE ACCOUNT: Separate Account KGC, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: An Annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain of the
Portfolios.
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SUMMARY
WHAT IS THE KEMPER GATEWAY CUSTOM VARIABLE ANNUITY?
The Kemper Gateway Custom Variable Annuity contract ("Contract") is an
insurance contract designed to help you accumulate assets for your retirement or
other important financial goals on a tax-deferred basis. The Contract combines
the concept of professional money management with the attributes of an annuity
contract. Features available through the Contract include:
- A customized investment portfolio with experienced professional portfolio
managers
- 14 KINF Portfolios
- 1 Fixed Account
- 9 Guarantee Period Accounts
- Optional Enhanced Death Benefit Rider, Living Benefits Rider, and
Disability Rider
- Tax deferral on earnings
- Guarantees that can protect your beneficiaries family during the
accumulation phase
- Income that can be guaranteed for life
The Contract has two phases, an accumulation phase and an annuity payout
phase. During the accumulation phase, your initial payment and any additional
payments you choose to make may be allocated to the combination of portfolios of
securities ("Portfolios") under your Contract, to the Guarantee Period Accounts,
and to the Fixed Account. Your Contract's Accumulated Value is based on the
investment performance of the Portfolios and accumulations in the Guarantee
Period Accounts and the Fixed Account. No income taxes are paid on any earnings
under the Contract unless and until accumulated values are withdrawn.
During the annuity payout phase, the Annuitant can receive income based on
several annuity options. These options include payment over a period of years or
for the rest of the Annuitant's life.
THE ACCUMULATION PHASE
During the accumulation phase, you select the investment options most
appropriate for your investment needs. The Contracts permit net payments to be
allocated among the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. Each Portfolio is professionally managed by Zurich Kemper Investments,
Inc. and its affiliate, Dreman Value Advisors, Inc. All investment gains or
losses of the Portfolios will be reflected in the Accumulated Value under your
Contract.
The accumulation phase provides certain protection and guarantees for the
beneficiary if the Annuitant should die before the annuity phase begins. See
discussion below under "What happens upon death during the accumulation phase?"
THE ANNUITY PAYOUT PHASE
You choose the annuity option and the date for the annuity benefit payments
to begin. Annuity benefit payments may be on a variable basis (dependent upon
the performance of the Portfolios) on a fixed basis (with payment amounts
guaranteed), or on a combination variable and fixed basis. Among the income
options available during the annuity phase are:
- Lump sum
- At regular intervals over a specified number of years; or
- At regular intervals for the rest of the Annuitant's life, regardless of
how long he or she lives.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you and us -- First Allmerica Financial Life
Insurance Company ("Company"). Each Contract has a Contract Owner, an Annuitant
and a beneficiary. As Contract
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Owner, you make payments, choose investment allocations and select the Annuitant
and beneficiary. The Annuitant is the individual who receives annuity benefit
payments under the Contract. The beneficiary is the person who receives any
payment on death of the Contract Owner or Annuitant.
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you
return the Contract to the Company during the first 10 days from the date you
received it, the Contract will be canceled. You will incur no fees to cancel
within the right-to-examine period and will receive the greater of (1) your
entire payment, or (2) the accumulated value of the Contract plus any amounts
deducted under the Contract or by the Portfolios for taxes, charges or fees. See
"RIGHT TO REVOKE CONTRACT."
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. The Fixed Account is part of the General Account of the Company and
provides a guarantee by the Company of principal and a fixed interest rate for
one year from the date amounts are allocated to the account. Payments allocated
to a Guarantee Period Account are held in a separate account and earn a
guaranteed interest rate if held for the full duration of the Guarantee Period.
THE FIXED ACCOUNT AND/OR THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN
ALL STATES.
VARIABLE ACCOUNT -- You have a choice of Sub-Accounts investing in the 14
Portfolios of the Kemper Investors Fund ("KINF"):
<TABLE>
<S> <C>
MONEY MARKET INVESTMENT GRADE BOND
TOTAL RETURN VALUE
HIGH YIELD SMALL CAP VALUE
GROWTH VALUE+GROWTH
GOVERNMENT SECURITIES HORIZON 20+
INTERNATIONAL HORIZON 10+
SMALL CAP GROWTH HORIZON 5
</TABLE>
This range of investment choices enables you to allocate your money among
the Portfolios to meet your particular investment needs. Because of your free
look right under the "Right to Examine" provision, for the first 15 days from
the date of issue, all Portfolio investments and allocations to the Guarantee
Period Accounts will be allocated to the Money Market Portfolio. Thereafter, all
amounts will be allocated according to your investment choices. For a more
detailed description of the Portfolios, see the prospectus of KINF.
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. However, values and benefits calculated
on the basis of Guarantee Period Account allocations 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 currently makes available nine Guarantee Periods ranging from two to
ten years in duration. Once declared, the Guaranteed Interest Rate will not
change during the duration of the Guarantee Period. If amounts allocated to a
Guarantee Period Account are transferred, surrendered or applied to any annuity
option at any time other than the day following the last day of the applicable
Guarantee Period, a Market Value Adjustment will apply that may increase or
decrease the account's value. For more information about the Guarantee Period
Accounts and the Market Value Adjustment, see "Guarantee Period Accounts."
FIXED ACCOUNT. The Fixed Account is part of the General Account, which
consists of all the Company's assets other than those allocated to the Variable
Account and any other separate account. Allocations to the Fixed Account are
guaranteed as to principal and a minimum rate of interest.
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Additional excess interest may be declared periodically at the Company's
discretion. Furthermore, the initial rate in effect on the date an amount is
allocated to the Fixed Account 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 PORTFOLIO MANAGERS?
Zurich Kemper Investments, Inc. ("ZKI"), is the investment manager of each
Portfolio of the KINF other than the Value and Small Cap Value Portfolios and
provides each with continuous professional investment supervision. Dreman Value
Advisors, Inc. ("DVA"), a wholly owned subsidiary of ZKI, is the investment
manager of the Value and Small Cap Value Portfolios and provides each with
continuous professional investment supervision. DVA is also the sub-adviser for
the Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5 Portfolios. Under the
terms of its Sub-Advisory Agreement with ZKI, DVA will manage the value portion
of each of these Portfolios and will provide such other investment advice,
research and assistance as ZKI may, from time to time, reasonably request.
Zurich Investment Management ("ZIM"), a wholly-owned subsidiary of ZKI, is the
investment manager of the Guarantee Period Accounts pursuant to an investment
advisory agreement between the Company and ZIM.
CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. You will incur no current taxes on transfers while your money remains
in the Contract. However, transfers out of a Guarantee Period Account prior to
its maturity date will incur a Market Value Adjustment. You may also elect
Automatic Account rebalancing to ensure assets remain allocated according to a
desired mix or choose automatic dollar cost averaging to gradually move money
into one or more portfolios. See "TRANSFER PRIVILEGE."
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject to the
minimum and maximum payments stated in "PAYMENTS."
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You can withdraw 15% of the total Accumulated Value per calendar year
without a surrender charge. You may surrender your Contract or make withdrawals
any time before your annuity payout phase begins subject to the restrictions
discussed in "SURRENDER," "WITHDRAWALS," and "MARKET VALUE ADJUSTMENT." Certain
charges may apply, see "CHARGES AND DEDUCTIONS," and there may be a tax-penalty
assessed under the Internal Revenue Code. See "FEDERAL TAX CONSIDERATIONS."
WHAT HAPPENS UPON DEATH DURING MY ACCUMULATION PHASE?
If the Annuitant, Contract Owner or Joint Owner should die before the
Annuity Date, a Death Benefit will be paid to the beneficiary. Unless the
Enhanced Death Benefit Rider is in effect at the death of the Annuitant (or a
Contract Owner who is also an Annuitant), a standard Annuitant Death Benefit
will be paid. The standard Annuitant Death Benefit is equal to the greater of:
- The Accumulated Value increased by any positive Market Value Adjustment;
or
- Gross payments reduced proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the Death Benefit
under this option immediately prior to the withdrawal, multiplied by the
withdrawal amount, and divided by the Accumulated Value immediately prior
to the withdrawal).
If the Contract Owner elects the Enhanced Death Benefit Rider, the Annuitant
Death Benefit will be the greatest of
- The Accumulated Value increased by any positive Market Value Adjustment;
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- Gross payments, reduced proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the Death Benefit
under this option immediately prior to the withdrawal, multiplied by the
withdrawal amount, and divided by the Accumulated Value immediately prior
to the withdrawal); or
- The Death Benefit that would have been payable on the most recent Contract
Anniversary, increased for subsequent payments and reduced proportionately
to reflect withdrawals after that date.
A separate charge is made for the Enhanced Death Benefit Rider. See "Death
Benefit" under "DESCRIPTION OF THE CONTRACT."
Regardless of whether the Enhanced Death Benefit Rider is in effect, if a
Contract Owner who is not also the Annuitant dies during the Accumulation phase,
the Death Benefit will equal the Accumulated Value of the Contract increased by
any positive Market Value Adjustment. If the Annuitant dies after the Annuity
Date but before all guaranteed annuity benefit payments have been made, the
remaining payments will be paid to the beneficiary at least as rapidly as under
the annuity option in effect. See "Death Benefit."
WHAT ARE MY ANNUITY OPTIONS UNDER THE CONTRACT?
You may choose variable annuity benefit payments based on the investment
performance of certain Portfolios, fixed-amount annuity benefit payments, or a
combination of fixed-amount and variable annuity benefit payments. Fixed-amount
payments are guaranteed by the Company. See "DESCRIPTION OF THE CONTRACT" for
information about annuity benefit payment options, selecting the Annuity Date,
and how annuity benefit payments are calculated.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
At each Contract anniversary and upon surrender, if the Accumulated Value is
less than $50,000, the Company will deduct a $35 Contract Fee from your
Contract. There will be no Contract Fee if the Accumulated Value is $50,000 or
more. The Contract Fee is waived for Contracts issued to and maintained by a
Trustee of a 401(k) plan.
Should you decide to surrender your Contract, make withdrawals, or receive
payments under certain annuity options, you may be subject to a contingent
deferred sales charge. If applicable, this charge will be between 2% and 7% of
payments withdrawn, based on when the payments were made.
Depending upon the state you live in, a deduction for state and local
premium taxes, if any, may be made as described under "PREMIUM TAXES."
Currently, the Company makes no charge for processing transfers. The first
twelve (12) transfers in a Contract year are guaranteed to be free of a transfer
charge. For each subsequent transfer in a contract year, the Company reserves
the right to assess a charge which is guaranteed never to exceed $25.
The Company will deduct on a daily basis, an annual Mortality and Expense
Risk Charge and Administrative Expense Charge equal to an annual charge of 0.95%
and 0.15%, respectively, of the average daily net assets invested in each
Portfolio. The Portfolios will incur certain management fees and expenses which
are more fully described in "OTHER CHARGES" and in the KINF prospectus, which
accompanies this Prospectus.
Three optional riders (Enhanced Death Benefit Rider, Living Benefits Rider,
and Disability Rider) are available for an additional charge of 0.25%, 0.05% and
0.05%, respectively, which is deducted in arrears on a monthly basis. For more
information, see "Living Benefits Rider" and "Disability Rider" under CHARGES
AND DEDUCTIONS, and "F. Death Benefit" under "DESCRIPTION OF THE CONTRACT."
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CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make 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 a beneficiary
irrevocably.
- You may change the allocation of payments, with no tax consequences under
current law.
- You may make transfers of Contract value among your current investments.
- You may cancel your Contract within 10 days of delivery, as discussed
above.
- You may select the form and timing of annuity benefit payments.
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under your Contract, expenses of the
Sub-Accounts, and expenses of the Portfolios. In addition to the charges and
expenses described below, premium taxes are applicable in some states and
deducted as described under "PREMIUM TAXES."
<TABLE>
<CAPTION>
YEARS FROM DATE
CONTRACT CHARGES OF PAYMENT CHARGE
- --------------------------------------------------------------------------------------- --------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7.0%
This charge may be assessed upon surrender, withdrawal or 2 6.0%
annuitization under any commutable period certain option or a 3 5.0%
noncommutable period certain option of less than 10 years. The charge 4 4.0%
is a percentage of payments applied to the amount surrendered (in excess 5 3.0%
of any amount that is free of charge) within the indicated time periods. 6 2.0%
Thereafter 0.0%
TRANSFER CHARGE: None
The Company currently makes no charge for processing
transfers. The Company guarantees that the first twelve
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.
CONTRACT FEE: $35
The Fee is deducted annually and upon surrender prior to the
annuity date when the Accumulated Value is less than $50,000.
The fee is waived for contracts issued to and maintained by the
Trustee of a 401(k) plan.
<CAPTION>
SUB-ACCOUNT EXPENSES
- ---------------------------------------------------------------------------------------
<S> <C> <C>
(on annual basis as percentage of average daily net assets)
Mortality and Expense Risk Charge: 0.95%
Administrative Expense Charge: 0.15%
---------
Total Asset Charge: 1.10%
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO EXPENSES
- ---------------------------------------------------------
<S> <C> <C> <C>
(annual basis as percentage of average daily net assets)
<CAPTION>
MANAGEMENT OTHER TOTAL
PORTFOLIO FEE EXPENSES EXPENSES
- --------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Money Market............................................. 0.50% 0.05% 0.55%
Total Return............................................. 0.55% 0.05% 0.60%
High Yield............................................... 0.60% 0.05% 0.65%
Growth................................................... 0.60% 0.04% 0.64%
Government Securities.................................... 0.55% 0.10% 0.65%
International............................................ 0.75% 0.17% 0.92%
Small Cap Growth......................................... 0.65% 0.22% 0.87%
Investment Grade Bond.................................... 0.60% 0.15%* 0.75%
Value.................................................... 0.75% 0.15%* 0.90%
Small Cap Value.......................................... 0.75% 0.15%* 0.90%
Value+Growth............................................. 0.75% 0.15%* 0.90%
Horizon 20+.............................................. 0.60% 0.15%* 0.75%
Horizon 10+.............................................. 0.60% 0.15%* 0.75%
Horizon 5................................................ 0.60% 0.15%* 0.75%
</TABLE>
*Estimated First-Year Expenses
EXAMPLES. The following examples demonstrate the cumulative expenses which
would be paid by the Contract Owner at 1-year, 3-year, 5-year and 10-year
intervals under certain contingencies. Each example assumes a $1,000 investment
in a Sub-Account and a 5% annual return on assets, as required by rules of the
Securities and Exchange Commission. Because the expenses of the Portfolios
differ, separate examples are used to illustrate the expenses incurred by a
Contract Owner on an investment in the various Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
(a) If, at the end of the applicable period, you surrender your Contract or
annuitize* under a commutable period certain option or a noncommutable period
certain option of less than 10 years, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market............................................. $ 79 $ 101 $ 123 $ 202
Total Return............................................. $ 79 $ 102 $ 125 $ 207
High Yield............................................... $ 80 $ 104 $ 128 $ 212
Growth................................................... $ 80 $ 103 $ 127 $ 211
Government Securities.................................... $ 80 $ 104 $ 128 $ 212
International............................................ $ 82 $ 111 $ 141 $ 240
Small Cap Growth......................................... $ 82 $ 110 $ 139 $ 235
Investment Grade Bond.................................... $ 81 $ 106 $ 133 $ 223
Value.................................................... $ 82 $ 111 $ 140 $ 238
Small Cap Value.......................................... $ 82 $ 111 $ 140 $ 238
Value+Growth............................................. $ 82 $ 111 $ 140 $ 238
Horizon 20+.............................................. $ 81 $ 106 $ 133 $ 223
Horizon 10+.............................................. $ 81 $ 106 $ 133 $ 223
Horizon 5................................................ $ 81 $ 106 $ 133 $ 223
</TABLE>
10
<PAGE>
(b) If, at the end of the applicable time period, you annuitize* under a
life option or a noncommutable period certain option of 10 years or longer, or
if you do not surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market............................................. $ 17 $ 54 $ 93 $ 202
Total Return............................................. $ 18 $ 55 $ 95 $ 207
High Yield............................................... $ 18 $ 57 $ 98 $ 212
Growth................................................... $ 18 $ 57 $ 97 $ 211
Government Securities.................................... $ 18 $ 57 $ 98 $ 212
International............................................ $ 21 $ 65 $ 112 $ 240
Small Cap Growth......................................... $ 21 $ 64 $ 109 $ 235
Investment Grade Bond.................................... $ 19 $ 60 $ 103 $ 223
Value.................................................... $ 21 $ 64 $ 111 $ 238
Small Cap Value.......................................... $ 21 $ 64 $ 111 $ 238
Value+Growth............................................. $ 21 $ 64 $ 111 $ 238
Horizon 20+.............................................. $ 19 $ 60 $ 103 $ 223
Horizon 10+.............................................. $ 19 $ 60 $ 103 $ 223
Horizon 5................................................ $ 19 $ 60 $ 103 $ 223
</TABLE>
As required in rules promulgated under the 1940 Act, the Contract Fee is
reflected in the examples by a method 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 0.088%, and the amount of the Contract Fee is assumed to
be $0.88 in the examples.
*The Contract Fee is not deducted after annuitization. No contingent
deferred sales charge is assessed at the time of annuitization under an option
including a life contingency or under a noncommutable period certain option of
ten years or longer.
OPTIONAL BENEFIT RIDERS. Subject to state availability, the Company offers
three optional benefit riders that may be elected by the Contract Owner. A
separate monthly charge is made for each rider selected. The applicable charge
is assessed on the Accumulated Value on the last day of each month and on the
date a rider is terminated, multiplied by 1/12th of the following annual
percentage rates:
<TABLE>
<S> <C>
Enhanced Death Benefit Rider 0.25%
Disability Rider 0.05%
Living Benefits Rider 0.05%
</TABLE>
For a description of these riders, see "Living Benefits Rider" and
"Disability Rider" under "CHARGES AND DEDUCTIONS," and "Enhanced Death Benefit
Rider" under "DESCRIPTION OF THE CONTRACT."
11
<PAGE>
PERFORMANCE INFORMATION
The Contracts are first being offered to the public in 1996. However,
Allmerica Financial and KINF may advertise "Total Return" and "Average Annual
Total Return" performance information based on the periods that the Portfolios
have been in existence. The results for any period prior to the Contracts being
offered will be calculated as if the Contracts had been offered during that
period of time, with all charges assumed to be those applicable to the
Sub-Accounts, the Portfolios, and (in Table I) assuming that the Contract is
surrendered at the end of the applicable period.
The "Total Return" of a Sub-Account refers to the total of the income
generated by an investment in the Sub-Account and of the changes in the value of
the principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The "Average Annual Total Return" represents the average annual percentage
change in the value of an investment in a Sub-Account over a given period of
time. Average Annual Total Return represents average 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 Money Market Portfolio
refers to the income generated by an investment in the Sub-Account over a
seven-day period (which period will be specified in the advertisement). This
income is then "annualized" by assuming that the income generated in the
specific week is generated over a 52-week period. This annualized Yield is shown
as a percentage of the investment. The "Effective Yield" calculation is similar,
but when annualized, the income earned by an investment in the Sub-Account is
assumed to be reinvested. Thus the "Effective Yield" will be slightly higher
than the "Yield" because of the compounding effect of this assumed reinvestment.
The Total Return, Yield, and Effective Yield figures are adjusted to reflect
the Sub-Account's asset charges. The total return figures also reflect the $35
annual Contract Fee and the contingent deferred sales load which would be
assessed if the investment were completely surrendered at the end of the
specified period.
The Company and KINF may also advertise supplemental total return
performance information. Supplemental total return refers to the total of the
income generated by an investment in the Sub-Account and of the changes in value
of the principal invested (due to realized and unrealized capital gains or
losses), adjusted by the Sub-Account's annual asset charges, and expressed as a
percentage of the investment. Because it is assumed that the investment is NOT
surrendered at the end of the specified period, the contingent deferred sales
load is NOT included in the calculation of supplemental total return.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock 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; (ii) other
groups of variable annuity variable 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, such as Morningstar, Inc., who rank such investment
products on overall performance or other criteria; or (iii) 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.
Performance information for any Sub-Account reflects only the performance of
a hypothetical investment in the Sub-Account during the particular time period
on which the calculations are based. Performance information should be
considered in light of the investment objectives and policies,
12
<PAGE>
characteristics and quality of the investment portfolio of the 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.
TABLE I
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING COMPLETE SURRENDER OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED: 5 INCEPTION
UNDERLYING PORTFOLIO 12/31/95 YEARS OR LESS)*
- -------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Money Market.................................................................... -1.88% 2.57% 4.71%
Total Return.................................................................... 17.51% 10.69% 10.51%
High Yield...................................................................... 9.13% 18.08% 10.19%
Growth.......................................................................... 24.43% 17.62% 11.93%
Government Securities........................................................... 10.60% 6.80% 7.21%
International................................................................... 4.88% N/A 7.41%
Small Cap Growth................................................................ 21.56% N/A 15.38 %
Investment Grade Bond........................................................... N/A N/A N/A
Value........................................................................... N/A N/A N/A
Small Cap Value................................................................. N/A N/A N/A
Value+Growth.................................................................... N/A N/A N/A
Horizon 20+..................................................................... N/A N/A N/A
Horizon 10+..................................................................... N/A N/A N/A
Horizon 5....................................................................... N/A N/A N/A
</TABLE>
TABLE II
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING NO SURRENDER OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED: 5 INCEPTION
UNDERLYING PORTFOLIO 12/31/95 YEARS OR LESS)*
- ------------------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Money Market.................................................................. 4.33% 3.10% 4.71%
Total Return.................................................................. 24.51% 11.09% 10.51%
High Yield.................................................................... 16.03% 18.39% 10.19%
Growth........................................................................ 31.43% 17.93% 11.93%
Government Securities......................................................... 17.59% 7.25% 7.21%
International................................................................. 11.51% N/A 8.23%
Small Cap Growth.............................................................. 28.56% N/A 18.67 %
Investment Grade Bond......................................................... N/A N/A N/A
Value......................................................................... N/A N/A N/A
Small Cap Value............................................................... N/A N/A N/A
Value+Growth.................................................................. N/A N/A N/A
Horizon 20+................................................................... N/A N/A N/A
Horizon 10+................................................................... N/A N/A N/A
Horizon 5..................................................................... N/A N/A N/A
</TABLE>
*The inception dates for the Portfolios are: 3/5/82 for Money Market, Total
Return and High Yield; 12/9/83 for Growth; 9/3/87 for Government Securities;
1/6/92 for International; 5/2/94 for the Small Cap Growth; 5/1/96 for Investment
Grade Bond, Value, Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+, and
Horizon 5.
13
<PAGE>
WHAT IS AN ANNUITY?
In general, an annuity is an insurance contract designed to provide a
retirement income in the form of periodic payments for the lifetime of the
Contract Owner or an individual chosen by the Contract Owner. The retirement
income payments are called "annuity benefit payments" and the individual
receiving the payments is called the "Annuitant." Annuity benefit payments begin
on the annuity date.
The Contract has two phases, an accumulation phase and an annuity payout
phase. During the accumulation phase, your initial payment and any additional
payments you choose to make may be allocated to the combination of portfolios of
securities ("Portfolios") under your Contract, to the Guarantee Period Accounts,
and to the Fixed Account.
During the annuity payout phase, the Annuitant can receive income based on
several annuity options. These options include payment over a period of years or
for the rest of the Annuitant's life.
Under an annuity contract, the insurance company assumes a mortality risk
and an expense risk. The mortality risk arises from the insurance company's
guarantee that annuity benefit payments will continue for the life of the
Annuitant, regardless of how long the Annuitant lives or how long all Annuitants
as a group live. The expense risk arises from the insurance company's guarantee
that charges will not be increased beyond the limits specified in the Contract,
regardless of actual costs of operations.
The Contract Owner's payments, less any applicable deductions, are invested
by the insurance company. After retirement, annuity benefit payments are paid to
the Annuitant for life or for such other period chosen by the Contract Owner. In
the case of a "fixed" annuity, the value of these annuity benefit payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed annuities see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT." With a variable annuity, the value of the Contract and the annuity
benefit payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Contract and in the annuity benefit payments. If
the portfolio increases in value, the value of the Contract increases. If the
portfolio decreases in value, the value of the Contract decreases.
RIGHT TO REVOKE OR SURRENDER
A Contract Owner may revoke the Contract within 10 days after receipt of the
Contract. In order to revoke the Contract, the Contract Owner must mail or
deliver the Contract to the principal office of the Company at 440 Lincoln
Street, Worcester, Massachusetts 01653, or to an Allmerica Financial agent of
the Company. Mailing or delivery must occur on or before 10 days after receipt
of the Contract for revocation to be effective. Within seven days, the Company
will send the Contract Owner a refund of the greater of (1) gross payments or
(2) the Accumulated Value plus any amounts deducted under the Contract or by the
Portfolios for taxes, charges or fees.
If on the date of revocation the Surrender Value of the Contract exceeds
gross payments, the Company will treat the revocation request as a request for
surrender (see "Surrender") and will pay the Contract Owner the Surrender Value
of the Contract. The liability of the Variable Account under this provision is
limited to the Contract Owner's Accumulated Value in the Variable Account on the
date of cancellation. Any additional amounts refunded to the Contract Owner will
be paid by the Company.
The refund of any premium paid by check may be delayed until the check has
cleared the Contract Owner's bank.
14
<PAGE>
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND KEMPER INVESTORS FUND
THE COMPANY -- The Company, organized under the laws of Massachusetts in
1844, is the fifth oldest life insurance company in America. As of December 31,
1995, the Company and its subsidiaries had over $11 billion in combined assets
and over $35.2 billion of 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 is located at 440
Lincoln Street, Worcester, Massachusetts 01653, telephone 508-855-1000
("Principal Office").
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
VARIABLE ACCOUNT -- Separate Account KGC ("Variable Account") is a separate
investment account of the Company with 14 Sub-Accounts. The assets used to fund
the variable portions of the Contracts are set aside in Sub-Accounts kept
separate from the general assets of the Company. Each Sub-Account invests in a
corresponding investment series ("Portfolio") of Kemper Investors Fund ("KINF").
Each Sub-Account is administered and accounted for as part of the general
business of the Company. However, the income, capital gains, or capital losses
of each Sub-Account are allocated to each Sub-Account, without regard to any
other income, capital gains, or capital losses of the Company. Under
Massachusetts law, the assets of the Variable Account may not be charged with
any liabilities arising out of any other business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on June 13, 1996. The Variable Account meets the definition of "separate
account" under federal securities laws and is registered with the Securities and
Exchange Commission ("SEC") as a unit investment trust under the Investment
Company Act of 1940 ("1940 Act"). This registration does not involve the
supervision of management or investment practices or policies of the Variable
Account by the SEC.
The Company reserves the right, subject to compliance with applicable law,
to change the names of the Variable Account and the Sub-Accounts.
KEMPER INVESTORS FUND -- The Variable Account invests in shares of Kemper
Investors Fund ("KINF"), a series type mutual fund registered with the
Commission as an open-end, diversified management investment company.
Registration of KINF does not involve supervision of its management, investment
practices or policies by the Commission. KINF is designed to provide an
investment vehicle for certain variable annuity contracts and variable life
insurance policies. Shares of the Portfolios of KINF are sold only to insurance
company separate accounts. The investment objectives of the fourteen Portfolios
of KINF are summarized below:
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 twelve months or less.
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.
HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
15
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth
and income, principally through an internationally diversified portfolio of
equity securities.
SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors' capital
from a portfolio primarily of growth stocks of smaller companies.
INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
VALUE PORTFOLIO seeks to achieve a high rate of total return from a
portfolio primarily of value stocks of larger companies.
SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.
HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+ year
investment horizon, seeks growth of capital, with income as a secondary
objective.
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.
HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
There is no assurance that any of the Portfolios of KINF will achieve its
objective as stated in KINF's prospectus. More detailed information, including a
description of risks involved in investing in each of the Portfolios, may be
found in the prospectus for KINF, which must accompany or precede this
Prospectus, and KINF's Statement of Additional Information available upon
request from KINF, 222 South Riverside Plaza, Chicago, Illinois 60606. Please
read the prospectus of KINF carefully before investing.
INVESTMENT MANAGEMENT SERVICES TO KINF -- Responsibility for overall
management of KINF rests with the Board of Trustees and officers of KINF. Zurich
Kemper Investments, Inc. ("ZKI"), is the investment manager of each Portfolio
other than the Value and Small Cap Value Portfolios and provides each with
continuous professional investment supervision. Dreman Value Advisors, Inc.
("DVA"), a wholly owned subsidiary of ZKI, is the investment manager of the
Value and Small Cap Value Portfolios and provides each with continuous
professional investment supervision. DVA is also the sub-adviser for the
Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5 Portfolios. Under the
terms of its Sub-Advisory Agreement with ZKI, DVA will manage the value portion
of each of these Portfolios and will provide such other investment advice,
research and assistance as ZKI may, from time to time reasonably request.
For its services, ZKI is paid a management fee based upon the average daily
net assets of such Portfolios, as follows: Money Market (.50 of 1%), Total
Return (.55 of 1%), High Yield (.60 of 1%), Growth (.60 of 1%), Government
Securities (.55 of 1%), International (.75 of 1%), Small Cap Growth (.65 of 1%),
Investment Grade Bond (.60 of 1%), Value+Growth (.75 of 1%), Horizon 20+ (.60 of
1%), Horizon 10+ (.60 of 1%), and Horizon 5 (.60 of 1%). DVA serves as the
investment manager for the Value and Small Cap Value Portfolios and is paid a
management fee at an annual rate of .75 of 1% of the average daily net assets of
these Portfolios. For more information, see the KINF Prospectus and SAI.
16
<PAGE>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law and to provisions
of the Participation Agreement (the "Participation Agreement") among the
Company, KINF, ZKI and Kemper Distributors, Inc., to make additions to,
deletions from, or substitutions for the shares that are held in the Sub-
Accounts or that the Sub-Accounts may purchase. If the shares of any Portfolio
are no longer available for investment or if in the Company's judgment further
investment in any Portfolio should become inappropriate in view of the purposes
of the Variable Account or the affected Sub-Account, the Company may redeem the
shares of that Portfolio and substitute shares of another registered open-end
management company. The Company will not substitute any shares attributable to a
Contract interest in a Sub-Account without notice to the Contract Owner and
prior approval of the Commission 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 a Contract Owner.
The Company also reserves the right to establish additional Sub-Accounts of
the Variable Account, each of which would invest in shares corresponding to a
new Portfolio or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required Commission
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 Contract Owners on a basis to be determined by the Company.
Shares of the Portfolios are also issued to variable accounts of other
insurance companies which issue variable life Contracts ("mixed funding").
Shares of the Portfolios are also 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 Contract
Owners or variable annuity Contract Owners. Although the Company and KINF do not
currently foresee any such disadvantages to either variable life insurance
Contract Owners or variable annuity Contract Owners, the Company and the
Trustees of KINF intend to monitor events in order to identify any material
conflicts between such Contract Owners and to determine what action, if any,
should be taken in response thereto. If the Trustees were to conclude that
separate portfolios should be established for variable life and variable annuity
Separate accounts, the Company will bear the attendant expenses.
If any of these substitutions or changes are made, the Company may by
appropriate endorsement change the Contract to reflect the substitution or
change and will notify Contract Owners of all such changes. If the Company deems
it to be in the best interest of Contract Owners, and subject to any approvals
that may be required under applicable law, the Variable Account or any
Sub-Account(s) may be operated as a management company under the 1940 Act, may
be deregistered under the 1940 Act if registration is no longer required, or may
be combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
The Company will vote Portfolio shares held by each Sub-Account in
accordance with instructions received from Contract Owners and, after the
Annuity Date, from the Annuitants. Each person having a voting interest in a
Sub-Account will be provided with proxy materials of the Portfolio together with
a form with which to give voting instructions to the Company. Shares for which
no timely instructions are received will be voted in proportion to the
instructions which are received. The Company will also 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.
17
<PAGE>
The number of votes which a Contract Owner or Annuitant may cast will be
determined by the Company as of the record date established by the Portfolio.
During the accumulation period, the number of Portfolio shares attributable to
each Contract Owner will be determined by dividing the dollar value of the
Accumulation Units of the Sub-Account credited to the Contract by the net asset
value of one Portfolio share. During the annuity period, the number of Portfolio
shares attributable to each Annuitant will be determined by dividing the reserve
held in each Sub-Account for the Annuitant's variable annuity by the net asset
value of one Portfolio share. Ordinarily, the Annuitant's voting interest in the
Portfolio will decrease as the reserve for the variable annuity is depleted.
CHARGES AND DEDUCTIONS
Deductions under the Contracts and charges against the assets of the
Sub-Accounts are described below. Other deductions and expenses paid out of the
assets of the Portfolios are described in the Prospectus and Statement of
Additional Information of KINF.
A. ANNUAL CHARGES AGAINST VARIABLE ACCOUNT ASSETS.
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 0.95% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
period and the annuity payout period. 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 option selected),
no matter how long the Annuitant (or other payee) lives and no matter how long
all Annuitants as a class live. Therefore, the mortality charge is deducted
during the annuity payout phase on all contracts, including those that do not
involve a life contingency, even though the Company does not bear direct
mortality risk with respect to variable annuity settlement options that do not
involve life contingencies. The expense risk arises from the Company's guarantee
that the charges it makes will not exceed the limits described in the Contract
and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover
actual mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be 0.55% for mortality risk and
0.40% for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation period and the
annuity payout period. The daily Administrative Expense Charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. However, there is no direct relationship
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 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 Contracts 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.
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OTHER CHARGES -- Because the Sub-Accounts hold shares of the Portfolios, the
value of the net assets of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Portfolios. The Prospectus and Statement
of Additional Information of KINF contain additional information concerning
expenses of the Portfolios.
B. CONTRACT FEE.
A $35 Contract Fee currently is deducted on the Contract anniversary date
and upon full surrender of the Contract when the Accumulated Value is less than
$50,000. The Contract Fee is waived for Contracts issued to and maintained by
the Trustee of a 401(k) plan. Where Contract value has been allocated to more
than one account, a percentage of the total Contract Fee will be deducted from
the Value in each account. The portion of the charge deducted from each account
will be equal to the percentage which the Value in that account bears to the
Accumulated Value under the Contract. The deduction of the Contract Fee from a
Sub-Account will result in cancellation of a number of Accumulation Units equal
in value to the percentage of the charge deducted from that account.
C. OPTIONAL BENEFIT RIDERS.
Subject to state availability, the Company offers three optional benefit
riders that may be elected by the Contract Owner. A separate monthly charge is
made for each rider selected. On the last day of each month and on the date the
rider is terminated, a charge equal to 1/12th of an annual rate (see table
below) is made against the Accumulated Value of the Contract at that time. The
charge is made through a pro-rata reduction (based on relative values) in
Accumulation Units of the Sub-Accounts, of dollar amounts in the Fixed Account,
and of dollar amounts in the Guarantee Period Accounts.
The applicable charge is assessed on the Accumulated Value on the last day
of each month and on the date a rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Enhanced Death Benefit Rider........................... 0.25%
Living Benefits Rider.................................. 0.05%
Disability Rider....................................... 0.05%
</TABLE>
For a description of these riders, see "Living Benefits Rider" and
"Disability Rider" under "CHARGES AND DEDUCTIONS," below, and "E. Death Benefit"
under "DESCRIPTION OF THE CONTRACT," below.
D. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
Contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for these Contracts at the time the payments are
received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law. If no amount for premium tax was deducted
at the time the payment was received, but subsequently tax is determined to be
due prior to the Annuity Date, the Company reserves the right to deduct the
premium tax from the Contract value at the time such determination is made.
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E. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the
payments are made. However, a contingent deferred sales charge is deducted from
the Accumulated Value of the Contract in the case of surrender and/or
withdrawals, or at the time annuity benefit payments begin, within certain time
limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments -- payments
received by the Company during the six years preceding the date of the
surrender; (2) Old Payments -- Accumulated payments not defined as New Payments;
and (3) Earnings -- the amount of Contract Value in excess of all payments that
have not been previously surrendered. For purposes of determining the amount of
any contingent deferred sales charge, surrenders will be deemed to be taken
first from Old Payments, then from New Payments. Old Payments may be withdrawn
from the Contract at any time without the imposition of a contingent deferred
sales charge. If a withdrawal is attributable all or in part to New Payments, a
contingent deferred sales charge may apply. An Owner may withdraw 15% of the
Accumulated Value in any calendar year without assessment of a withdrawal
charge. If the Owner withdraws an amount in excess of the Accumulated Value in
any calendar year, the amount withdrawn in excess of 15% is subject to a
Withdrawal Charge.
CHARGES FOR SURRENDER AND WITHDRAWALS. If a Contract is surrendered or if
New Payments are withdrawn, while the Contract is in force and before the
Annuity Date, a contingent deferred sales charge may be imposed. This surrender
charge will never be applied to earnings. The amount of the charge will depend
upon the number of years that the New Payments, if any, to which the withdrawal
is attributed have remained credited under the Contract. Amounts withdrawn are
deducted first from Old Payments. Then, for the purpose of calculating surrender
charges for New Payments, all amounts withdrawn are assumed to be deducted first
from the earliest New Payment and then from the next earliest New Payment and so
on, until all New Payments have been exhausted pursuant to the first-in-
first-out ("FIFO") method of accounting. (See "FEDERAL TAX CONSIDERATIONS" for a
discussion of how withdrawals are treated for income tax purposes.)
The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
CHARGE AS
YEARS FROM PERCENTAGE OF NEW
DATE OF PAYMENT PAYMENTS WITHDRAWN
- --------------------------------------------- -----------------------
<S> <C>
Less than 1 ................................. 7%
2 ........................................... 6%
3 ........................................... 5%
4 ........................................... 4%
5 ........................................... 3%
6 ........................................... 2%
Thereafter .................................. 0%
</TABLE>
The amount withdrawn equals the amount requested by the Contract Owner plus
the charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total contingent deferred sales charge
exceed a maximum limit of 7% of total gross New Payments. Such total charge
equals the aggregate of all applicable contingent deferred sales charges for
surrender, withdrawals, and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. From time to time, subject to
state law, the Company may allow a reduction in or elimination of the contingent
deferred sales charge, the period during which the charge applies, or both, or
credit additional amounts on contracts when Contracts are sold to individuals or
groups of individuals in a manner that reduces sales expenses. The Company will
consider factors such as the following: (a) the size and type of group or class,
and the persistency expected from that group or class; (b) the total amount of
payments to be received and the manner in which payments are remitted; (c) the
purpose for which the Contracts are being purchased and
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<PAGE>
whether that purpose makes it likely that costs and expenses will be reduced;
(d) other transactions where sales expenses are likely to be reduced; or (e) the
level of commissions paid to selling broker-dealers or certain financial
institutions with respect to Contracts within the same group or class (for
example, broker-dealers who offer this Contract in connection with financial
planning services offered on a fee for service basis). The Company may also
reduce or waive the contingent deferred sales charge, or credit additional
amounts on Contracts, where both the Contract Owner and the Annuitant on the
date of issue are within the following classes of individuals ("eligible
persons"): employees and registered representatives of any broker-dealer which
has entered into a Sales Agreement with the Company to sell the Contract;
officers, directors, trustees and employees of any of the Portfolios, investment
managers or sub-advisers; and the spouses of and immediate family members of
such eligible persons. "Immediate family members" means children, grandchildren,
parents and grandparents.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly between purchasers of this
Contract. The Company will not make any changes to this charge where prohibited
by law.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, including the
calendar year in which the Contract is issued, the Company will waive the
contingent deferred sales charge, if any, on an amount ("Withdrawal Without
Surrender Charge") equal to the greater of (1) or (2):
Where (1) is:
15% of the Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal, reduced by
the total amount of any prior withdrawals made in the same calendar year to
which no contingent deferred sales charge was applied.
Where (2) is:
The amount calculated under the Company's life expectancy distribution (see
"LED Distributions," below) whether or not the withdrawal was part of such
distribution (applies only if Annuitant is also an Owner)
For example, an 81 year old Owner/Annuitant with an Accumulated Value of
$15,000 would have a Free Withdrawal Amount of $2,250, which is equal to the
greater of:
(1) 15% of Accumulated Value ($2,250); or
(2) LED distribution of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will first be deducted from
Cumulative Earnings. If the Withdrawal Without Surrender Charge exceeds
Cumulative Earnings, the excess amount will be deemed withdrawn from payments
not previously withdrawn on a last-in-first-out ("LIFO") basis. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the contingent deferred sales load, if any, until the entire
Withdrawal Without Surrender Charge has been withdrawn. Amounts withdrawn from a
Guarantee Period Account prior to the end of the applicable Guarantee Period
will be subject to a Market Value Adjustment.
LIVING BENEFITS RIDER. For a separate monthly charge, an optional Living
Benefits Rider may be elected at the time of application for the Contract. Under
this rider, the Surrender Charge will be waived if the Contract Owner (or the
Annuitant if the Contract Owner is not a person), is:
(a) admitted to a "medical care facility" after the issue date of the
Contract and remains confined there until the later of one year after
the issue date or 90 consecutive days;
(b) first diagnosed by a licensed "physician" as having a "fatal illness"
after the issue date of the Contract; or (c) commencing one year after
issue of the Contract, is confined to a hospice or
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<PAGE>
receives home health care services, with certification from a licensed
physician that the confinement to the hospice or receipt of home health
care services is expected to continue until death.
For purposes of the above provision, "medical care facility" means any state
licensed facility (or, in a state that does not require licensing) a facility
that is operating pursuant to state law, providing medically necessary inpatient
care which is prescribed by a licensed "physician" in writing and based on
physical limitations which prohibit daily living in a non-institutional setting;
"fatal illness" means a condition diagnosed by a licensed physician which is
expected to result in death within two years of the diagnosis; and "physician"
means a person other than the Owner, Annuitant or a member of one of their
families who is state licensed to give medical care or treatment and is acting
within the scope of that license.
Where contingent deferred sales charges have been waived under either of the
two situations discussed above, no additional payments under this Contract will
be accepted.
On the last day of each month and on the date the rider is terminated, a
charge equal to 1/12th of an annual rate of 0.05% is made against the
Accumulated Value of the Contract at that time. The charge is made through a
pro-rata reduction in Accumulation Units of the Subaccounts, of dollar amounts
in the Fixed Account, and of dollar amounts in the Guarantee Period Accounts,
based on relative values.
DISABILITY RIDER. For a separate monthly charge, an optional Disability
Rider may be elected at the time of application for the Contract. Under this
rider, the Surrender Charge will be waived if the Contract Owner (or the
Annuitant if the Contract Owner is not a person), is physically disabled after
the issue date of the Contract and before attaining age 65. The Company may
require proof of continuing disability, including written confirmation of
receipt and approval of any claim for Social Security Disability Benefits, and
reserves the right to obtain an examination by a licensed physician of its
choice and at its expense.
Where contingent deferred sales charges have been waived under this rider,
no additional payments under this Contract will be accepted.
On the last day of each month and on the date the rider is terminated, a
charge equal to 1/12th of an annual rate of 0.05% is made against the
Accumulated Value of the Contract at that time. The charge is made through a
pro-rata reduction in Accumulation Units of the Subaccounts, of dollar amounts
in the Fixed Account, and of dollar amounts in the Guarantee Period Accounts,
based on relative values.
