<PAGE>
Registration No. 333-15569
811-07913
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N8B-2
Pre-Effective Amendment No. 1
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT OF ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
It is proposed that this filing will become effective:
_____immediately upon filing pursuant to paragraph (b)
_____On (________)pursuant to paragraph (b)
_____60 days after filing pursuant to paragraph (a) (1)
_____On (date) pursuant to paragraph (a) (1)
_____On (date) pursuant to paragraph (a)(2) of Rule 485
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 has been paid.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8b-2 AND THE PROSPECTUS
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Item No. of
Form N-8b-2 Caption in Prospectus
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1. . . . . . . . . . . . . . . . Cover Page
2. . . . . . . . . . . . . . . . Cover Page
3. . . . . . . . . . . . . . . . Not Applicable
4. . . . . . . . . . . . . . . . Distribution
5. . . . . . . . . . . . . . . . Allmerica Financial, The Variable Account
6. . . . . . . . . . . . . . . . The Variable Account
7. . . . . . . . . . . . . . . . Not Applicable
8. . . . . . . . . . . . . . . . Not Applicable
9. . . . . . . . . . . . . . . . Legal Proceedings
10 . . . . . . . . . . . . . . . Summary; Description of Allmerica Financial,
The Variable Account, The Palladian Trust and
Allmerica Investment Trust; The Contract;
Contract Termination and Reinstatement; Other
Contract Provisions
11 . . . . . . . . . . . . . . . Summary; The Palladian Trust and Allmerica
Investment Trust; Investment Objectives and
Policies
12 . . . . . . . . . . . . . . . Summary; The Palladian Trust and Allmerica
Investment Trust
13 . . . . . . . . . . . . . . . Summary; The Palladian Trust and Allmerica
Investment Trust; Investment Advisory
Services to The Palladian Trust; Investment
Advisory Services to Allmerica Investment
Trust; Charges and Deductions
14 . . . . . . . . . . . . . . . Summary; Application for a Contract
15 . . . . . . . . . . . . . . . Summary; Application for a Contract; Premium
Payments; Allocation of Net Premiums
16 . . . . . . . . . . . . . . . The Variable Account; The Palladian Trust and
Allmerica Investment Trust; Allocation of Net
Premiums
17 . . . . . . . . . . . . . . . Summary; Surrender; Partial Withdrawal;
Charges and Deductions; Contract Termination
and Reinstatement
18 . . . . . . . . . . . . . . . The Variable Account; The Palladian Trust and
Allmerica Investment Trust; Premium Payments
19 . . . . . . . . . . . . . . . Reports; Voting Rights
20 . . . . . . . . . . . . . . . Not Applicable
21 . . . . . . . . . . . . . . . Summary; Contract Loans; Other Contract
Provisions
22 . . . . . . . . . . . . . . . Other Contract Provisions
23 . . . . . . . . . . . . . . . Not Required
24 . . . . . . . . . . . . . . . Other Contract Provisions
25 . . . . . . . . . . . . . . . Allmerica Financial
26 . . . . . . . . . . . . . . . Not Applicable
27 . . . . . . . . . . . . . . . Allmerica Financial
28 . . . . . . . . . . . . . . . Directors and Principal Officers of Allmerica
Financial
29 . . . . . . . . . . . . . . . Allmerica Financial
30 . . . . . . . . . . . . . . . Not Applicable
31 . . . . . . . . . . . . . . . Not Applicable
32 . . . . . . . . . . . . . . . Not Applicable
33 . . . . . . . . . . . . . . . Not Applicable
34 . . . . . . . . . . . . . . . Not Applicable
35 . . . . . . . . . . . . . . . Distribution
36 . . . . . . . . . . . . . . . Not Applicable
37 . . . . . . . . . . . . . . . Not Applicable
38 . . . . . . . . . . . . . . . Summary; Distribution
39 . . . . . . . . . . . . . . . Summary; Distribution
40 . . . . . . . . . . . . . . . Not Applicable
41 . . . . . . . . . . . . . . . Allmerica Financial; Distribution
42 . . . . . . . . . . . . . . . Not Applicable
</TABLE>
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43 . . . . . . . . . . . . . . . Not Applicable
44 . . . . . . . . . . . . . . . Premium Payments; Contract Value and Cash
Surrender Value
45 . . . . . . . . . . . . . . . Not Applicable
46 . . . . . . . . . . . . . . . Contract Value and Cash Surrender Value;
Federal Tax Considerations
47 . . . . . . . . . . . . . . . Allmerica Financial
48 . . . . . . . . . . . . . . . Not Applicable
49 . . . . . . . . . . . . . . . Not Applicable
50 . . . . . . . . . . . . . . . The Variable Account
51 . . . . . . . . . . . . . . . Cover Page; Summary; Charges and Deductions;
The Contract; Contract Termination and
Reinstatement; Other Contract Provisions
52 . . . . . . . . . . . . . . . Addition, Deletion or Substitution of
Investments
53 . . . . . . . . . . . . . . . Federal Tax Considerations
54 . . . . . . . . . . . . . . . Not Applicable
55 . . . . . . . . . . . . . . . Not Applicable
56 . . . . . . . . . . . . . . . Not Applicable
57 . . . . . . . . . . . . . . . Not Applicable
58 . . . . . . . . . . . . . . . Not Applicable
59 . . . . . . . . . . . . . . . Not Applicable
</TABLE>
<PAGE>
THE FULCRUM FUND-SM- NEXT GENERATION
A MODIFIED SINGLE PAYMENT VARIABLE LIFE INSURANCE CONTRACT
Funded Through
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT
by
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
This prospectus describes THE FULCRUM FUND-SM- NEXT GENERATION contracts ("the
Contract"), a modified single payment variable life insurance contract offered
by Allmerica Financial Life Insurance and Annuity Company ("we, our, us or
Company.") The Contract provides for life insurance coverage and for the
accumulation of a Contract Value. The Contract requires the Contract Owner makes
an initial Payment of at least $25,000.