LED DISTRIBUTIONS. Prior to the Annuity Date a Contract Owner who is also
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option, by
returning a properly signed LED request form to the Company's Principal Office.
The LED option permits the Contract Owner to make systematic withdrawals from
the Contract over his or her lifetime. The amount withdrawn from the Contract
changes each year, because life expectancy changes each year that a person
lives. For example, actuarial tables indicate that a person age 70 has a life
expectancy of 16 years, but a person who attains age 86 has a life expectancy of
another 6.5 years.
If a Contract Owner elects the LED option, in each calendar year a fraction
of the Accumulated Value is withdrawn based on the Contract Owner's then life
expectancy. The numerator of the fraction is 1 (one) and the denominator of the
fraction is the remaining life expectancy of the Contract Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during the year. The Contract Owner may elect monthly,
bimonthly, quarterly, semiannual, or annual distributions, and may terminate the
LED option at any time. The Contract Owner may also elect to receive
distributions under an LED option which is determined on the joint life
expectancy of the Contract Owner and a beneficiary. The Company may also offer
other systematic withdrawal options.
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<PAGE>
If a Contract Owner makes withdrawals under the LED distribution prior to
age 59 1/2, the withdrawals may be treated by the IRS as premature distributions
from the Contract. The payments would then be taxed on an "income first" basis,
and be subject to a 10% federal tax penalty. For more information, see "FEDERAL
TAX CONSIDERATIONS," "B. Taxation of the Contracts in General." The LED will
cease on the Annuity Date.
SURRENDERS. In the case of a complete surrender, the amount received by the
Contract Owner is equal to the entire Accumulated Value under the Contract, net
of the applicable contingent deferred sales charge on New Payments, the Contract
Fee and any applicable tax withholding and adjusted for any applicable Market
Value Adjustment. Subject to the same rules applicable to withdrawals, the
Company will not assess a contingent deferred sales charge on an amount equal to
the greater of the Withdrawal Without Surrender Charge Amount, described above,
or the life expectancy distribution, if applicable.
Where a Contract Owner who is a trustee under a pension plan surrenders, in
whole or in part, a Contract on a terminating employee, the trustee will be
permitted to reallocate all or a part of the total Accumulated Value under the
Contract to other contracts issued by the Company and owned by the trustee, with
no deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Sub-Accounts as of the
valuation date on which a written, signed request is received at the Company's
Principal Office.
For further information on surrender and withdrawals, including minimum
limits on amount withdrawn and amount remaining under the Contract in the case
of withdrawals, and important tax considerations, see "Surrender" and
"Withdrawals" under "DESCRIPTION OF CONTRACT" and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date. (See discussion of PERIOD CERTAIN VARIABLE ANNUITY under "I --
Description of Variable Annuity Options."
No contingent deferred sales charge is imposed at the time of annuitization
in any Contract year under an option involving a life contingency or for any
non-commutable period certain option for 10 years or more. However, a Market
Value Adjustment may apply. See "Guarantee Period Accounts."
If an owner of a fixed annuity Contract issued by the Company wishes to
elect a variable annuity option, the Company may permit such owner to exchange,
at the time of annuitization, the fixed Contract for a Contract offered in this
Prospectus. The proceeds of the fixed Contract, minus any contingent deferred
sales charge applicable under the fixed Contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
F. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first twelve transfers in a Contract Year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract Year.
The Contract Owner may have automatic transfers of at least $100 a month
made on a periodic basis (a) to one or more of the Sub-Accounts from the Fixed
Account or from the Sub-Accounts which invest in the Money Market Portfolio or
the Government Securities Portfolio or (b) in order to reallocate or rebalance
Contract Value among the Sub-Accounts. The first automatic transfer and all
subsequent transfers of that request in the same contract year count as one
transfer towards the twelve transfers which are guaranteed to be free of a
transfer charge in each contract year. For more information, see "The Contract
Transfer Privilege."
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<PAGE>
DESCRIPTION OF THE CONTRACT
The Contracts are designed for use in connection with several types of
retirement plans as well as for sale to individuals. Participants under such
plans, as well as Contract Owners, Annuitants, and beneficiaries, are cautioned
that the rights of any person to any benefits under such Contracts may be
subject to the terms and conditions of the plans themselves, regardless of the
terms and conditions of the Contracts.
The Contracts offered by this Prospectus may be purchased from certain
independent broker-dealers, including representatives of Allmerica Investments,
Inc., the Principal Underwriter which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. ("NASD").
Contract Owners may direct any inquiries to Annuity Customer Services, First
Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester,
Massachusetts 01653 800-782-8380.
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the
initial payment and allocation instructions by the Company at its Principal
Office, must be met before a Contract can be issued. These requirements may also
include the proper completion of an application; however, where permitted, the
Company may issue a contract without completion of an application for certain
classes of annuity contracts. Payments are to be made payable to the Company. A
net payment is equal to the payment received less the amount of any applicable
premium tax.
The initial net payment will be credited to the Contract as of the date that
all issue requirements are properly met. If all issue requirements are not
complied with within five business days of the Company's receipt of the initial
payment, the payment will be returned unless the Owner specifically consents to
the holding of the initial payment until completion of any outstanding issue
requirements. Subsequent payments will be credited as of the Valuation Date
received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$2,000. Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $167. In all cases, each subsequent payment must be at least
$100. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a contract on the employee, if the plan's
average annual contribution per eligible plan participant is at least $600. 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 Money Market Portfolio.
Payments will be allocated among the accounts in the same proportion that
the initial net payment is allocated, or, if subsequently changed, according to
the most recent allocation instructions. Any portion of the initial net payment
and of additional net payments received during the contracts's first 15 days
measured from the date of issue, allocated to any Sub-Account and/or any
Guarantee Period Account, will be held in the Money Market Portfolio until the
end of the fifteen day period. Thereafter, these amounts will be allocated as
requested.
The Contract Owner may change allocation instructions for new payments
pursuant to a written or telephone request. If telephone requests are elected by
the Contract Owner, a properly completed authorization must be on file before
telephone requests will be honored. The Company will not be responsible for
losses resulting from acting upon telephone requests reasonably believed to be
genuine. The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; otherwise, the Company may
be liable for any losses due to unauthorized or fraudulent instructions. The
procedures the Company follows for transactions initiated by telephone
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<PAGE>
include requirements that callers on behalf of a Contract Owner identify
themselves by name and identify the Annuitant by name, date of birth and social
security number. All transfer instructions by telephone are tape recorded.
B. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date a Contract Owner may have amounts
transferred among all accounts. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer order. The
Company will make transfers pursuant to written or telephone requests. As
discussed in "A. Payments," a properly completed authorization form must be on
file before telephone requests will be honored.
Transfers to a Guarantee Period Account must be at least $1,000. If the
amount to be transferred to a Guarantee Period Account is less than $1,000, the
Company may transfer that amount to the Sub-Account which invests in the Money
Market Portfolio.
The Contract Owner may have automatic transfers of at least $100 a month
made on a periodic basis (a) from the Sub-Accounts which invest in the Money
Market Portfolio or the Government Securities Portfolio or from the Fixed
Account to one or more of the other Sub-Accounts or (b) in order to reallocate
or rebalance Contract Value among the Sub-Accounts. The first automatic transfer
and all subsequent transfers of that request in the same contract year count as
one transfer towards the twelve transfers which are guaranteed to be free of a
transfer in each contract year.
Currently, the Company makes no charge for transfers. The first twelve (12)
transfers in a Contract year are guaranteed to be free of any 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.
C. SURRENDER.
At any time prior to the Annuity Date, a Contract Owner may surrender the
Contract and receive its Accumulated Value, less applicable charges and adjusted
for any market value adjustment ("Surrender Amount"). The Contract Owner must
return the Contract and a signed, written request for surrender, satisfactory to
the Company, to the Company's Principal Office. The amount payable to the
Contract Owner upon surrender will be based on the Contract's Accumulated Value
as of the Valuation Date on which the request and the Contract are received at
the Company's Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted
when a Contract is surrendered if payments have been credited to the Contract
during the last six full contract years. See "CHARGES AND DEDUCTIONS." The
Contract Fee will be deducted upon surrender of the Contract.
After the Annuity Date, only Contracts under which future annuity benefit
payments are limited to a specified period (as specified in the Period Certain
Annuity Option ) may be surrendered. The Surrender Amount is the commuted value
of any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company 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.
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The surrender rights of Contract Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "FEDERAL TAX CONSIDERATIONS," "I. Public School
Systems and Certain Tax Exempt Organizations" and "J. Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL
TAX CONSIDERATIONS."
D. WITHDRAWALS.
At any time prior to the Annuity Date, a Contract Owner may withdraw a
portion of the Accumulated Value of his or her Contract, subject to the limits
stated below. The Contract Owner must file a signed, written request for
withdrawals, satisfactory to the Company, at the Company's Principal Office. The
written request must indicate the dollar amount the Contract Owner wishes to
receive and the accounts from which such amount is to be withdrawn. The contract
value following the withdrawal will reflect an amount withdrawn equal to the
amount requested by the Contract Owner plus any applicable contingent deferred
sales charge, as described under "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."
Where allocations have been made to more than one account, a percentage of
the withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Company's principal office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "Surrender."
After the Annuity Date, only Contracts under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Contract
Owners who are participants under Section 403(b) plans or under the Texas ORP,
see "FEDERAL TAX CONSIDERATIONS," "I. Public School Systems and Certain Tax
Exempt Organizations" and "J. Texas Optional Retirement Program."
For important tax consequences which may result from withdrawals, see
"FEDERAL TAX CONSIDERATIONS."
E. DEATH BENEFIT.
If the Annuitant dies (or a Contract Owner predeceases the Annuitant) prior
to the Annuity Date while the Contract is in force, the Company will pay the
Beneficiary a Death Benefit, except where the Contract continues as provided in
"F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY."
STANDARD DEATH BENEFIT. Upon death of the Annuitant (including an Owner who
is also the Annuitant), the standard Death Benefit is equal to the greater of
(a) the Accumulated Value under the Contract increased for any positive
Market Value Adjustment, or
(b) the sum of the gross payments reduced proportionately to reflect
withdrawals. For each withdrawal, the proportionate reduction is
calculated as the Death Benefit under this option immediately prior to
the withdrawal multiplied by the withdrawal amount and divided by the
Accumulated Value immediately prior to the withdrawal.
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<PAGE>
ENHANCED DEATH BENEFIT RIDER. At the time of application for the Contract,
the Contract Owner may elect an optional Enhanced Death Benefit Rider. Under the
Enhanced Death Benefit Rider, if the annuitant dies before the Annuity Date, the
Death Benefit will be the greatest of
(a) the Accumulated Value increased by any positive Market Value
Adjustment; or
(b) gross payments, reduced proportionately to reflect withdrawals. For
each withdrawal, the proportionate reduction is calculated as the Death
Benefit under this option immediately prior to the withdrawal
multiplied by the withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal; or
(c) the Death Benefit that would have been payable on the most recent
contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
A separate charge is made for an optional Enhanced Death Benefit Rider. On
the last day of each month and on the date the Rider is terminated, a charge
equal to 1/12th of an annual rate of 0.25% is made against the Accumulated Value
of the Contract at that time. The charge is made through a pro-rata reduction
(based on relative values) of Accumulation Units in the Sub-Accounts, of dollar
amounts in the Fixed Account, and of dollar amounts in the Guarantee Period
Accounts.
Under either Death Benefit, if an Owner who is not also the Annuitant dies
before the Annuity Date, the Death Benefit will be the Accumulated Value
increased by any positive Market Value Adjustment. The Death Benefit will never
be reduced by a negative Market Value Adjustment.
PAYMENT OF DEATH BENEFIT. The Death Benefit will generally be paid to the
Beneficiary in one sum within 7 days of the receipt of due proof of death unless
the Owner has specified a Death Benefit annuity option. Instead, the Beneficiary
may, by Written Request, elect to:
(a) defer distribution of the Death Benefit for a period no more than 5
years from the date of death; or
(b) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy. Annuity benefit payments must
begin within one year from the date of death.
If distribution of the Death Benefit is deferred under (a) or (b), any value
in the Guarantee Period Accounts will be transferred to the Sub-Account
investing in the Money Market Portfolio. The excess, if any, of the Death
Benefit over the Accumulated Value will also be added to the Money Market
Portfolio. The Beneficiary may, by Written Request, effect transfers and
withdrawals during the deferral period and prior to annuitization under (b), but
may not make additional payments. If there are multiple Beneficiaries, the
consent of all is required.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed annuity benefit payments, any unpaid amounts or
installments will be paid to the Beneficiary. The Company must pay the remaining
payments at least as rapidly as under the payment option in effect on the date
of the Annuitant's death.
With respect to any Death Benefit, the Accumulated Value under the Contract
will be based on the unit values next computed after due proof of the
Annuitant's death has been received at the Company's Principal Office. If the
beneficiary elects to receive the Death Benefit in one sum, the Death Benefit
will be paid within seven business days. If the beneficiary has not elected an
annuity option within one year from the date notice of death is received by the
Company, the Company will pay the Death Benefit in one sum. The Death Benefit
will reflect any earnings or losses experienced during the period and any
withdrawals.
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F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY.
The Contract Owner's spouse, if named as the sole primary beneficiary, may
by written request continue the Contract in lieu of receiving the amount payable
upon death of the Contract Owner. Upon such election, the spouse will become the
Owner and Annuitant subject to the following: (a) any value in the Guarantee
Period Accounts will be transferred to the Money Market Sub-Account; (b) the
excess, if any, of the Death Benefit over the Contract's Accumulated Value will
also be added to the Money Market Sub-Account. Additional payments may be made;
however, a surrender charge will apply to these amounts. All other rights and
benefits provided in the Contract will continue, except that any subsequent
spouse of such new Contract Owner will not be entitled to continue the Contract
upon such new Owner's death.
G. ASSIGNMENT.
The Contracts, other than those sold in connection with certain qualified
plans, may be assigned by the Contract Owner at any time prior to the Annuity
Date and while the Annuitant is alive (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 Contract Owner in full settlement of all
liability under the Contract. The interest of the Contract Owner and of any
beneficiary will be subject to any assignment.
H. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Contract Owner has the
right (1) to select the annuity option under which annuity benefit payments are
to be made, and (2) to determine whether payments are to be made on a fixed
basis, a variable basis, or a combination fixed and variable basis. Annuity
benefit payments are determined according to the annuity tables in the Contract,
by the annuity option selected, and by the investment performance of the
Account(s) selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account of the Company, and the annuity benefit
payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number
of Annuity Units in the Sub-Account(s) is made monthly, quarterly, semiannually
or annually. Since the value of an Annuity Unit in a Sub-Account will reflect
the investment performance of the Sub-Account, the amount of each annuity
benefit payment will vary.
The annuity option selected must produce an initial payment of at least $50
(a lower amount may be required in some states). The Company reserves the right
to increase this minimum amount. If the annuity option(s) selected does not
produce an initial payment which meet this minimum, a single payment will be
made. Once the Company begins making annuity benefit payments, the Annuitant
cannot make withdrawals or surrender the annuity benefit, except in the case
where future annuity benefit payments are limited to a "period certain." Only
beneficiaries entitled to receive remaining payments for a "'period certain" may
elect to instead receive a lump sum settlement.
The Annuity Date is selected by the Contract Owner. To the extent permitted
in your state, the Annuity Date may be the first day of any month (a) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Contract is 75 or under, or (b) within 10 years from the date of issue of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Contract Owner may elect to change the
Annuity Date by sending a request to the Company's Principal Office at least one
month before the new Annuity date. The new Annuity Date must be the first day of
any month occurring before the Annuitant's 90th birthday and
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must be within the life expectancy of the Annuitant. The Company shall determine
such life expectancy at the time a change in Annuity Date is requested. The
Internal Revenue Code and the terms of qualified plans impose limitations on the
age at which annuity benefit payments may commence and the type of annuity
option selected. See "FEDERAL TAX CONSIDERATIONS" for further information.
If the Contract Owner does not elect otherwise, a variable life annuity with
periodic payments for 10 years guaranteed will be purchased. Changes in either
the Annuity Date or annuity option can be made up to one month prior to the
Annuity Date.
I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company provides the variable annuity options described below.
Currently, Variable annuity options may be funded through the Sub-Accounts
investing in the Investment Grade Bond, Value+Growth, Horizon 10+ and Horizon 5
Portfolios. The Company also provides these same options funded through the
Fixed Account (fixed-amount annuity option). Regardless of how payments were
allocated during the accumulation period, any of the variable annuity options or
the fixed-amount options may be selected, or any of the variable annuity options
may be selected in combination with any of the fixed-amount annuity options.
Other annuity options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE PAYEE
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
However, payments will continue during the lifetime of the payee, no matter how
long the payee lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically
during the lifetime of the payee with the guarantee that if (1) exceeds (2) then
periodic variable annuity benefit payments will continue to the beneficiary
until the number of such payments equals the number determined in (1).
Where:
(1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee,
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY -- This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the beneficiary. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY -- This variable annuity
is payable jointly to two payees during their joint lifetime, and then continues
thereafter during the lifetime of the survivor. However, the amount of each
periodic payment to the survivor is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant in the Contract or the
beneficiary. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY -- This variable annuity has periodic
payments for a stipulated number of years ranging from one to thirty. This
option may be commutable, that is, the payee reserves the right to receive a
lump sum in place of installments, or it becomes non-commutable. The payee must
reserve this right at the time benefits begin.
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It should be noted that 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. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under the Period
Certain Option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of
the possible adverse tax consequences of selecting a Period Certain Option.
J. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States
Supreme Court ruled that, in connection with retirement benefit options offered
under certain employer-sponsored employee benefit plans, annuity options based
on sex-distinct actuarial tables are not permissible under Title VII of the
Civil Rights Act of 1964. The ruling requires that benefits derived from
contributions paid into a plan after August 1, 1983 be calculated without regard
to the sex of the employee. Annuity benefits attributable to payments received
by the Company under a Contract issued in connection with an employer-sponsored
benefit plan affected by the NORRIS decision will be based on the greater of (1)
the Company's unisex Non-Guaranteed Current Annuity Option Rates or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
K. COMPUTATION OF VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT. Each net payment is allocated to the account(s)
selected by the Contract Owner. Allocations to the Sub-Accounts are credited to
the Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received in good order
at the Company's Principal Office. The number of Accumulation Units resulting
from each payment will remain fixed unless changed by a subsequent split of
Accumulation Unit value, a transfer, a withdrawal, or surrender. The dollar
value of an Accumulation Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account and will
reflect the investment performance, expenses and charges of its Portfolios. The
value of an Accumulation Unit was set at $1.00 on the first Valuation Date for
each Sub-Account.
Allocations to 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 Appendix B.
The Accumulated Value under the Contract is determined by (1) multiplying
the number of Accumulation Units in each Sub-Account by the value of an
Accumulation Unit of that Sub-Account on the Valuation Date, (2) adding the
products, and (3) adding the amount of the accumulations in the Fixed Account
and Guarantee Period Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures
the investment performance of a Sub-Account from one Valuation Period to the
next. This factor is equal to 1.000000 plus the result from dividing (a) by (b)
and subtracting (c) and (d) where:
(a) 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;
(b) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(c) is a charge for mortality and expense risks equal to 0.95% on an annual
basis of the daily value of the Sub-Account's assets, and
(d) is an administrative charge of 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
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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 Accumulation Unit calculation using a hypothetical
example see "ANNUITY PAYMENTS" in the Statement of Additional Information.
THE ANNUITY UNIT. On and after the Annuity Date the Annuity Unit is a
measure of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The
first periodic annuity benefit payment is based upon the Accumulated Value as of
a date not more than four weeks preceding the date that the first annuity
benefit payment is due. Currently, variable annuity benefit payments are made on
the first of a month based on unit values as of the 15th day of the preceding
month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For Life Option and Noncommutable Period Certain Options of 10 or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than 10 years, the value is surrender value
less any premium tax. For a Death Benefit annuity, the annuity value will be the
amount of the Death Benefit. The annuity rates in the Contract are based on a
modification of the 1983(a) Individual Mortality Table.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "J. Norris Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 1/2% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the
Sub-Account(s) funding the annuity exceeds the equivalent of the assumed
interest rate for the period. Variable annuity benefit payments will decrease
over periods when the actual net investment result of the respective Sub-Account
is less than the equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of 10 years or more is
determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than 10 years, the Surrender Value less premium taxes, if any, is
used rather than the Accumulated Value. 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. This number of Annuity Units remains fixed under all annuity
options except the joint and two-thirds survivor annuity option. 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.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Account(s). The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
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The Company may from time to time offer its Contract Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Contract Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY PAYMENTS" in the Statement of Additional
Information.
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 Securities
Act of 1933 or the Investment Company Act of 1940. Accordingly, the staff of the
Commission 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 annuity
Contract or any benefits offered under these accounts may be subject to the
provisions of the Securities Act of 1933 relating to the accuracy and
completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there are currently nine
Guarantee Periods available under this Contract with durations of two, three,
four, five, six, seven, eight, nine and ten years. Each Guarantee Period Account
established for the Contract Owner is accounted for separately in a non-unitized
segregated account. Each Guarantee Period Account provides for the accumulation
of interest at a Guaranteed Interest Rate. The Guaranteed Interest Rate on
amounts allocated or transferred to a Guarantee Period Account is determined
from time-to-time by the Company in accordance with market conditions; however,
once an interest rate is in effect for a Guarantee Period Account, the Company
may not change it during the duration of the Guarantee Period. In no event will
the Guaranteed Interest Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time
to offer Guarantee Periods with durations that differ from those which were
available when a Contract was initially issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Contract 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.
(In Oregon and Massachusetts, payments and transfers to the Fixed Account are
subject to certain restrictions. See Appendix A.) 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 Contract Owner allocates
or transfers amounts to a Guarantee Period Account except that amounts allocated
to the same Guarantee Period on the same day will be treated as one Guarantee
Period Account. The minimum that may be allocated to establish a Guarantee
Period Account is $1,000. If less than $1,000 is allocated, the Company reserves
the right to apply that amount to the Money Market Portfolio. The Contract 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 Contract 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 will be
automatically applied to a new Guarantee Period Account with the same duration
unless (1) less than $1,000 would remain in the Guarantee Period Account on 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 Money Market Portfolio. Where amounts
have been automatically renewed in a new Guarantee Period, it is the Company's
current practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of an Market Value adjustment.
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MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a Death Benefit 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 "Death Benefit". A Market
Value Adjustment will apply to all other transfers, withdrawals, or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account
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)]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 Effective Valuation Date to
the end of the current Guarantee Period.
If the Guaranteed Interest Rate being credited is lower than the new
Guaranteed Interest Rate, the Market Value Adjustment will decrease the
Guarantee Period Account value. Similarly, if the Guaranteed Interest Rate being
credited is higher than the new Guaranteed Interest Rate, the Market Value
Adjustment will increase the Guarantee Period Account value. The Market Value
Adjustment will never result in a change to the value more than the interest
earned in excess of the Minimum Guarantee Period Account Interest Rate (see
Specifications page) compounded annually from the beginning of the current
Guarantee Period. For examples of how the Market Value Adjustment works, See
Appendix B.
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 it will grow pre-tax to equal the amount of
the entire initial payment. The required amount is then allocated to the
pre-selected Guarantee Period Account. The balance of the initial payment is
allocated among the other investment options selected by the Owner.
WITHDRAWALS. Prior to the Annuity Date, the Contract 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 "Withdrawals" and "Surrender." In addition, the following
provisions also apply to withdrawals from a Guarantee Period Account: a) a
Market Value Adjustment will apply to all withdrawals, including Withdrawals
without Surrender Charge, unless made at the end of the Guarantee Period; and b)
the Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a
portion of the value of a Guarantee Period Account, it will be calculated on the
amount requested and deducted or added to the amount remaining in the Guarantee
Period Account. If the entire amount in a Guarantee Period Account is requested,
the adjustment will be made to the amount payable. If a Contingent Deferred
Sales Charge applies to the withdrawal, it will be calculated as set forth under
"Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
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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 Contract 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 Internal Revenue Service (IRS).
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER SHOULD ALWAYS BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income,
assets, or existence of the Contracts, 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
Contract Owners and with respect to each separate account as though that
separate account were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"). The Company files a
consolidated tax return with its affiliates.
The Internal Revenue Service has issued regulations relating to the
diversification requirements for variable annuity and variable life insurance
contracts under Section 817(h) of the Code. The regulations 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. If the investments are not adequately diversified, the income on a
contract, for any taxable year of the Contract Owner, would be treated as
ordinary income received or accrued by the Contract Owner. It is anticipated
that the Portfolios will comply with the diversification requirements.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity
Contracts, "qualified" Contracts and "non-qualified" Contracts. A qualified
Contract is one that is purchased in connection with a retirement plan which
meets the requirements of Sections 401, 403, 408, or 457 of the Code, while a
non-qualified Contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
Contract or a non-qualified Contract. For more information on the tax provisions
applicable to qualified Contracts, see Sections D through J, below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contracts described in this Prospectus will,
with certain exceptions (see K below), be considered annuity contracts under
Section 72 of the Code. This section provides for the taxation of annuities. The
following discussion concerns annuities subject to Section 72. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts
issued by the same insurance company to the same Contract Owner during the same
calendar year be treated as a single contract in determining taxable
distributions under Section 72(e).
With certain exceptions, any increase in the Accumulated Value of the
Contract is not taxable to the Contract Owner until it is withdrawn from the
Contract. If the Contract is surrendered or amounts are withdrawn prior to the
Annuity Date, withdrawal of any investment gain in value over the cost basis of
the Contract would be taxed as ordinary income. Under the current provisions of
the
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Code, amounts received under a non-qualified Contract prior to the Annuity Date
(including payments made upon the death of the Annuitant or Contract Owner), or
as non-periodic payments after the Annuity Date, are generally first
attributable to any investment gains credited to the Contract over the
taxpayer's basis (if any) in the Contract. Such amounts will be treated as
income subject to federal income taxation.
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
after age 59 1/2, or if the withdrawal follows the death of the Contract Owner
(or, if the Contract Owner is not an individual, the death of the primary
Annuitant, as defined in the Code), or in the case of the "total disability" (as
defined in the Code) of the Owner. Furthermore, under Section 72 of the Code,
this penalty tax will not be imposed, irrespective of age, if the amount
received is one of a series of "substantially equal" periodic payments made at
least annually for the life or life expectancy of the payee. This requirement is
met when the Contract Owner elects to have distributions made over the Contract
Owner's life expectancy, or over the joint life expectancy of the Contract Owner
and beneficiary. The requirement that the amount be paid out as one of a series
of "substantially equal" periodic payments is met when the number of units
withdrawn to make each distribution is substantially the same.
In a Private Letter Ruling, the IRS took the position that where
distributions from a variable annuity contract were determined by amortizing the
accumulated value of the contract over the taxpayer's remaining life expectancy
(such as under the Contract's life expectancy distribution ("LED") option), and
the option could be changed or terminated at any time, the distributions failed
to qualify as part of a "series of substantially equal payments" within the
meaning of Section 72 of the Code. The distributions were therefore subject to
the 10% federal penalty tax. This Private Letter Ruling may be applicable to a
Contract Owner who receives distributions under the LED 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.
If the Contract Owner transfers (assigns) the Contract to another individual
as a gift prior to the Annuity Date, the Code provides that the Contract 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 the excess, if any, of the Surrender Value of the
Contract over the Contract Owner's cost basis at the time of the transfer. The
transfer is also subject to federal gift tax provisions. Where the Contract
Owner and Annuitant are different persons, the change of ownership of the
Contract to the Annuitant on the Annuity Date, as required under the Contract,
is a gift and will be taxable to the Contract Owner as such; however, the
Contract Owner will not incur taxable income. Instead, the Annuitant will incur
taxable income upon receipt of annuity benefit payments as discussed below.
When annuity benefit payments are commenced under the Contract, generally a
portion of each payment may be excluded from gross income. The excludable
portion is generally determined by a formula that establishes the ratio that the
cost basis of 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 cost basis 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 Annuitant's final tax return.
C. TAX WITHHOLDING AND PENALTIES.
The Code requires withholding with respect to payments or distributions from
nonqualified 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.
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<PAGE>
In certain situations, the Code provides for a tax penalty if, prior to
death, disability or attainment of age 59 1/2, a Contract Owner makes a
withdrawal or receives any amount under the Contract, unless the distribution is
in the form of a life annuity (including life expectancy distributions). The
penalty is 10% of the amount includible in income by the Contract Owner.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified employer plans, as defined by the
Code, vary according to the type of plan and the terms and conditions of the
plan itself. Therefore, the following is general information about the use of
the Contracts with various types of qualified plans. The rights of any person to
any benefits under such qualified plans will be subject to the terms and
conditions of the qualified plans themselves regardless of the terms and
conditions of the Contract.
A loan to a participant or beneficiary from plans qualified under Sections
401 and 403 or an assignment or pledge of an interest in such a plan is
generally treated as a distribution. This general rule does not apply to loans
which contain certain repayment terms and do not exceed a specified maximum
amount, as required under Section 72(p).
E. QUALIFIED EMPLOYEE PENSION AND PROFIT SHARING TRUSTS AND QUALIFIED ANNUITY
PLANS.
When an employee (including a self-employed individual) or one or more of
the employee's beneficiaries receives a "lump sum" distribution (a distribution
from a qualified plan described in Code Section 401(a) within one taxable year
equal to the total amount payable with respect to such an employee) the taxable
portion of such distribution may qualify for special treatment under a special
five-year income averaging provision of the Code. The employee must have had at
least 5 years of participation under the plan, and the lump sum distribution
must be made after the employee has attained age 59 1/2 or on account of his or
her death, separation from the employer's service (in the case of a common-law
employee) or disability (in the case of a self-employed individual). Such
treatment can be elected for only one taxable year once the individual has
reached age 59 1/2. An employee who attained age 50 before January 1, 1986 may
elect to treat part of the taxable portion of a lump-sum distribution as
long-term capital gains and may also elect 10-year averaging instead of
five-year averaging.
The Company can provide prototype plans for certain of the pension or profit
sharing plans for review by your legal counsel. For information, ask your
financial representative.
F. SELF-EMPLOYED INDIVIDUALS
The Self-Employed Individuals Tax Retirement Act of 1962, as amended,
frequently referred to as "H.R. 10", allows self-employed individuals and
partners to establish qualified pension and profit sharing trusts and annuity
plans to provide benefits for themselves and their employees.
These plans generally are subject to the same rules and requirements
applicable to corporate qualified plans, with some special restrictions imposed
on "owner-employees." An "owner-employee" is an employee who (1) owns the entire
interest in an unincorporated trade or business, or (2) owns more than 10% of
either the capital interest or profits interest in a partnership.
G. INDIVIDUAL RETIREMENT ACCOUNT PLANS
Any individual who earns "compensation" (as defined in the Code and
including alimony payable under a court decree) from employment or
self-employment, whether or not he or she is covered by another qualified plan,
may establish an Individual Retirement Account or Annuity plan ("IRA") for the
accumulation of retirement savings on a tax-deferred basis. Income from
investments is not included in "compensation." The assets of an IRA may be
invested in, among other things, annuity Contracts including the Contracts
offered by this Prospectus.
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<PAGE>
Contributions to the IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the lesser
of (1) $2,000 or (2) 100% of compensation. The deduction is reduced
proportionately for adjusted gross income between $40,000 and $50,000 (between
$25,000 and $35,000 for unmarried taxpayers and between $0 and $10,000 for a
married taxpayer filing separately) if the taxpayer and his or her spouse file a
joint return and either is an active participant in an employer sponsored
retirement plan.
An individual and a working spouse each may have an IRA with the
above-described limit on each. An individual with an IRA may establish an
additional IRA for a non-working spouse if they file a joint return.
Contributions to the two IRAs together are deductible up to the lesser of $2,250
or 100% of compensation.
No deduction is allowed for contributions made for the year in which the
individual attains age 70 1/2 and years thereafter. Contributions for that year
and for years thereafter will result in certain adverse tax consequences.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be deducted,
taxes on their earnings are deferred until the earnings are distributed. The
maximum permissible non-deductible contribution is $2,000 for an individual
taxpayer and $2,250 for a taxpayer and non-working spouse. These limits are
reduced by the amount of any deductible contributions made by the taxpayer.
Contributions may be made with respect to a particular year until the due
date of the individual's federal income tax return for that year, not including
extensions. However, for reporting purposes, the Company will regard
contributions as being applicable to the year made unless it receives notice to
the contrary.
All annuity benefit payments and other distributions under an IRA will be
taxed as ordinary income unless the owner has made non-deductible contributions.
In addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70 1/2, and failure to
make adequate distributions at this time may result in certain adverse tax
consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA and all distributions during the same taxable year are
treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's tax
return to enable the IRS to determine the proportion of the IRA balance which
represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate balance
of all of the individual's IRAs, is excludable from income.
Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information is
not provided to the IRS, distributions from an IRA to which both deductible and
non-deductible contributions have been made are presumed to be fully taxable.
H. SIMPLIFIED EMPLOYEE PENSIONS.
Employers may establish Simplified Employee Pensions ("SEPs") under Code
Section 408(k) if certain requirements are met. A SEP is an IRA to which the
employer contributes under a written formula. Currently, a SEP may accept
employer contributions each year up to $30,000 or 15% of compensation (as
defined), whichever is less. To establish SEPs the employer must make a
contribution for every employee age 21 and over who has performed services for
the employer for at least three of the five immediately preceding calendar years
and who has earned at least $300 for the year. SEP contributions for employees
over age 70 1/2 are permissible.
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<PAGE>
The employer's contribution is excluded from the employee's gross income for
the taxable year for which it was made up to the $30,000/15% limit. In addition
to the employer's contribution, the employee may contribute 100% of the
employee's earned income, up to $2,000, to the SEP, but such contributions will
be subject to the rules described above in "G. Individual Retirement Account
Plans."
These plans are subject to the general employer's deduction limitations
applicable to all corporate qualified plans.
I. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS.
Under the provisions of Section 403(b) of the Code, payments made for
annuity Contracts purchased for employees under annuity plans adopted by public
school systems and certain organizations which are tax exempt under Section
501(c)(3) of the Code are excludable from the gross income of such employees to
the extent that the aggregate payments for such annuity Contracts in any year do
not exceed the maximum contribution permitted under the Code.
A Contract qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) may not begin before the employee
attains age 59 1/2, separates from service, dies, or becomes disabled. In the
case of hardship a Contract Owner may withdraw amounts contributed by salary
reduction, but not the earnings on such amounts. Even though a distribution may
be permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax. The distribution restrictions are
effective for years beginning after December 31, 1988, but only with respect to
amounts that were not held under the Contract as of that date.
J. TEXAS OPTIONAL RETIREMENT PROGRAM.
Under a Code Section 403(b) annuity contract issued as a result of
participation in the Texas Optional Retirement Program, distributions may not be
received except in the case of the participant's death, retirement or
termination of employment in the Texas public institutions of higher education.
These restrictions are imposed by reason of an opinion of the Texas Attorney
General interpreting the Texas laws governing the Optional Retirement Program.
K. SECTION 457 PLANS FOR STATE GOVERNMENTS AND TAX-EXEMPT ENTITIES.
Code Section 457 allows employees of a state, one of its political
subdivisions, or certain tax-exempt entities to participate in eligible
government deferred compensation plans. An eligible plan, by its terms, must not
allow deferral of more than $7,500 or 33 1/3% of a participant's includible
compensation for the taxable year, whichever is less. Includible compensation
does not include amounts excludable under the eligible deferred compensation
plan or amounts paid into a Code Section 403(b) annuity. The amount a
participant may defer must be reduced dollar-for-dollar by elective deferrals
under a SEP, 401(k) plan or a deductible employee contribution to a 501(c)(18)
plan. Under eligible deferred compensation plans the state, political
subdivision, or tax-exempt entity will be owner of the Contract.
If an employee also participates in another eligible plan or contributes to
a Code Section 403(b) annuity, a single limit of $7,500 will be applied for all
plans. Additionally, the employee must designate how much of the $7,500 or
33 1/3% limitation will be allocated among the various plans. Contributions to
an eligible plan will serve to reduce the maximum exclusion allowance for a Code
Section 403(b) annuity. Amounts received by employees under such plans generally
are includible in gross income in the year of receipt.
L. NON-INDIVIDUAL OWNERS.
Non-individual Owners (e.g., a corporation) of deferred annuity contracts
generally will be currently taxed on any increase in the cash surrender value of
the deferred annuity attributable to contributions made after February 28, 1986.
This rule does not apply to immediate annuities or to
38
<PAGE>
deferred annuities held by a qualified pension plan, an IRA, a 403(b) plan,
estates, employers with respect to terminated pension plans, or a nominee or
agent holding a contract for the benefit of an individual. Corporate-owned
annuities may result in exposure to the alternative minimum tax, to the extent
that income on the annuities increases the corporation's adjusted current
earnings.
REPORTS
A Contract Owner is sent a report semi-annually which states certain
financial information about the Portfolios. The Company will also furnish an
annual report to the Contract Owner containing a statement of his or her
account, including unit values and other information as required by applicable
law, rules and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA contracts (i.e. contracts issued under
Section 403(b) of the Internal Revenue Code) and to contracts issued to plans
qualified under Sections 401(a) and 401(k) of the Code. Loans are subject to
provisions of the Code and to applicable qualified retirement plan rules. Tax
advisors and plan fiduciaries should be consulted prior to exercising loan
privileges.
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account
values on a pro-rata basis until exhausted. Thereafter, any additional amounts
will be withdrawn from the Guarantee Period Accounts (pro-rata by duration and
LIFO (last-in, first-out) within each duration), subject to any applicable
Market Value Adjustments. The maximum loan amount will be determined under the
Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be
secured by a security interest in the contract and the amount borrowed will be
transferred to a loan asset account within the Company's General Account, where
it will accrue interest at a specified rate below the then-current loan rate.
Generally, loans must be repaid within five years or less and repayments must be
made quarterly and in substantially equal amounts. Repayments will be allocated
pro-rata in accordance with the most recent payment allocation, except that any
allocations to a Guarantee Period Account will instead be allocated to the Money
Market Portfolio.
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT
The Company reserves the right, subject to compliance with applicable law
and to the provisions of the Participation Agreements to (1) transfer assets
from any Separate Account or Sub-Account to another of the Company's variable
accounts or Sub-Accounts having assets of the same class, (2) to operate the
variable account or any Sub-Account as a management investment company under the
1940 Act or in any other form permitted by law, (3) to deregister the Variable
Account under the 1940 Act in accordance with the requirements of the 1940 Act,
(4) to substitute the shares of any other registered investment company for the
Portfolio shares held by a Sub-Account, in the event that Portfolio shares are
unavailable for investment, or if the Company determines that further investment
in such Portfolio shares is inappropriate in view of the purpose of the
Sub-Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the
Sub-Accounts. In no event will the changes described above be made without
notice to Contract Owners in accordance with the 1940 Act.
DISTRIBUTION
The Contracts offered by the Prospectus may be purchased from certain
independent broker-dealers, including representatives of Allmerica Investments,
Inc. (the Principal Underwriter) which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. ("NASD").
The Company pays commissions not to exceed 6.0% of payments to
broker-dealers which sell the Contracts. Alternative commission schedules are
available with lower initial commission amounts based on payments, plus ongoing
annual compensation of up to 1% of contract value. To the extent
39
<PAGE>
permitted by NASD rules, promotional incentives or payments may also 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 Contracts, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contracts, including
additional incentives or payments, do not result in any additional charge to
Contract Owners or to the Variable Account. Any contingent deferred sales
charges assessed on a Contract will be retained by the Company.
Contract Owners may direct any inquiries to their financial representative
or to Allmerica Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts
01653, 800-782-8380.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a
party.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the Securities and Exchange Commission. Certain
portions of the Registration Statement and amendments have been omitted in this
Prospectus pursuant to the rules and regulations of the Commission. The omitted
information may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the Commission's prescribed fees.
40
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the Securities and
Exchange Commission.
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to the 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 Contracts, the minimum interest which may be credited on
amounts allocated to the Fixed Account is 3% compounded annually. Additional
"Excess Interest" may or may not be credited at the sole discretion of the
Company.
If a Contract is surrendered, or if an Excess Amount is withdrawn, while the
Contract is in force and before the Annuity Date, a contingent deferred sales
charge is imposed if such event occurs before the payments attributable to the
surrender or withdrawal have been credited to the Contract less than six full
contract years.
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<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER -- Assume a Payment of $50,000 is made on the Date of Issue
and no additional Payments are made. Assume there are no withdrawals and that
the free withdrawal amount is equal to 15% of the current Account Value. The
table below presents examples of the surrender charge resulting from a full
surrender of the Contract Owner's Account, based on hypothetical Accumulated
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- --------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
1 54,000.00 8,100.00 7% 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 9,447.84 5% 2,500.00
4 68,024.45 10,203.67 4% 2,000.00
5 73,466.40 11,019.96 3% 1,500.00
6 79,343.72 11,901.56 2% 1,000.00
7 85,691.21 12,853.68 0% 0.00
</TABLE>
WITHDRAWAL -- Assume a Payment of $50,000 is made on the Date of Issue and
no additional Payments are made. Assume that the free withdrawal amount is equal
to 15% of the current Account Value and there are withdrawals as detailed below.
The table below presents examples of the surrender charge resulting from
withdrawals from the Contract Owner's Account, based on hypothetical Accumulated
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE WITHDRAWAL AMOUNT PERCENTAGE CHARGE
- --------- ------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 54,000.00 0.00 8,100.00 7% 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 9,447.84 5% 0.00
4 68,024.45 30,000.00 10,203.67 4% 791.85
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 0% 0.00
</TABLE>
PART 2: 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 (2555 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.
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<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C>
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
= -.12054X$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>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.07)]2555/365-1
= (1.0093)7-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694X$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C>
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%
= Minimum of (-.17454*$62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 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 6.00% or 0.06
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)7-1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the excess interest earned over
3%
= Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
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APPENDIX C
THE DEATH BENEFIT
PART 1 : DEATH OF THE ANNUITANT -- WITHOUT ENHANCED DEATH BENEFIT RIDER
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are no withdrawals. The table below presents
examples of the Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT
--- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1 53,000.00 0.00 53,000.00 50,000.00 53,000.00
2 53,530.00 500.00 54,030.00 50,000.00 54,030.00
3 58,883.00 0.00 58,883.00 50,000.00 58,883.00
4 52,994.70 500.00 53,494.70 50,000.00 53,494.70
5 58,294.17 0.00 58,294.17 50,000.00 58,294.17
6 64,123.59 500.00 64,623.59 50,000.00 64,623.59
7 70,535.95 0.00 70,535.95 50,000.00 70,535.95
8 77,589.54 500.00 78,089.54 50,000.00 78,089.54
9 85,348.49 0.00 85,348.49 50,000.00 85,348.49
10 93,883.34 0.00 93,883.34 50,000.00 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments reduced proportionately to reflect
withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a) or
(b)
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are withdrawals as detailed in the table below.
The table below presents examples of the Death Benefit based on the hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT
--- ------------ ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 0.00 53,000.00 50,000.00 53,000.00
2 53,530.00 0.00 500.00 54,030.00 50,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,297.21 3,883.00
4 3,494.70 0.00 500.00 3,994.70 3,297.21 3,297.21
5 3,844.17 0.00 0.00 3,844.17 3,297.21 3,297.21
6 4,228.59 0.00 500.00 4,728.59 3,297.21 4,728.59
7 4,651.45 0.00 0.00 4,651.45 3,297.21 3,297.21
8 5,116.59 0.00 500.00 5,616.59 3,297.21 5,616.59
9 5,628.25 0.00 0.00 5,628.25 3,297.21 5,628.25
10 691.07 5,000.00 0.00 691.07 368.05 691.07
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment
Death Benefit (b) is the gross payments reduced proportionately to reflect
withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a) or
(b).
44
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
VARIABLE ACCOUNT KGC
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE VARIABLE ACCOUNT DATED
OCTOBER __, 1996, ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM
ALLMERICA INVESTMENTS, INC., 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653,
(800) 782-8380.
DATED OCTOBER __, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 5
TAX-DEFERRED ACCUMULATION . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 8
GENERAL INFORMATION AND HISTORY
Separate Account KGC ("Variable Account") is a separate investment account of
First Allmerica Financial Life Insurance Company ("Company") authorized by
vote of the Board of Directors on June 13, 1996. Its Principal Office is
located at 440 Lincoln Street, Worcester, Massachusetts 01653, Telephone
508-855-1000. The Company is subject to the laws of the Commonwealth of
Massachusetts governing insurance companies and to regulation by the
Commissioner of Insurance of Massachusetts. In addition, the Company is
subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. On October 13, 1995, the
Company converted from a mutual life insurance company to a stock life
insurance company and adopted its present name. At that time the Company also
became a wholly-owbed subsidiary of Allmerica Financial Corporation, 440
Lincoln Street, Worcester, Massachusetts 01653.
As of December 31, 1995 the Company and its subsidiaries had over
$11 billion in combined assets and over $35.2 billion in life insurance in
force.
Each Sub-Account invests in a corresponding investment portfolio of Kemper
Investors Fund ("the Fund"), a series type mutual fund registered with the
Securities and Exchange Commission (the "SEC") as an open-end, diversified
management investment company. Currently, 14 Sub-Accounts of the Variable
Account are available under the Contracts. The Money Market Portfolio, Total
Return Portfolio, High Yield Portfolio, Growth Portfolio, Government Securities
Portfolio, International Portfolio, Small Cap Growth Portfolio, Investment Grade
Bond Portfolio, Value Portfolio, Small Cap Value Portfolio, Value+Growth
Portfolio, Horizon 20+Portfolio, Horizon 10+Portfolio, and Horizon 5 Portfolio.
Each Portfolio available under the Contracts has its own investment objectives
and certain attendant risks.
TAXATION OF THE CONTRACT, VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local
-2-
<PAGE>
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 Code and files a consolidated tax return with its parent and
affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets, or existence of Contracts 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. 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. Trust shares owned by the Sub-Accounts are held on an open
account basis. A Sub-Account's ownership of Trust shares is reflected on the
records of the Trust and not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995,
included in this Statement of Additional Information constituting part of the
Registration Statement, have been so included in reliance on the report of Price
Waterhouse 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
Contracts.
UNDERWRITERS
Allmerica Investments, Inc., ("Allmerica Investments, Inc.") 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 for the Contracts pursuant to a contract with the Company and the
Separate Account. Allmerica Investments distributes the Contracts on a best
efforts basis. Allmerica Investments, 440 Lincoln Street, Worcester,
Massachusetts 01653 was organized in 1969 as a wholly-owned subsidiary of
First Allmerica and is an indirect wholly-owned subsidiary of First
Allmerica.
The Contracts offered by this Prospectus are 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 contracts are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions not to exceed 6.0% of purchase payments to entities
which sell the Contracts. To the extent permitted by NASD rules, promotional
incentives or payments may also 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 Contracts, including the recruitment and training of
personnel, production of promotional literature, and similar services.
Commissions paid on the Contracts, including additional incentives or payments,
do not result in any additional charge to Contract Owners or to the Variable
Account.
-3-
<PAGE>
Commissions are paid by The Company and do not result in any charge to Contract
Owners or to the Variable Account in addition to the charges described under
"CHARGES AND DEDUCTIONS" in the Prospectus. The Company intends to recoup the
commission and other sales expense through a combination of anticipated
surrender, withdrawal, and/or annuitization charges, profits from The Company's
general account, including the 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.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "COMPUTATION OF CONTRACT VALUES AND ANNUITY PAYMENTS"
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 Net
Assets of a portfolio share held in a Sub-Account at the end of a one-day
Valuation Period were $1.135000; that the Net Asset Value on the previous
date was $1.132000; that the value of an Accumulation Unit on the previous
date was $1.117500; and that during the Valuation Period, the dividends and
capital gain distributions were $0.000335 per share. The Accumulation Unit
Value at the end of the current Valuation Period would be calculated as
follows:
(1) Accumulation Unit Value - Previous Valuation Period. . . . . . .$1.117500
(2) Net Asset Value - Previous Valuation Period. . . . . . . . . . .$1.132000
(3) Net Asset Value - Current Valuation Period . . . . . . . . . . .$1.135000
(4) Dividends and capital gain distributions . . . . . . . . . . . .$0.000335
(5) Annual Charge (one day equivalent of 1.10% per annum). . . . . . 0.000030
(6) Net Investment Factor {[(3) + (4)] DIVIDED BY (2)} - (5) . . . . 1.002917
(8) Accumulation Unit Value - Current Period (1)X(6) . . . . . . . .$1.120760
The method for determining the amount of annuity payments is described in detail
under "COMPUTATION OF CONTRACT VALUES AND ANNUITY PAYMENTS" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE.
The determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume an Annuitant has
40,000 Accumulation Units in a Variable Account, and that the value of an
Accumulation Unit on the Valuation Date used to determine the amount of the
first variable annuity payment is $1.120000. Therefore, the Accumulation Value
of the Contract is $44,800 (40,000 x $1.120000). Assume also that the Contract
Owner elects an option for which the first monthly payment is $6.57 per $1,000
of Accumulated Value applied. Assuming no premium tax or contingent deferred
sales charge, the first monthly payment would be 44.800 multiplied by $6.57, or
$294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3-1/2% 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
-4-
<PAGE>
the former reflect the 3-1/2% assumed interest rate used in the annuity rate
calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment the number of Annuity Units represented by that payment is
determined to be 267.5818. The value of this same number of Annuity Units will
be paid in each subsequent month under most options. Assume further that the
net investment factor for the Valuation Period applicable to the next annuity
payment is 1.000190. Multiplying this factor by .999906 (the one-day adjustment
factor for the assumed interest rate of 3-1/2% per annum) produces a factor of
1.000096. This is then multiplied by the Annuity Unit value on the immediately
preceding Valuation Date (assumed here to be $1.105000). The result is an
Annuity Unit value of $1.105106 for the current monthly payment. The current
monthly payment is then determined by multiplying the number of Annuity Units by
the current Annuity Unit value, or 267.5818 times $1.105106, which produces a
current monthly payment of $295.71.
Method for Determining Variable Annuity Option V Redemption and Illustration
Using Hypothetical Example. As discussed in the Prospectus under "DESCRIPTION
OF VARIABLE ANNUITY OPTIONS," the Annuitant, or the beneficiary if the Annuitant
has died, may choose at any time to redeem the Contract and receive its commuted
value. Commuted value is the present value of remaining payments commuted at 3
1/2% interest. However, if the annuitant elects the redemption, the remaining
payments are deemed to be the remaining payments that would have been payable
had the Surrender Value, rather than the Accumulation Value, been applied at the
Annuity Date. The determination of the commuted value upon redemption by an
Annuitant may be illustrated by the following hypothetical example.
Assume an annuity period of 10 years or longer is elected. The number of
Annuity Units each payment is based on would be calculated using the Accumulated
Value. Assume this results in 267.5818 Annuity Units. Assume the commuted
value is requested with 60 monthly payments remaining and a current Annuity Unit
Value of $1.200000. Based on these assumptions, the dollar amount of remaining
payments would be $321.10 a month for 60 months. If the commuted value was
requested by a beneficiary, the value would be based on the present value at 3
1/2% interest of this stream of annuity payments. The commuted value would be
$17,725.49. However, if the commuted value is requested by an Annuitant, the
value is calculated as if the Surrender Value, not the Accumulated Value, had
been used to calculate the number of Annuity units. Assume this results in 250
Annuity units. Based on these assumptions, the dollar amount of remaining
payments would be $300 a month for 60 months. The present value at 3 1/2% of
all remaining payments would be $16,560.72.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, The Company may provide advertising,
sales literature, periodic publications or other materials information on
various topics of interest to Contract owners and prospective Contract 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 Contracts 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-Accounts asset charge and any applicable contingent deferred sales
charge which would be assessed upon complete redemption of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission. The quotations are computed by
finding the average annual compounded rates of return over the specified periods
that would equate the initial amount invested to the ending redeemable values,
according to the following formula:
n
P(1 + T) = ERV
-5-
<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 asset of
the Sub-Account. This charge is 1.40% on an annual basis. The calculation of
ending redeemable value assumes (1) the policy was issued at the beginning of
the period and (2) a complete surrender of the policy at the end of the period.
The deduction of the contingent deferred sales charge, if any, applicable at the
end of the period is included in the calculation, according to the following
schedule:
Years from date of Charge as Percentage of
Payment New Payments Withdrawn*
------------------ -----------------------
Less than 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 0%
Thereafter 0%
*Subject to the maximum limit described in the prospectus.
No contingent deferred sales charge is deducted upon expiration of the
periods specified above. In all calendar years, an amount equal to (a) 15%
of the Accumulated Value; or (b) cumulative earnings (Accumulated Value less
total gross payments not previously withdrawn) is not subject to the
contingent deferred sales charge.
The calculations of Total Return reflect the deduction of an 0.88 Annual
Contract Fee, representing a pro-rata portion of the $35 Annual Contract Fee
base on a mean Contract size of $40,000.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return information in this section 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 charges.
However, it is assumed that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return 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 values, according to the following
formula:
n
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the
specified period
-6-
<PAGE>
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
policy is NOT withdrawn at the end of the specified period, and there is
therefore no adjustment for the contingent deferred sales charge that would be
applicable if the policy was withdrawn at the end of the period.
The calculations of Supplemental Total Return include the deduction of an
0.88 Annual Contract Fee, representing a pro-rata portion of the $35 Annual
Contract Fee base on a mean Contract size of $40,000.
YIELD AND EFFECTIVE YIELD - MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1995:
Yield 4.22%
Effective Yield 4.31%
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, subtracting
a charge reflecting the annual 1.40% deduction for mortality and expense risk
and the administrative charge, dividing the difference by the value of the
account at the beginning of the same period to obtain the base period return,
and then multiplying the return for a seven-day base period by (365/7), with the
resulting yield carried to the nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield do NOT reflect the $35 Annual
Contract fee.
TAX-DEFERRED ACCUMULATION
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
After-tax contributions
and tax-deferred earnings
----------------------------
Taxable Lump After-tax contributions
No Withdrawals Sum Withdrawal and taxable earnings
-------------- -------------- -----------------------
10 Years..... $107,946 $ 86,448 $ 81,693
20 Years..... 233,048 165,137 133,476
30 Years..... 503,133 335,021 218,082
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract and 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 Contracts. Income on non-qualified annuity
contracts is taxed as ordinary income upon withdrawal. A 10% tax penalty may
apply to early withdrawals. See "Federal Income Taxes" in the prospectus.
The chart does not reflect the following charges and expenses under the
contract: 1.25% for mortality and expense risk; 0.15% administration charges;
7% maximum deferred withdrawal charge; and $35 annual records maintenance
charge. 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 Contracts.
[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. Financial Statements for Separate Account KGC are not
included as the Variable Account has not begun operations.
-7-
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
(formerly known as State Mutual Life Assurance Company of America)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December
31, 1995 and 1994, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in the accompanying notes to the consolidated financial
statements, the Company changed its method of accounting for investments
(Notes 1 and 3) and postemployment benefits (Notes 11) in 1994 and for
postretirement benefits (Note 10) in 1993.
/s/ Price Waterhouse LLP
Boston, Massachusetts
February 5, 1996
<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, except per share data) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 2,222.8 $ 2,181.8 $ 2,079.3
Universal life and investment product policy fees 170.4 156.8 143.7
Net investment income 710.1 743.1 782.8
Net realized investment gains 19.1 1.1 61.0
Realized gain on sale of subsidiary -- -- 35.7
Realized gain on sale of mutual fund processing business 20.7 -- --
Realized gain on issuance of subsidiary common stock -- -- 62.9
Other income 95.4 112.3 73.8
----------------------------------------
Total revenues 3,238.5 3,195.1 3,239.2
----------------------------------------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment expenses 2,008.3 2,047.0 1,987.2
Policy acquisition expenses 470.3 475.7 435.8
Other operating expenses 455.0 518.9 421.3
----------------------------------------
Total benefits, losses and expenses 2,933.6 3,041.6 2,844.3
----------------------------------------
Income before federal income taxes 304.9 153.5 394.9
----------------------------------------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current 119.7 45.4 95.1
Deferred (37.0) 8.0 (20.4)
----------------------------------------
Total federal income tax expense 82.7 53.4 74.7
----------------------------------------
Income before minority interest, extraordinary item, and
cumulative effect of accounting change 222.2 100.1 320.2
Minority interest (73.1) (51.0) (122.8)
----------------------------------------
Income before extraordinary item and cumulative effect of
accounting changes 149.1 49.1 197.4
Extraordinary item - demutualization expenses (12.1) (9.2) (4.6)
Cumulative effect of changes in accounting principles -- (1.9) (35.4)
----------------------------------------
Net income $ 137.0 $ 38.0 $ 157.4
----------------------------------------
----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<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) 1995 1994
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at amortized cost (fair value of $949.9 in 1994) $ -- $ 959.3
Fixed maturities-at fair value (amortized cost of $7,467.9 and $6,724.6) 7,739.3 6,512.0
Equity securities-at fair value (cost of $410.6 and $260.4) 517.2 286.4
Mortgage loans 799.5 1,106.7
Real estate 179.6 180.3
Policy loans 123.2 364.9
Other long-term investments 71.9 68.1
-------------------------------
Total investments 9,430.7 9,477.7
-------------------------------
Cash and cash equivalents 236.6 539.7
Accrued investment income 163.0 186.6
Deferred policy acquisition costs 735.7 802.8
-------------------------------
Reinsurance receivables:
Future policy benefits 97.1 59.7
Outstanding claims, losses and loss adjustment expenses 799.6 741.0
Unearned premiums 43.8 61.9
Other 58.9 62.1
-------------------------------
Total reinsurance receivables 999.4 924.7
-------------------------------
Deferred federal income taxes 81.2 189.1
Premiums, accounts and notes receivable 526.7 510.3
Other assets 361.4 324.9
Closed Block assets 818.9 --
Separate account assets 4,348.8 2,965.7
-------------------------------
Total assets $ 17,702.4 $ 15,921.5
-------------------------------
-------------------------------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,639.3 $ 3,416.4
Outstanding claims, losses and loss adjustment expenses 3,081.3 2,991.5
Unearned premiums 800.9 796.6
Contractholder deposit funds and other policy liabilities 2,737.4 3,435.7
-------------------------------
Total policy liabilities and accruals 9,258.9 10,640.2
-------------------------------
Expenses and taxes payable 600.3 589.2
Reinsurance premiums payable 42.0 65.8
Short-term debt 28.0 32.8
Deferred federal income taxes 47.8 13.8
Long-term debt 2.8 2.7
Closed Block liabilities 902.0 --
Separate account liabilities 4,337.8 2,954.9
-------------------------------
Total liabilities 15,219.6 14,299.4
-------------------------------
Minority interest 758.5 629.7
Commitments and contingencies (Notes 14 and 19)
SHAREHOLDERS' EQUITY
Common stock, $10 par value, 1 million shares authorized, 500,000
shares issued and outstanding 5.0 --
Additional paid-in-capital 392.4 --
Unrealized appreciation (depreciation) on investments, net 153.0 (79.0)
Retained earnings 1,173.9 1,071.4
-------------------------------
Total shareholders' equity 1,724.3 992.4
-------------------------------
Total liabilities and shareholders' equity $ 17,702.4 $ 15,921.5
-------------------------------
-------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ -- $ -- $ --
Demutualization transaction 5.0 -- --
----------------------------------------
Balance at end of year 5.0 -- --
----------------------------------------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year -- -- --
Contributed from parent 392.4 -- --
----------------------------------------
Balance at end of year 392.4 -- --
----------------------------------------
RETAINED EARNINGS
Balance at beginning of year 1,071.4 1,033.4 876.0
Net income prior to demutualization 93.2 38.0 157.4
----------------------------------------
1,164.6 1,071.4 1,033.4
Demutualization transaction (34.5) -- --
Net income subsequent to demutualization 43.8 -- --
----------------------------------------
Balance at end of year 1,173.9 1,071.4 1,033.4
----------------------------------------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Balance at beginning of year (79.0) 17.5 20.6
----------------------------------------
Cumulative effect of accounting change:
Net appreciation on available-for-sale debt securities -- 296.1 --
Provision for deferred federal income taxes and minority interest -- (149.1) --
----------------------------------------
-- 147.0 --
----------------------------------------
Effect of transfer of securities from held-to-maturity to available-for-sale:
Net appreciation on available-for-sale debt securities 22.4 -- --
Provision for deferred federal income taxes and minority interest (9.6) -- --
----------------------------------------
12.8 -- --
----------------------------------------
Appreciation (depreciation) during the period:
Net appreciation (depreciation) on available-for-sale securities 466.0 (492.1) (9.6)
(Provision) benefit for deferred federal income taxes (163.1) 171.9 2.8
Minority interest (83.7) 76.7 3.7
----------------------------------------
219.2 (243.5) (3.1)
----------------------------------------
Balance at end of year 153.0 (79.0) 17.5
----------------------------------------
Total shareholders' equity $1,724.3 $ 992.4 $ 1,050.9
----------------------------------------
----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<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) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 137.0 $ 38.0 $ 157.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 73.1 50.1 112.7
Net realized gains (39.8) (1.1) (159.6)
Deferred federal income taxes (benefits) (37.0) 8.0 (20.4)
Increase in deferred policy acquisition costs (38.4) (34.6) (51.8)
Increase in premiums and notes receivable, net of reinsurance payable (42.0) (25.6) (37.5)
(Increase) decrease in accrued investment income 7.0 4.6 (1.6)
Increase in policy liabilities and accruals, net 116.2 175.9 131.7
(Increase) decrease in reinsurance receivable (75.6) (31.9) 18.6
Increase in expenses and taxes payable 7.5 88.0 104.7
Separate account activity, net (0.1) 0.4 21.4
Other, net 23.9 59.9 2.7
-----------------------------------------
Net cash provided by operating activities 131.8 331.7 278.3
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of available-for-sale
fixed maturities 2,738.4 2,097.8 --
Proceeds from disposals of held-to-maturity fixed maturities 271.3 304.4 2,094.9
Proceeds from disposals of equity securities 120.0 143.9 585.8
Proceeds from disposals of other investments 40.5 25.9 74.0
Proceeds from mortgages matured or collected 230.3 256.4 291.2
Purchase of available-for-sale fixed maturities (3,273.3) (2,150.1) --
Purchase of held-to-maturity fixed maturities -- (111.6) (2,577.1)
Purchase of equity securities (254.0) (172.2) (673.3)
Purchase of other investments (24.8) (26.6) (46.5)
Proceeds from sale of businesses 32.9 -- 79.5
Capital expenditures (14.1) (43.1) (37.5)
Other investing activities, net 4.7 2.4 1.3
-----------------------------------------
Net cash (used in) provided by investing activities (128.1) 327.2 (207.7)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 445.8 786.3 738.7
Withdrawals from contractholder deposit funds (1,069.9) (1,187.0) (894.0)
Change in short-term debt (4.8) (6.0) 1.4
Change in long-term debt 0.2 0.3 --
Dividends paid to minority shareholders (4.1) (4.2) (3.9)
Capital contributed from parent 392.4 -- 156.2
Payments for policyholders' membership interests (27.9) -- --
Net proceeds from issuance of long-term debt -- -- --
Other, net (20.9) -- (1.3)
-----------------------------------------
Net cash used in financing activities (289.2) (410.6) (2.9)
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (285.5) 248.3 67.7
Net change in cash held in the Closed Block (17.6) -- --
Cash and cash equivalents, beginning of year 539.7 291.4 223.7
-----------------------------------------
Cash and cash equivalents, end of year $ 236.6 $ 539.7 $ 291.4
-----------------------------------------
-----------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 4.1 $ 4.3 $ 1.7
Income taxes paid $ 90.6 $ 46.1 $ 57.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
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",
formerly State Mutual Life Assurance Company of America ["State Mutual"]) was
organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of
reorganization effective October 16, 1995 and became a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). The consolidated
financial statements have been prepared as if FAFLIC were organized as a
stock life insurance company for all periods presented. Thus, generally
accepted accounting principles for stock life insurance companies have been
applied retroactively for all periods presented.
The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC", formerly
SMA Life Assurance Company) its wholly owned life insurance subsidiary,
non-insurance subsidiaries (principally brokerage and investment advisory
subsidiaries), and Allmerica Property and Casualty Companies, Inc.
("Allmerica P&C", a 58.3%-owned non-insurance holding company). The Closed
Block assets and liabilities at December 31, 1995 and its results of
operations subsequent to demutualization are presented in the consolidated
financial statements as single line items. Prior to demutualization such
amounts are presented line by line in the consolidated financial statements
(see Note 6). Unless specifically stated, all disclosures contained herein
supporting the consolidated financial statements as of December 31, 1995 and
the year then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C
and its only significant subsidiary, The Hanover Insurance Company
("Hanover"). Hanover's 81.1%-owned subsidiary is Citizens Corporation, the
holding company for Citizens Insurance Company of America ("Citizens").
Minority interest also includes an amount related to the minority interest in
Citizens Corporation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. CLOSED BLOCK
As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force 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 after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On
October 16, 1995, 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 at October 16, 1995
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 October 16, 1995,
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 as of October 16, 1995.
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
5
<PAGE>
(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
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). SFAS No. 115 requires that an
enterprise classify debt and equity securities into one of three categories;
held-to-maturity, available-for-sale, or trading. Investments classified as
held-to-maturity shall be investments that the enterprise has the positive
intent and ability to hold until maturity. Trading securities are investments
which are bought and held principally for the purpose of selling them in the
near term. Investments classified as neither trading securities nor
held-to-maturity shall be classified as available-for-sale securities. SFAS No.
115 also requires that unrealized holding gains and losses for trading
securities be included in earnings, while unrealized gains and losses for
available-for-sale securities be excluded from earnings and reported as a
separate component of shareholder equity until realized. SFAS No. 115 also
requires that for a decline in the fair value which is judged to be other than
temporary, the cost basis of the security should be written down to fair value,
and the amount of the write-down recognized in earnings as a realized loss.
Previously, the Company classified all of its fixed maturities and equity
securities as available-for-sale or held-to-maturity investments. Fixed
maturities held-to-maturity consist of certain bonds, presented at amortized
cost, that management intends and has the ability to hold until maturity. Fixed
maturities available-for-sale consist of certain bonds and redeemable preferred
stocks, presented at fair value, that management may not hold until maturity.
Equity securities available-for-sale are comprised of common stocks which are
carried at fair value. Prior to January 1, 1994, all fixed maturity investments,
which included bonds and redeemable preferred stocks, were principally carried
at amortized cost. Equity securities, which included common and non-redeemable
preferred stock, were carried at fair value. Unrealized gains or losses on
investments classified as available-for-sale, net of deferred federal income
taxes, minority interest, deferred policy acquisition expenses and amounts
attributable to participating contractholders, are included as a separate
component of shareholders' equity. As discussed in Note 3, the Company
transferred all securities classified as held-to-maturity to available-for-sale
on November 30, 1995.
Realized gains and losses on sales of fixed maturities and equity
securities are determined on the specific-identification basis using amortized
cost for fixed maturities and cost for equity securities. Fixed maturities and
equity securities with other than temporary declines in fair value are written
down to estimated fair value resulting in the recognition of realized losses.
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 management 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 management believes may not be collectible in
full. In establishing reserves, management 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.
Real estate that has been acquired through the foreclosure of mortgage
loans is valued at the estimated fair value at the time of foreclosure. The
Company considers several methods in determining fair value at foreclosure,
using primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
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 and real
estate are included in realized investment gains or losses.
6
<PAGE>
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, 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.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include 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 and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits over the expected life of the contracts using a revised
interest rate applied to the remaining benefit period. Acquisition costs related
to annuity and other life insurance businesses 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 product 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,
management 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
shareholders' equity or net investment income.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% 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 include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made on property and casualty and health insurance
for reported losses and estimates of losses 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, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
7
<PAGE>
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates
discussed above. Although the adequacy of these amounts cannot be assured,
management believes that it is more likely than not that policy liabilities and
accruals will be sufficient to meet future obligations of policies in force. The
amount of liabilities and accruals, however, could be revised in the near term
if the estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values.
K. POLICYHOLDER DIVIDENDS
Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. The
participating life insurance in force was 16.2% of the face value of total life
insurance in force at December 31, 1994. The premiums on participating life,
health and annuity policies were 11.3%, 6.4% and 6.6% of total life, health and
annuity statutory premiums prior to demutualization in 1995, 1994 and 1993,
respectively. Total policyholders' dividends were $23.3 million, $32.8 million
and $24.2 million prior to demutualization in 1995, 1994 and 1993, respectively.
L. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
consolidated United States federal income tax return. Entities included within
the consolidated group are segregated into either a life insurance or non-life
insurance company subgroup. The consolidation of these subgroups is subject to
certain statutory restrictions on the percentage of eligible non-life tax losses
that can be applied to offset life company taxable income. Allmerica P&C and its
subsidiaries file a separate United States federal income tax return.
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" (SFAS
No. 109). These differences result primarily from loss reserves, policy
acquisition expenses, and unrealized appreciation/depreciation on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" was issued. This statement requires
companies to write down to fair value long-lived assets whose carrying value is
greater than the undiscounted cash flows of those assets. The statement also
requires that long-lived assets of which management is committed to dispose,
either by sale or abandonment, be valued at the lower of their carrying amount
or fair value less costs to sell. This statement is effective for fiscal years
beginning after December 15, 1995. Management expects that adoption of this
statement will not have a material effect on the financial statements.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
8
<PAGE>
2. SIGNIFICANT TRANSACTIONS
Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of $21.00 per share in
a public offering, resulting in net proceeds of $248.0 million, and issued
Senior Debentures in the principal amount of $200.0 million which resulted in
net proceeds of $197.2 million. AFC contributed $392.4 million of these proceeds
to FAFLIC.
Effective March 31, 1995, the Company entered into an agreement with TSSG,
a division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995.
In March and April, 1993, Citizens Corporation, a newly formed holding
company for Citizens, issued approximately 19.35% of its common stock in an
initial public offering, generating net proceeds of $156.2 million (7.0 million
shares at $24.00 per share). Proceeds to Citizens Corporation were reduced by
underwriting and other stock issuance costs. A non-taxable gain of $62.9 million
was recorded in 1993 in connection with this initial public offering. This gain
is non-taxable because only newly-issued shares of Citizens Corporation were
issued to the public.
Effective December 31, 1992, Hanover entered into a definitive agreement to
sell its wholly owned subsidiary, Beacon Insurance Company of America, and its
wholly owned subsidiary, American Select Insurance Company, for $89.7 million. A
gain of $20.7 million, net of taxes of $15.0 million, was recorded in 1993.
3. INVESTMENTS
A. FIXED MATURITIES AND EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS No. 115, which requires that
investments be classified into one of three categories: held-to-maturity,
available-for-sale, or trading.
The effect of implementing SFAS No. 115 as of January 1, 1994 was an
increase in the carrying value of fixed maturity investments of $335.3 million,
a decrease in deferred policy acquisition costs of $20.8 million, an increase in
policyholder liabilities of $18.4 million, a net increase in deferred income tax
liabilities of $103.7 million, an increase in minority interest of $45.4
million, and an increase in shareholders' equity of $147.0 million, which
resulted from changing the carrying value of certain fixed maturities from
amortized cost to fair value and related adjustments. The implementation had no
effect on net income.
In November 1995, the Financial Accounting Standards Board issued a Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholders' equity of $12.8 million.
The amortized cost and fair value of available-for-sale and
held-to-maturity fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and agency securities $ 377.0 $ 21.0 $ -- $ 398.0
States and political subdivisions 2,110.6 60.7 4.0 2,167.3
Foreign governments 60.6 3.4 0.6 63.4
Corporate fixed maturities 4,582.1 200.8 16.4 4,766.5
U.S. government mortgage-backed securities 337.6 8.6 2.1 344.1
Total fixed maturities available-for-sale $ 7,467.9 $ 294.5 $ 23.1 $ 7,739.3
---------------------------------------------------------
Equity securities $ 410.6 $ 111.7 $ 5.1 $ 517.2
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
December 31
(In millions) 1994
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and agency securities $ 280.2 $ 4.8 $ 9.1 $ 275.9
States and political subdivisions 2,011.3 14.9 76.2 1,950.0
Foreign governments 96.8 1.8 12.8 85.8
Corporate fixed maturities 4,201.4 24.7 157.4 4,068.7
U.S. government mortgage-backed securities 134.9 0.4 3.7 131.6
----------------------------------------------------------
Total fixed maturities available-for-sale $ 6,724.6 $ 46.6 $ 259.2 $ 6,512.0
----------------------------------------------------------
----------------------------------------------------------
Equity securities $ 260.4 $ 35.3 $ 9.3 $ 286.4
----------------------------------------------------------
----------------------------------------------------------
HELD-TO-MATURITY
State and political subdivisions $ 8.1 $ 0.1 $ 0.8 7.4
Foreign governments 20.7 0.2 0.2 20.7
Corporate fixed maturities 927.3 13.7 22.5 918.5
Corporate mortgage-backed securities 3.2 0.1 -- 3.3
----------------------------------------------------------
Total fixed maturities held-to-maturity $ 959.3 $ 14.1 $ 23.5 $ 949.9
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC 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, 1995, the amortized cost and market value of assets
on deposit were $295.0 million and $303.6 million, respectively. At December 31,
1994, the amortized cost and market value of assets on deposit were $327.9
million and $323.5 million, respectively. In addition, fixed maturities,
excluding those securities on deposit in New York, with an amortized cost of
$82.2 million and $67.0 million were on deposit with various state and
governmental authorities at December 31, 1995 and 1994, respectively.
There were approximately $21.8 million of contractual fixed maturity
investment commitments at December 31, 1994 and none at December 31, 1995.
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.
10
<PAGE>
<TABLE>
<CAPTION>
December 31
(In millions) 1995
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Available-for-Sale
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 970.8 $ 975.6
Due after one year through five years 3,507.9 3,657.1
Due after five years through ten years 1,794.0 1,866.0
Due after ten years 1,195.2 1,240.6
-----------------------------
Total $ 7,467.9 $ 7,739.3
-----------------------------
-----------------------------
</TABLE>
The proceeds from sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Proceeds from Sales
of Available-for-Sale Gross Gross
1995 Securities Gains Losses
<S> <C> <C> <C>
Fixed maturities $ 1,612.3 $ 23.7 $ 33.0
---------------------------------------
Equity securities $ 122.2 $ 23.1 $ 6.9
---------------------------------------
1994
Fixed maturities $ 1,026.2 $ 12.6 $ 21.6
---------------------------------------
Equity securities $ 124.3 $ 17.4 $ 4.5
---------------------------------------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
Equity
Fixed Securities
Maturities and Other (1) Total
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
Net appreciation (depreciation),
beginning of year $ (89.4) $ 10.4 $ (79.0)
---------------------------------------
Effect of transfer of securities
between classifications:
Net appreciation on available-
for-sale fixed maturities 29.2 -- 29.2
Effect of transfer on deferred
policy acquisition costs and
on policy liabilities (6.8) -- (6.8)
Provision for deferred federal
income taxes and minority
interest (9.6) -- (9.6)
---------------------------------------
12.8 -- 12.8
---------------------------------------
Net appreciation on available-
for-sale securities 465.4 87.5 552.9
Net depreciation from the effect
on deferred policy acquisition
costs and on policy liabilities (86.9) (86.9)
Provision for deferred federal
income taxes and minority interest (193.2) (53.6) (246.8)
---------------------------------------
185.3 33.9 219.2
---------------------------------------
Net appreciation, end of year $ 108.7 $ 44.3 $ 153.0
---------------------------------------
---------------------------------------
1994
Net appreciation, beginning of year $ -- $ 17.5 $ 17.5
---------------------------------------
Cumulative effect of accounting
change:
Net appreciation on available-
for-sale fixed maturities 335.3 -- 335.3
Net depreciation from the effect
of accounting change on
deferred policy acquisition
costs and on policy liabilities (39.2) -- (39.2)
Provision for deferred federal
income taxes and minority
interest (149.1) -- (149.1)
---------------------------------------
147.0 17.5 164.5
---------------------------------------
Net depreciation on available-
for-sale securities (547.9) (17.4) (565.3)
Net appreciation from the effect
on deferred policy acquisition
costs and on policy liabilities 73.2 -- 73.2
Benefit for deferred federal income
taxes and minority interest 238.3 10.3 248.6
---------------------------------------
Net appreciation (depreciation),
end of year $ (89.4) $ 10.4 $ (79.0)
---------------------------------------
---------------------------------------
</TABLE>
(1) Includes net appreciation on other investments of $6.9 million and $0.6
million in 1995 and 1994, respectively.
11
<PAGE>
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ 799.5 $ 1,106.7
-----------------------
Real estate:
Held for sale 168.9 134.5
Held for production of income 10.7 45.8
-----------------------
Total real estate 179.6 180.3
-----------------------
Total mortgage loans and real estate $ 979.1 $ 1,287.0
-----------------------
-----------------------
</TABLE>
Reserves for mortgage loans were $33.8 million and $47.2 million as of
December 31, 1995 and 1994, respectively.
During 1995, 1994 and 1993, non-cash investing activities included real
estate acquired through foreclosure of mortgage loans, which had a fair value of
$26.1 million, $39.2 million and $26.7 million, respectively.
At December 31, 1995, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $8.2 million in
the Closed Block. These commitments generally expire within one year. There
are no contractual commitments to extend credit under commercial mortgage
loan agreements outside the Closed Block.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Office building $ 435.9 $ 553.6
Residential 145.3 207.3
Retail 205.6 246.5
Industrial / warehouse 93.8 144.1
Other 151.9 205.6
Valuation allowances (53.4) (70.1)
-----------------------
Total $ 979.1 $ 1,287.0
-----------------------
-----------------------
Geographic region:
South Atlantic $ 281.4 $ 374.2
Pacific 191.9 238.7
East North Central 118.2 138.5
Middle Atlantic 148.9 151.2
West South Central 79.7 102.3
New England 94.9 103.1
Other 117.5 249.1
Valuation allowances (53.4) (70.1)
-----------------------
Total $ 979.1 $ 1,287.0
-----------------------
-----------------------
</TABLE>
At December 31, 1995, scheduled mortgage loan maturities were as follows:
1996 - $206.1 million; 1997 - $143.7 million; 1998 - $167.4 million; 1999 -
$109.9 million; 2000 - $124.2 million; and $48.2 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1995, the Company refinanced $24.0 million of mortgage
loans based on terms which differed from those granted to new borrowers.
12
<PAGE>
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
(In millions)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
1995 Balance at Balance at
January 1 Additions Deductions December 31
<S> <C> <C> <C> <C>
Mortgage loans $ 47.2 $ 1.5 $ 14.9 $ 33.8
Real estate 22.9 (0.6) 2.7 19.6
-----------------------------------------------------
Total $ 70.1 $ 0.9 $ 17.6 $ 53.4
-----------------------------------------------------
-----------------------------------------------------
1994
Mortgage loans $ 73.8 $ 14.6 $ 41.2 $ 47.2
Real estate 21.0 3.2 1.3 22.9
-----------------------------------------------------
Total $ 94.8 $ 17.8 $ 42.5 $ 70.1
-----------------------------------------------------
-----------------------------------------------------
1993
Mortgage loans $ 86.7 $ 4.6 $ 17.5 $ 73.8
Real estate 8.3 12.7 -- 21.0
-----------------------------------------------------
Total $ 95.0 $ 17.3 $ 17.5 $ 94.8
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
D. FUTURES CONTRACTS
FAFLIC purchases and sells futures contracts on margin to hedge against interest
rate fluctuations and their effect on the net cash flows from the sales of
guaranteed investment contracts. The notional amount of such futures contracts
outstanding were $74.7 million and $126.6 million at December 31, 1995 and 1994,
respectively. Because the Company purchases and sells futures contracts through
brokers who assume the risk of loss, the Company's exposure to credit risk under
futures contracts is limited to the margin deposited with the broker. The
maturity of all futures contracts outstanding are less than one year. The fair
value of futures contracts outstanding were $75.7 million and $126.5 million at
December 31, 1995 and 1994, 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. Deferred hedging gains and (losses)
were $5.6 million, $(7.7) million, and $6.9 million in 1995, 1994 and 1993,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
management are realized immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contracts outstanding,
beginning of year $ 126.6 $ 141.7 $ 120.0
New contracts 343.5 816.0 493.3
Contracts terminated (395.4) (831.1) $ (471.6)
---------------------------------------
Contracts outstanding, end of year $ 74.7 $ 126.6 $ 141.7
---------------------------------------
---------------------------------------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed
13
<PAGE>
upon in the swap contract, and the foreign currency spot rate on the date of the
exchange. The fair values of the foreign currency swap contracts outstanding
were $104.2 million and $117.5 million at December 31, 1995 and 1994,
respectively.
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 1995, 1994, and 1993. The Company had no deferred
gains or losses on foreign currency swap contracts.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contracts outstanding, beginning
of year $ 118.7 $ 128.8 $ 95.0
New Contracts -- 5.0 50.8
Contracts expired -- (10.1) (17.0)
Contracts terminated (14.1) (5.0) --
---------------------------------------
Contracts outstanding, end
of year $ 104.6 $ 118.7 $ 128.8
---------------------------------------
---------------------------------------
</TABLE>
Expected maturities of foreign currency swap contracts are $36.0 million in
1996, $28.8 million in 1997, and $39.8 million in 1998 and thereafter.
F. OTHER
At December 31, 1995, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 554.0 $ 578.3 $ 601.5
Mortgage loans 97.0 119.9 155.7
Equity securities 16.8 12.1 7.1
Policy loans 20.3 23.3 23.5
Real estate 48.5 44.6 43.4
Other long-term investments 4.4 4.3 2.1
Short-term investments 21.4 9.5 7.4
---------------------------------------
Gross investment income 762.4 792.0 840.7
Less investment expenses (52.3) (48.9) (57.9)
---------------------------------------
Net investment income $ 710.1 $ 743.1 $ 782.8
---------------------------------------
---------------------------------------
</TABLE>
As of December 31, 1995, fixed maturities and mortgage loans on non-accrual
status were $1.4 million and $85.4 million, including restructured loans of
$46.8 million. The effect of non-accruals, compared with amounts that would have
been recognized in accordance with the original terms of the investments, was to
reduce net income by $0.6 million, $5.1 million and $14.0 million in 1995, 1994
and 1993, respectively.
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 $98.9 million , $126.8 million and $167.0 million at
December 31, 1995, 1994 and 1993, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $11.1 million, $14.4 million and $18.1 million
in 1995, 1994 and 1993, respectively. Actual interest income on these loans
included in net investment income aggregated $7.1 million, $8.2 million and
$10.6 million in 1995, 1994 and 1993, respectively.
At December 31, 1995, fixed maturities with a carrying value of $1.4
million were non-income producing for the twelve months ended December 31, 1995.
There were no mortgage loans which were non-income producing for the twelve
months ended December 31, 1995.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ (7.0) $ 2.4 $ 48.8
Mortgage loans 1.4 (12.1) (0.5)
Equity securities 16.2 12.4 29.8
Real estate 5.3 1.4 (14.5)
Other 3.2 (3.0) (2.6)
--------------------------------------
Net realized investment gains $ 19.1 $ 1.1 $ 61.0
--------------------------------------
--------------------------------------
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were
$1,612.3 million, $1,036.5 million and $817.5 million in 1995, 1994 and 1993,
respectively. Realized gains on such sales were $23.7 million, $12.9 million and
$38.8 million; and realized losses were $33.0 million, $21.6 million and $2.6
million for 1995, 1994 and 1993, respectively.
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS 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
14
<PAGE>
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. Fair values of interest rate futures
were not material at December 31, 1995 and 1994.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 236.6 $ 236.6 $ 539.7 $ 539.7
Fixed maturities 7,739.3 7,739.3 7,471.3 7,461.9
Equity securities 517.2 517.2 286.4 286.4
Mortgage loans 799.5 845.4 1,106.7 1,105.8
Policy loans 123.2 123.2 364.9 364.9
------------------------------------------------------------
$ 9,415.8 $ 9,461.7 $ 9,769.0 $ 9,758.7
------------------------------------------------------------
------------------------------------------------------------
FINANCIAL LIABILITIES
Guaranteed investment contracts $ 1,632.8 $ 1,677.0 $ 2,170.6 $ 2,134.0
Supplemental contracts without life contingencies 24.4 24.4 25.3 25.3
Dividend accumulations 86.2 86.2 84.5 84.5
Other individual contract deposit funds 95.7 92.8 111.3 108.0
Other group contract deposit funds 894.0 902.8 980.3 969.6
Individual annuity contracts 966.3 810.0 988.9 870.6
Short-term debt 28.0 28.0 32.8 32.8
Long-term debt 2.8 2.9 2.7 2.7
------------------------------------------------------------
$ 3,730.2 $ 3,624.1 $ 4,396.4 $ 4,227.5
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
15
<PAGE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1995 is a
net pre-tax contribution from the Closed Block of $2.9 million. Summarized
financial information of the Closed Block as of September 30, 1995 (date used to
estimate financial information for the date of establishment of October 16,
1995) and December 31, 1995 and for the period October 1, 1995 through December
31, 1995 is as follows:
<TABLE>
<CAPTION>
(In millions) 1995
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
December 31 September 30
<S> <C> <C>
Assets
Fixed maturities, at fair value
(amortized cost of $447.4 and
$313.3, respectively) $ 458.0 $ 318.4
Mortgage loans 57.1 61.6
Policy loans 242.4 245.3
Cash and cash equivalents 17.6 12.3
Accrued investment income 16.6 15.3
Deferred policy acquisition costs 24.5 24.8
Other assets 2.7 6.4
-----------------------
Total assets $ 818.9 $ 684.1
-----------------------
-----------------------
Liabilities
Policy liabilities and accruals $ 899.2 $ 894.3
Other liabilities 2.8 4.2
-----------------------
Total liabilities $ 902.0 $ 898.5
-----------------------
-----------------------
</TABLE>
<TABLE>
<CAPTION>
Period from October 1 through December 31
(In millions) 1995
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
<S> <C>
Revenues
Premiums $ 11.5
Net investment income 12.8
---------
Total revenues 24.3
---------
Benefits and expenses
Policy benefits 20.6
Policy acquisition expenses 0.8
---------
Total benefits and expenses 21.4
---------
Contribution from the Closed Block $ 2.9
---------
---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block $ 2.9
Initial cash transferred to the Closed Block 139.7
Change in deferred policy acquisition costs, net 0.4
Change in premiums and other receivables (0.1)
Change in policy liabilities and accruals 2.0
Change in accrued investment income (1.3)
Other, net 0.8
---------
Net cash provided by operating activities 144.4
---------
---------
Cash flows from investing activities:
Sales, maturities and repayments of investments 29.0
Purchases of investments (158.8)
Other, net 3.0
---------
Net cash used by investing activities (126.8)
---------
Change in cash and cash equivalents and ending balance $ 17.6
---------
---------
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans at December 31, 1995.
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.
16
<PAGE>
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term
Commercial paper $ 27.7 $ 32.8
Other 0.3 --
-----------------------
Total short-term debt $ 28.0 $ 32.8
-----------------------
-----------------------
Long-term debt $ 2.8 $ 2.7
-----------------------
-----------------------
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between
operating cash flows and existing commitments. Commercial paper borrowing
arrangements are supported by various lines of credit. As of December 31, 1995,
the weighted average interest rate for outstanding commercial paper was 5.8%.
As of December 31, 1995, FAFLIC had approximately $245.0 million in
committed lines of credit provided by U.S. banks, of which $217.3 million was
available for borrowing. These lines of credit generally have terms of less than
one year, and require the Company to pay annual commitment fees ranging from
0.10% to 0.125% of the available credit. Interest that would be charged for
usage of these lines of credit is based upon negotiated arrangements.
Interest expense was $4.1 million, $4.3 million and $1.6 million in 1995,
1994 and 1993, respectively.
In October, 1995, AFC issued $200.0 million face amount of Senior
Debentures for proceeds of $197.2 million net of discounts and issuance costs.
These securities have an effective interest rate of 7.65%, and mature on October
16, 2025. Interest is payable semiannually on October 15 and April 15 of each
year. The Senior Debentures are subject to certain restrictive covenants,
including limitations on issuance of or disposition of stock of restricted
subsidiaries and limitations on liens. AFC is in compliance with all covenants.
The primary source of cash for repayment of the debt by AFC is dividends from
FAFLIC.
8. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current $ 119.7 $ 45.4 $ 95.1
Deferred (37.0) 8.0 (20.4)
---------------------------------------
Total $ 82.7 $ 53.4 $ 74.7
---------------------------------------
---------------------------------------
</TABLE>
The federal income taxes attributable to the consolidated results of
operations are different from the amounts determined by multiplying income
before federal income taxes by the expected federal income tax rate. The sources
of the difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal income tax
expense $ 105.6 $ 53.7 $ 138.2
Tax-exempt interest (32.2) (35.9) (32.8)
Differential earnings amount (7.6) 35.0 (10.9)
Non-taxable gain -- -- (22.0)
Dividend received deduction (4.0) (2.5) (1.3)
Foreign tax credit (0.7) (0.8) (0.9)
Changes in tax reserve estimates 19.3 4.0 3.5
Other, net 2.3 (0.1) 0.9
---------------------------------------
Federal income tax expense $ 82.7 $ 53.4 $ 74.7
---------------------------------------
---------------------------------------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual
company, reduced its deduction for policyholder dividends by the differential
earnings amount. This amount was computed, for each tax year, by multiplying the
average equity base of the FAFLIC/AFLIAC consolidated group, as determined for
tax purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). For its
1995 federal income tax return, FAFLIC has estimated that there will be no tax
effect from a differential earnings amount, including the expected effect of
future recomputations by the IRS. As a stock life company, FAFLIC is no longer
required to reduce its policyholder dividend deduction by the differential
earnings amount.
17
<PAGE>
The deferred income tax asset represents the tax effects of temporary
differences attributable to Allmerica P&C, a separate consolidated group for
federal tax return purposes. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards $ (9.8) $ (11.9)
Loss reserve discounting (178.3) (187.6)
Deferred acquisition costs 55.1 54.2
Employee benefit plans (25.5) (22.0)
Investments, net 77.4 (22.7)
Fixed assets 2.5 4.5
Bad debt reserve (1.8) (1.8)
Other, net (0.8) (1.8)
------------------------
Deferred tax asset, net $ (81.2) $ (189.1)
------------------------
------------------------
</TABLE>
The deferred income tax liability represents the tax effects of temporary
differences attributable to the FAFLIC/AFLIAC consolidated federal tax return
group. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax (assets) liabilities
NOL carryforwards $ -- $ (3.3)
AMT carryforwards -- (1.5)
Loss reserve discounting (129.1) (118.2)
Deferred acquisition costs 169.7 199.0
Differential earnings amount -- 27.7
Employee benefit plans (14.6) (15.4)
Investments, net 67.0 (30.9)
Fixed assets (1.7) (0.9)
Bad debt reserve (26.3) (27.9)
Other, net (17.2) (14.8)
------------------------
Deferred tax liability, net $ 47.8 $ 13.8
------------------------
------------------------
</TABLE>
Gross deferred income tax assets totaled $405.1 million and $460.7 million
at December 31, 1995 and 1994, respectively. Gross deferred income tax
liabilities totaled $371.1 million and $285.4 million at December 31, 1995 and
1994, respectively.
Management believes, based on the Company's 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, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1995, there are no available non-life
net operating loss carryforwards, and there are available alternative minimum
tax credit carryforwards of $9.8 million.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the FAFLIC/AFLIAC consolidated
group's federal income tax returns through 1988. The IRS has also examined the
Allmerica P&C consolidated group's federal income tax returns through 1988.
Deficiencies asserted with respect to tax years 1977 through 1981 have been paid
and recorded, and the Company has filed a recomputation of such years with
appeals claiming a refund with respect to certain agreed upon issues. The
Company is currently considering its response to certain adjustments proposed by
the IRS with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and
1983, and to possible adjustments under consideration by the IRS with respect to
Allmerica P&C's federal income tax returns for 1989, 1990, and 1991. If upheld,
these adjustments would result in additional payments; however, the Company will
vigorously defend its position with respect to these adjustments. In
management's opinion, adequate tax liabilities have been established for all
years. However, the amount of these tax liabilities could be revised in the near
term if estimates of the Company's ultimate liability are revised.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Through December 31, 1994,
retirement benefits were based primarily on employees' years of service and
compensation during the highest five consecutive plan years of employment.
Benefits under this defined benefit formula were frozen for most employees (but
not for eligible agents) effective December 31, 1994. In their place, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee as a percentage of
that employee's salary, similar to a defined contribution plan arrangement. The
1995 allocation was based on 7.0% of each eligible employee's salary.
Continuation of the defined benefit cash balance formula is subject to the
resolution of certain technical issues, and may be subject to receipt of a
favorable determination letter from the IRS that the Company's pension plans, as
amended to reflect the cash balance formula, will continue to satisfy the
requirements of Section 401(a) of the Internal Revenue Code. 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.
18
<PAGE>
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 19.7 $ 13.0 $ 9.8
Interest accrued on projected
benefit obligations 21.1 20.0 16.9
Actual return on assets (89.3) (2.6) (15.1)
Net amortization and deferral 66.1 (16.3) (5.8)
--------------------------------------
Net pension expense $ 17.6 $ 14.1 $ 5.8
--------------------------------------
--------------------------------------
</TABLE>
The following table summarizes the combined status of the three pension
plans. At December 31, 1995 and 1994, each plan's projected benefit obligation
exceeded its assets.
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $ 325.6 $ 221.7
Unvested benefit obligation 5.0 3.5
-----------------------
Accumulated benefit obligation $ 330.6 $ 225.2
-----------------------
-----------------------
Pension liability included in
Consolidated Balance Sheets:
Projected benefit obligation $ 367.1 $ 254.6
Plan assets at fair value 321.2 239.7
-----------------------
Plan assets less than projected
benefit obligation (45.9) (14.9)
Unrecognized net loss from
past experience 48.8 42.3
Unrecognized prior service benefit (13.8) (17.3)
Unamortized transition asset (26.5) (28.3)
-----------------------
Net pension liability $ (37.4) $ (18.2)
-----------------------
-----------------------
</TABLE>
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1995 and 8.5% in 1994, and the assumed
long-term rate of return on plan assets was 9%. The actuarial present value of
the projected benefit obligations was determined using assumed rates of increase
in future compensation levels ranging from 5.5% to 6.5%. The effect of changes
in actuarial assumptions, including the decrease in the weighted average
discount rate, was an increase in the Company's projected benefit obligation of
$76.7 million at December 31, 1995. Plan assets are invested primarily in
various separate accounts and the general account of FAFLIC. The plans also hold
stock of AFC.
The Company has a profit sharing and 401(k) plan for its employees.
Effective for plan years beginning after 1994, the profit sharing formula for
employees has been discontinued and a 401(k) match feature has been added to the
continuing 401(k) plan for the employees. Total plan expense in 1995, 1994 and
1993 was $5.2 million, $12.6 million and $22.6 million, respectively. In
addition to this Plan, the Company has a defined contribution plan for
substantially all of its agents. The Plan expense in 1995, 1994 and 1993 was
$3.5 million, $2.7 million and $2.4 million, respectively.
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover and Citizens.
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.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
SFAS No. 106 requires employers to recognize the costs and obligations of
postretirement benefits other than pensions over the period ending with the date
an employee is fully eligible to receive benefits. Previously, such costs were
generally recognized as expenses when paid. The adoption increased accrued
liabilities by $69.1 million. The effect on the consolidated income statement
was $35.4 million, net of tax of $23.5 million and minority interest of $10.2
million, reported as a cumulative effect of a change in accounting principle.
The ongoing effect of adopting the new standard increased 1993 net periodic
postretirement benefit expense by $6.6 million, and decreased net income by $4.3
million.
19
<PAGE>
The plans' funded status reconciled with amounts recognized in the
Company's consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 44.9 $ 35.2
Fully eligible active plan participants 14.0 15.2
Other active plan participants 45.9 38.5
-----------------------
104.8 88.9
Plan assets at fair value -- --
-----------------------
Accumulated postretirement benefit
obligation in excess of plan assets 104.8 88.9
Unrecognized loss 13.4 4.7
-----------------------
Accrued postretirement benefit costs $ 91.4 $ 84.2
-----------------------
-----------------------
</TABLE>
The components of net periodic postretirement benefit expense were as
follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <S> <C> <C>
Service cost $ 4.2 $ 6.6 $ 3.8
Interest cost 6.9 6.9 5.7
Amortization of (gain) loss (0.5) 1.4 --
-------------------------------------
Net periodic postretirement
benefit expense $ 10.6 $ 14.9 $ 9.5
-------------------------------------
-------------------------------------
</TABLE>
For purposes of measuring the accumulated postretirement benefit obligation
at December 31, 1995, health care costs were assumed to increase 10% in 1996,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1995
by $10.1 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1995 by $1.2 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at January 1, 1993 was 8.5%. The rate was 7.0%
and 8.5% at December 31, 1995 and 1994, respectively. The effect of changes in
actuarial assumptions, including the decrease in the weighted average discount
rate, was an increase in the Company's accumulated postretirement benefit
obligation of $15.1 million at December 31, 1995.
11. POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 112, (SFAS No. 112), "Employers' Accounting
for Postemployment Benefits", which requires employers to recognize the costs
and obligations of severance, disability and related life insurance and health
care benefits to be paid to inactive or former employees after employment but
before retirement. Prior to adoption, the Company had recognized the cost of
these benefits on an accrual or paid basis, depending on the plan.
Implementation of SFAS No. 112 resulted in a transition obligation of $1.9
million, net of federal income taxes and minority interest, and is reported as a
cumulative effect of a change in accounting principle in the consolidated
statement of income. The impact of this accounting change, after recognition of
the cumulative effect, was not significant.
12. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
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. At January 1, 1996, FAFLIC could pay
dividends of $144.9 million to AFC without prior approval of the Commissioner.
Dividends from FAFLIC to AFC will be the primary source of cash for
repayment of the debt by AFC and payment of dividends to AFC stockholders.
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
20
<PAGE>
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. At January 1,
1996, AFLIAC could pay dividends of $4.3 million to FAFLIC without prior
approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
At January 1, 1996, the maximum dividend and other distributions that could be
paid to Allmerica P&C by Hanover, without prior approval of the Insurance
Commissioner, was approximately $72.8 million.
Pursuant to Michigan's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without prior
approval of the Michigan Insurance Commissioner, is limited to the greater of
10% of policyholders' surplus as of December 31 of the immediately preceding
year or the statutory net income less realized gains, for the immediately
preceding calendar year. At January 1, 1996, Citizens Insurance could pay
dividends of $45.6 million to Citizens Corporation without prior approval.
13. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Management. Within these broad areas, the
Company conducts business principally in five operating segments.
The Risk Management group includes two segments: Regional Property and
Casualty and Corporate Risk Management Services. The Regional Property and
Casualty segment includes property and casualty insurance products, such as
automobile insurance, homeowners insurance, commercial multiple-peril insurance,
and workers' compensation insurance. These products are offered by Allmerica P&C
through its operating subsidiaries, Hanover and Citizens. Substantially all of
the Regional Property and Casualty segment's earnings are generated in Michigan
and the Northeast (Connecticut, Massachusetts, New York, New Jersey, New
Hampshire, Rhode Island, Vermont and Maine). The Corporate Risk Management
Services segment, formerly known as the Employee Benefit Services segment,
includes group life and health insurance products and services which assist
employers in administering employee benefit programs and in managing the related
risks.
The Retirement and Asset Management group includes three segments: Retail
Financial Services, Institutional Services and Allmerica Asset Management. The
Retail Financial Services segment, formerly known as the Individual Financial
Services segment, includes variable annuities, variable universal life-type,
traditional and health insurance products distributed via retail channels to
individuals across the country. The Institutional Services segment includes
primarily group retirement products such as 401(k) plans, tax-sheltered
annuities and GIC contracts which are distributed to institutions across the
country via work-site marketing and other arrangements. Allmerica Asset
Management, formerly included in the results of the Institutional Services
segment, is a Registered Investment Advisor which provides investment advisory
services to other institutions, such as insurance companies and pension plans.
21
<PAGE>
Summarized below is financial information with respect to business segments
for the year ended and as of December 31.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty $ 2,095.1 $ 2,004.8 $ 2,051.1
Corporate Risk Management 328.5 302.4 296.0
-----------------------------------------
Subtotal 2,423.6 2,307.2 2,347.1
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 486.7 507.9 524.0
Institutional Services 344.1 397.9 382.0
Allmerica Asset Management 4.4 4.0 -
-----------------------------------------
Subtotal 835.2 909.8 906.0
Eliminations (20.3) (21.9) (13.9)
-----------------------------------------
Total $ 3,238.5 $ 3,195.1 $ 3,239.2
-----------------------------------------
-----------------------------------------
Income (loss) from continuing
operations before income taxes:
Risk Management
Regional Property and Casualty $ 206.3 $ 113.1 $ 331.3
Corporate Risk Management 18.3 19.9 18.1
-----------------------------------------
Subtotal 224.6 133.0 349.4
-----------------------------------------
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 35.2 14.2 61.6
Institutional Services 42.8 4.4 (16.1)
Allmerica Asset Management 2.3 1.9 --
-----------------------------------------
Subtotal 80.3 20.5 45.5
-----------------------------------------
Total $ 304.9 $ 153.5 $ 394.9
-----------------------------------------
-----------------------------------------
Identifiable assets:
Risk Management
Regional Property and Casualty $ 5,741.8 $ 5,408.7 $ 5,198.1
Corporate Risk Management 458.9 386.3 367.6
-----------------------------------------
Subtotal 6,200.7 5,795.0 5,565.7
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 7,218.7 5,639.8 5,104.5
Institutional Services 4,280.9 4,484.5 4,708.2
Allmerica Asset Management 2.1 2.2 --
-----------------------------------------
Subtotal 11,501.7 10,126.5 9,812.7
-----------------------------------------
Total $ 17,702.4 $ 15,921.5 $ 15,378.4
-----------------------------------------
-----------------------------------------
</TABLE>
14. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $36.4 million, $35.2 million and $31.9 million in 1995, 1994 and
1993, respectively. At December 31, 1995, future minimum rental payments under
non-cancelable operating leases were approximately $84.6 million, payable as
follows: 1996 - $29.4 million; 1997 - $21.5 million; 1998 - $14.6 million; 1999
- - $8.7 million; 2000 - $5.5 million; and $4.9 million thereafter.
15. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual
22
<PAGE>
Market Pool ("MWCRP") and the Michigan Catastrophic Claims Association ("MCCA").
As of December 31, 1995, the MCCA and CAR were the only two reinsurers which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1995, 1994 and 1993 were
$49.1 million and $37.9 million, $50.0 million and $34.6 million, and $45.0
million and $31.7 million, respectively.
From 1988 through 1992, the Company was a servicing carrier in Maine, and
ceded a significant portion of its workers' compensation premiums to the Maine
Workers' Compensation Residual Market Pool, which is administered by The
National Council on Compensation Insurance ("NCCI"). The Company is currently
involved in legal proceedings regarding the MWCRP's deficit which through a
legislated settlement issued on June 23, 1995 provided for an initial funding of
$220.0 million, of which the insurance carriers were responsible for $65.0
million. Hanover paid its allocation of $4.2 million in December 1995. Some of
the small carriers are currently appealing this decision. The Company's right to
recover reinsurance balances for claims properly paid is not at issue in any
such proceedings. The Company expects to collect its reinsurance balance;
however, funding of the cash flow needs of the MWCRP may in the future be
affected by issues related to certain litigation, the outcome of which the
Company cannot predict. The Company ceded to MCCA net premiums earned and losses
and loss adjustment expenses in 1995, 1994 and 1993 of $66.8 million and $62.9
million, $80.0 million and $24.2 million, and $76.4 million and $126.8 million,
respectively. 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.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life insurance premiums:
Direct $ 438.9 $ 447.2 $ 453.0
Assumed 71.0 54.3 31.3
Ceded (150.3) (111.0) (83.2)
----------------------------------------
Net premiums $ 359.6 $ 390.5 $ 401.1
----------------------------------------
----------------------------------------
Property and casualty
premiums written:
Direct $ 2,039.4 $ 1,992.4 $ 1,906.2
Assumed 125.0 128.6 106.3
Ceded (279.1) (298.1) (267.4)
----------------------------------------
Net premiums $ 1,885.3 $ 1,822.9 $ 1,745.1
----------------------------------------
----------------------------------------
Property and casualty
premiums earned:
Direct $ 2,021.7 $ 1,967.1 $ 1,870.1
Assumed 137.7 116.1 114.8
Ceded (296.2) (291.9) (306.7)
----------------------------------------
Net premiums $ 1,863.2 $ 1,791.3 $ 1,678.2
----------------------------------------
----------------------------------------
Life insurance and other individual
policy benefits, claims, losses and
loss adjustment expenses:
Direct $ 749.6 $ 773.0 $ 819.4
Assumed 38.5 28.9 6.8
Ceded (69.5) (61.6) (38.4)
----------------------------------------
Net policy benefits, claims, losses
and loss adjustment expenses $ 718.6 $ 740.3 $ 787.8
----------------------------------------
----------------------------------------
Property and casualty benefits,
claims, losses and loss
adjustment expenses:
Direct $ 1,372.7 $ 1,364.4 $ 1,310.3
Assumed 146.1 102.7 98.8
Ceded (229.1) (160.4) (209.7)
----------------------------------------
Net policy benefits, claims, losses
and loss adjustment expenses $ 1,289.7 $ 1,306.7 $ 1,199.4
----------------------------------------
----------------------------------------
</TABLE>
23
<PAGE>
16. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the amount of policy acquisition expenses deferred and
amortized:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 802.8 $ 746.9 $ 700.4
Acquisition expenses deferred 504.8 510.3 482.3
Amortized to expense
during the year (470.3) (475.7) (435.8)
Adjustment to equity
during the year (50.4) 21.3 --
Transferred to the Closed Block (24.8) -- --
Adjustment for cession of
term life insurance (26.4) -- --
---------------------------------------
Balance at end of year $ 735.7 $ 802.8 $ 746.9
---------------------------------------
---------------------------------------
</TABLE>
17. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates at 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 reflected in results of operations in the year such
changes are determined to be needed and recorded.
The liability for outstanding claims, losses and loss adjustment expenses
related to the Company's accident and health business was $375.9 million, $305.0
million and $276.3 million at December 31, 1995, 1994 and 1993, respectively.
Accident and health claim liabilities have been re-estimated for all prior years
and were increased by $26.4 million, $6.5 million and $12.7 million in 1995,
1994 and 1993, respectively. Unfavorable development in the accident and health
business during 1995 is primarily due to reserve strengthening and adverse
experience in the Company's individual disability line of business.
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for losses and LAE,
beginning of year $ 2,821.7 $ 2,717.3 $ 2,598.9
Incurred losses and LAE, net
of reinsurance recoverable:
Provision for insured events of
the current year 1,427.3 1,434.8 1,268.2
Decrease in provision for insured
events of prior years (137.6) (128.1) (68.8)
----------------------------------------
Total incurred losses and LAE 1,289.7 1,306.7 1,199.4
----------------------------------------
Payments, net of reinsurance
recoverable:
Losses and LAE attributable to
insured events of current year 652.2 650.2 523.5
Losses and LAE attributable to
insured events of prior years 614.3 566.9 564.3
----------------------------------------
Total payments 1,266.5 1,217.1 1,087.8
----------------------------------------
Less reserves assumed by purchaser
of Beacon -- -- (28.8)
----------------------------------------
Change in reinsurance recoverable
on unpaid losses 51.1 14.8 35.6
----------------------------------------
Reserve for losses and LAE,
end of year $ 2,896.0 $ 2,821.7 $ 2,717.3
----------------------------------------
----------------------------------------
</TABLE>
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $137.6 million,
$128.1 million and $68.8 million in 1995, 1994 and 1993, respectively. The
increase in favorable development on prior years' reserves of $9.5 million in
1995 results primarily from a $34.6 million increase in favorable development at
Citizens. Favorable development in Citizens' personal automobile and workers'
compensation lines increased $16.6 million and $15.5 million, to favorable
development of $4.4 million and $32.7 million, respectively. Hanover's favorable
development, not including the effect of voluntary and involuntary pools, was
relatively unchanged at $90.2 million in 1995 compared to $91.7 million in 1994.
Favorable development in Hanover's workers' compensation line increased $27.7
million to $31.0 million during 1995. This was offset by decreases of $14.6
million and
24
<PAGE>
$12.6 million, to $45.5 million and $0.1 million, in the personal automobile
and commercial multiple peril lines, respectively. Favorable development in
Hanover's voluntary and involuntary pools decreased $23.6 million to $0.4
million during 1995.
The increase in favorable development on prior years' reserves of $59.3
million in 1994 primarily results from an increase in favorable development in
the voluntary and involuntary pools of $47.0 million in 1994. The remainder of
the favorable reserve development in 1994 is the result of favorable severity
trends, primarily in the personal automobile and commercial multiple peril
lines.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
Due to the nature of business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small.
Losses and LAE reserves related to environmental damage and toxic tort
liability, included in the total reserve for losses and LAE, were $28.6 million
and $19.4 million, net of reinsurance of $8.4 million and $8.1 million, at the
end of 1995 and 1994, respectively. During 1995, the Regional Property and
Casualty subsidiaries redefined their environmental liabilities in conformity
with new guidelines issued by the NAIC. The 1994 liability has been conformed to
the 1995 presentation. This had no impact on results of operations. Management
believes that, notwithstanding the evolution of case law expanding such
liability, recorded reserves for environmental liability are adequate, and is
not aware of any litigation or pending claims that may result in additional
material liabilities in excess of recorded reserves. During 1995, Hanover
performed an actuarial review of its environmental reserves. This resulted in
Hanover's providing additional reserves for "IBNR" (incurred but not reported)
claims, in addition to existing reserves for reported claims. At Citizens,
environmental reserves are primarily related to reported claims. Although these
claims are not material, their existence gives rise to uncertainty and is
discussed because of the possibility, however remote, that they may become
material. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
18. MINORITY INTEREST
The Company's interest in Allmerica P&C, is represented by ownership of 58.3%,
57.4% and 57.4% of the outstanding shares of common stock at December 31, 1995,
1994 and 1993, respectively. Earnings and shareholders' equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
19. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions have contributed to an increase in the number of
insurance companies that are under regulatory supervision. This is expected to
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
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers are liable for $65.0 million payable
on or before January 1, 1996, and employers will contribute $110.0 million
payable through surcharges on premiums over the course of the next ten years.
The major insurers are responsible for 90% of the $65.0 million. Hanover's
allocated share of the settlement is approximately $4.2 million, which was paid
in December 1995. The remainder of the deficit of $45.0 million will be paid by
the Maine Guaranty Fund Surplus payable in quarterly contributions over ten
years. The smaller carriers have recently filed litigation to appeal the
settlement. The Company believes that adequate reserves have been established
for any additional liability.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
25
<PAGE>
20. STATUTORY FINANCIAL INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). Statutory surplus differs from
shareholders' equity reported in accordance with generally accepted accounting
principles for stock life insurance companies primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, postretirement benefit costs are based on different
assumptions and reflect a different method of adoption, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory net income (Unconsolidated)
Property and Casualty Companies $ 139.8 $ 74.5 $ 166.8
Life and Health Companies 134.3 40.7 114.8
----------------------------------------
Statutory Shareholders'
Surplus (Unconsolidated)
Property and Casualty Companies $ 1,151.7 $ 989.8 $ 960.1
Life and Health Companies 965.6 465.3 526.4
----------------------------------------
</TABLE>
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
For the Three Months Ended
(In millions)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 March 31 June 30 Sept. 30 Dec. 31
Total revenues $ 841.4 $ 793.4 $ 819.2 $ 784.5
------------------------------------------------------
Income before extraordinary item $ 39.2 $ 29.9 $ 34.8 $ 45.2
Extraordinary item - demutualization expenses (2.5) (3.5) (4.7) (1.4)
------------------------------------------------------
Net income $ 36.7 $ 26.4 $ 30.1 $ 43.8
------------------------------------------------------
------------------------------------------------------
1994
Total revenues $ 815.4 $ 786.8 $ 799.3 $ 793.6
------------------------------------------------------
Income (loss) before extraordinary item $ (10.9) $ 15.7 $ 26.6 $ 17.7
Extraordinary item - demutualization expenses (1.6) (2.5) (2.8) (2.3)
Cumulative effect of changes in accounting principles (1.9) -- -- --
------------------------------------------------------
Net income $ (14.4) $ 13.2 $ 23.8 $ 15.4
------------------------------------------------------
------------------------------------------------------
</TABLE>
26
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
FINANCIAL STATEMENTS INCLUDED IN PART A
None
FINANCIAL STATEMENTS INCLUDED IN PART B
Financial Statements for First Allmerica Financial Life Insurance
Company
FINANCIAL STATEMENTS INCLUDED IN PART C
None
(b) EXHIBITS
Exhibit 1 - Vote of Board of Directors Authorizing Establishment of
Registrant dated June 13, 1996.
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) Proposed Form of Wholesaling Agreement filed herewith.
(b) Sales Agreement filed herewith.
(c) Broker's Agreement and Specimen Schedule of Sales
Commissions for Variable Annuity Policies were previously
filed on November 3, 1994 in Registration Statement
No. 33-85916, and are incorporated by reference herein.
Exhibit 4 - Policy Form is filed herewith.
and
Exhibit 5 - Application Form is filed herewith.
Exhibit 6 - The Depositor's Articles of Incorporation, as amended effective
October 1, 1995 to reflect its new name, and Bylaws
Exhibit 7 - Not Applicable.
Exhibit 8 - None
Exhibit 9 - Consent and Opinion of Counsel is filed herewith
Exhibit 10 - Consent and Opinion of Independent Accountants is filed herewith
Exhibit 11 - None.
Exhibit 12 - None.
Exhibit 13 - Performance Calculations filed herewith.
Exhibit 15- Form of Participation Agreement filed herewith.
<PAGE>
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR.
The principal business address of all the following Directors and
Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
Name and Position Principal Occupation
----------------- --------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996;
Vice President, First Allmerica
Abigail M. Armstrong Secretary of First Allmerica since 1996;
Counsel, First Allmerica
Kruno Huitzingh Director of First Allmerica since 1996;
Vice President & Chief Information Officer,
First Allmerica since 1993; Executive Vice
President, Chicago Board Options Exchange,
1986 to 1993
John F. Kelly Director of First Allmerica since 1996;
Senior Vice President, General Counsel and
Assistant Secretary, First Allmerica
James R. McAuliffe Director of First Allmerica since 1996;
President and CEO, Citizens Insurance Company
of America since 1994; Vice President from
1982 - 1994 and Chief Investment Officer,
First Allmerica, 1986 to 1994
<PAGE>
John F. O'Brien Director, Chairman of the Board, President and
Chief Executive Officer, First Allmerica
Edward J. Parry, III Vice President and Treasurer, First Allmerica
since 1993; Assistant Vice President, 1992
to 1993; Manager, Price Waterhouse, 1987 to
1992
Richard M. Reilly Director of First Allmerica since 1996; Vice
President, First Allmerica; Director,
Allmerica Investments, Inc.; Director and
President, Allmerica Investment Management
Company, Inc. since 1990
Larry C. Renfro Director of First Allmerica since 1996;
Vice President of First Allmerica
Theodore J. Rupley Director of First Allmerica since 1996;
Director and President, The Hanover
Insurance Company since 1992; President,
Fountain Powerboat Industries, 1992;
President, Metropolitan Property & Casualty
Company, 1986-1992
Phillip E. Soule Director of First Allmerica since 1996;
Vice President of First Allmerica
Eric A. Simonsen Director of First Allmerica since 1996;
Vice President and Chief Financial Officer,
First Allmerica
John P. Kavanaugh Director of First Allmerica since 1996;
Vice President and Chief Investment Officer,
First Allmerica
</TABLE>
Item 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT. See attached
organization chart.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory
Worcester MA 01653 services
Allmerica Employees Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident
and Annuity Company Worcester MA 01653 & health insurance,
annuities, variable
annuities and variable
life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester, MA 01653
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Institutional Services, Inc. 440 Lincoln Street Accounting, marketing
Worcester MA 01653 and shareholder
<PAGE>
services for investment
companies
Allmerica Investment Services, Inc. 440 Lincoln Street Holding Company
(formerly Allmerica Financial Worcester, MA 01653
Services, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment Advisory
Company, Inc. Worcester MA 01653 Services
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-
Worcester MA 01653 dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
(formerly SMA Investment Trust) Worcester MA 01653
Allmerica Property and Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Realty Advisors, Inc. 440 Lincoln Street Investment Advisory
Worcester MA 01653 services
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services, Inc. 440 Lincoln Street Service Company
Worcester MA 01653
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national
Worcester MA 01653 trust company
AMGRO, Inc. 472 Lincoln Street Premium financing
Worcester MA 01653
APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Beltsville Drive Limited 440 Lincoln Street Real estate partnership
Partnership Worcester MA 01653
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line fire &
Howell MI 48843 casualty insurance
Citizens Insurance Company of Ohio 645 West Grand River Multi-line fire &
Howell MI 48843 casualty insurance
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
The Hanover American Insurance 100 North Parkway Multi-line fire &
Company Worcester MA 01653 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line fire &
Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Road Incorporated Branch
Management Company, Inc. Richardson TX 75081 Office of The Hanover
Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line fire &
Richardson TX 75081 casualty insurance
<PAGE>
Hollywood Center, Inc. 440 Lincoln Street General business
Worcester MA 01653 corporation
Linder Skokie Real Estate 440 Lincoln Street General business
Corporation Worcester MA 01653 corporation
Lloyds Credit Corporation 440 Lincoln Street Premium financing
Worcester MA 01653 service franchises
Logan Wells Water Company, Inc. 603 Heron Drive Water Company, serving
Bridgeport NJ 08014 land development
investment
Massachusetts Bay Insurance 100 North Parkway Multi-line fire &
Company Worcester MA 01653 casualty
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street General business
Worcester MA 01653 corporation
Sterling Risk Management Services, Inc. 100 North Parkway Risk management
Worcester MA 01605 services
</TABLE>
Item 27. NUMBER OF CONTRACT OWNERS.
The Variable Account has no Policyholders because
operations have not yet begun
Item 28. INDEMNIFICATION.
Article VIII of the Bylaws of the Depositor state: 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 judgement,
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, Group Vel, Separate Accounts VA-A, VA-B,
VA-C, VA-G, VA-H, VA-K, VA-P, Allmerica Select Separate Account and
Inheiritage Account of Allmerica Financial Life Insurance and Annuity
Company
- Separate Accounts I, VA-K, VA-P, VEL II Account, Inheiritage Account
and Allmerica Select Separate Account of First Allmerica Financial
Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
Name Position or Office with Underwriter
---- -----------------------------------
Emil J. Aberizk Vice President
Abigail M. Armstrong Secretary and Counsel
Phillip J. Coffey Vice Presdient
Thomas J. Cunningham Vice President, Chief Financial Officer
and Controller
<PAGE>
John F. Kelly Director
William F. Monroe, Jr. Vice Presdient
David J. Mueller Vice Presdient
John F. O'Brien Director
Stephen Parker President, Director and Chief
Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric a. Simonsen Director
Mark Steinberg Senior Vice President
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Each account, book or other document required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts or on
behalf of the Company by The First Data Investor Services, Inc. at 4400 Computer
Drive, Westboro, Massachusetts 01581.
Item 31. MANAGEMENT SERVICES.
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
Item 32. UNDERTAKINGS.
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
(b) The registrant hereby undertakes to include in the prospectus a postcard
that the applicant can remove to send for a Statement of Additional Information.
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information 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 Securities and Exchange Commission, 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.
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
<PAGE>
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.
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>
EXHIBIT TABLE
Exhibit 1 - Vote of Board of Directors Authorizing Establishment of
Registrant date June 13, 1006.
Exhibit 3(a) - Proposed Form of Wholesaling Agreement
(b) Form of Sales Agreement
Exhibti 4 - Policy Form.
Exhibit 5 - Application Form.
Exhibit 6 - The Depositor;s Articles of Incorporation, as amended effective
October 1, 1995 to reflect its new name, and Bylaws.
Exhibit 9 - Consent and Opinion of Counsel.
Exhibit 10 - Consent and Opinion of Independent Accountants
Exhibit 13 - Performance Calculations
Exhibit 15 - Participation Agreement
<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 Initial Registration
Statement to be signed by the undersigned, in the City of Worcester, and
Commonwealth of Massachusetts, on the 9th day of August, 1996.
SEPARATE ACCOUNT KGC OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
By: /s/ John F. O'Brien
------------------------------------
John F. O'Brien, President
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ John F. O'Brien Director, President and Chief
John F. O'Brien Executive Officer
/s/ Bruce C. Anderson Director and Vice President
Bruce C. Anderson
/s/ Kruno Huitzingh Director, Vice President and August 9, 1996
Kruno Huitzingh Chief Information Officer
/s/ John F. Kelly Director, Senior Vice President
John F. Kelly and General Counsel
/s/ James R. McAuliffe Director
James R. McAuliffe
/s/ Richard M. Reilly Director and Vice President
Richard M. Reilly
/s/ Larry C. Renfro Director and Vice President
Larry C. Renfro
/s/ Theodore J. Rupley Director
Theodore J. Rupley
/s/ Eric A. Simonsen Director, Vice President and Chief
Eric A. Simonsen Financial Officer
/s/ Phillip E. Soule Director and Vice President
Phillip E. Soule
/s/ John P. Kavanaugh Director and Vice President
John P. Kavanaugh
/s/ Edward J. Parry Vice President and Treasurer
Edward J. Parry (Chief Accounting Officer)
<PAGE>
First Allmerica Financial Life Insurance Company
I, Abigail M. Armstrong, Secretary and Counsel of First Allmerica Financial Life
Insurance Company ("Company"), do hereby certify and attest that the following
is a true copy of a vote of the Board of Directors of the Company on June 13,
1996, that said vote has not been amended or repealed and is in full force and
effect as of the date hereof.
Whereas, the Company may from time-to-time desire to issue variable annuity
contracts, variable life contracts, or other contracts ("Contracts"), which may
provide, among other things, that benefits or contractual payments shall vary,
in whole or in part, so as to reflect the investment results of a separate
account or accounts, or that benefits funded by a separate account shall be
payable in fixed amounts and the Contract values shall be guaranteed by the
Company as to principal amount, or that the performance of the separate account
shall be guaranteed as to principal and a stated rate of interest;
Now, therefore, it is voted:
That pursuant to the provisions of Section 132F and Section 132G of Chapter 175
of the Massachusetts General Laws, the appropriate officers of the Company are
hereby authorized to establish from time-to-time and to maintain one or more
separate accounts (collectively, "Separate Accounts") independent and apart from
the Company's general investment account for the purpose of providing for the
issuance by the Company of such Contracts as may be determined from time-to-
time;
That separate investment divisions ("Sub-Accounts") may be established within
each Separate Account to which net payments may be allocated in accordance with
the terms of the relevant Contracts, and that the appropriate officers of the
Company be and hereby are authorized to increase or decrease the number of Sub-
Accounts in a Separate Account, as may be deemed necessary or appropriate from
time-to-time;
That in accordance with the terms of the relevant Contracts, the portion of the
assets of each such Separate Account equal to the separate account reserves and
other contract liabilities shall not be chargeable with liabilities arising out
of any other business the Company may conduct;
That the income and gains and losses, whether or not realized, from assets
allocated to a Separate Account shall be credited to or charged against such
Separate Account without regard to other income, gains or losses of the Company
or any other Separate Account, and that the income and gains and losses, whether
or not realized, from assets allocated to each Sub-Account of a Separate Account
shall be credited to or charged against such Sub-Account without regard to other
income, gains or losses of the Company, any other Sub-Account or any other
Separate Account;
That the appropriate officers of the Company are authorized to determine
investment objectives and appropriate underwriting criteria, investment
management policies and other requirements necessary or desirable for the
operation and management of each of the Company's Separate Accounts and Sub-
Accounts thereof; provided, however, that if a Separate Account is registered
with the Securities and Exchange Commission as a unit investment trust, each
such Sub-Account thereof shall invest only in the shares of a single investment
company or a single series or portfolio of an investment company organized as a
series fund pursuant to the Investment Company Act of 1940;
That the appropriate officers of the Company be and they hereby are authorized
to deposit such amounts in a Separate Account and the Sub-Accounts thereof as
may be necessary or appropriate to facilitate the commencement of operations;
That the appropriate officers of the Company be and they hereby are authorized
to transfer funds from time-to-time between the Company's general account and
the Separate Accounts as deemed necessary or
<PAGE>
appropriate and consistent with the terms of the relevant Contracts;
That the appropriate officers of the Company be and they hereby are authorized
to change the name or designation of a Separate Account and Sub-Accounts thereof
to such other names or designations as they may deem necessary or appropriate;
That the appropriate officers of the Company, with such assistance from the
Company's auditors, legal counsel and independent consultants, or others as they
may require, are hereby severally authorized to take all appropriate action, if
in their discretion deemed necessary, to: (a) register the Separate Accounts
under the Investment Company Act of 1940, as amended; (b) register the relevant
Contracts in such amounts, which may be an indefinite amount, as the appropriate
officers of the Company shall from time-to-time deem appropriate under the
Securities Act of 1933; (c) to claim exemptions from registration of a Separate
Accounts and/or the relevant Contracts, if appropriate; and (d) take all other
actions which are necessary in connection with the offering of the Contracts for
sale and the operation of the Separate Accounts in order to comply with the
Investment Company Act of 1940, the Securities Exchange Act of 1934, the
Securities Act of 1933, and other applicable federal laws, including the filing
of any amendments to registration statements, any undertakings, any applications
for exemptions from the Investment Company Act of 1940 or other applicable
federal laws, and the filing of any documents necessary to claim or to maintain
such exemptions, as the appropriate officers of the Company shall deem necessary
or appropriate;
That the Secretary and Counsel is hereby appointed as agent for service under
any such registration statement and is duly authorized to receive communications
and notices from the Securities and Exchange Commission with respect thereto and
to exercise the powers given to such agent in the rules and regulations of the
Securities and Exchange Commission under the Securities Act of 1933, the
Securities Exchange Act of 1934, or the Investment Company Act of 1940;
That the appropriate officers of the Company are hereby authorized to establish
procedures under which the Company will institute procedures for providing
voting rights for owners of such Contracts with respect to securities owned by
the Separate Accounts;
That the appropriate officers of the Company are hereby authorized to execute
such agreement or agreements as deemed necessary and appropriate (i) with
Allmerica Investments, Inc., or other qualified entity under which Allmerica
Investments, Inc., or other such entity, will be appointed principal underwriter
and distributor for the Contracts, (ii) with one or more qualified banks or
other qualified entities to provide administrative and/or custodial services in
connection with the establishment and maintenance of the Separate Accounts and
the design, issuance and administration of the Contracts;
That, since it is anticipated that the Separate Accounts will invest in
securities, the appropriate officers of the Company are hereby authorized to
execute such agreement or agreements as may be necessary or appropriate to
enable such investments to be made;
That the appropriate officers of the Company, and each of them, are hereby
authorized to execute and deliver all such documents and papers and to do or
cause to be done all such acts and things as they may deem necessary or
desirable to carry out the foregoing votes and the intent and purposes thereof.
* * *
Attested to this 13th day of June, 1996.
/s/ Abigail M. Armstrong
------------------------------
Abigail M. Armstrong
<PAGE>
FORM OF
WHOLESALING AGREEMENT
AGREEMENT dated as of _______, 1996 by and between FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY, a Massachusetts insurance company ("Company"),
ALLMERICA INVESTMENTS, INC., a Massachusetts corporation (the "Underwriter"),
**********., *************************** (the "Distributor"), and the
insurance agencyaffiliates of the Distributor listed on Schedule 1 to this
Agreement (hereinafter referred to as "Distributor Agency Affiliates).
WITNESSETH:
WHEREAS, the Company proposes to register with the Securities and Exchange
Commission interests in certain variable annuity contracts and variable life
insurance contracts under the Securities Act of 1933 and to issue and sell such
contracts through Underwriter acting as the principal underwriter for such
contracts; and
WHEREAS, the Company, Underwriter and Distributor desire to establish an
arrangement whereby the Distributor will act as a wholesaler for such variable
annuity contracts and variable life insurance contracts and, as such, will
recruit business firms to distribute such contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
Underwriter and Distributor hereby agree as follows:
1. DEFINITIONS
a. ACCOUNT -- Each and any separate account established by the Company and
listed on Schedule 2 to this Agreement, as amended from time to time. The
phrase "Account supporting the Contracts" or "Account supporting a class of
Contracts" shall mean the separate account identified in such Contracts as
the separate account to which the Purchase Payments made under such
Contracts are allocated and as to which income, gains and losses, whether
or not realized, from assets allocated to such separate account, are, in
accordance with such Contracts, credited to or charged against such
separate account without regard to other income, gains, or losses of a
Company or any other separate account established by such Company.
b. CONTRACTS -- The variable annuity contracts or variable life insurance
contracts described more specifically on Schedule 3 to this Agreement, as
amended from time to time. The term "Contracts" shall include any riders
to such contracts and any other contracts offered in connection therewith
or any contracts for which such Contracts may be exchanged or converted.
The phrase "a class of Contracts" shall mean those variable annuity
contracts or variable life insurance contracts, as the case may be, issued
on the same policy form or forms and covered by the same Registration
Statement, as shown on Schedule 3 to this Agreement.
c. REGISTRATION STATEMENT -- At any time while this Agreement is in
effect, the currently effective registration statement filed with the SEC
under the 1933 Act, or currently effective post-effective amendment
thereto, relating to a class of Contracts, including financial statements
included in, and all exhibits to, such registration statement or
post-effective amendment. (For purposes of Sections 5.a and 11 of this
Agreement, however, the term "Registration Statement" means any document
that is or at any time was a Registration Statement within the meaning of
this Section 1.c.)
d. PROSPECTUS -- The prospectus and any statement of additional
information included within a Registration Statement, except that, if the
prospectus and statement of additional information most recently filed with
the SEC pursuant to Rule 497 under the 1933 Act after the date on which the
Registration Statement became effective differs from the prospectus and
statement of additional information included within the Registration
Statement at the time it became effective, the term "Prospectus" shall
refer to the most recently filed prospectus and statement of additional
information filed under Rule 497 under the 1933 Act from and after the date
on which they each shall have been filed. (For purposes of Sections 5.a and
11 of this Agreement,
<PAGE>
however, the term "any Prospectus" means any document that is or at any
time was a Prospectus within the meaning of this Section l.c.)
e. FUND -- Kemper Investors Fund
f. FUND REGISTRATION STATEMENT -- At any time while this Agreement is in
effect, the currently effective registration statement filed with the SEC
under the 1933 Act, or currently effective post-effective amendment
thereto, for shares of the Fund. (For purposes of Section 11 of this
Agreement, however, the term "Fund Registration Statement" means any
document that is or at any time was a Fund Registration Statement within
the meaning of this Section l.f.)
g. FUND PROSPECTUS -- At any time while this Agreement is in effect, the
prospectus and statement of additional information for the Fund most
recently filed with the SEC pursuant to Rule 497 under the 1933 Act. (For
purposes of Section 11 of this Agreement, however, the term "Fund
Prospectus" means any document that is or at any time was a Fund Prospectus
within the meaning of this Section l.g.)
h. 1933 ACT -- The Securities Act of 1933, as amended.
i. 1934 ACT -- The Securities Exchange Act of 1934, as amended.
j. 1940 ACT -- The Investment Company Act of 1940, as amended.
k. SEC -- The Securities and Exchange Commission.
l. NASD -- The National Association of Securities Dealers, Inc.
m. REGULATIONS -- The rules and regulations promulgated by the SEC under
the 1933 Act, the 1934 Act and the 1940 Act as in effect at the time
this Agreement is executed or thereafter promulgated, and as they may
be amended from time to time.
n. TERRITORY -- The fifty states of the United States, the District of
Columbia, and all other territories of the United States.
o. STATE -- any state or commonwealth of the United States, the District
of Columbia or any other territory of the United States.
p. BROKER-DEALER -- An entity registered as a broker-dealer and licensed
as a life insurance agent or affiliated with an entity so licensed, and
recruited by the Distributor and subsequently authorized by the Company and
Underwriter to distribute the Contracts pursuant to a sales agreement with
the Company and Underwriter entered into in accordance with Section 3 of
this Agreement.
q. ASSOCIATED PERSON -- This term as used in this Agreement shall have the
meaning assigned to it in the 1934 Act.
r. REPRESENTATIVE -- An Associated Person of the Distributor or a Broker-
Dealer registered with the NASD as a registered representative or principal
of the Distributor or Broker-Dealer, as the case may be.
s. PURCHASE PAYMENT -- A payment made under a Contract by an applicant or
purchaser to purchase benefits under the Contract.
t. PROCEDURES -- The administrative procedures prepared and distributed by
the Company, as such may be amended or supplemented from time to time,
relating to the solicitation, sale and delivery of the Contracts.
u. PARTICIPATION AGREEMENT -- The agreement dated as of _______, 1996
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Distributor and the Fund relating to the investment of assets of the
separate accounts of the Company in the Fund.
2. APPOINTMENT AND WHOLESALING RIGHT
a. The Company hereby authorizes the Distributor to represent the Company
in the wholesaling activities contemplated by this Agreement. Where
required by relevant state insurance law, the Company hereby appoints the
Distributor as an agent under such state insurance laws to represent the
Company in the wholesaling activities contemplated by this Agreement. In
those states in which the Distributor is not licensed as an insurance agent
and the relevant state insurance law requires that the Distributor be
licensed as an insurance agent, the Company hereby appoints the appropriate
entity or individual ("Distributor Agency Affiliate") affiliated with the
Distributor (as set forth on Schedule 1 to this Agreement, as such Schedule
may be amended from time to time by the Distributor to reflect changes in
the licensing status, if any, as required by relevant state insurance law
of the Distributor or Distributor Agency Affiliates) as its agent under the
insurance laws to engage in such wholesaling activities. The Underwriter
hereby authorizes the Distributor under applicable securities laws to
engage in the activities contemplated in this Agreement relating to the
wholesaling of the Contracts for which the Underwriter acts or may act as
principal underwriter.
b. The Distributor (both on its own behalf and on behalf of Distributor
Agency Affiliates) undertakes to use its best efforts to recruit Broker-
Dealers in accordance with Section 3 of this Agreement, consistent with
market conditions and compliance with its responsibilities under the federal
securities laws and NASD rules and regulations. The obligations of the
Distributor and Distributor Agency Affiliates hereunder are further subject
to the accuracy of the representations and warranties of the Company and
Underwriter contained in this Agreement and to the performance by the
Company of its obligations hereunder.
c. The appointment and authorization of the Distributor and Distributor
Agency Affiliates to engage in wholesaling activities pursuant to this
Agreement is exclusive as to the Contracts listed on Schedule 3, as amended
from time to time in accordance with Section 2.e of this Agreement.
Neither the Company nor Underwriter shall authorize any other person (as
principal underwriter or otherwise) to engage in wholesaling or
distribution activities with respect to the Contracts or to recruit
business firms to engage in wholesaling or distribution activities with
respect to the Contracts (other than business firms recommended by the
Distributor pursuant to Section 3 of this Agreement) without the
Distributor's prior written consent, nor shall the Company or Underwriter
separately engage in wholesaling or distribution activities relating to the
Contracts.
The Company shall design the Contracts, subject to consultation with the
Distributor and subject to the Distributors's right to refuse to engage in
wholesaling activities with respect to a class of Contracts that the
Distributor reasonably determines to be unattractive from a marketing or
business perspective. The Contracts shall be issued by the Company and the
variable portion thereof shall be supported by the Accounts. The Company
alone shall be responsible for filing the initial Registration Statements
and any amendments thereto with the SEC in accordance with the 1933 Act,
1934 Act, 1940 Act and the Regulations to register interests in each class
of Contracts. The Company will not make any amendment or rider to the
Contracts or a class of Contracts, or file a Registration Statement, or
make an amendment to a Registration Statement or supplement to a
Prospectus, without the Distributor having been given the opportunity to
review any such filing, amendment, rider or supplement. However, such
opportunity to review shall not make the Distributor responsible for the
content of any such filing, amendment, rider or supplement; the Company
alone shall be responsible for such content.
Each Company shall register its Accounts with the SEC. The subaccounts of
each Account available under the Contracts or a class of Contracts are
listed on Schedule 3 to this Agreement, as amended from time to time. All
amounts available under the Contracts shall be invested only in the Fund
(through the Account(s) supporting the Contracts) and/or allocated to the
Company's general account, provided that
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such amounts may also be invested in an investment company or investment
vehicle other than the Fund if: (1) such other investment company is
advised by the Fund's investment adviser; (2) the Fund and/or Distributor,
in their sole discretion, consents to the use of such other investment
company or investment vehicle; (3) there is a substitution of the Fund made
in accordance with Section 10.1(e) of the Participation Agreement; or (4)
the Participation Agreement is terminated pursuant to Article X of the
Participation Agreement. The Company will not take action to operate any
Account, or any subaccount(s) of an Account listed on Schedule 3 to this
Agreement, as amended from time to time, as a management investment company
under the 1940 Act without the Fund's and Distributor's prior written
consent.
d. The Company shall obtain appropriate authorizations, to the extent
necessary, whether by registration, qualification, approval or otherwise,
for the issuance and sale of the Contracts in each State in the Territory
(provided, however, that it shall be within the Company's discretion
whether to obtain such authorization in Guam). From time to time, the
Company shall notify the Distributor in writing of all States in the
Territory in which each class of Contracts can then lawfully be offered.
To the extent that the Company is not authorized to issue the Contracts or
any class of Contracts in any State in the Territory, the Company shall
employ all reasonable efforts to obtain such authorization in such State
(provided, however, that it shall be within such Company's discretion
whether to obtain such authorization in Guam).
e. The Distributor may unilaterally amend Schedule 1 from time to time
pursuant to Section 2.a of this Agreement. The parties to this Agreement
may amend Schedules 2 and 3 to this Agreement from time to time by mutual
agreement to reflect changes in or relating to the Contracts and the
Accounts and to add new classes of variable annuity contracts and variable
life insurance contracts to be issued by the Company or which the
Distributor will act as wholesaler. The provisions of this Agreement shall
be equally applicable to each such class of Contracts, unless the context
otherwise requires. Schedule 4 to this Agreement may be amended only by
mutual agreement of the parties to this Agreement pursuant to Section 9 of
this Agreement.
3. RECRUITMENT OF BROKER-DEALERS AND RELATED RESPONSIBILITIES
a. The Company and Underwriter hereby authorize the Distributor and any
Distributor Agency Affiliates to contact and recommend business firms to
act as Broker-Dealers for the sale of the Contracts. The Company shall
have the right to reject any such recommendation, but shall not do so
arbitrarily or unreasonably.
b. The Company and Underwriter shall have the responsibility for: (i)
executing appropriate sales agreements with the business firms recommended
by the Distributor or Distributor Agency Affiliates and (ii) except as
limited in Section 9.c of this Agreement, appointing such business firms,
and/or Associated Persons of such firms, as insurance agents of the Company
in those States where such business firms and/or Associated Persons possess
insurance agent licenses. None of the Distributor, Distributor Agency
Affiliates, the Company or Underwriter shall have responsibility for, or
bear the cost of, any registration or licensing of Broker-Dealers or any of
their Associated Persons with the SEC, NASD or any state insurance
governmental or regulatory agency. The costs of appointment shall be borne
as provided in Section 9.c hereof. The Company shall maintain the
appointment records of all agents appointed by the Company to distribute
the Contracts or, if required by relevant state law, to engage in the
wholesaling activities contemplated by this Agreement.
c. Any sales agreement entered into by the Company and/or Underwriter with
a Broker-Dealer shall provide that:
(i) The Broker-Dealer (or an affiliated person duly registered as a
broker-dealer with the SEC) shall train, supervise, and be solely
responsible for the conduct of all of its Associated Persons in the
proper method of solicitation, sale and delivery of the Contracts for
the purpose of complying on a continuous basis with the NASD Rules of
Fair Practice and with federal and state securities and insurance law
requirements applicable in connection with the offering and sale of the
Contracts;
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(ii) Purchase Payments shall be made payable to the Company and shall
be delivered together with all applications and related information in
accordance with the Procedures;
(iii) The Broker-Dealer shall be solely responsible for all
compensation paid to its Representatives and all related tax reporting
that may be required under applicable law;
(iv) The Broker-Dealer and its Representatives shall not use, develop
or distribute any promotional, sales or advertising material that has
not been approved in writing by the Company, Underwriter and
Distributor and filed with the appropriate governmental or regulatory
agencies; and
(v) The Broker-Dealer shall not have authority, on behalf of the
Company, Underwriter, Distributor or Distributor Agency Affiliates: to
make, alter or discharge any Contract or other contract entered into
pursuant to a Contract; to waive any Contract forfeiture provision; to
extend the time of paying any Purchase Payment; to receive any monies
or Purchase Payments (except for the sole purpose of forwarding monies
or Purchase Payments to the Company); or to expend, or contract for the
expenditure of, funds of the Company, Underwriter, Distributor or
Distributor Agency Affiliates.
d. The Distributor and Distributor Agency Affiliates shall provide
assistance to the Company in the appointment procedure applicable to
Broker-Dealers and their Representatives as may be reasonably acceptable to
the Company.
e. The Distributor shall train, supervise, and be solely responsible for
the conduct of all of its Associated Persons (including Distributor Agency
Affiliates, but not Broker-Dealers or their Representatives unaffiliated
with the Distributor or Distributor Agency Affiliates), for the purpose of
complying on a continuous basis with the NASD Rules of Fair Practice and
with federal and state securities and insurance laws applicable to the
wholesaling activities contemplated in this Agreement. The Distributor and
Distributor Agency Affiliates shall be responsible for the maintenance of
licenses, certifications or permits that they determine to be necessary for
themselves and/or their Associated Persons pursuant to any federal or state
securities law or state insurance law.
f. None of the Distributor, Distributor Agency Affiliates, the Company or
Underwriter will have any supervisory responsibility (as such supervision
is contemplated by the 1934 Act or the NASD's Rules of Fair Practice) with
respect to Broker-Dealers or their Representatives. Under no circumstances
will the Distributor or Distributor Agency Affiliates be responsible for
Broker-Dealers' or their Representatives' failure to comply with applicable
law or the Procedures.
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<PAGE>
g. The Distributor shall not have authority on behalf of the Company: to
make, alter or discharge any Contract or other contract entered into
pursuant to a Contract; to waive any Contract forfeiture provision; to
extend the time of paying any Purchase Payment; or to receive any monies or
Purchase Payments. The Distributor shall not expend, nor contract for the
expenditure of, funds of the Company; nor shall the Distributor possess or
exercise any authority on behalf of the Company other than that expressly
conferred on the Distributor by this Agreement.
h. The Distributor and Distributor Agency Affiliates shall act as
independent contractors in the performance of their duties and obligations
under this Agreement and nothing contained in this Agreement shall
constitute the Distributor or any Distributor Agency Affiliate or their
respective Associated Persons as employees of the Company or Underwriter in
connection with the wholesaling activities contemplated by this Agreement
or otherwise.
4. MARKETING AND SALES
a. The Company shall be responsible for the design and cost of initial
promotional, sales and advertising material relating to the Contracts,
which include the marketing brochure, application, broker-dealer guide
book, and asset allocator worksheet..
Prior to use with any member of the public, the Company shall provide to
the Distributor copies of all promotional, sales and advertising material
developed by the Company for the Distributor's review and written approval.
Upon receipt of such material from the Company, the Distributor shall be
given a reasonable amount of time to complete its review. The Distributor
will respond on a prompt and timely basis in approving any such material.
Failure to respond shall not relieve the Company of the obligation to
obtain the prior written approval of the Distributor.
In the event that the Distributor shall design any promotional, sales or
advertising material relating to the Contracts, the Distributor shall
provide to the Company copies of such material for the Company's review and
written approval. Upon receipt of such material from the Distributor, the
Company shall be given a reasonable amount of time to complete its review.
The Company will respond on a prompt and timely basis in approving any such
material. Failure to respond shall not relieve the Distributor of the
obligation to obtain the prior written approval of the Company.
The Underwriter shall be responsible for filing, as required, all
promotional, sales or advertising material, whether developed by the
Company, Underwriter or Distributor, with the NASD and any federal and
state securities governmental or regulatory agencies. The Company shall be
responsible for filing, as required, such material, whether developed by
the Company, Underwriter or Distributor, with any state insurance
governmental or regulatory agencies. Neither the Distributor nor
Distributor Agency Affiliates shall have any responsibility for any of the
filings referred to in this paragraph.
If any such promotional, sales or advertising material names the Fund or
the Fund's investment adviser, the Company shall furnish such material to
the Fund or the Fund's distributor (if other than the Distributor) prior
to its use. Such material shall not be used unless written approval has
been obtained from the Fund or the Fund's distributor. Failure of the Fund
or the Fund's distributor to respond shall not relieve the Company or
Underwriter of the obligation to obtain the prior written approval of the
Fund or the Fund's distributor.
b. The Distributor acknowledges that the Company shall have the
unconditional right to reject, in whole or in part, any application for a
Contract. In the event an application is rejected, any Purchase Payment
submitted will be returned by or on behalf of the Company to the applicant.
The Company will notify the Distributor and the Broker-Dealer who submitted
the Purchase Payment of such action. In the event that a purchaser
exercises his/her free look right under his/her Contract, any amount to be
refunded as provided in such Contract will be so refunded to the purchaser
by or on behalf of the Company. The Company will notify the Distributor
and the Broker-Dealer who solicited the sale of the Contract of such
action.
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c. The Company and Distributor shall equally share the costs (other than
those borne by the Fund pursuant to the Participation Agreement) for
printing any preliminary and all definitive Prospectuses for the Contracts
and Fund Prospectuses and any supplements thereto.
d. The Distributor will pay the following expenses related to its
wholesaling activities contemplated by this Agreement:
(i) the compensation, if any, of its Associated Persons;
(ii) expenses associated with the initial licensing, if any, and
training of its Associated Persons involved in the wholesaling
activities;
(iii) the printing and mailing of any promotional, sales or advertising
material for use in connection with the distribution of the Contracts;
(iv) the printing, mailing, and all other activities associated with
proxy solicitations;
(v) expenses associated with telecommunications with the Company at the
sites of the Distributor or its Associated Persons, including site
installations and purchases, leases or rentals of modems, terminals and
other hardware, and lease line telephone charges; and
(vi) any other expenses incurred by the Distributor or its Associated
Persons for the purpose of carrying out the obligations of the
Distributor hereunder.
Except for such expenses and the expenses described in Section 4.c of
this Agreement, the Distributor shall not be responsible for any
expenses relating to the Contracts or distribution of the Contracts or
the processing of Contracts or applications, including without
limitation any expenses incurred in connection with the return of
Purchase Payments solicited by Broker-Dealers for applications rejected
or not timely received by the Company, or relating to any of the
matters or acts contemplated by this Agreement.
e. The Company will pay all expenses in connection with:
(i) the preparation and filing with appropriate governmental or
regulatory agencies of the Registration Statements and each preliminary
Prospectus and definitive Prospectus;
(ii) the preparation and issuance of the Contracts;
(iii) any authorization, registration, qualification or approval of the
Contracts required under the securities, blue-sky laws or insurance
laws of the States in the Territory;
(iv) registration fees for the Contracts payable to the SEC, the NASD
or any other governmental or regulatory agency;
(v) the mailing of Prospectuses for the Contracts and Fund
Prospectuses, any supplements thereto, as required by federal
securities laws, and periodic reports relating to the Fund or the
Accounts to Contract owners;
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<PAGE>
(vi) the preparation and printing of administrative forms utilized in
connection with the distribution of the Contracts;
(vii) the preparation of Contract Owner lists for the purposes of proxy
solicitations;
(viii) compensation as provided in Section 9 hereof; and
(ix) any other expenses related to the distribution of the Contracts
except those set forth in Section 4.d of this Agreement and except as
provided in Section 4.c of this Agreement.
f. The Company alone shall be responsible for and bear the cost of
administration of the Contracts following their issuance including all
Contract Owner service and communication activities, but the Distributor
shall be responsible for answering inquiries from Broker-Dealers or
Representatives regarding the investment performance of the Contracts as
permitted by applicable law.
g. The Company, as agent for the Underwriter, will confirm to each
applicant for and owner of a Contract in accordance with Rule lOb-10 under
the 1934 Act its acceptance of Purchase Payments and such other
transactions as are required by Rule l0b-10 or administrative
interpretations thereunder and in accordance with Release 8389 under the
1934 Act.
h. At the end of 15 months from the date (a) on which the Company
notifies the Underwriter that it has received approval of the Contracts
from twenty (20) or more states (as provided in Section 2(d), or (b) on
such date as the Contracts may be legally distributed under the federal
securities laws, or (c) from March 1, 1995, whichever is later, the
Underwriter agrees to reimburse the Company for development and
administrative costs of the Contracts based on the following schedule:
Aggregate Sales Reimbursement
---------------- -------------
$0 up to $60,000,000 $250,000
$60,000,001 to $70,000,000 $200,000
$70,000,001 to $80,000,000 $150,000
$80,000,001 to $90,000,000 $100,000
$90,000,001 to $100,000,000 $ 50,000
$100,000,001 and over $ 0
5. REPRESENTATIONS AND WARRANTIES
a. The Company and Underwriter each represent and warrant to the
Distributor and each Distributor Agency Affiliate, on the effective date of
each Registration Statement for the Contracts (or class of Contracts) and
at each time that a Contract is sold and, with respect to Clauses (vii),
(viii), (xi) and (xii) below, also on the date of this Agreement, as
follows:
(i) The Registration Statement has been declared effective by the SEC
or has become effective in accordance with the Regulations.
(ii) The Registration Statements and the Prospectuses each comply in
all material respects with the provisions of the 1933 Act and the 1940
Act and the Regulations, and neither the Registration Statements nor
the Prospectuses contain an untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein not
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misleading, in light of the circumstances in which they were made;
provided, however, that none of the representations and warranties in
this Section 5.a(2) shall apply to statements in or omissions from the
Registration Statements or Prospectuses made in reliance upon and in
conformity with information furnished to the Company in writing by the
Distributor expressly for use in the Registration Statements.
(iii) Neither the Company nor Underwriter has received any notice from
the SEC with respect to the Registration Statement or the Account
supporting the Contracts described in the Registration Statements
pursuant to Section 8(e) of the 1940 Act and no stop order under the
1933 Act has been issued and no proceeding therefor has been instituted
or threatened by the SEC.
(iv) The accountants who certified the financial statements included in
the Registration Statements and Prospectuses are independent public
accountants as required by the 1933 Act and the Regulations.
(v) The financial statements included in the Registration Statements
present fairly the respective financial positions of the Company and
the Account supporting the Contracts described in the Registration
Statements as of the dates indicated; and such financial statements
have been prepared in conformity with generally accepted accounting
principles in the United States applied on a consistent basis.
(vi) Subsequent to the respective dates as of which information is
given in the Registration Statement or the Prospectus, there has not
been any material adverse change in the condition, financial or
otherwise, of the Company, Underwriter or the Account supporting the
Contracts described in the Registration Statements that would cause
such information to be materially misleading.
(vii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of its state of domicile
with full power and authority to own, lease and operate its properties
and conduct its business in the manner described in the Prospectus; is
duly qualified to transact the business of a life insurance company;
and is in good standing, in each State in the Territory in which the
Contracts are or will be offered.
(viii) The Underwriter has been duly organized and is validly existing
as a corporation in good standing under the laws of the Commonwealth of
Massachusetts with full power and authority to own, lease and operate
its properties and conduct its business in the manner described in the
Prospectuses; is duly registered as a broker-dealer with the SEC and
with the securities commission of every state in the Territory with
which such registration is required; and is a member in good standing
with the NASD.
(ix) Each Account supporting the Contracts described in the
Registration Statements has been duly authorized and established and is
validly existing as a separate account under the insurance code of the
respective Company's state of domicile, and is duly registered with the
SEC as a unit investment trust under the 1940 Act.
(x) The form of the Contracts has been approved to the extent required
by the Insurance Commissioner of each Company's respective state of
domicile and by the governmental agency responsible for regulating
insurance companies in each other State in the Territory in which the
contracts are offered.
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(xi) The execution and delivery of this Agreement and the consummation
of the transactions contemplated in this Agreement have been duly
authorized by all necessary corporate action by the Company and
Underwriter and when so executed and delivered this Agreement will be
the valid and binding obligation of the Company and Underwriter
enforceable in accordance with its terms.
(xii) The consummation of the transactions contemplated by this
Agreement, and the fulfillment of the terms of this Agreement, will not
conflict with, result in any breach of any of the terms and provisions
of, or constitute (with or without notice or lapse of time) a default
under, the charter or bylaws of the Company or Underwriter, or any
indenture, agreement, mortgage, deed of trust, or other instrument to
which the Company or Underwriter is a party or by which either is
bound, or violate any law, or, to the best of the Company's or
Underwriter's knowledge, any order, rule or regulation applicable to
the Company or Underwriter of any court or of any federal or state
regulatory body, administrative agency or any other governmental
instrumentality having jurisdiction over the Company or Underwriter or
any of their respective properties.
(xiii) No consent, approval, authorization or order of any court or
governmental authority or agency is required for the issuance or sale
of the Contracts or for the consummation of the transactions
contemplated by this Agreement, that has not been obtained.
(xiv) The Company has filed with the SEC all statements and other
documents required for registration under the provisions of the 1940
Act and the Regulations thereunder of the Account supporting the
Contracts described in the Registration Statement, and such
registration has been effected; there are no agreements or documents
required by the 1933 Act, the 1940 Act, or the Regulations to be filed
with the SEC as exhibits to the Registration Statement, that have not
been so filed; and the Company has obtained all exemptive or other
orders of the SEC necessary to make the public offering and consummate
the sale of the Contracts pursuant to this Agreement and to permit the
operation of the Accounts supporting the Contracts described in the
Registration Statements, as contemplated in the Prospectuses.
(xv) The Contracts have been duly authorized by the Company and
conform to the descriptions thereof in the Registration Statements and
the Prospectuses and, when issued as contemplated by the Registration
Statements, will constitute legal, validly issued and binding
obligations of the Company in accordance with their terms.
b. The Distributor represents and warrants to the Company on the date
hereof as follows:
(i) the Distributor has taken all action including, without
limitation, those necessary under its articles of incorporation,
by-laws and applicable state corporate law, necessary to authorize the
execution, delivery and performance of this Agreement and all
transactions contemplated hereunder.
(ii) the Distributor is and during the term of this Agreement shall
remain duly registered as a broker-dealer under the 1934 Act, a member
in good standing with the NASD, and duly registered as a broker-dealer
under applicable state securities laws.
6. ADDITIONAL RESPONSIBILITIES OF THE COMPANY
a. The Company shall use its best efforts:
(i) to maintain the registration of the Contracts with the SEC and
any state securities commissions of any State in the Territory where
the securities or blue-sky laws of such State require registration of
the Contracts, including without limitation using its best efforts to
prevent a stop order from being issued or if a stop order has been
issued to cause such stop order to be withdrawn;
(ii) to gain approval or other authorization of the Contract forms
where required under the insurance
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laws and regulations of each State in the Territory (provided, however,
that it shall be within the Company's discretion whether to obtain such
approval or authorization in Guam); and
(iii) to keep such registration, approval and authorization in effect
thereafter so long as the Contracts are outstanding.
b. During the term of this Agreement the Company shall take all action
required to cause each class of Contracts to comply, and to continue to
comply, as annuity contracts or life insurance contracts, as the case may
be, and to cause the Registration Statements and the Prospectus for each
class of Contracts to comply, and to continue to comply, with: all
applicable federal laws and regulations and all applicable laws and
regulations of each State in the Territory.
c. The Company, during the term of this Agreement, shall notify the
Distributor immediately:
(i) when each Registration Statement has become effective or any
post-effective amendment with respect to the Registration Statement
thereafter becomes effective;
(ii) of any request by the SEC for any amendment to a Registration
Statement or supplement to a Prospectus or for additional information;
(iii) of any event that makes any material statement made in a
Registration Statement or a Prospectus untrue in any material respect
or results in a material omission in a Registration Statement or a
Prospectus;
(iv) of the issuance by the SEC of any stop order with respect to a
Registration Statement or any amendment thereto, or the initiation of
any proceedings for that purpose, or for any other purpose relating to
the registration and/or offering of the Contracts (or class of
Contracts);
(v) in which States in the Territory registration of the Contracts
(or class of Contracts) is required under the securities or blue-sky
laws, and when such registrations have become effective.
d. The Company shall furnish to the Distributor without charge promptly
after filing five (5) copies of each Registration Statement as originally
filed and any pre-effective or post-effective amendment thereto, including
financial statements and all exhibits, including exhibits incorporated
therein by reference.
e. The Company shall timely file all reports, statements and amendments
required to be filed by or for each Account or class of Contracts under the
1933 Act and/or the 1940 Act or the Regulations.
f. The Company shall deliver to the Distributor, as soon as practicable
after it becomes available, the Annual Statements for the Company and for
each Account in the form filed with their respective state of domicile, and
any quarterly reports upon the Distributor's request.
g. The Company and Underwriter will provide the Distributor access to such
records, officers and employees of the Company, Underwriter and each
Account at reasonable times as is necessary to enable the Distributor to
fulfill its obligations under the federal securities laws and NASD rules.
The Distributor will provide the Company and Underwriter access to such of
its records, officers and employees at reasonable times as is necessary to
enable the Company and Underwriter to fulfill their obligations under the
federal securities laws and NASD rules.
7. CONFIDENTIALITY
a. The Company and Underwriter acknowledge that the names and addresses of
all customers and prospective customers (for purposes of this Section 7.a,
the terms "customers" and "prospective customers" shall not mean Broker-
Dealers) of the Distributor, of its parent company and of any affiliated
person of the
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Distributor, Distributor Agency Affiliates or of any Broker-Dealer that may
come to the attention of the Company, Underwriter or any person affiliated
with the Company or Underwriter as a result of their relationship with the
Distributor, its parent company or any affiliated person of the
Distributor, Distributor Agency Affiliates or any Broker-Dealer and not
from any independent source, are confidential and shall not be used by the
Company or Underwriter or any person affiliated with the Company or
Underwriter for any purpose whatsoever except as may be necessary in
connection with the administration of the Contracts sold by the
Broker-Dealers, including responses to specific requests made to the
Company for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. The restrictions set forth in the previous
sentence do not apply if and to the extent a Broker-Dealer knowingly
discloses the names and addresses of its customers or prospective customers
to the Company or Underwriter outside the operation of this Agreement. In
no event shall the names and addresses of such customers and prospective
customers be furnished by the Company, Underwriter or any of their
affiliated persons to any other person. The intent of this paragraph is
that neither the Company nor Underwriter, nor persons affiliated with the
Company or Underwriter, shall utilize, or permit to be utilized, their
knowledge of the Distributor, of its parent company or of any affiliated
person of the Distributor, Distributor Agency Affiliates or any
Broker-Dealer, derived as a result of the relationship created through the
funding and sale of the Contracts or the solicitation of sales of any
product or service. This paragraph shall remain operative and in full
force and effect regardless of the termination of this Agreement, and shall
survive any such termination.
8. RECORDS
The Company, Underwriter, Distributor and Distributor Agency Affiliates
shall each maintain such accounts, books and other documents as are
required to be maintained by each of them by applicable laws and
regulations and shall preserve such accounts, books and other documents for
the periods prescribed by such laws and regulations. The accounts, books
and records of the Company, Underwriter, the Account, the Distributor and
Distributor Agency Affiliates as to all transactions hereunder shall be
maintained so as to clearly and accurately disclose the nature and details
of the transactions, including such accounting information as necessary to
support the reasonableness of the amounts paid by the Company hereunder.
Each party shall have the right to inspect and audit such accounts, books
and records of the other party during normal business hours upon reasonable
written notice to the other party. Each party shall keep confidential all
information obtained pursuant to such an inspection or audit, and shall
disclose such information to third parties only upon receipt of written
authorization from the other party, except as required by law.
9. BROKER-DEALER COMPENSATION AND DISTRIBUTOR PROMOTIONAL ALLOWANCES
a. The Company shall compensate Broker-Dealers for sales of the Contracts
by the Broker-Dealers pursuant to Schedule 4 to this Agreement, as such
Schedule may be amended from time to time upon mutual agreement of the
parties to this Agreement. Such compensation shall be based on Purchase
Payments received and accepted by the Company for all Contracts issued on
applications obtained by the Broker-Dealers or any of their respective
Representatives. The Company will pay compensation due Broker-Dealers in
accordance with the procedures set forth on Schedule 4. The compensation
provided for in this Section 9 shall be payable to the Broker-Dealer in
accordance with the Sales Agreement between the Underwriter and the
Broker-Dealer for so long as the Contracts are outstanding regardless of
whether this Agreement is still in effect. In addition to the Compensation
payable to Broker-Dealers, the Company shall pay Distributor a Promotional
Allowance as a reimbursement for its expenses incurred relating to its
wholesaling activities contemplated by this Agreement. Promotional
Allowances shall be payable to Distributor in such amount and in accordance
with the procedures as set forth on Schedule 4, as such Schedule may be
amended from time to time upon mutual agreement of the parties to this
Agreement. Promotional Allowances shall be payable to Distributor for so
long as the Contracts are outstanding and this Agreement remains in effect.
If any State in the Territory by insurance rule, regulation or statute,
prohibits payment of Promotional
12
<PAGE>
Allowances to the Distributor, the Distributor shall designate in writing a
business entity or natural person, including Distributor Agency Affiliates,
meeting the requirements of such State to receive any amounts that may
otherwise be payable to the Distributor hereunder. The Distributor may
change such designation from time to time upon written notice to the
Company. Any payments made by the Company to any person or entity so
designated by the Distributor shall discharge the Company's liability to
the Distributor hereunder.
If a purchaser rescinds a Contract or exercises a right to surrender a
contract for return of all Purchase Payments, the Distributor will pay on
demand the amount of any Promotional Allowances it received on the Purchase
Payments returned.
b. INDEBTEDNESS. Nothing in this Agreement shall be construed as giving
the Distributor the right to incur any indebtedness on behalf of the
Company.
c. APPOINTMENT FEES. The Company will pay the initial and renewal fees
for agent appointment by the Company of duly licensed Distributor Agency
Affiliates and Broker-Dealers and their respective Associated Persons;
provided, however, (a) that if total annual sales of the Contracts do not
exceed $20 million during any calendar year beginning after December 31,
1996, the Distributor will reimburse the Company for the total amount of
initial or renewal fees paid by the Company during such calendar year(s),
and (b) that the Company reserves the right to refuse to pay renewal fees
for individuals not meeting such minimal sales as may be agreed upon from
time to time.
d. REPORTING. The Distributor shall be responsible for all tax reporting
information, if any, that the Distributor is required to provide under
applicable tax law to its Associated Persons with respect to the Contracts.
Nothing contained in this Agreement or any sales agreement with a
Broker-Dealer is to be construed to require the Distributor to provide any
tax reporting information directly or indirectly to any Broker-Dealer or
its Representatives.
e. SURVIVAL. This Section 9 shall remain operative and in full force and
effect regardless of the termination of this Agreement, and shall survive
any such termination.
10. INVESTIGATION AND PROCEEDINGS
a. The Company, Underwriter and Distributor will cooperate fully in any
securities or insurance governmental or regulatory investigation or
proceeding or judicial proceeding arising in connection with the offering,
sale or distribution of the Contracts for which the Distributor acts as
wholesaler pursuant to this Agreement. Without limiting the foregoing, the
Company, Underwriter and Distributor agree to notify one another promptly
of any customer complaint or notice of any governmental or regulatory
investigation or proceeding or judicial proceeding received by any of them
with respect to the Company, Underwriter, Distributor or any of their
respective Associated Persons or that may affect the issuance of any
Contract for which the Distributor acts as wholesaler pursuant to this
Agreement.
b. In the case of a substantive customer complaint, the Company,
Underwriter, Distributor and Distributor Agency Affiliates will cooperate
in investigating such complaint and any response by the Company or
Underwriter, as one party, or the Distributor or Distributor Agency
Affiliates, as another party, to such complaint will be sent to the other
party for approval not less than five business days prior to its being sent
to the customer or any governmental or regulatory agency, except that if a
more prompt response is required, the proposed response shall be
communicated by telephone, telegraph or facsimile. Neither such party will
release any such response without the other party's prior written approval,
unless otherwise required by applicable law.
11. INDEMNIFICATION
a. The Company and Underwriter, jointly and severally, shall indemnify and
hold harmless the Distributor and Distributor Agency Affiliates and each
person who controls or is associated with the Distributor or
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<PAGE>
Distributor Agency Affiliates within the meaning of such terms under the
federal securities laws, and any officer, director, employee or agent of
the foregoing, against any and all losses, claims, damages or liabilities,
joint or several (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amounts paid in settlement
of, any action, suit or proceeding or any claim asserted), to which the
Distributor, Distributor Agency Affiliates and/or such person may become
subject, under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration
Statement, Prospectus, blue sky application or other document executed
by the Company specifically for the purpose of qualifying any or all of
the Contracts for sale under the securities laws of any State,
promotional, sales or advertising material for the Contracts, or the
Contracts themselves (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances in which they were made; provided that this
obligation to indemnify shall not apply if such untrue statement or
omission or such alleged untrue statement or alleged omission was made
in reliance upon and in conformity with information furnished in
writing to the Company or Underwriters by the Distributor specifically
for use in the preparation of any such Registration Statement,
Prospectus or blue-sky application or other document, material or
Contract (or any such amendment or supplement thereto); or
(ii) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Fund Registration
Statement, Fund Prospectus, blue sky application or other document
executed by the Fund specifically for the purpose of qualifying any or
all of the shares of the Fund for sale under the securities law of any
State, or in any promotional, sales or advertising material or written
information relating to the shares of the Fund authorized by the Fund
(or any amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the
circumstances in which they were made, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and
in conformity with information furnished in writing to the Distributor
or the Fund by the Company specifically for use in the preparation of
any such Fund Registration Statement, Fund Prospectus, blue-sky
application or other document (or any such amendment or supplement
thereto); or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement or omission or alleged omission of a material fact by
or on behalf of the Company or Underwriter (other than statements or
representations contained in the Fund Registration Statement, Fund
Prospectus or promotional, sales or advertising material of the Fund
that were not supplied by the Company, Underwriter or persons under
their control) or wrongful conduct of the Company or Underwriter or
persons under their control with respect to the sale or distribution of
the Contracts; or
(iv) result because of the terms of any Contract or because of any
material breach by the Company or Underwriter of any terms of this
Agreement or of any Contract or that proximately result from any
activities of the Company' or Underwriter' officers, directors,
employees or agents or their failure to take action in connection with
the sale of a Contract, to the extent of the Company's or Underwriter's
obligations under this Agreement or otherwise, or the processing or
administration of the Contracts.
This indemnification obligation will be in addition to any liability
that the Company or Underwriter may otherwise have; provided, however,
that no person shall be entitled to indemnification pursuant to this
Section ll.a if such loss, claim, damage or liability is due to the
willful misfeasance, bad faith, gross negligence or reckless disregard
of duty by the person seeking indemnification.
b. The Distributor shall indemnify and hold harmless the Company and
Underwriter and each person who
14
<PAGE>
controls or is associated with the Company or Underwriter within the
meaning of such terms under the federal securities laws and any officer,
director, employee or agent of the foregoing, against any and all losses,
claims, damages or liabilities, joint or several (including any
investigative, legal and other expenses reasonably incurred in connection
with, and any amounts paid in settlement of, any action, suit or proceeding
or any claim asserted), to which the Company and/or any such person may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are
based upon:
(i) any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement, Prospectus or blue-sky
application or other document executed by the Company specifically for
the purposes of qualifying any or all of the Contracts for sale under
the securities law of any State (or any amendment or supplement to the
foregoing), or omission or alleged omission to state therein a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, in light of the circumstances in
which they were made, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in
conformity with information furnished in writing to the Company or
Underwriter by the Distributor specifically for use in the preparation
of any such Registration Statement, Prospectus, such blue-sky
application or other document (or any such amendment or supplement
thereto); or
(ii) any use of promotional, sales or advertising material for the
Contracts not authorized by the Company or any verbal or written
misrepresentations or any unlawful sales practices concerning the
Contracts by the Distributor or Distributor Agency Affiliates under
federal securities laws or NASD regulations (but not including state
insurance laws compliance with which is a responsibility of the Company
or Underwriter under this Agreement or otherwise); or
(iii) claims by agents, representatives or employees of the
Distributor for compensation or other remuneration of any type; or
(iv) any material breach by the Distributor or Distributor Agency
Affiliates of any provision of this Agreement.
This indemnification obligation will be in addition to any liability
that the Distributor may otherwise have; provided, however, that no
person shall be entitled to indemnification pursuant to this Section
ll.b if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty
by the person seeking indemnification.
c. After receipt by a party entitled to indemnification ("indemnified
party") under this Section 11 of notice of the commencement of any action,
if a claim in respect thereof is to be made by the indemnified party
against any person obligated to provide indemnification under this Section
11 ("indemnifying party"), such indemnified party will notify the
indemnifying party in writing of the commencement thereof as soon as
practicable thereafter, provided that the omission to so notify the
indemnifying party will not relieve it from any liability under this
Section 11, except to the extent that the omission results in a failure of
actual notice to the indemnifying party and such indemnifying party is
damaged solely as a result of the failure to give such notice. The
indemnifying party, upon the request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party
shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless
(i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any
such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnified party
15
<PAGE>
shall indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment.
d. The indemnification provisions contained in this Section 11 shall
remain operative in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or by or on behalf of any
controlling person thereof, (ii) delivery of any Contracts and Purchase
Payments therefor, or (iii) any termination of this Agreement. A successor
by law of the Distributor or the Company, as the case may be, shall be
entitled to the benefits of the indemnification provisions contained in
this Section 11.
12. TERMINATION
a. This Agreement may be terminated at the option of any party upon six
months advance written notice to the other parties, such termination to be
effective no earlier than one year following the date on which the first
Contract is issued to the public.
b. This Agreement shall terminate automatically if it is assigned. This
Agreement may be terminated at the option of the Company and Underwriter,
as one party, or the Distributor and Distributor Agency Affiliates, as one
party, upon the other party's material breach of any provision of this
Agreement.
c. Upon termination of this Agreement all authorizations, rights and
obligations shall cease except: (i) the obligation to settle accounts
hereunder, as set forth in Schedule 4; (ii) the provisions contained in
Sections 7, 9 and 11 of this Agreement; and (iii) the indemnification
provisions set forth in Section 11 of this Agreement, or as otherwise
specifically noted in this Agreement.
13. RIGHTS, REMEDIES, ETC. ARE CUMULATIVE.
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties to this Agreement are
entitled to under state and federal laws. Failure of the Distributor or
Distributor Agency Affiliates, as one party, or the Company or Underwriter,
as another party, to insist upon strict compliance by the other party with
any of the conditions of this Agreement shall not be construed as a waiver
of any of the conditions, but the same shall remain in full force and
effect. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provisions, whether or
not similar, nor shall any waiver constitute a continuing waiver.
14. NOTICES
All notices hereunder are to be made in writing and shall be given:
if to the Company to:
Lila M. Weihs, Director
State Mutual Life Assurance Company of America
440 Lincoln Street
Worcester, MA 01653
if to the Underwriter:
Richard M. Reilly, President
Allmerica Investments Inc.
440 Lincoln Street
Worcester, MA 01653
if to the Distributor or Distributor Agency Affiliates, to:
16
<PAGE>
Steven Graziano
Senior Vice President
Pioneer Funds Distributor, Inc.
60 State Street
Boston, MA 02109
or such other address as such party may hereafter specify in writing. Each
such notice to a party shall be either hand delivered or transmitted by
registered or certified United States mail with return receipt requested,
and shall be effective upon delivery.
15. INTERPRETATION, JURISDICTION ETC.
This Agreement constitutes the whole agreement between the parties to this
Agreement relating to the wholesaling activities contemplated in this
Agreement, and supersedes all prior oral or written negotiations between
the parties to this Agreement with respect to the subject matter of this
Agreement. The parties acknowledge that the Company, the Distributor and
the Fund have entered into the Participation Agreement in contemplation of
entering into this Agreement. This Agreement shall be construed and the
provisions of this Agreement interpreted under and in accordance with the
internal laws of the Commonwealth of Massachusetts without giving effect to
principles of conflict of laws.
16. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement, or
the breach of this Agreement, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
17
<PAGE>
17. HEADINGS
The headings in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions of this
Agreement or otherwise affect their construction or effect.
18. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
taken together shall constitute one and the same instrument.
19. SEVERABILITY
This is a severable agreement and in the event that any part or parts of
this Agreement shall be held to be unenforceable to its or their full
extent, then it is the intention of the parties to this Agreement that such
part or parts shall be enforced to the extent permitted under the law, and,
in any event, that all other parts of this Agreement shall remain valid and
duly enforceable as if the unenforceable part or parts had never been a
part of this Agreement.
20. REGULATION
This Agreement shall be subject to the provisions of the 1933 Act, 1934 Act
and 1940 Act and the Regulations and the rules and regulations of the NASD,
from time to time in effect, including such exemptions from the 1940 Act as
the SEC may grant, and the terms of this Agreement shall be interpreted and
construed in accordance therewith. Without limiting the generality of the
foregoing, the term "assigned" shall not include any transaction exempted
from Section 15(b)(2) of the 1940 Act.
21. MISCELLANEOUS
For the purposes of Section 4(h), "Aggregate Sales" shall refer to the
aggregate sales through Distributor pursuant both to this Agreement and to
the Wholesaling Agreement with First Allmerica Financial Life Insurance
Company ("FAFLIC") dated __________, 1996 ("FAFLIC Life Agreement").
Based on such Aggregate Sales, Distributor shall be responsible for only a
single Reimbursement amount, and such Reimbursement shall be divided
between the Company and FAFLIC as they may mutually agree. For the
purposes of Section 9(c)(a), "total annual sales" shall refer to the total
annual sales through Distributor pursuant both to this Agreement and to
the FAFLIC Agreement, and "total amount of initial or renewal fees" shall
refer to the aggregate amount of such fees incurred by the Company and
FAFLIC.
18
<PAGE>
IN WITNESS WHEREOF, each party hereto represents that the officer signing
this Agreement on the party's behalf is duly authorized to execute this
Agreement; and each party has caused this Agreement to be duly executed by
such authorized officer on the date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Date: By:
-----------------------------------
Name:
Title:
ALLMERICA INVESTMENTS, INC.
Date: By:
-----------------------------------
Name:
Title:
(on its own behalf and on behalf of
the Distributor Agency Affiliates)
Date: By:
-----------------------------------
Name:
Title:
19
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SCHEDULE I
Distributor Agency Affiliates
Effective March 1, 1995
Name of
Distributor Agency Affiliate State(s) In
- ---------------------------- Which Licensed
--------------
None
20
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SCHEDULE 2
Separate Account Subaccounts
Available under the Contracts
Effective , 1996
Name of Separate Account Subaccounts Fund Portfolio
------------------------ ----------- --------------
Separate Account ****** of Kemper MM
First Allmerica Financial Life Kemper Gov Sec
Insurance Company Kemper Inv Grade
Kemper High Yield
Kemper Horizon 5
Kemper Horizon 10+
Kemper Horizon 20+
Kemper Total Return
Kemper Growth
Kemper Value
Kemper Value & Growth
Kemper Small Cap Value
Kemper Small Cap Growth
Kemper International
21
<PAGE>
SCHEDULE 3
Contracts Subject to Promotional Agent Agreement
Effective March 1, 1995
SEC
Marketing Policy Registration Name of
Name Form No. No. Separate Account
---- -------- ------------ ----------------
22
<PAGE>
SCHEDULE 4
BROKER-DEALER COMPENSATION AND
DISTRIBUTOR PROMOTIONAL ALLOWANCE SCHEDULE
The maximum Broker-Dealer Compensation and Distributor Promotional Allowances
payable by the Company with respect to the sale and distribution of the
Contracts shall be 6.75% of initial and subsequent Purchase Payments received
and accepted by the Company. Of this amount, 5.00% shall be payable to
Broker-Dealers as sales commissions. The remaining 1.75%* ("Promotional
Allowance") shall be payable to Distributor as reimbursement for its expenses
incurred with respect to the distribution of the Contracts ("Support Services");
provided, however, that the Company shall pay such amounts from the Promotional
Allowances to Broker-Dealers who provide Support Services, as Distributor may
from time to time direct.
Actual Promotional Allowances paid to the Distributor will be net of a charge to
the Distributor in the amount of $30 for each policy anniversary and surrender
of any Contract issued to a Trustee of a 401(k) plan where the Accumulated was
$50,000 or less. This charge will apply only to the extent that the Company
waives its policy fee for such 401(k) plans.
Commissions and Promotional Allowances will be paid according to the then
current practice of the Company but no less frequently than twice each month.
* Reduced by 0.50% for Contracts issued in Maine, Pennsylvania and
South Dakota on which an upfront premium tax is levied.
23
<PAGE>
ALLMERICA FINANCIAL
PRINCIPAL OFFICE: WORCESTER, MASSACHUSETTS 01653
FORM OF SALES AGREEMENT
First Allmerica Financial Life Insurance Company and Allmerica Financial Life
Insurance and Annuity Company (herein collectively referred to as "the Assurance
Companies" and individually as "First Allmerica Financial Life Insurance
Company" and "Allmerica Financial Life Insurance and Annuity Company",
respectively) and Allmerica Investments, Inc. (herein referred to as "the
Underwriter") do hereby
appoint________________________________________and______________________________
the NASD Registered Broker-Dealer (herein "Broker") their Broker to solicit
application for life insurance and annuity policies, this appointment to be
effective on___________________, 199__.
Broker accepts this appointment, subject to the terms and provisions set forth
in this Agreement.
AUTHORITY TO SOLICIT BUSINESS
SECTION 1. Through appointed sub-agents, Broker may solicit life insurance
and annuity policy applications for the Assurance Companies on a
non-exclusive basis.
RELATIONSHIP OF PARTIES
SECTION 2. Nothing in this Agreement will be construed to create the
relationship of employer and employee between either Assurance
Company or the Underwriter and any sub-agent or employee of
Broker. Broker and any sub-agent of Broker wil be free to
exercise their independent judgment as to the time, place and
manner of solicitation and servicing of business underwritten by
the Assurance Companies. However, neither Broker nor any employee
or sub-agent of Broker shall have authority to act on behalf of
the Assurance Companies or the Underwriter in a manner which does
not conform to applicable statues, ordinances, or governmental
regulations or to reasonable rules adopted from time to time by
the Assurance Companies or the Underwriter.
Broker understands and agrees that it is responsible for its
continued compliance and the continued compliance of Broker's
sub-agents with the NASD Rules of Fair Practice and Federal and
state securities laws.
SUB-AGENTS
SECTION 3. Broker may not only solicit life insurance and annuity policy
applications on behalf of the Assurance Companies through sub-
agents properly licensed with the Assurance Companies.
LIMITATIONS ON AUTHORITY
SECTION 4. Neither Broker nor any sub-agent of Broker will have authority to
accept risks of any kind; to make, alter or discharge contracts
of insurance or annuities; to waive forfeitures or exclusions; to
fix any premium for hazardous or stubstandard risks; to alter or
amend any papers received from either Assurance Company; to
deliver any policy of insurance or any document, agreement or
endorsement changing the amount of insurance coverage if Broker
knows or has reason to believe that the insured is uninsurable;
to collect any premium after the expiration of the policy grace
period except in connection with a policy reinstatement; or to
accept payment of any premium unless the premium meets the
minimum premium requirement for the policy established by the
Assurance Company.
APPLIED AUTHORITY
SECTION 5. Neither Broker nor any sub-agent of Broker will have any power or
authority other than as expressly provided in this Agreement and
no other power or authority shall be implied from the grant or
denial of power specifically mentioned in this agreement.
_______________COMPLIANCE NEGATIVE OBLIGATIONS
SECTION 6. Broker agrees that neither Broker nor any sub-agent of Broker
will intentionally violate any applicable state or Federal law,
ruling or regulation pertaining to the business of the Assurance
Companies or any rule or regulation of either Assurance Company
or the Underwriter. Neither Broker nor any sub-agent of Broker
will knowlingly engage in any activity which is detrimental to
the best interests of either Assurance Company or the Underwriter
or any of their affiliates.
Broker shall have the sole responsibility for the training and
supervision of all persons appointed as sub-agents hereunder.
Broker shall obtain and maintain for itself, its officers,
directors, employees and sales personnel, all licenses,
registrations and appointments required by any law, regulation or
other requirement of the SEC, the NASD or of any jurisdiction
where variable life insurance or variable annuity policies are
sold. Broker shall comply and shall have the responsibility to
ensure that all persons associated with it
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<PAGE>
comply with all laws; rules and regulations applicable to
variable life insurance or variable annuity products, including
those requirements applicable to delivery of prospectuses and
determination of client suitability. Broker is responsible for
the education, supervision and instruction of all its associated
persons, including sub-agents of Broker, in the proper method of
solicitation, sale and delivery of variable life insurance or
variable annuity policies. Broker and all persons associated
with it shall use only those sales, advertising and promotional
materials which have been approved in writing by the affected
Assurance Company and the Underwriter.
SUBMISSION OF APPLICATIONS; DELIVERY OF POLICIES; REJECTED BUSINESS
SECTION 7. Broker will submit directly to the Principal Office of the
Assurance Companies all Assurance Company life insurance and
annuity policy applications solicited by sub-agents of the
Broker. Broker will deliver, or cause to be delivered, within 10
days of the date of issue all policies issued on applications
submitted by sub-agents of Broker and will return to the
Assurance Companies any policy which is declined by the applicant
or which cannot be delivered within the time permitted by the
Assurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 8. Neither Broker nor any sub-agent of Broker will furnish any
prospective policyowner an illustration of the financial or other
aspects of a policy or a proposal for a policy of either
Assurance Company unless the same has been either furnished by
the Assurance Companies or prepared from computer software or
other material furnished or approved by the Assurance Companies.
Any illustration or proposal delivered by Broker or by any sub-
agent of Broker will conform to standards of completeness and
accuracy established by the Assurance Companies. If the proposal
or illustration was not furnished by the Assurance Companies,
Broker will relate in its records for availablility to the
Assurance Companies a copy thereof or the means to duplicate the
same. Any computer software or materials furnished by either
Assurance Company will be and remain its property.
ACCOUNTING FOR FUNDS COLLECTED
SECTION 9. In accordance with the rules of the Assurance Companies, Broker
will account for and remit immediately to the Principal Office of
the Assurance Companies all funds received or collected by Broker
or by a sub-agent of Broker for or on behalf of either Assurance
Company without deduction for any commissions, or other claim
Broker or the sub-agent may have against
-3-
<PAGE>
either Assurance Company and will make such reports and file such
substantiating documents and records as the Assurance Companies
may require.
INDEMNIFICATION
SECTION 10. If, due to the inaction or negligence of Broker of its sub-agents
or employees, a life insurance or annuity policy is not delivered
to the policy owner within 10 days of the date of issue of the
policy and if after delivery the owner returns the policy to the
Assurance Company and receives a full refund of all premiums
paid, the difference between the premium refunded and the cash
value of the policy on the date the policy is received by the
Assurance Company at its Principal Office shall be reimbursed to
the Assurance Company by the Broker in any case where the cash
value is less than the premium refunded. Any such reimbursement
shall be paid by the Broker to the affected Assurance Company
within 30 days of Broker's receipt of a written request for
payment.
Broker shall indemnify and hold the Assurance Companies and the
Underwriter and their officers, directors, and employees,
harmless from any liability arising from any act or omission of
Broker or of any officer, director, employee of Broker or of sub-
agents or other sales persons associated with Broker.
The Assurance Companies and the Underwriter shall, jointly or
severally, indemnify and hold the Broker and its sub-agents,
officers, directors and employees harmless from any liability
arising from any act or omission of either Assurance Company or
the Underwriter, or of any officer, director, employee or agent
of any such person.
The indemnifications provided by this Section 10 shall survive
termination of this Agreement and expressly include reimbusement
of reasonable attorneys' fees incurred by the indemnified party
in connection with the defense of any claim indemnified
hereunder.
LIABILITY FOR REFUND OF COMMISSIONS AND FEES
SECTION 11. If a policyholder rescinds a policy or exercises a right to
surrender a policy for return of all premiums paid, Broker will
pay on demand the amount of any commissions received on the
premiums returned.
-4-
<PAGE>
_______________OF COMPENSATION
SECTION 12. Broker's compensation will consist of commissions payable on
premiums for life insurance and annuity policies placed with the
Assurance Companies. Annuity commissions shall be payable at the
rates set forth in Commission Schedule DG-1, attached, as in
effect from time to time. Life insurance commissions shall be
payable at the rate or rates set forth in a Commission Schedule
to be furnished to Broker at such time as Broker begins to
solicit life insurance applications on behalf of the Assurance
Companies.
All compensation due Broker under this Agreement will be paid by
Allmerica Financial as the common paymaster.
TIME OF PAYMENT OF COMMISSIONS
SECTION 13. A premium will not be considered paid until it has been received
by the Assurance Company at its Principal Office. On premiums
paid, commissions will be paid twice each month in accordance
with the rules of the Assurance Companies.
TERMINATION WITHOUT CAUSE
SECTION 14. Whether or not there is a breach of this Agreement, either party
may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year
hereof, and by giving thirty (30) days' written notice after the
expiration of the first year hereof. If this Agreement
terminates without breach of its provisions by Broker, annuity
commissions provided for under Section 12 shall continue to be
paid the Broker in accordance with Schedule DG-1 as if this
agreement had not terminated. Provided, that no annuity
commissions will be paid on premiums paid during the 11th or
subsequent policy year.
TERMINATION FOR CAUSE
SECTION 15. This Agreement may be terminated for cause and without notice if
Broker or any sub-agent of Broker:
(a) misappropriates any funds belonging to or received on behalf
of either Assurance Company or any of its affiliates; or
(b) witholds any funds or other property belonging to either
Assurance Company after the same should have been reported
and transmitted to said Assurance Company or after a demand
has been made for the same; or
-5-
<PAGE>
(c) commits any willful or dishonest act which injuries either
Assurance Company; or
(d) willfully violates any of the provisions of this Agreement.
No commissions will be paid following termination of this
Agreement, if it is terminated for cause, nor will commissions
continue to be paid after termination of this Agreement if
thereafter Broker or any sub-agent of Broker breaches any of its
terms or conditions by the commission of an act prohibited by its
terms.
TOP SET-OFF
SECTION 16. The Assurance Companies will have a lieu on any commissions
payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to
be satisfaction of indebtedness to either Assurance Company to
the extent permitted by law.
_______________WAIVER OF_______________
SECTION 17. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of the
Assurance Companies to enforce said provision thereafter.
SIGNABILITY
SECTION 18. This Agreement is not transferable. Without the consent of the
Assurance Companies, no rights or interest in or to commissions
will be subject to assignment, and any attempted absolute
assignment, sale or transfer of this Agreement or of any
commissions without the written consent of the Assurance
Companies will immediately make this Agreement void and be a
release to the Assurance Companies in full of any and all of
their obligations hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 19. The Assurance Companies reserve the right at any time, and from
time to time, to change the terms and conditions or this
Agreement, including but not limited to, the rates of commissions
or to discontinue the payment of any commissions. The Assurance
Companies may act through Allmerica Financial and a notice of
change given in the name of Allmerica Financial will bind or
benefit (as the case may be) Allmerica Financial Life Insurance
and Annuity Company, even though not named, unless the notice
specifies otherwise.
-6-
<PAGE>
ELECTIVE DATE OF CHANGE
SECTION 20. Any change will become effective on the date specified in a
notice or, if later, 30 days after the notice is given to Broker.
However, the requirement to give advance notice shall not apply
if the change becomes necessary or expedient by reason of
legislation or the requirements of any governmental body and, in
the opinion of the Assurance Companies, it is not reasonably
possible to meet the 30 day requirement. Changes will not be
retroactive and will apply only to life insurance coverage
solicited or annuity premiums paid on or after the effective date
of the change. Notice of any change may be given by a Allmerica
Financial or Allmerica Financial Life Insurance and Annuity
Company bulletin or announcement and distribution of the bulletin
or announcement in the usual manner will constitute notice to
Broker.
NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of
notice to the Assurance Companies or to the Underwriter, if
delivered or mailed postage prepaid to the Vice President,
Individual Marketing, or to such other officer as may be
specified and, in the case of notice to Broker, if delivered or
mailed postage prepaid to Broker's principal place of business
(as specified above).
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to effect the substance of any provision of
this Agreement.
___________
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between
Broker and the Assurance Companies, or either of them or the
Underwriter, relating to the solicitation or life insurance or
annuity policies. It is hereby understood and agreed that any
other agreement or representation, commitment, promise or
statement of any nature, whether oral or written, relating to or
purporting to relate to the relationship of the parties is hereby
rendered null and void.
-7-
<PAGE>
UNDERSTOOD THAT THIS IS AN "AT WILL" RELATIONSHIP WHICH MAY BE TERMINATED BY
EITHER PARTY WITHOUT CAUSE OR REASON AS PROVIDED FOR IN SECTION 14.
WITNESS WHEREOF, the parties have executed this Agreement in duplicate to take
effect on effective date.
First Allmerica Financial Life Insurance Company
and
Allmerica Financial Life Insurance and Annuity Company
_________________________
(Name of Broker)
_________________________
By:_____________________________________________________
Vice President
Allmerica Investments, Inc.
By:_____________________________________________________
Title:
-8-
<PAGE>
Form A3026KC-APP-96 Send to:
APPLICATION FOR GROUP First Allmerica Financial
VARIABLE ANNUITY CONTRACT Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
- -------------------------------------------------------------------------------
1. Applicant: The ABC Company
2. Address: 1 Any Street, Any Town, USA 12345
3. Applicant hereby applies to First Allmerica Financial Life Insurance
Company (First Allmerica) for a Group Variable Annuity Contract, First
Allmerica Form No. A3026-96 GRP, a draft copy of which was previously
furnished to Applicant.
4. The Applicant agrees that the coverage for which application is hereby
made shall become effective when:
(a) This application is received and approved by First Allmerica as its
Principal Office in Worcester, Massachusetts; and
(b) the Contract is issued by First Allmerica.
5. Optional Riders: __ Living Benfits Rider __Enhanced Death Benefit Rider
__Disability Rider
6. The Applicant acknowledges receipt of a current prospectus.
7. THE APPLICANT UNDERSTANDS AND ACKNOWLEDGES THAT ANNUITY PAYMENTS AND
OTHER VALUES, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE
ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.
Dated at USA this first day of January 1997.
The ABC Company
---------------------------
(Name of Applicant)
By:---------------------------
(Title)
Form A3026KC-APP-96
<PAGE>
PLEASE READ THIS CERTIFICATE CAREFULLY
ANNUITY BENEFIT PAYMENTS AND OTHER VALUES PROVIDED BY THIS CERTIFICATE, WHEN
BASED ON THE INVESTMENT PERFORMANCE OF THE VARIABLE ACCOUNT, MAY INCREASE OR
DECREASE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. PLEASE REFER TO
THE VALUE OF THE VARIABLE ACCOUNT SECTION FOR ADDITIONAL INFORMATION.
VALUES REMOVED FROM A GUARANTEE PERIOD ACCOUNT PRIOR TO THE END OF ITS
GUARANTEE PERIOD MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT THAT MAY
INCREASE OR DECREASE THE VALUES. A NEGATIVE MARKET VALUE ADJUSTMENT WILL
NEVER BE APPLIED TO THE DEATH BENEFIT. A POSITIVE MARKET VALUE ADJUSTMENT, IF
APPLICABLE, WILL BE ADDED TO THE DEATH BENEFIT WHEN THE BENEFIT PAID IS THE
CERTIFICATE'S ACCUMULATED VALUE. PLEASE REFER TO THE MARKET VALUE ADJUSTMENT
SECTION FOR ADDITIONAL INFORMATION.
RIGHT TO EXAMINE CERTIFICATE
The Owner may cancel this certificate by returning it to the Company or one
of its authorized representatives within ten days after receipt. If
returned, the Company will refund the greater of (1) gross payments or (2)
the Accumulated Value plus any amounts deducted for fees and charges.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Home Office: Dover, Delaware
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
This certificate is a legal contract between First Allmerica Financial Life
Insurance Company (the Company) and the Owner and is issued in consideration
of the initial payment shown on the Specifications page. Additional payments
are permitted and may be made either to the Principal Office or to an
authorized representative of the Company. Payments may be allocated to
Variable Sub-Accounts, the Fixed Account or Guarantee Period Accounts. While
this certificate is in effect, the Company agrees to pay annuity benefits to
the Annuitant beginning on the Annuity Date or to pay a death benefit to the
Beneficiary if either the Owner or Annuitant dies prior to the Annuity Date.
/s/ John F. O'Brien /s/ Richard J. Baker
----------------------- -----------------------
President Secretary
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY
NON-PARTICIPATING
FORM A3026-96GRC
<PAGE>
TABLE OF CONTENTS
SPECIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
OWNER AND BENEFICIARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
VALUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
TRANSFERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
WITHDRAWAL AND SURRENDER . . . . . . . . . . . . . . . . . . . . . . . . . . .10
DEATH BENEFIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
ANNUITY BENEFIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
ANNUITY OPTION TABLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
VOTING RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
2
FORM A3026-96GRC
<PAGE>
SPECIFICATIONS
Annuitant: Certificate Number:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Issue Date: Certificate Type:
Annuitant Sex: Annuitant Date of Birth:
Owner: Owner Date of Birth:
Joint Owner: Joint Owner Date of Birth:
Annuity Date: Beneficiary:
- -------------------------------------------------------------------------------
Minimum Fixed Account Guaranteed Interest Rate: 3%
Minimum Additional Payment: $100
Minimum Guarantee Period Account Interest Rate: 3%
Minimum Guarantee Period Account Allocation: $1,000
[Death Benefit Effective Annual Yield: [5%]]
Minimum Withdrawal Amount: $100
Minimum Annuity Benefit Payment: $50
Minimum Accumulated Value After Withdrawal: $1,000
Maximum Alternative Annuity Date: No later than the first of the month
preceding the Annuitant's 90th birthday.
Surrender Charge Table: [ Riders:
Years Measured From | Surrender Charge as a
Date of Payment | Percent of the Payments Disability Rider
To Date of Withdrawal | Withdrawn Annual Percentage Rate: .05%
- ------------------------------------------------
| Living Benefits Rider
Less than: 1 | 7% Annual Percentage Rate: .05%
2 | 6%
3 | 5%
4 | 4% Enhanced Death Benefit
5 | 3% Annual Percentage Rate: .25%]
6 | 2%
Thereafter | 0%
Withdrawal without Surrender Charge: 15%
Certificate Fee: $35, if the Accumulated Value is less than $50,000.
Sub-Account Charges:
Mortality and Expense Risk Charge: .95% on an annual basis of the daily
value of the Sub-Account assets.
Administrative Charge: .15% on an annual basis of the daily value of the
Sub-Account assets.
With combined annual Sub-account charges of 1.40%, the smallest rate of
investment return required to ensure that the dollar amount of variable
annuity paymetns does not decrease is 4.90% for variable annuity options
based on an annual rate of 3 1/2%.
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
(1-800-688-9915)
3
FORM A8036-96GRC
<PAGE>
SPECIFICATIONS (continued)
Annuitant: Certificate Number:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Initial Net Payment:
Initial Net Payment Allocation:
VARIABLE SUB-ACCOUNTS
[Small Cap Value
Small Cap Growth
Value
International
Growth
Value + Growth
Horizon 20+
Total Return
Horizon 10+
Horizon 5
High Yield
Investment Grade Bond
Government Security]
FIXED ACCOUNT
[ Initial Interest Rate: ]
GUARANTEE PERIOD ACCOUNTS
GUARANTEED
GUARANTEE ISSUE INTEREST EXPIRATION
PERIOD RATE RATE DATE
--------- ----- -------- ----------
[ 2 years
3 years
4 years
5 years
6 years
7 years
8 years
9 years
10 years ]
------
100% TOTAL
4
FORM A8026-96GRC
<PAGE>
DEFINITIONS
ACCUMULATED VALUE The value of all accounts in this certificate
before the Annuity Date. As long as the Accumulated
Value is greater than zero, the certificate will
stay in effect.
ACCUMULATION UNIT A measure used to calculate the value of a
Sub-Account before annuity benefit payments begin.
ANNUITY DATE The date annuity benefit payments begin, but in no
event later than the first day of the month before
the Annuitant's 85th birthday. The Annuity Date is
shown on the Specifications page, unless the Owner
elects an alternative Annuity Date.
ANNUITY UNIT A measure used to calculate annuity benefit
payments under a variable annuity option.
BENEFICIARY The person, persons or entity entitled to the death
benefit.
CERTIFICATE YEAR A period of one year computed from the date of
issue or from an anniversary of the date of issue.
COMPANY First Allmerica Financial Life Insurance Company.
EFFECTIVE VALUATION DATE The Valuation Date on or immediately following the
day a payment, request for transfer, withdrawal or
surrender, or proof of death is received at the
Principal Office.
FIXED ACCOUNT The part of the Company's General Account to which
all or a portion of a payment or transfer may be
allocated.
FUND Each separate investment series eligible for
investment by a Sub-Account of the Variable Account.
GENERAL ACCOUNT All assets of the Company that are not allocated to
a Separate Account.
GROUP ANNUITY CONTRACT The Company's Group Annuity Contract No. 3025 owned
by the First Allmerica Financial Life Insurance
Company Group Annuity Trust.
GUARANTEED INTEREST RATE The annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
GUARANTEE PERIOD The number of years that a Guaranteed Interest Rate
may be credited to a Guarantee Period Account. The
Guarantee Period may range from two to ten years.
GUARANTEE PERIOD ACCOUNT An account which corresponds to a Guaranteed
Interest Rate for a specified Guarantee Period and
is supported by assets in a Separate Account.
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.
OWNER The person, persons or entity entitled to exercise
the rights and privileges under this certificate.
Joint owners are permitted if one of the two is the
annuitant.
PRINCIPAL OFFICE The Company's office at 440 Lincoln Street,
Worcester, Massachusetts, 01653.
5
FORM A3026-96GRC
<PAGE>
PRO RATA How a payment or withdrawal may be allocated among
the accounts. A Pro-Rata allocation or withdrawal
will be made in the same proportion that the value
of each account bears to the Accumulated Value.
SEPARATE ACCOUNT A segregated account established by the Company.
The assets are not commingled with the Company's
general assets and obligations.
SUB-ACCOUNT A Variable Account subdivision that invests
exclusively in shares of a corresponding Fund.
SURRENDER VALUE The amount payable to the Owner on full surrender
after application of any Surrender Charge, Market
Value Adjustment and certificate fee.
VALUATION DATE A day the values of all units are determined.
Valuation Dates occur at the close of business on
each day the New York Stock Exchange is open for
trading.
VALUATION PERIOD The interval between two consecutive Valuation
Dates.
VARIABLE ACCOUNT The Company's Separate Account, consisting of
Sub-Accounts that invest in the underlying Funds.
WRITTEN REQUEST OR A request or notice in writing satisfactory to the
WRITTEN NOTICE Company and filed at the Principal Office.
6
FORM A3026-96GRC
<PAGE>
CERTIFICATE OWNER AND BENEFICIARY
OWNER During the lifetime of the Annuitant and before the
Annuity Date, the Owner will be as shown on the
Specifications page unless changed in accordance
with the terms of this certificate. On and after
the Annuity Date, the Annuitant will be the Owner
unless the Owner immediately prior to the Annuity
Date is not a person. In that case, ownership will
remain the same on and after the Annuity Date.
The Owner may exercise all rights and options
granted in this certificate or by the Company,
subject to the consent of any irrevocable
Beneficiary. Where the certificate is owned
jointly, the consent of both is required in order
to exercise any ownership rights.
ASSIGNMENT The Owner may be changed at any time prior to the
Annuity Date and while the Annuitant is alive.
Only the Owner may assign this certificate. An
absolute assignment will transfer ownership to the
assignee. This certificate may also be
collaterally assigned as security. The limitations
on ownership rights while the collateral assignment
is in effect are stated in the assignment.
Additional limitations may exist for certificates
issued under provisions of the Internal Revenue
Code.
An assignment will take place only when the Company
has received Written Notice and recorded the change
at the Principal Office. The Company will not be
deemed to know of the assignment until it has
received Written Notice. When recorded, the
assignment will take effect as of the date it was
signed. The assignment will be subject to payments
made or actions taken by the Company before the
change was recorded.
The Company will not be responsible for the
validity of any assignment nor the extent of any
assignee's interest. The interests of the
Annuitant and the Beneficiary will be subject to
any assignment.
BENEFICIARY The Beneficiary is as named on the Specifications
page unless subsequently changed. The Owner may
declare any Beneficiary to be revocable or
irrevocable. A revocable Beneficiary may be
changed at any time. An irrevocable Beneficiary
must consent in writing to any change. Unless
otherwise indicated, the Beneficiary will be
revocable.
A Beneficiary change must be made in writing on a
Beneficiary designation form and will be subject to
the rights of any assignee of record. When the
Company receives the form, the change will take
place as of the date it was signed, even if the
Owner or Annuitant is then deceased. Any rights
created by the change will be subject to payments
made or actions taken by the Company before the
change was recorded.
All death benefits provided by this certificate
will be divided equally among the surviving
Beneficiaries of the same class, unless the Owner
directs otherwise. If there is no surviving
Beneficiary, the deceased Beneficiary's interest
will pass to the Owner or the Owner's estate.
PROTECTION OF PROCEEDS To the extent allowed by law, this certificate and
any payments made under it will be exempt from the
claims of creditors. Neither the Annuitant nor the
Beneficiary can assign, transfer, commute,
anticipate or encumber the proceeds or payments
unless given that right by the Owner.
7
FORM A3026-96GRC
<PAGE>
PAYMENTS
The Initial Payment is shown on the Specifications
page.
ADDITIONAL PAYMENTS Prior to the Annuity Date, the Owner may make
additional payments of at least the Minimum
Additional Payment (see Specifications page). Total
payments made may not exceed $5,000,000 without the
Company's consent.
NET PAYMENTS Each Net Payment is equal to the gross payment less
the amount of any applicable premium tax. The
Company reserves the right to deduct the amount of
the premium tax from the Accumulated Value at a
later date rather than when the tax is first
incurred. In no event will an amount be deducted
for premium taxes before the Company has incurred a
tax liability under applicable state law.
NET PAYMENT ALLOCATIONS The initial Net Payment will be allocated as shown
on the Specifications page. Additional Net
Payments will be allocated in the same proportion
as the initial Net Payment, unless changed by the
Owner's Written or Telephone Request.
Any portion of the initial Net Payment allocated to
a Sub-Account or a Guarantee Period Account will be
held in the Money Market Sub-Account during the
certificate's first fifteen days. After fifteen
days, these amounts will be allocated as requested.
The minimum that may be allocated to a Guarantee
Period Account is shown on the Specifications page.
If less is allocated to a Guarantee Period
Account, the Company reserves the right to apply
that amount to the Money Market Sub-Account.
VALUES
VALUE OF THE VARIABLE The value of a Sub-Account on a Valuation Date is
ACCOUNT determined by multiplying the Accumulation Units in
that Sub-Account by the Accumulation Unit value as
of the Valuation Date.
Accumulation Units are credited when an amount is
allocated to a Sub-Account. The number of
Accumulation Units credited equals that amount
divided by the applicable Accumulation Unit Value
as of the Effective Valuation Date.
ACCUMULATION UNIT VALUES The value of a Sub-Account Accumulation Unit as of
any Valuation Date is determined by multiplying the
value of an Accumulation Unit for the preceding
Valuation Date by the net investment factor for
that Valuation Period.
NET INVESTMENT FACTOR The net investment factor measures the investment
performance of a Sub-Account from one Valuation
Period to the next. This factor is equal to
1.000000 plus the result from dividing (a) by (b)
and subtracting (c) and (d) where:
(a) 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;
8
FORM A3026-96GRC
<PAGE>
(b) is the value of that Sub-Account's assets at
the beginning of the Valuation Period;
(c) is the Mortality and Expense Risk Charge (see
Specifications page); and
(d) is the Administrative Charge (see Specifications
page).
The Company assumes the risk that actual mortality
and expenses may exceed the amount provided for
such costs and guarantees that the charge for
mortality and expense risks and the administrative
charge will not be increased. Subject to applicable
state and federal laws, these charges may be
decreased or the method used to determine the net
investment factor may be changed.
VALUE OF THE FIXED Allocations to the Fixed Account are credited
ACCOUNT interest at rates periodically set by the Company.
The Company guarantees that the rate of interest in
effect when an amount is allocated to the Fixed
Account will remain in effect for that amount for
one year. Thereafter, the rate of interest for that
amount will be the Company's current interest rate,
but no less than the Minimum Fixed Account
Guaranteed Interest Rate (see Specifications page).
The value of the Fixed Account on any date is the
sum of allocations to the Fixed Account plus
interest compounded and credited daily at the rates
applicable to those allocations. The value of the
Fixed Account will be at least equal to the minimum
required by law in the state in which this
certificate is delivered.
VALUE OF THE GUARANTEE A Guarantee Period Account will be established on
PERIOD ACCOUNTS the date a Net Payment or transfer is allocated to
a specific Guarantee Period. Amounts allocated to
the same Guarantee Period on the same day will be
treated as one Guarantee Period Account. The
interest rate in effect when an amount is allocated
is guaranteed for the duration of the Guarantee
Period. Additional amounts allocated to Guarantee
Periods of the same or different durations will
result in additional Guarantee Period Accounts,
each with its own Guaranteed Interest Rate and
expiration date.
The value of a Guarantee Period Account on any date
is the sum of the allocation to that Guarantee
Period Account plus interest compounded and
credited daily at the rate applicable to that
allocation.
GUARANTEED INTEREST RATES The Company will periodically set Guaranteed
Interest Rates for each available Guarantee Period.
These rates will be guaranteed for the duration of
the respective Guarantee Periods. A Guaranteed
Interest Rate will never be less than the Minimum
Guarantee Period Account Interest Rate (see
Specifications page.)
RENEWAL GUARANTEE PERIODS 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. 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 as of the day
following the expiration of the Guarantee Period
without a Market Value Adjustment. Guaranteed
Interest Rates corresponding to the available
Guarantee Periods may be higher or lower than the
previous Guaranteed Interest Rate. If reallocation
instructions are not received at the Principal
Office before the end of a Guarantee Period,
9
FORM A3026-96GRC
<PAGE>
the Guarantee Period Account value will be
automatically applied to a new Guarantee Period
Account with the same Guarantee Period unless:
(a) less than the Minimum Guarantee Period Account
Allocation (see Specifications page) remains
in the Guarantee Period Account on the
expiration date; or
(b) 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 Money Market
Sub-Account.
CERTIFICATE FEE The Company will deduct a certificate fee (see
Specifications page) Pro Rata on each certificate
anniversary prior to the Annuity Date and when the
certificate is surrendered. If the certificate is
issued to and maintained by the Trustee of a
401(k) Plan, the Company will waive the
certificate fee, but reserves the right to impose
a fee of not more than $30.
TRANSFERS Prior to the Annuity Date, the Owner may transfer
amounts among accounts by Written Request to the
Principal Office. Transfers to a Guarantee Period
Account will be subject to the Minimum Guarantee
Period Account Allocation (see Specifications
page). If less would be allocated to a Guarantee
Period Account, the Company may transfer that
amount to the Money Market Sub-Account.
Any transfer from a Guarantee Period Account prior
to the end of its Guarantee Period will be subject
to a Market Value Adjustment. In the case of a
partial transfer of a Guarantee Period Account the
Market Value Adjustment will be applied to the
value remaining in the account.
There is no charge for the first twelve transfers
per certificate year. A transfer charge of up to
$25 may be imposed on each additional transfer.
Prior to the Annuity Date, the Owner may request
automatic transfers of at least $100 on a periodic
basis to one or more Sub-accounts from one of the
following source accounts - (1) the Fixed Account;
(2) the Money Market Sub-Account or (3) any
additional Sub-Accounts that the Company may offer
under its then current rules. Automatic transfers
may not be made into the Fixed Account or into an
account that is also used as the source account.
Automatic transfers may be made on a monthly,
bi-monthly, quarterly, semi-annual or annual
basis. The first automatic transfer out of the
source account will be treated as one transfer for
purposes of the transfers provision regardless of
how many Sub-Accounts are involved. Any
subsequent automatic transfers that are made while
this arrangement is in effect during the
certificate year will never be treated as a
transfer without charge. (The Company reserves
the right to limit the number of Sub-Accounts that
may be utilized for automatic transfers and to
discontinue the arrangement at any time upon
advance written notice to the Owner.) If an
automatic transfer would reduce the balance in the
source fund to less than $100, the entire balance
will be transferred proportionately to the chosen
Sub-Account(s). Automatic
10
FORM A3026-96GRC
<PAGE>
transfers will continue unless the amount in the
source fund on the date an automatic transfer is
to occur is zero or until the Owner's request to
terminate the arrangement is received at the Home
Office.
Prior to the Annuity Date, the Owner may request
automatic rebalancing of Sub-Account allocations
to be made at least as frequently as monthly,
quarterly, semi-annually or annually. The Owner
will designate the percentage allocation for
amounts invested in each of the Sub-Accounts
chosen. On the periodic transfer dates specified
by the Owner, the Company will review the
percentage allocation in the various Sub-Accounts
and, as necessary, transfer funds in order to
reestablish the original designated percentage
allocation mix. If the amount necessary to
reestablish the designated mix on any transfer
date is less than $100, no transfer will be made.
The first rebalancing transfer will count as a
transfer for purposes of the transfers provision.
The arrangement will terminate when the Owner's
request is received at the Home Office. (The
Company reserves the right to limit the number of
Sub-Accounts that may be utilized for automatic
rebalancing and to discontinue the arrangement
upon advance written notice to the Owner.)
WITHDRAWAL AND SURRENDER The Owner may, by Written Request, withdraw a part
of the Accumulated Value of this certificate or
surrender it for its Surrender Value prior to the
Annuity Date.
Any withdrawal must be at least the Minimum
Withdrawal Amount (see Specifications page). A
withdrawal will not be permitted if the
Accumulated Value remaining in the certificate
would be less than the Minimum Accumulated Value
After Withdrawal (see Specifications page). The
Written Request must indicate the dollar amount to
be paid and the accounts from which it is to be
withdrawn.
When surrendered, this certificate terminates and
the Company has no further liability under it.
The Surrender Value will be based on the
Accumulated Value on the Effective Valuation Date.
Amounts taken from the Variable Account will be
paid within 7 days of the date a Written Request
is received except that the Company reserves the
right to defer surrenders and partial redemptions
of amounts in the Variable Account during any
period when (1) trading on the New York Stock
Exchange is restricted as determined by the
Securities and Exchange Commission or the Exchange
is closed for other than weekends and holidays,
(2) the Securities and Exchange Commission by
order has permitted such suspension, or (3) an
emergency exists as determined by the Securities
and Exchange Commission such that disposal of
portfolio securities or valuation of assets of the
Separate Account is not reasonably practicable.
Amounts taken from the Fixed Account or the
Guarantee Period Accounts will normally be paid
within 7 days of receipt of a Written Request. The
Company may defer payment for up to six months
from the receipt date. If deferred for 30 days or
more, the amount payable will be credited interest
at the rate(s) then being credited by the Company.
However, no interest will be paid if it is less
than $25 or the delay is pursuant to New York law.
WITHDRAWAL WITHOUT Any amounts withdrawn or surrendered in excess of
SURRENDER CHARGE
11
<PAGE>
surrender charge or life expectancy distribution
benefit may be subject to a surrender charge.
These amounts will be taken on a first-in,
first-out basis from payments not previously
considered withdrawn. The Company will compute
applicable charges using the Surrender Charge
Table (see Specifications page) until the total
amount withdrawn equals the amount of the
withdrawal requested plus the withdrawal charge
or, if a surrender, until all remaining payments
have been exhausted. The surrender charge will
then be deducted from the Accumulated Value in the
same manner as the withdrawals.
LIFE EXPECTANCY In each calendar year, the amount of the life
DISTRIBUTION BENEFIT expectancy distribution available under the
Company's then current life expectancy
distribution rules that exceeds the withdrawal
without surrender charge may also be withdrawn
without charge. Life expectancy distribution is
available only if the Annuitant is an Owner.
LED distributions will cease on the Annuity Date.
The Owner must either surrender this Certificate
at that time or choose an annuity option to
commence immediately. If the Owner does not
choose an annuity option, monthly benefit payments
under a Variable life annuity with payments
guaranteed for 10 years will be made.
WITHDRAWAL WITH Any amounts withdrawn or surrendered in excess of
SURRENDER CHARGE the withdrawal without surrender charge or life
expectancy distribution benefit may be subject to
a surrender charge.
These amounts will be taken on a first-in,
first-out basis from payments not previously
considered withdrawn. The Company will compute
applicable charges using the Surrender Charge
Table (see Specifications page) until the total
amount withdrawn equals the amount of the
withdrawal requested plus the withdrawal charge
or, if a surrender, until all remaining payments
have been exhausted. The surrender charge will
then be deducted from the Accumulated Value in the
same manner as the withdrawals.
MARKET VALUE ADJUSTMENT A transfer, withdrawal or surrender from a
Guarantee Period Account at the end of its
Guarantee Period will not be subject to a Market
Value Adjustment. A Market Value Adjustment will
apply to all other transfers or withdrawals, or a
surrender. Amounts applied under an annuity option
are treated as withdrawals when calculating the
Market Value Adjustment. The Market Value
Adjustment will be determined by multiplying the
amount taken from each Guarantee Period Account
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)](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
12
FORM A3026-96GRC
<PAGE>
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
Effective Valuation Date to the end of the current
Guarantee Period.
If the Guaranteed Interest Rate being credited is
lower than the current Guaranteed Interest Rate,
the Market Value Adjustment will decrease the
Guarantee Period Account value. Similarly, if the
Guaranteed Interest Rate being credited is higher
than the current Guaranteed Interest Rate, the
Market Value Adjustment will increase the
Guarantee Period Account value. The Market Value
Adjustment will never result in a change to the
value more than the interest earned in excess of
the Minimum Guarantee Period Account Interest Rate
(see Specifications page) compounded annually from
the beginning of the current Guarantee Period.
DEATH BENEFIT
At the death of the Annuitant, Owner or joint
Owner, whichever occurs first, the Company will
pay to the Beneficiary a death benefit determined
as of the Effective Valuation Date upon receipt at
the Principal Office of proof of death. If the
Annuitant is also an Owner and dies, the
Annuitant's death benefit will apply.
ANNUITANT'S DEATH If the Annuitant dies before the Annuity Date, the
BENEFIT BEFORE THE death benefit will be the greater of:
ANNUITY DATE
(a) the Accumulated Value increased by
any positive Market Value Adjustment;
or,
(b) gross payments starting on the Effective
Valuation Date of each gross payment, reduced
proportionately to reflect withdrawals. For each
withdrawal, the proportionate reduction is
calculated as the death benefit immediately
prior to the withdrawal multiplied by the
withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal.
OWNER'S DEATH BENEFIT If an Owner who is not also the Annuitant dies
BEFORE THE ANNUITY DATE before the Annuity Date, the death benefit will be
the Accumulated Value increased by any positive
Market Value Adjustment.
PAYMENT OF THE DEATH The death benefit will be paid to the Beneficiary
BENEFIT BEFORE THE within 7 days of the Effective Valuation Date
ANNUITY DATE unless the Owner has specified a death benefit
annuity option. Instead, the Beneficiary may, by
Written Request, elect to:
(a) defer distribution of the death benefit for a
period no more than 5 years from the date of
death; or
(b) receive a life annuity or an annuity for a
period certain not extending beyond the
Beneficiary's life expectancy. Annuity
benefit payments must begin within one year
from the date of death.
If distribution of the death benefit is deferred
under (a) or (b), any value in the Guarantee
Period Accounts will be transferred to the Money
Market Sub-
13
FORM A3026-96GRC
<PAGE>
Account. The excess, if any, of the death benefit
over the Accumulated Value will also be added to
the Money Market Sub-Account. The Beneficiary may,
by Written Request, effect transfers and
withdrawals, but may not make additional payments.
If there are multiple Beneficiaries, the consent
of all is required.
If the sole Beneficiary is the deceased Owner's
spouse, the Beneficiary may, by Written Request,
continue the certificate and become the new Owner
and Annuitant subject to the following:
(a) any value in the Guarantee Period Accounts
will be transferred to the Money Market
Sub-Account
(b) the excess, if any, of the death benefit over
the certificate's Accumulated Value will also
be added to the Money Market Sub-Account;
(c) additional payments may be made. A surrender
charge will apply only to these additional
payments; and
(d) any subsequent spouse of the new Owner, if
named as the Beneficiary, may not continue
the certificate.
DEATH BENEFIT AND If the Annuitant dies after the Annuity Date but
PAYMENT AFTER THE before all guaranteed annuity benefit payments
ANNUITY DATE have been made, the remaining payments will be
paid to the Beneficiary at least as rapidly as
under the annuity option in effect on the
Annuitant's death.
ANNUITY BENEFIT
ANNUITY OPTIONS Annuity options are available on a fixed, variable
or combination fixed and variable basis. The
annuity options described below or any alternative
option offered by the Company may be chosen. If no
option is chosen, monthly benefit payments under a
variable life annuity with payments guaranteed for
10 years will be made.
The Owner may also elect to have the death benefit
applied under a life annuity or a period certain
annuity not extending beyond the Beneficiary's
life expectancy. Such an election may not be
altered by the Beneficiary.
Fixed annuity options are funded through the Fixed
Account. Variable annuity options may be funded
through one or more of the Sub-Accounts. Not all
Sub-Accounts may be made available.
ANNUITY BENEFIT PAYMENTS Annuity benefit payments may be received on a
monthly, quarterly, semiannual or annual basis. If
the first payment would be less than the Minimum
Annuity Benefit Payment (see Specifications page),
a single payment will be made instead. The Company
reserves the right to increase the minimum payment
amount to not more than $500, subject to
applicable state regulations. Satisfactory proof
of the payee's date of birth must be received at
the Principal Office before annuity benefit
payments begin. Where a life annuity option has
been elected, the Company may require satisfactory
proof that the payee is alive before any payment
is made.
ANNUITY VALUE The amount of the first annuity benefit payment
under all available options except period certain
options will depend on the age and sex of the
payee or payees on the Annuity Date and the
annuity value applied. Period certain options are
based on the duration of payments and the annuity
value.
14
FORM A3026-96GRC
<PAGE>
For life annuity options and non-commutable period
certain options with a duration of 10 years or
more, the annuity value will be the Accumulated
Value and may include any applicable Market Value
Adjustment less any premium tax. For commutable
period certain options or any period certain
option less than 10 years, the annuity value will
be the Surrender Value less any premium tax. For
a death benefit annuity, the annuity value will be
the amount of the death benefit. The annuity value
applied under a variable annuity option is based
on the Accumulation Unit value on a Valuation Date
not more than four weeks, uniformly applied,
before the Annuity Date.
ANNUITY UNIT VALUES A Sub-Account Annuity Unit value on any Valuation
Date is equal to its value on the preceding
Valuation Date multiplied by the product of:
(a) a discount factor equivalent to the assumed
interest rate; and
(b) the net investment factor of the Sub-Account
funding the annuity benefit payments for the
applicable Valuation Period.
The value of an Annuity Unit as of any date other
than a Valuation Date is equal to its value as of
the preceding Valuation Date.
Each variable annuity benefit payment is equal
to the number of Annuity Units multiplied by the
applicable value of an Annuity Unit, except that
under a Joint and Two-Thirds Option, payments to
the surviving payee are based on two-thirds the
number of Annuity Units that applied when both
payees were living. Variable annuity benefit
payments will increase or decrease with the
value of annuity units. The Company guarantees
that the amount of each variable annuity benefit
payment will not be affected by changes in
mortality and expense experience.
NUMBER OF ANNUITY UNITS The number of Annuity Units determining the
benefit payable is equal to the amount of the
first annuity benefit payment divided by the value
of the Annuity Unit as of the Valuation Date used
to calculate the amount of the first payment.
Once annuity benefit payments begin, the number of
Annuity Units will not change unless a split is
made.
ANNUITY BENEFIT VARIABLE OR FIXED LIFE ANNUITY WITH PAYMENTS
PAYMENT OPTIONS GUARANTEED FOR 10 YEARS: Periodic annuity benefit
payments during the payee's life. If the payee
dies before all guaranteed payments have been
made, the remaining payments will be made to the
Beneficiary.
VARIABLE OR FIXED LIFE ANNUITY: Periodic annuity
benefit payments during the payee's life.
UNIT REFUND VARIABLE OR FIXED LIFE ANNUITY:
Periodic annuity benefit payments during the
payee's life. If the payee dies and the annuity
value initially applied to purchase the option,
divided by the first payment, exceeds the number
of payments made before the payee's death,
payments will continue to the Beneficiary until
the number of payments equals the Annuity Value
divided by the first payment.
JOINT AND SURVIVOR VARIABLE OR FIXED LIFE ANNUITY:
Periodic annuity benefit payments during the joint
lifetime of two payees with payments continuing
during the lifetime of the survivor. One of the
payees must be the Annuitant or, if the Annuitant
is not living when payments begin, one of the
payees must be the Beneficiary.
15
FORM A3026-96GRC
<PAGE>
JOINT AND TWO-THIRDS SURVIVOR VARIABLE OR FIXED
LIFE ANNUITY: Periodic annuity benefit payments
during the joint lifetime of two payees with
payments continuing during the lifetime of the
survivor at two-thirds the amount payable when
both payees were living. One of the payees must
be the Annuitant or, if the Annuitant is not
living when payments begin, one of the payees
must be the Beneficiary.
VARIABLE OR FIXED ANNUITY FOR A PERIOD CERTAIN:
Periodic annuity benefit payments for a chosen
number of years. The number of years selected may
be from 1 to 30. If the payee dies before the end
of the period, remaining payments will continue to
the Beneficiary.
ANNUITY TABLES The first annuity benefit payment will be based on
the greater of the guaranteed annuity rates shown
in the following tables or the Company's
non-guaranteed current annuity option rates
applicable to this class of certificates. Second
and subsequent annuity benefit payments, when
based on the investment experience of the Variable
Account, may increase or decrease.
16
FORM A3026-96GRC
<PAGE>
SEX-DISTINCT SETTLEMENT OPTION RATES
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MALE FEMALE
- -----------------------------------------------------------------------------------------------
AGE PAYMENTS LIFE UNIT REFUND PAYMENTS LIFE UNIT REFUND
NEAREST GUARANTEED ANNUITY LIFE ANNUITY GUARANTEED ANNUITY LIFE ANNUITY
BIRTHDAY FOR 10 YEARS FOR 10 YEARS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
50 4.41 4.45 4.30 4.09 4.11 4.03
51 4.47 4.52 4.36 4.15 4.16 4.08
52 4.54 4.59 4.42 4.20 4.22 4.13
53 4.62 4.67 4.48 4.26 4.29 4.19
54 4.70 4.76 4.55 4.33 4.35 4.25
55 4.78 4.85 4.62 4.40 4.43 4.31
56 4.87 4.94 4.70 4.47 4.50 4.37
57 4.96 5.04 4.78 4.54 4.58 4.44
58 5.05 5.15 4.86 4.62 4.66 4.51
59 5.16 5.26 4.95 4.71 4.75 4.58
60 5.26 5.38 5.04 4.80 4.85 4.66
61 5.38 5.51 5.14 4.89 4.95 4.74
62 5.50 5.65 5.25 4.99 5.06 4.83
63 5.62 5.80 5.35 5.09 5.17 4.92
64 5.75 5.96 5.47 5.20 5.30 5.02
65 5.89 6.13 5.59 5.32 5.43 5.12
66 6.03 6.32 5.71 5.44 5.57 5.23
67 6.18 6.51 5.85 5.57 5.72 5.35
68 6.33 6.72 5.99 5.71 5.88 5.47
69 6.49 6.94 6.14 5.86 6.06 5.60
70 6.65 7.18 6.29 6.01 6.24 5.74
71 6.81 7.43 6.45 6.17 6.45 5.88
72 6.98 7.70 6.62 6.34 6.67 6.04
73 7.15 7.99 6.80 6.51 6.90 6.20
74 7.33 8.30 6.99 6.69 7.16 6.37
75 7.50 8.63 7.19 6.88 7.44 6.56
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the 1983(a) Individual Mortality Table.
17
FORM A3026-96GRC
<PAGE>
SEX-DISTINCT SETTLEMENT OPTION RATES (CONTINUED)
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
<TABLE>
<CAPTION>
JOINT AND SURVIVOR LIFE ANNUITY JOINT AND TWO-THIRDS SURVIVOR LIFE ANNUITY
MALE AGE MALE AGE
- --------------------------------------------------------------------------------------------------------
50 55 60 65 70 75 80 50 55 60 65 70 75 80
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
F 50 3.91 3.97 4.02 4.05 4.07 4.09 4.10 4.25 4.40 4.57 4.76 4.96 5.18 5.39
E
M 55 4.18 4.26 4.32 4.36 4.39 4.41 4.60 4.80 5.02 5.26 5.50 5.75
A
L 60 4.54 4.65 4.73 4.78 4.81 5.08 5.35 5.63 5.92 6.21
E
65 5.04 5.19 5.29 5.35 5.74 6.10 6.46 6.82
70 5.75 5.95 6.08 6.67 7.15 7.62
A 75 6.77 7.06 8.04 8.69
G
E 80 8.29 10.05
- --------------------------------------------------------------------------------------------------------
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the 1983(a) Individual Mortality Table.
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
NUMBER OF VARIABLE OR FIXED ANNUITY NUMBER OF VARIABLE OR FIXED ANNUITY
YEARS FOR A PERIOD CERTAIN YEARS FOR A PERIOD CERTAIN
- -------------------------------------------------------------------------------
1 84.65 16 6.76
2 43.05 17 6.47
3 29.19 18 6.20
4 22.27 19 5.97
5 18.12 20 5.75
6 15.35 21 5.56
7 13.38 22 5.39
8 11.90 23 5.24
9 10.75 24 5.09
10 9.83 25 4.96
11 9.09 26 4.84
12 8.46 27 4.73
13 7.94 28 4.63
14 7.49 29 4.53
15 7.10 30 4.45
- -------------------------------------------------------------------------------
These tables are based on an annual interest rate of 3 1/2%.
18
FORM A3026-96GRC
<PAGE>
GENERAL PROVISIONS
ENTIRE CONTRACT The entire contract consists of this certificate,
any application attached at issue and any
endorsements.
MISSTATEMENT OF AGE If a payee's age or sex is misstated, the Company
OR SEX will adjust all annuity benefit payments to those
that the annuity value applied would have
purchased at the correct age or sex. Any
underpayments already made by the Company will be
paid immediately. Any overpayments will be
deducted from future annuity benefits. Any
overpayment or underpayment will be charged or
credited with interest, as applicable, at a rate
of 6%
MODIFICATIONS Only the President, a Vice President or Secretary
of the Company may modify or waive any provisions
of this certificate. Agents or Brokers are not
authorized to do so.
INCONTESTABILITY The Company cannot contest this certificate.
CHANGE OF ANNUITY DATE The Owner may change the Annuity Date by Written
Request at any time after the certificate has been
issued. The request must be received at the
Principal Office at least one month before the new
Annuity Date. The alternative Annuity Date must
be the first of any month prior to the Maximum
Alternative Annuity Date shown on the
Specifications page and must be within the life
expectancy of the Annuitant. The Company will
determine life expectancy at the time a change in
the Annuity Date is requested.
MINIMUMS All values, benefits or settlement options
available under this certificate equal or exceed
those required by the state in which the
certificate is delivered.
ANNUAL REPORT The Company will furnish an annual report to the
Owner containing a statement of the number and
value of Accumulation Units credited to the
Sub-Accounts, the value of the Fixed Account and
the Guarantee Period Accounts and any other
information required by applicable law, rules and
regulations.
ADDITION, DELETION, The Company reserves the right, subject to
OR SUBSTITUTION OF compliance with applicable law and prior approval
INVESTMENTS of the Superintendent of Insurance, to add to,
delete from, or substitute for the shares of a
Fund that are held by the Sub-Accounts or that the
Sub-Accounts may purchase. The Company also
reserves the right to eliminate the shares of any
Fund no longer available for investment or if the
Company believes further investment in the Fund is
no longer appropriate for the purposes of the
Sub-Accounts.
The Company will not substitute shares
attributable to any interest in a Sub-Account
without notice to the Owner and prior approval of
the Securities and Exchange Commission as required
by the Investment Company Act of 1940. This will
not prevent the Variable Account from purchasing
other securities for other series or classes of
certificates, or from permitting a conversion
between series or classes of certificates on the
basis of requests made by Owners.
The Company reserves the right, subject to
compliance with applicable laws, to establish
additional Guarantee Period Accounts and
Sub-Accounts and to make them available to any
class or series of certificates as the Company
considers appropriate. Each new Sub-Account will
invest in a new investment company or in shares of
another open-end investment company. The Company
19
FORM A3026-96GRC
<PAGE>
also reserves the right to eliminate or combine
existing Sub-Accounts and to transfer the assets
of any Sub-Accounts to any other Sub-Accounts. In
the event of any substitution or change, the
Company may, by appropriate notice, make such
changes in this and other certificates as may be
necessary or appropriate to reflect the
substitution or change. If the Company considers
it to be in the best interests of certificate
Owners, the Variable Account or any Sub-Account
may be operated as a management company under the
Investment Company Act of 1940, or may be
deregistered under that Act in the event
registration is no longer required, or may be
combined with other accounts of the Company.
No material changes in the investment policy of
the Variable Account or any Sub-Accounts will be
made without approval pursuant to the applicable
insurance laws of the state of New York.
CHANGE OF NAME Subject to compliance with applicable law, the
Company reserves the right to change the names of
the Variable Account or the Sub-Accounts.
FEDERAL TAX The Variable Account is not currently subject to
CONSIDERATIONS tax, but the Company reserves the right to assess
a charge for taxes if the Variable Account becomes
subject to tax, subject to prior notification to
the Superintendent of Insurance.
SPLITTING OF UNITS The Company reserves the right to split the value
of a unit, either to increase or decrease the
number of units. Any splitting of units will have
no material effect on the benefits, provisions or
investment return of this certificate or upon the
Owner, the Annuitant, any Beneficiary, or the
Company.
INSULATION OF SEPARATE The investment performance of Separate Account
ACCOUNT assets is determined separately from the other
assets of the Company. The assets of a Separate
Account equal to the reserves and liabilities of
the certificates supported by the account will not
be charged with liabilities from any other
business that the Company may conduct.
VOTING RIGHTS
The Company will notify Owners with voting
interests of any shareholders' meeting at which
Fund shares held by each Sub-Account will be voted
and will provide proxy materials together with a
form to be used to give voting instructions to the
Company. The Company will vote Fund shares for
which no timely instructions have been received in
the same proportion as shares of that Fund for
which instructions have been received.
Prior to the Annuity Date, the number of shares is
determined by dividing the dollar value of the
Sub-Account Accumulation Units by the net asset
value of one Fund share. After the Annuity Date,
the number of Fund shares is determined by
dividing the reserves held in each Sub-Account to
meet the annuity obligations by the net asset
value of one Fund share.
Flexible Payment Deferred Variable and Fixed Annuity
Annuity Benefits Payable to Annuitant on the Annuity Date
Death Benefit Payable to Beneficiary if either Owner or Annuitant Dies
prior to Annuity Date
Non-Participating
20
FORM A3026-96GRC
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND 440 LINCOLN STREET, VARIABLE ANNUITY APPLICATION
ANNUITY COMPANY WORCESTER, MA 01653
_______________________________________________________________________________
1. ANNUITANT
Please Print Clearly
First MI Last
___________________________________________________________________________
Street Address Apt.
___________________________________________________________________________
City State ZIP
___________________________________________________________________________
Daytime Telephone / / Male Date of Birth
( ) / / Female / /
___________________________________________________________________________
S.S.#
___________________________________________________________________________
_______________________________________________________________________________
2. OWNER COMPLETE THIS SECTION ONLY IF (CHECK ONE AND FILL IN BELOW):
Please Print Clearly
/ / THE OWNER IS OTHER THAN THE ANNUITANT, OR
/ / THIS IS A JOINT OWNER WITH THE ANNUITANT.
First MI Last
_______________________________________________________________________________
Street Address Apt.
_______________________________________________________________________________
City State Zip
_______________________________________________________________________________
S.S.#/Tax I.D. # Date of Birth Date of Trust
/ / / /
_______________________________________________________________________________
_______________________________________________________________________________
3. BENEFICIARY
/ /______ Day Common Disaster Clause
_______________________________________________________________________________
Primary Relationship to Annuitant
_______________________________________________________________________________
Contingent Relationship to Annuitant
_______________________________________________________________________________
4. TYPE OF PLAN
/ / 401(a) Pension/Profit Sharing* / / 408(k) SEP-IRA*
/ / 401(k) Profit Sharing* / / 457 Deferred Comp.
/ / 403(b) TSA* / / Non-Qual. Def. Comp.
/ / 408(b) IRA / / Non-Qualified
*Attach required additional forms.
_______________________________________________________________________________
5. INITIAL PAYMENT
Initial Payment $ _________________________________________
If IRA or SEP-IRA application, the applicant has received a
Disclosure Buyer's Guide and this payment is a (check one):
/ / Rollover / /Trustee to Trustee Transfer
/ / Regular or SEP-IRA Payment for Tax Year ___________
_______________________________________________________________________________
6. REPLACEMENT
Will the proposed contract replace or change any existing
annuity or insurance policy? / / NO / / YES
(If yes, list company name and policy number)
_________________________________________________________
_______________________________________________________________________________
7. ALLOCATION OF PAYMENTS (FUNDS)
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________%
___________% 3 Year
___________% 5 Year
___________% 6 Year
___________% 7 Year
___________% 8 Year
___________% 9 Year
___________% 10 Year
1 0 0 % (All allocations above must total 100%)
___________
________________________________________________________________________
/ / I elect Automatic Account Rebalancing among the above accounts
(excluding the Fixed and Guarantee Period Accounts) starting on the
16th day after the issue date and continuing every:
/ / 1 / / 2 / / 3 / / 6 / / 12 Months
NOTE: If the contract applied for provides for a full refund of the
initial payment under its "Right to Examine" provision, that portion
of each payment not allocated to the Fixed Account will be allocated
solely to the Money Market account during its first 15 days.
Reallocation will then be made as specified.
_______________________________________________________________________________
8. TELEPHONE TRANSFER
I/We authorize and direct Allmerica Financial Life Insurance and Annuity
Company to accept telephone instructions from any person who can furnish
proper identification to effect transfers and future payment allocation
changes. I agree to hold harmless and indemnify Allmerica Financial
Life Insurance and Annuity Company and its affiliates and their collective
directors, officers, employees and agents against any claim arising from
such action.
/ / I DO NOT accept this telephone transfer privilege.
_______________________________________________________________________________
SML-1443 (7/96)
<PAGE>
_______________________________________________________________________________
9. DOLLAR COST AVERAGING
Please transfer $_________________ from (check ONE source account)
($100 minimum)
/ / Fixed Account / / Government Bond / / Money Market
EVERY: / / 1 / / 2 / / 3 / / 6 / / 12 months
FUNDS
TO: ___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
___________ %
Dollar Cost Averaging begins on the 16th day after the issue date and
ends when the source account value is exhausted.
DOLLAR COST AVERAGING INTO THE FIXED OR GUARANTEE PERIOD ACCOUNTS IS
NOT AVAILABLE.
_______________________________________________________________________________
10. SYSTEMATIC WITHDRAWALS
Please withdraw $_________________
($100 minimum)
EVERY: / / 1 / / 2 / / 3 / / 6 / / 12 months
(Systematic withdrawls from the Guarantee Period Accounts are not available.)
___________ % From _______________________________
___________ % From _______________________________
___________ % From _______________________________
___________ % From _______________________________
___________ % From _______________________________
___________ % From _______________________________
___________ % From _______________________________
___________ % From _______________________________
___________ % From _______________________________
___________ % From _______________________________
1 0 0 % TOTAL
___________
/ / Do NOT Withhold Federal Income Taxes
/ / Do Withhold at 10% or _________ (% or $)
Systematic withdraws begin on the 16th day after the issue date.
/ / I wish to use Electronic Funds Transfer. I authorize the Company to
electronically correct any overpayments or erroneous credits made to
my account.
A VOIDED CHECK MUST BE ATTACHED.
_______________________________________________________________________________
11. OPTIONAL BILLING REMINDERS
/ / I wish to receive periodic reminders that I can include with future
remittances.
PAYMENT REMINDER REQUEST (FORM SML-1203) MUST BE ATTACHED.
_______________________________________________________________________________
12. REMARKS
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
13. SIGNATURES
I/We represent to the best of my/our knowledge and belief that the
statements made in this application are true and complete. I/We agree to
all terms and conditions as shown on the front and back. It is indicated
and agreed that the only statements which are to be construed as the basis
of the contract are those contained in this application. I/We acknowledge
receipt of a current prospectus describing the contract applied for. I/WE
UNDERSTAND THAT ALL PAYMENTS AND VALUES BASED ON THE VARIABLE ACCOUNTS MAY
FLUCTUATE AND ARE NOT GUARANTEED AS TO DOLLAR AMOUNT; AND ALL PAYMENTS AND
VALUES BASED ON THE GUARANTEE PERIOD ACCOUNTS ARE SUBJECT TO A MARKET
VALUE ADJUSTMENT FORMULA, THE OPERATION OF WHICH MAY RESULT IN EITHER AN
UPWARD OR DOWNWARD ADJUSTMENT. I/We understand that unless I/we elect
otherwise, the Annuity Date will be the earlier of the date, if any,
selected by the Owner, or the later of the Annuitant's 85th birthday or
the birthday following the tenth contract anniversary, not to exceed
age 90.
____________________________________ ___________________________________
Signature of Owner Signed at (City and State) Date
____________________________________
Signature of Joint Owner
_______________________________________________________________________________
14. REGISTERED REPRESENTATIVE/DEALER INFORMATION
Does the contract applied for replace an existing annuity or life
insurance policy?
/ / Yes / / No If yes, attach replacement form as required.
I CERTIFY THAT (1) THE INFORMATION PROVIDED BY THE OWNER HAS BEEN ACCURATELY
RECORDED; (2) A CURRENT PROSPECTUS WAS DELIVERED; (3) NO WRITTEN SALES
MATERIALS OTHER THAN THOSE APPROVED BY THE PRINCIPAL OFFICE WERE USED;
AND (4) I HAVE REASONABLE GROUNDS TO BELIEVE THE PURCHASE OF THE CONTRACT
APPLIED FOR IS SUITABLE FOR THE OWNER.
<TABLE>
<S> <C> <C> <C> <C> <C>
Date Signature of Registered Representative % TR Print Full Name Code Agency
_________________________________________________________________________________________________________________________
Date Signature of Registered Representative % TR Print Full Name Code Agency
_________________________________________________________________________________________________________________________
Date Signature of Registered Representative % TR Print Full Name Code Agency
_________________________________________________________________________________________________________________________
</TABLE>
<PAGE>
ANNUITY OPTION TABLES (CONTINUED)
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Joint and Two-Thirds Survivor Life
Joint and Survivor Life Annuity Annuity
Older Age Older Age
- ---------------------------------------------------------------------------------------------------
50 55 60 65 70 75 80 50 55 60 65 70 75 80
- ----------------------------------------------------------------------------------------------------
Y 50 3.91 3.97 4.02 4.05 4.07 4.09 4.10 4.25 4.40 4.57 4.76 4.96 5.18 5.39
O
U 55 4.18 4.26 4.32 4.36 4.39 4.41 4.60 4.80 5.02 5.26 5.50 5.75
N
G 60 4.54 4.65 4.73 4.78 4.81 5.08 5.35 5.63 5.92 6.21
E
R 65 5.04 5.19 5.29 5.35 5.74 6.10 6.46 6.82
A 70 5.75 5.95 6.08 6.67 7.15 7.62
G 75 6.77 7.06 8.04 8.69
E 80 8.29 10.05
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the 1983(a) Individual Mortality Table.
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
Number of Variable or Fixed Annuity Number of Variable or Fixed Annuity
Years for a Period Certain Years for a Period Certain
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1 84.65 16 6.76
2 43.05 17 6.47
3 29.19 18 6.20
4 22.27 19 5.97
5 18.12 20 5.75
6 15.35 21 5.56
7 13.38 22 5.39
8 11.90 23 5.24
9 10.75 24 5.09
10 9.83 25 4.96
11 9.09 26 4.84
12 8.46 27 4.73
13 7.94 28 4.63
14 7.49 29 4.53
15 7.10 30 4.45
These tables are based on an annual interest rate of 3 1/2%.
18
<PAGE>
GENERAL PROVISIONS
ENTIRE CONTRACT The entire contract consists of this contract, any
application attached at issue and any endorsements.
MISSTATEMENT OF If a payee's age is misstated, the Company will adjust
AGE all annuity benefit payments to those that the annuity
value applied would have purchased at the correct age.
Any underpayments already made by the Company will be
paid immediately. Any overpayments will be deducted
from future annuity benefits.
MODIFICATIONS Only the President, a Vice President or Secretary of the
Company may modify or waive any provisions of this
contract. Agents or Brokers are not authorized to do so.
INCONTESTABILITY The Company cannot contest this contract.
CHANGE OF ANNUITY The Owner may change the Annuity Date by Written Request
DATE at any time after the contract has been issued. The
request must be received at the Principal Office at least
one month before the new Annuity Date. The alternative
Annuity Date must be the first of any month prior to the
Maximum Alternative Annuity Date shown on the
Specifications page and must be within the life
expectancy of the Annuitant. The Company will determine
life expectancy at the time a change in the Annuity Date
is requested.
MINIMUMS All values, benefits or settlement options available
under this contract equal or exceed those required by the
state in which the contract is delivered.
ANNUAL REPORT The Company will furnish an annual report to the Owner
containing a statement of the number and value of
Accumulation Units credited to the Sub-Accounts, the
value of the Fixed Account and the Guarantee Period
Accounts and any other information required by applicable
law, rules and regulations.
ADDITION, DELETION, The Company reserves the right, subject to compliance
OR SUBSTITUTION OF with applicable law, to add to, delete from, or
INVESTMENTS substitute for the shares of a Fund that are held by the
Sub-Accounts or that the Sub-Accounts may purchase. The
Company also reserves the right to eliminate the shares
of any Fund no longer available for investment or if the
Company believes further investment in the Fund is no
longer appropriate for the purposes of the Sub-Accounts.
The Company will not substitute shares attributable to
any interest in a Sub-Account without notice to the Owner
and prior approval of the Securities and Exchange
Commission as required by the Investment Company Act of
1940. This will not prevent the Variable Account from
purchasing other securities for other series or classes
of contracts, or from permitting a conversion between
series or classes of contracts on the basis of requests
made by Owners.
The Company reserves the right, subject to compliance
with applicable laws, to establish additional Guarantee
Period Accounts and Sub-Accounts and to make them
available to any class or series of contracts as the
Company considers appropriate. Each new Sub-Account will
invest in a new investment company or in shares of
another open-end investment company. The Company also
reserves the right to eliminate or combine existing
Sub-Accounts and to transfer the assets of any
Sub-Accounts to any other Sub-Accounts. In the event of
any substitution or change, the Company may, by
appropriate notice,
19
<PAGE>
make such changes in this and other
contracts as may be necessary or appropriate to reflect
the substitution or change. If the Company considers it
to be in the best interests of contract Owners, the
Variable Account or any Sub-Account may be operated as a
management company under the Investment Company Act of
1940, or may be deregistered under that Act in the event
registration is no longer required, or may be combined
with other accounts of the Company.
CHANGE OF NAME Subject to compliance with applicable law, the Company
reserves the right to change the names of the Variable
Account or the Sub-Accounts.
FEDERAL TAX The Variable Account is not currently subject to tax, but
CONSIDERATIONS the Company reserves the right to assess a charge for
taxes if the Variable Account becomes subject to tax.
SPLITTING OF UNITS The Company reserves the right to split the value of a
unit, either to increase or decrease the number of units.
Any splitting of units will have no material effect on
the benefits, provisions or investment return of this
contract or upon the Owner, the Annuitant, any
Beneficiary, or the Company.
INSULATION OF The investment performance of Separate Account assets is
SEPARATE ACCOUNT determined separately from the other assets of the
Company. The assets of a Separate Account equal to the
reserves and liabilities of the contracts supported by
the account will not be charged with liabilities from any
other business that the Company may conduct.
VOTING RIGHTS The Company will notify Owners with voting interests of
any shareholders' meeting at which Fund shares held by
each Sub-Account will be voted and will provide proxy
materials together with a form to be used to give voting
instructions to the Company. The Company will vote Fund
shares for which no timely instructions have been
received in the same proportion as shares of that Fund
for which instructions have been received.
Prior to the Annuity Date, the number of shares is
determined by dividing the dollar value of the
Sub-Account Accumulation Units by the net asset value of
one Fund share. After the Annuity Date, the number of
Fund shares is determined by dividing the reserves held
in each Sub-Account to meet the annuity obligations by
the net asset value of one Fund share.
Flexible Payment Deferred Variable and Fixed Annuity
Annuity Benefits Payable to Annuitant on the Annuity Date
Death Benefit Payable to Beneficiary if either Owner or
Annuitant Dies prior to Annuity Date
Non-Participating
20
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this initial Registration Statement for Separate Account
KGC of First Allmerica Financial Life Insurance Company on Form N-4 of our
report dated February 5, 1996, relating to the consolidated financial
statements of First Allmerica Financial Life Insurance Company which appears
in such Statement of Additional Information. We also consent to the reference
to us under the heading "Experts" in such Statement of Additional Information.
Price Waterhouse LLP
Boston, Massachusetts
August 15, 1996
<PAGE>
August 9, 1996
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
Gentlemen:
In my capacity as Counsel of First Allmerica Financial Life Insurance Company
(the "Company"), I have participated in the preparation of the Initial
Registration for the Separate Account KGC on Form N-4 under the Securities Act
of 1933 and the Investment Company Act of 1940, with respect to the Company's
individual and group variable annuity policies.
I am of the following opinion:
1. Separate Account KGC is a separate account of the company validly existing
pursuant to the Massachusetts Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account KGC are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The individual and group variable annuity policies, when issued in
accordance with the Prospectus contained in the Registration Statement
and upon compliance with applicable local law, will be legal and binding
obligations of the Company in accordance with their terms and when sold
will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Initial
Registration of Separate Account KGC filed under the Securities Act of 1933.
Very truly yours,
/s/Sheila B. St. Hilaire
Sheila B. St. Hilaire
Counsel
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
TOTAL RETURN
Following are the calculations of Total Return for the Separate Accounts, which
are included in the Statement of Additional Information in this filing.
The calculations are based on the formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment to the Separate 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 the ending value reflects the Separate Account asset charge,
and an $0.88 contract fee which represents a pro-rata portion of the $35
contract fee based on a mean contract size of $40,000. It is assumed that the
investment is redeemed at the end of the period; therefore, the calculation
reflects the contingent deferred sales load which might be applicable upon
redemption of the policy.
Solving for T results in the following formula:
T = (ERV / P) (1 / n) - 1
The following intermediate calculations are needed to determine ERV in order to
solve for T.
(1) CALCULATE THE ACCUMULATED VALUE AFTER N YEARS
AV(n) = Sum (from j=0 to n-1) of [AV(j) x (1+NR(n)) - PF]
Where: AV(j) = Accumulated Value after j years
and: AV(0) = P
NR(n) = average annual net return for the n year performance period
NR(n) = [ (1 + GR(n) ) (1/365) - DFF] (365)
Where: GR(n) = average annual gross return for the underlying
funds as reported by Lipper Analytical Services.
DFF = daily fee factor equal to 0.0039% representing the
daily deduction of the mortality and expense charge
(1.25% annually) and the administrative charge
(0.15% annually).
PF = policy fee equal to $0.88 representing the $35.00 charge spread
across a mean contract size of $40,000.
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
(2) CALCULATE THE SURRENDER CHARGE
SC(n)= P x SCRATE(n) - PF (if not the end of the policy year)
Where: SC(n) = total charge due assuming surrender at the end of n years
SCRATE(n) = contingent deferred sales charge for surrender at the
end of years
(3) CALCULATE THE REDUCTION IN SURRENDER CHARGE DUE TO THE WITHDRAWAL WITHOUT
SURRENDER CHARGE PROVISION
SC(n) = SC(n) - FPW(n) x SCRATE(n)
Where: FPW(n) = the amount of payment (P) reduced due to the Withdrawal
without Surrender Charge provision. This is equal to the
amount the withdrawal without surrender charge exceeds the
earnings in the contract at the end of n years.
FPWn = max(0) ; FW(n) - (AV(n) - P))
Where: FW(n) = the withdrawal without surrender charge available at the
end of n years
FW(n) = AVn x 15%
(4) CALCULATE ERV
ERV = AV(n) - SC(n)
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
KINF FUNDS AVERAGE ANNUAL RETURNS FOR THE PERIOD ENDING DECEMBER 31, 1995
Source - Lipper Analytical Services
(GR(n))
<TABLE>
<CAPTION>
Year Ended: Since Inception
Underlying Portfolios 12/31/95 3 Years 5 Years 10 Years Inception Date
- --------------------- -------- ------- ------- -------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market 5.57 % 4.10 % 4.32 % 5.93 % 7.01 % 3/5/82
Total Return 25.97 % 8.53 % 12.38 % 11.79 % 13.16 % 3/5/82
High Yield 17.40 % 11.26 % 19.75 % 11.46 % 13.68 % 3/5/82
Growth 32.97 % 13.52 % 19.30 % 13.22 % 20.80 % 12/9/83
Government Securities 18.98 % 7.20 % 8.51 % N/A 8.46 % 9/3/87
International 12.83 % 13.04 % N/A N/A 9.48 % 1/6/92
Small Cap Growth 30.07 % N/A N/A N/A 20.03 % 5/2/94
Investment Grade Bond N/A N/A N/A N/A N/A 5/1/96
Value N/A N/A N/A N/A N/A 5/1/96
Small Cap Value N/A N/A N/A N/A N/A 5/1/96
Value+Growth N/A N/A N/A N/A N/A 5/1/96
Horizon 20+ N/A N/A N/A N/A N/A 5/1/96
Horizon 10+ N/A N/A N/A N/A N/A 5/1/96
Horizon 5+ N/A N/A N/A N/A N/A 5/1/96
</TABLE>
ILLUSTRATION OF TOTAL RETURN FOR n = 1 YEAR, USING THE MONEY MARKET PORTFOLIO
NR(1) = [(1 + 0.0557) (1/365) - 0.000030] 365 - 1 = 4.42%
AV(1) = 1,000 x (1 + 0.0442) - 0.88 = 1,043.32
FW(1) = 1,043.32 x 0.15 = 156.50
FPW(1) = max(0 ; 156.50 - (1,043.32 - 1,000)) = 113.18
SC(1) = 1,000 x 7% - 113.18 x 7% = 62.08
ERV = 1,043.32 - 62.08 = 981.24
T = (981.24 / 1,000) (1/1) - 1 = -1.88%
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
ILLUSTRATION OF TOTAL RETURN FOR n = 3 YEARS, USING THE MONEY MARKET PORTFOLIO
NR(3)= [(1 + 0.0410) (1/365) - 0.000030] 365 - 1 = 2.97%
AV(1) = 1,000 x (1 + 0.0297) - 0.88 = 1,028.82
AV(2) = 1,028.82 x (1 + 0.0297) - 0.88 = 1,058.50
AV(3) = 1,058.50 x (1 + 0.0297) - 0.88 = 1,089.05
FW(3) = 1,089.05 x 0.15 = 163.36
FPW(3) = max(0 ; 163.36 - (1,089.05 - 1,000)) = 74.31
SC(3) = 1,000 x 5% - 74.31 x 5% = 46.28
ERV = 1,089.05 - 46.28 = 1,042.77
T = (1,042.77 / 1,000) (1/3) - 1 = 1.41%
ILLUSTRATION OF TOTAL RETURN FOR n = 5 YEARS, USING THE MONEY MARKET PORTFOLIO
NR(5) = [(1 + 0.0432) (1/365) - 0.000030] (365) - 1 = 3.18%
AV(1) = 1,000 x (1 + 0.0318) - 0.88 = 1,030.92
AV(2) = 1,030.92 x (1 + 0.0318) - 0.88 = 1,062.82
AV(3) = 1,062.82 x (1 + 0.0318) - 0.88 = 1,095.74
AV(4) = 1,095.74 x (1 + 0.0318) - 0.88 = 1,129.71
AV(5) = 1,129.71 x (1 + 0.0318) - 0.88 = 1,164.75
FW(5) = 1,164.75 x 0.15 = 174.71
FPW(5) = max(0 ; 174.71 - (1,164.75 - 1,000)) = 9.96
SC(5) = 1,000 x 3% - 9.96 x 3% = 29.70
ERV = 1,146.20 - 29.70 = 1,135.05
T = (1,135.05 / 1,000) (1/5) - 1 = 2.57%
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
ILLUSTRATION OF TOTAL RETURN FOR n = 10 YEARS, USING THE MONEY MARKET PORTFOLIO
NR(10) = [(1 + 0.0593) (1/365) - 0.000030}] (365) - 1 = 4.78%
AV(1) = 1,000 x (1 + 0.0478) - 0.88 = 1,046.92
AV(2) = 1,046.92 x (1 + 0.0478) - 0.88 = 1,096.08
AV(3)= 1,096.08 x (1 + 0.0478) - 0.88 = 1,147.60
AV(4) = 1,147.67 x (1 + 0.0478) - 0.88 = 1,201.57
AV(5) = 1,201.57 x (1 + 0.0478) - 0.88 = 1,258.13
AV(6) = 1,258.13 x (1 + 0.0478) - 0.88 = 1,317.38
AV(7) = 1,317.38 x (1 + 0.0478) - 0.88 = 1,379.48
AV(8) = 1,379.48 x (1 + 0.0478) - 0.88 = 1,444.53
AV(9) = 1,444.53 x (1 + 0.0478) - 0.88 = 1,512.70
AV(10) = 1,512.70 x (1 + 0.0478) - 0.88 = 1,584.13
FW(10) = 1,584.13 x 0.15 = 237.62
FPW(10) = max(0 ; 237.62 - (1,584.13 - 1,000)) = 0.00
SC(10) = 1,000 x 0% - 0.00 x 0% = 0.00
ERV = 1,584.13 - 0.00 = 1,584.13
T = (1,584.13 / 1,000) (1/10) - 1 = 4.71%
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
ILLUSTRATION OF TOTAL RETURN FOR n = LIFETIME OF FUND (13 YEARS, 301 DAYS),
USING THE MONEY MARKET PORTFOLIO
NR(13 301 / 365) = [(1 + 0.0701) (1/365) - 0.000030] (365) - 1 = 5.84%
AV(1) = 1,000 x (1 + 0.0584) - 0.88 = 1,057.52
AV(2) = 1,057.52 x (1 + 0.0584) - 0.88 = 1,118.40
AV(3) = 1,118.40 x (1 + 0.0584) - 0.88 = 1,182.83
AV(4) = 1,182.83 x (1 + 0.0584) - 0.88 = 1,251.03
AV(5) = 1,251.03 x (1 + 0.0584) - 0.88 = 1,323.21
AV(6) = 1,323.21 x (1 + 0.0584) - 0.88 = 1,399.61
AV(7) = 1,399.61 x (1 + 0.0584) - 0.88 = 1,480.46
AV(8) = 1,480.46 x (1 + 0.0584) - 0.88 = 1,566.04
AV(9) = 1,566.04 x (1 + 0.0584) - 0.88 = 1,656.62
AV(10) = 1,656.62 x (1 + 0.0584) - 0.88 = 1,752.49
AV(11) = 1,752.49 x (1 + 0.0584) - 0.88 = 1,853.95
AV(12) = 1,853.95 x (1 + 0.0584) - 0.88 = 1,961.34
AV(13) = 1,961.34 x (1 + 0.0584) - 0.88 = 2,075.01
AV(13) 301/365 = 2,075.01 x (1 + 0.0584) = 2,174.44
FW(13 301/365) -= 2,174.44 x 0.15 = 326.17
FPW(13 301/365) = max(0 ; 326.17 - (2,174.44 - 1,000)) = 0.00
SC(13 301/365) = 1,000 x 0% - 0.00 x 0% - 0.88 = 0.88
ERV = 2,174.44 - 0.88 = 2,173.56
T = (2,173.56 / 1,000) (1/(13 301/365)) - 1 = 5.78%
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
SUPPLEMENTAL TOTAL RETURN
Following are the calculations for supplemental total return information which
is included in the Statement of Additional Information in this filing.
The calculations are based on the formula:
P(1+T)(n) = EV
Where: P = a hypothetical initial payment to the Separate Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the specified
period.
The calculation of the ending value reflects the Separate Account asset charge,
and an $0.88 contract fee which represents a pro-rata portion of the $35
contract fee based on a mean contract size of $40,000. It is assumed that the
investment is NOT redeemed at the end of the period; therefore, the calculation
does NOT reflect the contingent deferred sales load which might be applicable
upon redemption of the policy.
Solving for T results in the following formula:
T = (EV / P) (1 / n) -
The following intermediate calculation is needed to determine EV.
CALCULATE THE ACCUMULATED VALUE AFTER N YEARS
EV = AV(n) = Sum (from j=0 to n-1) of [AV(j) x (1+NR(n)) - PF]
Where: AVj = Accumulated Value after j years
and: AV0 = P
NRn = average annual net return for the n year performance period
NR(n) = [ (1 + GR(n) ) (1/365) - DFF] (365)
Where: GR(n) = average annual gross return for the underlying
funds as reported by Lipper Analytical Services.
DFF = daily fee factor equal to 0.0039% representing the
daily deduction of the mortality and expense charge
(1.25% annually) and the administrative charge
(0.15% annually).
PF = policy fee equal to $0.88 representing the $35.00 charge spread
across a mean contract size of $40,000.
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
KINF FUNDS AVERAGE ANNUAL RETURNS FOR THE PERIOD ENDING DECEMBER 31, 1995
Source - Lipper Analytical Services
(GR(n))
<TABLE>
<CAPTION>
Year Ended: Since Inception
Underlying Portfolios 12/31/95 3 Years 5 Years 10 Years Inception Date
- --------------------- -------- ------- ------- -------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market 5.57 % 4.10 % 4.32 % 5.93 % 7.01 % 3/5/82
Total Return 25.97 % 8.53 % 12.38 % 11.79 % 13.16 % 3/5/82
High Yield 17.40 % 11.26 % 19.75 % 11.46 % 13.68 % 3/5/82
Growth 32.97 % 13.52 % 19.30 % 13.22 % 20.80 % 12/9/83
Government Securities 18.98 % 7.20 % 8.51 % N/A 8.46 % 9/3/87
International 12.83 % 13.04 % N/A N/A 9.48 % 1/6/92
Small Cap Growth 30.07 % N/A N/A N/A 20.03 % 5/2/94
Investment Grade Bond N/A N/A N/A N/A N/A 5/1/96
Value N/A N/A N/A N/A N/A 5/1/96
Small Cap Value N/A N/A N/A N/A N/A 5/1/96
Value+Growth N/A N/A N/A N/A N/A 5/1/96
Horizon 20+ N/A N/A N/A N/A N/A 5/1/96
Horizon 10+ N/A N/A N/A N/A N/A 5/1/96
Horizon 5+ N/A N/A N/A N/A N/A 5/1/96
</TABLE>
ILLUSTRATION OF SUPPLEMENTAL TOTAL RETURN FOR n = 1 YEAR, USING THE MONEY MARKET
PORTFOLIO
NR(1) = [(1 + 0.0557) (1/365) - 0.000030] (365) - 1 = 4.42%
AV(1) = 1,000 x (1 + 0.0442) - 0.88 = 1,043.32
EV = 1,043.32
T = (1,043.32 / 1,000) (1/1) - 1 = 4.33%
ILLUSTRATION OF SUPPLEMENTAL TOTAL RETURN FOR n = 3 YERS, USING THE MONEY
MARKET PORTFOLIO
NR(3)= [(1 + 0.0410) (1/365) - 0.000030] (365) - 1 = 2.97%
AV(1) = 1,000 x (1 + 0.0297) - 0.88 = 1,028.82
AV(2) = 1,028.82 x (1 + 0.0297) - 0.88 = 1,058.50
AV(3) = 1,058.50 x (1 + 0.0297) - 0.88 = 1,089.05
EV = 1,089.05
T = (1,089.05 / 1,000) (1/3) - 1 = 2.88%
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
ILLUSTRATION OF SUPPLEMENTAL TOTAL RETURN FOR n = 5 YEARS, USING THE MONEY
MARKET PORTFOLIO
NR(5) = [(1 + 0.0432) (1/365) - 0.000030] (365) - 1 = 3.18%
AV(1) = 1,000 x (1 + 0.0318) - 0.88 = 1,030.92
AV(2) = 1,030.92 x (1 + 0.0318) - 0.88 = 1,062.82
AV(3) = 1,062.82 x (1 + 0.0318) - 0.88 = 1,095.74
AV(4) = 1,095.74 x (1 + 0.0318) - 0.88 = 1,129.71
AV(5) = 1,129.71 x (1 + 0.0318) - 0.88 = 1,164.75
EV = 1,146.20
T = (1,146.20 / 1,000) (1/5) - 1 = 3.10%
ILLUSTRATION OF SUPPLEMENTAL TOTAL RETURN FOR n = 10 YEARS, USING THE MONEY
MARKET PORTFOLIO
NR(10) = [(1 + 0.0593) (1/365) - 0.000030] (365) - 1 = 4.78%
AV(1) = 1,000 x (1 + 0.0478) - 0.88 = 1,046.92
AV(2) = 1,046.92 x (1 + 0.0478) - 0.88 = 1,096.08
AV(3) = 1,096.08 x (1 + 0.0478) - 0.88 = 1,147.60
AV(4) = 1,147.67 x (1 + 0.0478) - 0.88 = 1,201.57
AV(5) = 1,201.57 x (1 + 0.0478) - 0.88 = 1,258.13
AV(6) = 1,258.13 x (1 + 0.0478) - 0.88 = 1,317.38
AV(7) = 1,317.38 x (1 + 0.0478) - 0.88 = 1,379.48
AV(8) = 1,379.48 x (1 + 0.0478) - 0.88 = 1,444.53
AV(9) = 1,444.53 x (1 + 0.0478) - 0.88 = 1,512.70
AV(10) = 1,512.70 x (1 + 0.0478) - 0.88 = 1,584.13
EV = 1,584.13
T = (1,584.13 / 1,000) (1/10) - 1 = 4.71%
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
ILLUSTRATION OF SUPPLEMENTAL TOTAL RETURN FOR n = LIFETIME OF FUND (13 YEARS,
301 DAYS), USING THE MONEY MARKET PORTFOLIO
NR(13 301 / 365) = [(1 + 0.0701) (1/365) - 0.000030] (365) - 1 = 5.84%
AV(1) = 1,000 x (1 + 0.0584) - 0.88 = 1,057.52
AV(2)= 1,057.52 x (1 + 0.0584) - 0.88 = 1,118.40
AV(3)= 1,118.40 x (1 + 0.0584) - 0.88 = 1,182.83
AV(4) = 1,182.83 x (1 + 0.0584) - 0.88 = 1,251.03
AV(5) = 1,251.03 x (1 + 0.0584) - 0.88 = 1,323.21
AV(6) = 1,323.21 x (1 + 0.0584) - 0.88 = 1,399.61
AV(7) = 1,399.61 x (1 + 0.0584) - 0.88 = 1,480.46
AV(8) = 1,480.46 x (1 + 0.0584) - 0.88 = 1,566.04
AV(9) = 1,566.04 x (1 + 0.0584) - 0.88 = 1,656.62
AV(10) = 1,656.62 x (1 + 0.0584) - 0.88 = 1,752.49
AV(11) = 1,752.49 x (1 + 0.0584) - 0.88 = 1,853.95
AV(12) = 1,853.95 x (1 + 0.0584) - 0.88 = 1,961.34
AV(13) = 1,961.34 x (1 + 0.0584) - 0.88 = 2,075.01
AV(13 301/365) = 2,075.01 x (1 + 0.0584) = 2,174.44
EV = 2,174.44
T = (2,174.44 / 1,000) (1/(13 301/365)) - 1 = 5.78%
<PAGE>
EXHIBIT 13 (KEMPER GATEWAY CUSTOM)
ILLUSTRATION OF SUPPLEMENTAL TOTAL RETURN FOR n = LIFETIME OF FUND (13 YEARS,
301 DAYS), USING THE MONEY MARKET PORTFOLIO
NR(13 301 / 365) = [(1 + 0.0701) (1/365) - 0.000030] (365) - 1 = 5.50%
AV(1) = 1,000 x (1 + 0.0584) - 0.88 = 1,054.12
AV(2) = 1,054.12 x (1 + 0.0584) - 0.88 = 1,111.22
AV(3) = 1,111.22 x (1 + 0.0584) - 0.88 = 1,171.45
AV(4) = 1,171.45 x (1 + 0.0584) - 0.88 = 1,235.00
AV(5) = 1,235.00 x (1 + 0.0584) - 0.88 = 1,302.05
AV(6) = 1,302.05 x (1 + 0.0584) - 0.88 = 1,372.78
AV(7) = 1,372.78 x (1 + 0.0584) - 0.88 = 1,447.40
AV(8) = 1,447.40 x (1 + 0.0584) - 0.88 = 1,526.13
AV(9) = 1,526.13 x (1 + 0.0584) - 0.88 = 1,609.19
AV(10) = 1,609.19 x (1 + 0.0584) - 0.88 = 1,696.81
AV(11) = 1,696.81 x (1 + 0.0584) - 0.88 = 1,789.26
AV(12) = 1,789.26 x (1 + 0.0584) - 0.88 = 1,886.79
AV(13) = 1,886.79 x (1 + 0.0584) - 0.88 = 1,989.68
AV(13 301/365) = 1,989.68 x (1 + 0.0584) = 2,079.50
EV = 2,079.50
T = (2,079.50 / 1,000) (1/(13 301/365)) - 1 = 5.44%
<PAGE>
GATEWAY
PARTICIPATION AGREEMENT
AMONG
KEMPER INVESTORS FUND
ZURICH KEMPER INVESTMENTS, INC.
KEMPER DISTRIBUTORS, INC.
AND
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this _____ day of ____________,
1996 by and among First Allmerica Financial Life Insurance Company
(hereinafter, the "Company"), a Massachusetts insurance company, on its own
behalf and on behalf of each separate account of the Company set forth on
Schedule A hereto as may be amended from time to time (each account
hereinafter referred to as an "Account"), Kemper Investors Fund, a business
trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund"), Zurich Kemper Investments, Inc. (hereinafter the
"Adviser"), a Delaware corporation, and Kemper Distributors, Inc.
(hereinafter the "Underwriter"), a Delaware corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance and variable annuity contracts
(hereinafter the "Variable Insurance Products") offered by insurance companies
that have entered into participation agreements with the Fund (hereinafter
"Participating Insurance Companies");
WHEREAS, the beneficial interest in the Fund is divided into several series of
shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets;
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance separate accounts exemptions from the
provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company
Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, if and to the extent necessary to permit shares of
the Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
(hereinafter the "Shared Funding Exemption Order");
<PAGE>
WHEREAS, the Fund is registered as an open-end management investment company
under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act");
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws;
WHEREAS, the Company has registered or will register certain variable life
insurance and variable annuity contracts supported wholly or partially by the
Accounts (the "Contracts") under the 1933 Act, and said Contracts are listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement;
WHEREAS, each Account is duly established and maintained as a separate account,
established by resolution of the Board of Directors of the Company, on the date
shown for such Account on Schedule A hereto, to set aside and invest assets
attributable to the aforesaid Contracts;
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act;
WHEREAS, the Underwriter is registered as a broker-dealer with the SEC under the
Securities Exchange Act of 1934, as amended ("1934 Act"), and is a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company intends to purchase shares of the Portfolios listed in Schedule A
hereto, as it may be amended from time to time at the request of the Fund,
Underwriter and Adviser and with the consent of the Company, which consent will
not be unreasonably withheld ("Designated Portfolios"), on behalf of the
Accounts to fund the aforesaid Contracts, and the Underwriter is authorized to
sell such shares to unit investment trusts such as the Accounts at net asset
value; and
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company also intends to purchase shares in other open-end investment
companies or series thereof not affiliated with the Fund ("Unaffiliated Funds")
on behalf of the Accounts to fund the Contracts if and to the extent that the
Underwriter and the Adviser so agree, in their sole discretion;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund, the Adviser and the Underwriter agree as follows:
2
<PAGE>
ARTICLE I
SALE OF FUND SHARES
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios that the Accounts order, executing such orders on a daily
basis at the net asset value next computed after receipt by the Fund or its
designee of the order for the shares of the Designated Portfolios.
1.2 The Fund agrees to make shares of each Designated Portfolio available
for purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which the Fund calculates such Designated Portfolio's
net asset value pursuant to rules of the SEC, and the Fund shall use reasonable
efforts to calculate such net asset value on each day when the New York Stock
Exchange is open for trading. Notwithstanding the foregoing, the Board of
Trustees of the Fund ("Board") may refuse to sell shares of any Designated
Portfolio to any person, or suspend or terminate the offering of shares of any
Designated Portfolio if such action is required by law or by regulatory
authorities having jurisdiction, or is, in the sole discretion of the Board
acting in good faith and in light of its fiduciary duties under federal and any
applicable state laws, necessary in the best interest of the shareholders of
such Designated Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies or their separate accounts. No
shares of any Designated Portfolios will be sold to the general public. The
Fund and the Underwriter will not sell shares of any Designated Portfolio to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Sections 2.1, 3.4, 3.5 and 3.6 and Article VII of this
Agreement is in effect to govern such sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios held by the Company, executing
such requests on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of the request for redemption, except that
the Fund reserves the right to suspend the right of redemption or postpone the
date of payment or satisfaction upon redemption consistent with Section 22(e) of
the 1940 Act and any rules thereunder, and in accordance with the procedures and
policies of the Fund as described in the Fund's then current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the
designee of the Fund for receipt of purchase and redemption orders from the
Accounts, and receipt by such designee shall constitute receipt by the Fund;
provided that the Company receives the order prior to the determination of net
asset value as set forth in the Fund's then current prospectus and the Fund
receives notice of such order by 9:30 a.m. New York time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the SEC.
3
<PAGE>
1.6 The Company agrees to purchase and redeem the shares of each
Designated Portfolio offered by the Fund's then current prospectus in accordance
with the provisions of such prospectus.
1.7 The Company shall pay for shares of a Designated Portfolio on the next
Business Day after receipt of an order to purchase shares of such Designated
Portfolio. Payment shall be in federal funds transmitted by wire by 11:00 a.m.
New York time. If payment in federal funds for any purchase is not received or
is received by the Fund after 11:00 a.m. New York time on such Business Day, the
Company shall promptly, upon the Fund's request, reimburse the Fund for any
charges, costs, fees, interest or other expenses incurred by the Fund in
connection with any advances to, or borrowing or overdrafts by, the Fund, or any
similar expenses incurred by the Fund, as a result of portfolio transactions
effected by the Fund based upon such purchase request. For purposes of
Section 2.8 and 2.9 hereof, upon receipt by the Fund of the federal funds so
wired, such funds shall cease to be the responsibility of the Company and shall
become the responsibility of the Fund.
1.8 Issuance and transfer of the shares of a Designated Portfolio will be
by book entry only. Stock certificates will not be issued to the Company or any
Account. Shares of a Designated Portfolio ordered from the Fund will be
recorded in an appropriate title for each Account or the appropriate subaccount
of each Account.
1.9 The Fund shall furnish same-day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on shares of the Designated Portfolios. The Company
hereby elects to receive all such income, dividends, and capital gain
distributions as are payable on shares of a Designated Portfolio in additional
shares of that Designated Portfolio. The Company reserves the right to revoke
this election and to receive all such income dividends and capital gain
distributions in cash. The Fund shall notify the Company of the number of
shares so issued as payment of such dividends and distributions. The Fund shall
use its best efforts to furnish advance notice of the day such dividends and
distributions are expected to be paid.
1.10 The Fund shall make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
New York time) and shall use its best efforts to make such net asset value per
share available by 7:00 p.m. New York time.
1.11 The Parties hereto acknowledge that the arrangement contemplated by
this Agreement is not exclusive; the shares of the Designated Portfolios (and
other Portfolios of the Fund) may be sold to other insurance companies (subject
to Section 1.3 and Article VII hereof) and the cash value of the Contracts may
be invested in other investment companies, provided, however, that the Adviser
and Underwriter consent to the use of such other investment company in their
sole discretion.
4
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a separate account under the
Delaware insurance laws and has registered or, prior to any issuance or sale of
the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a separate account
for the Contracts.
2.2 The Fund represents and warrants that shares of the Designated
Portfolios sold pursuant to this Agreement shall be registered under the 1933
Act, duly authorized for issuance and sold in compliance with all applicable
federal securities laws and that the Fund is and shall remain registered under
the 1940 Act. The Fund shall amend the Registration Statement for its shares
under the 1933 Act and the 1940 Act from time to time as required in order to
effect the continuous offering of its shares. The Fund shall register and
qualify the shares of the Designated Portfolios for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it may
make such payments in the future subject to applicable law.
2.4 The Fund makes no representations as to whether any aspect of its
operation, including but not limited to, investments policies, fees and
expenses, complies with the insurance and other applicable laws of the
various states, except that the Fund represents that the investment policies,
fees and expenses of the Designated Portfolios are and shall at all times
remain in compliance with the insurance laws of the Commonwealth of
Massachusetts to the extent required to perform this Agreement. The Company
will advise the Fund in writing as to any requirements of Delaware insurance
law that affect the Designated Portfolios, and the Fund will be deemed to be
in compliance with this Section 2.4 so long as the Fund complies with such
advice of the Company.
2.5 The Fund represents that it is lawfully organized and validly existing
as a business trust under the laws of the Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act.
2.6 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the shares of
the Designated Portfolios in accordance with any applicable state and federal
securities laws.
5
<PAGE>
2.7 The Adviser represents and warrants that it is and shall remain duly
registered as an investment adviser under all applicable federal and state
securities laws and that the Adviser shall perform its obligations for the Fund
in compliance in all material respects with any applicable state and federal
securities laws.
2.8 The Fund, the Adviser and the Underwriter represent and warrant that
all their directors, officers, employees, investment advisers, and other
individuals or entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimum coverage required currently by Rule 17g-1 of the 1940 Act or such
related provisions as may be promulgated from time to time. The aforesaid bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.9 The Company represents and warrants that all its directors, officers,
employees, investment advisers, and other individuals or entities employed or
controlled by the Company dealing with the money and/or securities of the Fund
are covered by a blanket fidelity bond or similar coverage in an amount not less
than $20 million. The aforesaid bond includes coverage for larceny and
embezzlement and is issued by a reputable bonding company. The Company agrees
that this bond or another bond containing these provisions will always be in
effect, and agrees to notify the Fund, the Adviser and the Underwriter in the
event that such coverage no longer applies.
2.10 The Company represents and warrants that all shares of the Designated
Portfolios purchased by the Company will be purchased on behalf of one or more
unmanaged separate accounts that offer interests therein that are registered
under the 1933 Act and upon which a registration fee has been or will be paid;
and the Company acknowledges that the Fund intends to rely upon this
representation and warranty for purposes of calculating SEC registration fees
payable with respect to such shares of the Designated Portfolios pursuant to
Instruction B.5 to Form 24F-2 or any similar form or SEC registration fee
calculation procedure that allows the Fund to exclude shares so sold for
purposes of calculating its SEC registration fee. The Company agrees to
cooperate with the Fund on no less than an annual basis to certify as to its
continuing compliance with this representation and warranty.
ARTICLE III
PROSPECTUSES, STATEMENTS OF ADDITIONAL
INFORMATION, AND PROXY STATEMENTS; VOTING
3.1 The Fund shall provide the Company with as many copies of the Fund's
current prospectus for the Designated Portfolios as the Company may reasonably
request. If requested by the Company in lieu thereof, the Fund shall provide
such documentation (including a final copy of the new prospectus) and other
assistance as is reasonably necessary in order for the Company once each year
(or more frequently if the prospectus for a Designated Portfolio is amended) to
have the prospectus for the Contracts and the prospectus for the Designated
6
<PAGE>
Portfolios printed together in one document. Expenses with respect to the
foregoing shall be borne as provided under Article V.
3.2 The Fund's prospectus shall disclose that (a) the Fund is intended to
be a funding vehicle for all types of variable annuity and variable life
insurance contracts offered by Participating Insurance Companies, (b) material
irreconcilable conflicts of interest may arise, and (c) the Fund's Board will
monitor events in order to identify the existence of any material irreconcilable
conflicts and determine what action, if any, should be taken in response to such
conflicts. The Fund hereby notifies the Company that disclosure in the
prospectus for the Contracts regarding the potential risks of mixed and shared
funding may be appropriate. Further, the Fund's prospectus shall state that the
current Statement of Additional Information ("SAI") for the Fund is available
from the Company (or, in the Fund's discretion, from the Fund), and the Fund
shall provide a copy of such SAI to any owner of a Contract who requests such
SAI and to the Company in such quantities as the Company may reasonably request.
Expenses with respect to the foregoing shall be borne as provided under Article
V.
3.3 The Fund shall provide the Company with copies of its proxy material,
reports to shareholders, and other communications to shareholders for the
Designated Portfolios in such quantity as the Company shall reasonably require
for distributing to Contract owners. Expenses with respect to the foregoing
shall be borne as provided under Article V.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the shares of each Designated Portfolio in accordance
with instructions received from Contract owners; and
(iii) vote shares of each Designated Portfolio for which no
instructions have been received in the same proportion as
shares of such Designated Portfolio for which instructions
have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners or to the
extent otherwise required by law. The Company reserves the right to vote shares
of each Designated Portfolio held in any separate account in its own right, to
the extent permitted by law.
3.5 The Company shall be responsible for assuring that each of its
separate accounts participating in a Designated Portfolio calculates voting
privileges as required by the Shared Funding Exemption Order and consistent with
any reasonable standards that the Fund has adopted or may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with
7
<PAGE>
Section 16(c) of the 1940 Act (although the Fund is not one of the trusts
described in Section 16(c) of that Act) as well as with Sections 16(a) and, if
and when applicable, Section 16(b). Further, the Fund will act in accordance
with the SEC's interpretation of the requirements of Section 16(a) with respect
to periodic elections of directors or trustees and with whatever rules the SEC
may promulgate from time to time with respect thereto. The Fund reserves the
right, upon prior written notice to the Company, to take all actions, including
but not limited to, the dissolution, termination, merger and sale of all assets
of the Fund or any Designated Portfolio upon the sole authorization of the
Board, to the extent permitted by the laws of the Commonwealth of Massachusetts
and the 1940 Act.
3.7 It is understood and agreed that, except with respect to information
regarding the Fund, the Underwriter, the Adviser or Designated Portfolios
provided in writing by the Fund, the Underwriter or the Adviser, none of the
Fund, the Underwriter or the Adviser is responsible for the content of the
prospectus or statement of additional information for the Contracts.
ARTICLE IV
SALES MATERIAL AND INFORMATION
4.1 The Company shall furnish, or shall cause to be furnished, to the Fund
or the Underwriter, each piece of sales literature or other promotional material
("sales literature") that the Company develops or uses and in which the Fund (or
a Designated Portfolio thereof) or the Adviser or the Underwriter is named, at
least fifteen calendar days prior to its use. No such material shall be used if
the Fund or its designee reasonably objects to such use within fifteen calendar
days after receipt of such material. The Fund or its designee reserves the
right to reasonably object to the continued use of such material, and no such
material shall be used if the Fund or its designee so object.
4.2 The Company shall not give any information or make any representation
or statement on behalf of the Fund or concerning the Fund in connection with the
sale of the Contracts other than the information or representations contained in
the registration statement, prospectus or SAI for the shares of the Designated
Portfolios, as such registration statement, prospectus or SAI may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature approved by the Fund or its designee or by the
Underwriter, except with the permission of the Fund or the Underwriter or the
designee of either.
4.3 The Fund or the Underwriter shall furnish, or shall cause to be
furnished, to the Company, each piece of sales literature that the Fund or
Underwriter develops or uses in which the Company and/or its Account is named,
at least fifteen calendar days prior to its use. No such material shall be used
if the Company reasonably objects to such use within fifteen calendar days after
receipt of such material. The Company reserves the right to reasonably object
to the continued use of such material and no such material shall be used if the
Company so objects.
4.4 The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than
8
<PAGE>
the information or representations contained in a registration statement,
prospectus, or statement of additional information for the Contracts, as such
registration statement, prospectus or statement of additional information may be
amended or supplemented from time to time, or in published reports for the
Accounts which are the public domain or approved by the Company for distribution
to Contract owners, or in sales literature approved by the Company or its
designee, except with the permission of the Company.
4.5 The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, SAIs, reports, proxy statements, sales
literature, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Designated Portfolios,
contemporaneously with the filing of such document(s) with the SEC or other
regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
shareholder reports, solicitations for voting instructions, sales literature,
applications for exemptions, request for no-action letters, and all amendments
to any of the above, that relate to the Contracts or the Accounts,
contemporaneously with the filing of such document(s) with the SEC or other
regulatory authorities.
4.7 For purposes of this Agreement, the phrase "sales literature"
includes, but is not limited to, any of the following: advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media), sales literature
(I.E., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, reports, market
letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article) and educational or
training materials or other communications distributed or made generally
available to some or all agents or employees.
4.8 At the request of any party to this Agreement, any other party will
make available to the requesting party's independent auditors all records, data
and access to operating procedures that may reasonably be requested in
connection with compliance and regulatory requirements related to this Agreement
or any party's obligations under this Agreement.
4.9 The Company shall not without the written consent of the Fund and the
Underwriter directly or indirectly solicit, encourage or induce: (i) Contract
owner transactions that will result in the redemption of shares of a Designated
Portfolio; (ii) Contract owners to change the investment manager or sub-adviser
of a Designated Portfolio; or (iii) Contract owners to change, modify,
substitute, add or delete any investment media.
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ARTICLE V
FEES AND EXPENSES
5.1 All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, except and as further provided in Schedule B. The
Fund shall see to it that all shares of the Designated Portfolios are
registered, duly authorized for issuance and sold in compliance with applicable
federal securities laws and, if and to the extent deemed advisable by the Fund,
in accordance with applicable state securities laws prior to their sale.
5.2 The parties hereto shall bear the expenses of typesetting, printing
and distributing the Fund's prospectus, SAI, proxy materials and reports as
provided in Schedule B.
5.3 Administrative services to variable Contract owners shall be the
responsibility of the Company and shall not be the responsibility of the Fund,
Underwriter or Adviser. The Fund recognizes the Company as the sole shareholder
of shares of the Designated Portfolios issued under the Agreement.
5.4 The Fund shall not pay and neither the Adviser nor the Underwriter
shall pay any fee or other compensation to the Company under this Agreement,
although the parties will bear certain expenses in accordance with Schedule B
and other provisions of this Agreement.
ARTICLE VI
DIVERSIFICATION AND QUALIFICATION
6.1 The Fund will invest the assets of each Designated Portfolio in such a
manner as to ensure that the Contracts will be treated as annuity or life
insurance contracts, whichever is appropriate, under the Internal Revenue Code
of 1986, as amended ("Code") and the regulations issued thereunder (or any
successor provisions). Without limiting the scope of the foregoing, the Fund
will, with respect to each Designated Portfolio, comply with Section 817(h) of
the Code and Treasury Regulation Section 1.817-5, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts, and any amendments or
other modifications or successor provisions to such Section or Regulations. In
the event of a breach of this Article VI, the Fund will take all reasonable
steps (a) to notify the Company of such breach and (b) to adequately diversify
the affected Designated Portfolio so as to achieve compliance within the grace
period afforded by Treasury Regulation Section 1.817-5.
6.2 The Fund represents that each Designated Portfolio is currently
qualified (and for new Designated Portfolios, intends to qualify) as a Regulated
Investment Company under Subchapter M of the Code, and that it will make every
effort to maintain such qualification (under Subchapter M or any successor or
similar provisions) and that it will notify the Company immediately upon having
a reasonable basis for believing that a Designated Portfolio has ceased to so
qualify or that a Designated Portfolio might not so qualify in the future.
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6.3 The Company represents that the Contracts are currently, and at the
time of issuance shall be, treated as life insurance or annuity insurance
contracts, under applicable provisions of the Code, and that it will make every
effort to maintain such treatment, and that it will notify the Fund, the Adviser
and the Underwriter immediately upon having a reasonable basis for believing the
Contracts have ceased to be so treated or that they might not be so treated in
the future. The Company agrees that any prospectus offering a contract that is
a "modified endowment contract" as that term is defined in Section 7702A of the
Code (or any successor or similar provision), shall identify such contract as a
modified endowment contract.
ARTICLE VII
POTENTIAL CONFLICTS
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Designated Portfolio are being managed; (e) a difference in
voting instructions given by variable annuity contract and variable life
insurance contract owners; or (f) a decision by a Participating Insurance
Company to disregard the voting instructions of contract owners. The Board
shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2 The Company and the Adviser will report any potential or existing
conflicts of which each is aware to the Board. The Company will assist the
Board in carrying out its responsibilities under the Shared Funding Exemption
Order, by providing the Board with all information reasonably necessary for the
Board to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever Contract owner voting
instructions are disregarded. At least annually, and more frequently if deemed
appropriate by the Board, the Company shall submit to the Adviser, and the
Adviser shall at least annually submit to the Board, such reports, materials and
data as the Board may reasonably request so that the Board may fully carry out
the obligations imposed upon it by the conditions contained in the Shared
Funding Exemption Order; and said reports, materials and data shall be submitted
more frequently if deemed appropriate by the Board. The responsibility to
report such information and conflicts to the Board will be carried out with a
view only to the interests of the contract owners.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and any other Participating Insurance Companies shall, at their expense
and to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (a),
withdrawing the assets
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allocable to some or all of the separate accounts from the Fund or any
Designated Portfolio and reinvesting such assets in a different investment
medium, which may include another Designated Portfolio of the Fund, or
submitting to a vote of all affected contract owners the question whether such
segregation should be implemented and, as appropriate, segregating the assets of
any appropriate group (I.E. annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (b), establishing a new
registered management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in any Designated Portfolio and terminate this Agreement with respect
to such Account provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. The
Company will bear the cost of any remedial action, including such withdrawal and
termination. No penalty will be imposed by the Fund upon the affected Account
for withdrawing assets from the Fund in the event of a material irreconcilable
conflict. Any such withdrawal and termination must take place within six (6)
months after the Fund gives written notice that this provision is being
implemented, and until the effective date of such termination the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of such Designated Portfolio.
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the affected Designated Portfolio and terminate
this Agreement with respect to such Account within six months after the Board
informs the Company in writing that it has determined that such decision has
created an irreconcilable material conflict; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Until the effective date of such
termination the Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of such Designated
Portfolios.
7.6 For purposes of Sections 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict; but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 to establish a new funding
medium for the Contract if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the irreconcilable
material conflict. In the event that the Board determines that any proposed
action does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw
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an Account's investment in any Designated Portfolio and terminate this Agreement
within six (6) months after the Board informs the Company in writing of the
foregoing determination; provided, however, that such withdrawal and termination
shall be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
7.7 If and to the extent the Shared Funding Exemption Order contains terms
and conditions different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5
of this Agreement, then the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with the
Shared Funding Exemption Order, and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4
and 7.5 of the Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in the
Shared Funding Exemption Order or any amendment thereto. If and to the extent
that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide
exemptive relief from any provision of the 1940 Act or the rules promulgated
thereunder with respect to mixed or shared funding (as defined in the Shared
Funding Exemption Order) on terms and conditions materially different from those
contained in the Shared Funding Exemption Order, then (a) the Fund and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3,
as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 3.5,
3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of this Agreement shall continue in effect only
to the extent that terms and conditions substantially identical to such Sections
are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION BY THE COMPANY.
(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, the Underwriter and each of their officers, trustees and directors and
each person, if any, who controls the Fund, the Adviser or the Underwriter
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Company) or litigation (including legal and other expenses), to
which the Indemnified Parties may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements are
related to the sale or acquisition of the shares of the Designated Portfolios or
the Contracts and;
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement, prospectus, or statement of additional information
for the Contracts or contained in the Contracts or sales literature for the
Contracts (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission to
state
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therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; PROVIDED that this agreement to
indemnify shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to the Company by
or on behalf of the Fund for use in the Registration Statement, prospectus
or statement of additional information for the Contracts or in the
Contracts or sales literature for the Contracts (for any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or shares of the Designated Portfolios; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus, SAI or sales literature of the Fund not supplied by
the Company or persons under its control) or wrongful conduct of the
Company or persons under its authorization or control, with respect to the
sale or distribution of the Contracts or shares of the Designated
Portfolios; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement,
prospectus, SAI or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or omission was made
in reliance upon information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good faith or
otherwise, to comply with the qualification requirements specified in
Article VI of this Agreement); or
(v) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in any
Registration Statement, prospectus, statement of additional information or
sales literature for any Unaffiliated Fund, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or otherwise pertain to or arise in connection with the
availability of any Unaffiliated Fund as an underlying funding vehicle in
respect of the Contracts; or
(vi) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company;
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c).
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(b) The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of its obligations or duties under this Agreement.
(c) The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability that it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision, except to the extent that the Company
has been prejudiced by such failure to give notice. In case any such action is
brought against an Indemnified Party, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action and to settle the claim at its own expense
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent, include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Company to such
party of the Company's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Company will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the shares of the Designated Portfolios or the Contracts
or the operation of the Fund.
8.2 INDEMNIFICATION BY THE UNDERWRITER
(a) The Underwriter agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute
or regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of shares of the Designated Portfolios or
the Contracts; and
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, prospectus or SAI
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of the Fund or sales literature of the Fund developed by the Underwriter
(or any amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Underwriter or Fund by
or on behalf of the Company for use in the Registration Statement or
prospectus for the Fund or its sales literature (or any amendment or
supplement thereto) or otherwise for use in connection with the sale of the
Contracts or shares of the Designated Portfolios; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus or sales literature for the Contracts not supplied by
the Underwriter or persons under its control) or wrongful conduct of the
Fund or Underwriter or person under their control with respect to the sale
or distribution of the Contracts or shares of the Designated Portfolios; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement, prospectus or sales
literature for the Contracts, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or omission was made
in reliance upon information furnished to the Company by or on behalf of
the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or otherwise,
to comply with the diversification and other qualification requirements
specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
(b) The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance or such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company or the Accounts, whichever is applicable.
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(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision, except to the extent that the
Underwriter has been prejudiced by such failure to give notice. In case any
such action is brought against the Indemnified Party, the Underwriter will be
entitled to participate, at its own expense, in the defense thereof. The
Underwriter also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action and to settle the claim at is own
expense; provided, however, that no such settlement shall, without the
Indemnified Parties' written consent, include any factual stipulation referring
to the Indemnified Parties or their conduct. After notice from the Underwriter
to such party of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
(d) The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3 INDEMNIFICATION BY THE FUND
(a) The Fund agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, expenses, damages, liabilities (including amounts paid in
settlement with the written consent of the Fund); or litigation (including legal
and other expenses) to which the Indemnified Parties may be required to pay or
may become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, expenses, damages, liabilities or expenses (or
actions in respect thereof) or settlements, are related to the operations of the
Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or otherwise,
to comply with the diversification and qualification requirements specified
in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Fund;
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as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
(b) The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation to which
an Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company, the Fund, the Underwriter, the Adviser or the Accounts, whichever is
applicable.
(c) The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability that it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision, except to the extent that the Fund has been
prejudiced by such failure to give notice. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action and to settle the claim at its own expense; provided, however, that no
such settlement shall, without the Indemnified Parties' written consent, include
any factual stipulation referring to the Indemnified Parties or their conduct.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
(d) The Company, the Adviser and the Underwriter agree to notify the
Fund promptly of the commencement of any litigation or proceeding against it or
any of its respective officers or directors in connection with the Agreement,
the issuance or sale of the Contracts, the operation of any Account, or the sale
or acquisition of shares of the Designated Portfolios.
ARTICLE IX
APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2 This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from the statutes, rules and regulations as the SEC may grant
(including, but not limited to, the Shared Funding
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Exemption Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X
TERMINATION
10.1 This Agreement shall continue in full force and effect until the first
to occur of:
(a) termination by any party, for any reason with respect to any
Designated Portfolio, by twelve (12) months' advance written notice delivered to
the other parties; provided, however, that such notice shall not be given
earlier than five (5) years following the date of this Agreement; or
(b) termination by the Company by written notice to the Fund, the
Adviser and the Underwriter with respect to any Designated Portfolio based upon
the Company's reasonable and good faith determination that shares of such
Designated Portfolio are not reasonably available to meet the requirements of
the Contracts; or
(c) termination by the Company by written notice to the Fund, the
Adviser and the Underwriter with respect to any Designated Portfolio if the
shares of such Designated Portfolio are not registered, issued or sold in
accordance with applicable state and/or federal securities laws or such law
precludes the use of such shares to fund the Contracts issued or to be issued by
the Company; or
(d) termination by the Fund, the Adviser or Underwriter in the event
that formal administrative proceedings are instituted against the Company or any
affiliate by the NASD, the SEC, or the Insurance Commissioner or like official
of any state or any other regulatory body regarding the Company's duties under
this Agreement or related to the sale of the Contracts, the operation of any
Account, or the purchase of the shares of a Designated Portfolio or the shares
of any Unaffiliated Fund, provided, however, that the Fund, the Adviser or
Underwriter determines in its sole judgement exercised in good faith, that any
such administrative proceedings will have a material adverse effect upon the
ability of the Company to perform its obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund, the Adviser or
Underwriter by the NASD, the SEC, or any state securities or insurance
department or any other regulatory body, provided, however, that the Company
determines in its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse effect upon the ability
of the Fund or Underwriter to perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund, the
Adviser and the Underwriter with respect to any Designated Portfolio in the
event that such Designated Portfolio ceases to qualify as a Regulated Investment
Company under Subchapter M or fails to comply
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with the Section 817(h) diversification requirements specified in Article VI
hereof, or if the Company reasonably believes that such Designated Portfolio may
fail to so qualify or comply; or
(g) termination by the Fund, the Adviser or Underwriter by written
notice to the Company in the event that the Contracts fail to meet the
qualifications specified in Article VI hereof; or
(h) termination by any of the Fund, the Adviser or the Underwriter by
written notice to the Company, if any of the Fund, the Adviser or the
Underwriter, respectively, shall determine, in their sole judgement exercised in
good faith, that the Company has suffered a material adverse change in its
business, operations, financial condition, insurance company rating or prospects
since the date of this Agreement or is the subject of material adverse
publicity; or
(i) termination by the Company by written notice to the Fund, the
Adviser and the Underwriter, if the Company shall determine, in its sole
judgment exercised in good faith, that the Fund, the Adviser or the Underwriter
has suffered a material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the subject of
material adverse publicity and that material adverse change or publicity will
have a material adverse on the Fund's or the Underwriter's ability to perform
its obligations under this Agreement; or
(j) at the option of Company, as one party, or the Fund, the Adviser
and the Underwriter, as one party, upon the other party's material breach of any
provision of this Agreement upon 30 days' notice and opportunity to cure.
10.2 EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter may, at their sole option, continue to
make available additional shares of a Designated Portfolio pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, the owners of the Existing Contracts may in such
event be permitted to reallocate investments in the Designated Portfolios,
redeem investments in the Designated Portfolios and/or invest in the Designated
Portfolios upon the making of additional purchase payments under the Existing
Contracts. The parties agree that this Section 10.2 shall not apply to any
termination under Article VII and the effect of such Article VII termination
shall be governed by Article VII of this Agreement. The parties further agree
that this Section 10.2 shall not apply to any termination under Section 10.1(g)
of this Agreement.
10.3 Notwithstanding termination of this Agreement, the Company shall not
redeem shares of a Designated Portfolio attributable to the Contracts (as
opposed to shares of a Designated Portfolio attributable to the Company's assets
held in an Account) except (i) as necessary to implement Contract owner
initiated or approved transactions provided the Company shall not directly or
indirectly solicit, encourage or induce any such Contract owner initiated or
approved transaction so long as the Fund and the Underwriter continue to make
additional shares of the
20
<PAGE>
Designated Portfolio available pursuant to Section 10.2 above, or (ii) as
required by state and/or federal laws or regulations or judicial or other legal
precedent of general application (hereinafter referred to as a "Legally Required
Redemption"). Upon request, the Company will promptly furnish to the Fund, the
Adviser and the Underwriter the opinion of counsel for the Company (which
counsel shall be reasonably satisfactory to the Fund, the Adviser and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, the Company shall not prevent
Contract owners from allocating payments to a Designated Portfolio that was
otherwise available under the Contracts.
10.4 Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
ARTICLE XI
NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
Kemper Investors Fund
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Secretary
If to the Company:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, Massachusetts 06158
Attention:
If to the Adviser:
Zurich Kemper Investments, Inc.
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Secretary
21
<PAGE>
If to the Underwriter:
Kemper Distributors, Inc.
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Secretary
ARTICLE XII
MISCELLANEOUS
12.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.4 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Delaware Insurance Commissioner with any information or
reports in connection with services provided under this Agreement that such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with the
Delaware variable annuity laws and regulations and any other applicable law or
regulations.
12.5 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies, and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.6 This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto.
12.7 All persons are expressly put on notice of the Fund's Agreement and
Declaration of Trust and all amendments thereto, all of which on file with the
Secretary of the Commonwealth of Massachusetts, and the limitation of
shareholder and trustee liability contained therein. This Agreement has been
executed by and on behalf of the Fund by its representatives as such
representatives and not individually, and the obligations of the Fund with
respect to a Designated Portfolio hereunder are not binding upon any of the
trustees, officers or shareholders of the Fund
22
<PAGE>
individually, but are binding upon only the assets and property of such
Designated Portfolio. All parties dealing with the Fund with respect to a
Designated Portfolio shall look solely to the assets of such Designated
Portfolio for the enforcement of any claims against the Fund hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed
in its name and on behalf by its duly authorized representative and its seal to
be hereunder affixed hereto as of the date specified below.
COMPANY: First Allmerica Financial Life Insurance Company
By:
----------------------------------------
Title:
----------------------------------------
Date:
----------------------------------------
FUND: Kemper Investors Fund
By:
----------------------------------------
Title:
----------------------------------------
Date:
----------------------------------------
ADVISER Zurich Kemper Investments, Inc.
By:
----------------------------------------
Title:
----------------------------------------
Date:
----------------------------------------
UNDERWRITER Kemper Distributors, Inc.
By:
----------------------------------------
Title:
----------------------------------------
Date:
----------------------------------------
23
<PAGE>
SCHEDULE A
NAME OF SEPARATE ACCOUNT AND DATE
ESTABLISHED BY BOARD OF DIRECTORS
CONTRACTS FUNDED
BY SEPARATE ACCOUNT
DESIGNATED PORTFOLIOS*
- -------------------------
*Additional Designated Portfolios may be added at the request of the Fund,
Adviser and Underwriter and with the consent of the Company, which consent will
not be unreasonably withheld.
A-1
<PAGE>
SCHEDULE B
EXPENSES
In the event the prospectus, SAI, annual report or other communication of
the Fund is combined with a document of another party, the Fund will pay
the costs based upon the relative number of pages attributable to the Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESPONSIBLE
ITEM FUNCTION PARTY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
Update Typesetting Fund (1)
- --------------------------------------------------------------------------------
New Sales: Printing Company
Distribution Company
- --------------------------------------------------------------------------------
Existing Printing Fund (1)
Owners:
Distribution Fund (1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF Same as Prospectus Same
ADDITIONAL
INFORMATION
- --------------------------------------------------------------------------------
PROXY MATERIALS OF Typesetting Fund
THE FUND
Printing Fund
Distribution Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORTS &
OTHER COMMUNICATIONS
WITH SHAREHOLDERS
OF THE FUND
- --------------------------------------------------------------------------------
All Typesetting Fund (1)
- --------------------------------------------------------------------------------
Marketing: Printing Company
Distribution Company
- --------------------------------------------------------------------------------
Existing Owners: Printing Fund (1)
Distribution Fund (1)
- --------------------------------------------------------------------------------
B-1
<PAGE>
- --------------------------------------------------------------------------------
OPERATIONS OF FUND All operations and related Fund
expenses, including the cost
of registration and
qualification of the Fund's
shares, preparation and filing
of the Fund's prospectus and
registration statement, proxy
materials and reports, the
preparation of all statements
and notices required by any
federal or state law and all
taxes on the issuance of the
Fund's shares, and all costs
of management of the business
affairs of the Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
B-2