Contract Value may accumulate on a variable basis in the Contract's variable
account, known as the Fulcrum Variable Life Separate Account ("Variable
Account.") The assets of the Variable Account are divided into sub-accounts
("Sub-Account"), each investing exclusively in shares of one of the series of an
underlying investment company. The following portfolios of THE PALLADIAN-SM-
TRUST ("Palladian-SM-") are offered under the Contract:
VALUE PORTFOLIO
GROWTH PORTFOLIO
INTERNATIONAL GROWTH PORTFOLIO
GLOBAL STRATEGIC INCOME PORTFOLIO
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The following series of ALLMERICA INVESTMENT TRUST ("Trust") is offered under
the Contract:
MONEY MARKET FUND
Contract Values may also be allocated to the Fixed Account, which is part of the
Company's General Account. Amounts allocated to the Fixed Account earn interest
at a guaranteed rate from the date allocated to the next Contract anniversary.
Each Contract is a "modified endowment contract" for federal income tax
purposes, except in certain circumstances described in "FEDERAL TAX
CONSIDERATIONS." A loan, distribution or other amounts received from a modified
endowment contract during the life of the Insured will be taxed to the extent of
accumulated income in the Contract. Death Benefits under a modified endowment
contract, however, are generally not subject to federal income tax, except in
certain cases described in "FEDERAL TAX CONSIDERATIONS."
IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH THE CONTRACT. THIS
PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
PALLADIAN-SM- TRUST AND ALLMERICA INVESTMENT TRUST. INVESTORS SHOULD RETAIN A
COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES COMMISSIONS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
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 __________ 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 3
SUMMARY............................................................................... 5
DESCRIPTION OF ALLMERICA FINANCIAL, THE VARIABLE ACCOUNT,
THE PALLADIAN-SM- TRUST AND ALLMERICA INVESTMENT TRUST............................... 11
Allmerica Financial................................................................. 11
The Variable Account................................................................ 11
The Palladian-SM- Trust............................................................. 11
Allmerica Investment Trust.......................................................... 12
INVESTMENT OBJECTIVES AND POLICIES.................................................... 13
THE CONTRACT.......................................................................... 13
Application for a Contract.......................................................... 13
Free Look Period.................................................................... 14
Conversion Privilege................................................................ 14
Payments............................................................................ 14
Allocation of Payments.............................................................. 15
Transfer Privilege.................................................................. 15
Death Benefit....................................................................... 16
Contract Value...................................................................... 17
Payment Options..................................................................... 18
Optional Insurance Benefits......................................................... 18
Surrender........................................................................... 18
Partial Withdrawal.................................................................. 19
CHARGES AND DEDUCTIONS................................................................ 19
Monthly Deductions.................................................................. 19
Daily Deductions.................................................................... 20
Surrender Charge.................................................................... 20
Partial Withdrawal Costs............................................................ 20
Transfer Charges.................................................................... 21
CONTRACT LOANS........................................................................ 21
CONTRACT TERMINATION AND REINSTATEMENT................................................ 22
OTHER CONTRACT PROVISIONS............................................................. 23
FEDERAL TAX CONSIDERATIONS............................................................ 24
Allmerica Financial and the Variable Account........................................ 24
Taxation of the Contracts........................................................... 24
VOTING RIGHTS......................................................................... 26
DIRECTORS AND PRINCIPAL OFFICERS...................................................... 27
DISTRIBUTION.......................................................................... 27
REPORTS............................................................................... 28
PERFORMANCE INFORMATION............................................................... 28
LEGAL PROCEEDINGS..................................................................... 29
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 29
FURTHER INFORMATION................................................................... 30
INDEPENDENT ACCOUNTANTS............................................................... 30
MORE INFORMATION ABOUT THE FIXED ACCOUNT.............................................. 30
FINANCIAL STATEMENTS.................................................................. F-1
APPENDIX A -- GUIDELINE MINIMUM SUM INSURED TABLE..................................... A-1
APPENDIX B -- OPTIONAL INSURANCE BENEFITS............................................. A-2
APPENDIX C -- PAYMENT OPTIONS......................................................... A-3
APPENDIX D -- ILLUSTRATIONS........................................................... A-5
</TABLE>
2
<PAGE>
SPECIAL TERMS
AGE: how old the Insured is on his/her last birthday measured on the Date of
Issue and each Contract anniversary.
ALLMERICA FINANCIAL: Allmerica Financial Life Insurance and Annuity Company.
"We," "our," "us" and "Company" refer to Allmerica Financial in this prospectus.
BENEFICIARY: the person or persons you name to receive the Net Death Benefit
when the Insured dies.
CONTRACT OWNER: the person who may exercise all rights under the Contract, with
the consent of any irrevocable Beneficiary. "You" and "your" refer to the
Contract Owner in this prospectus.
CONTRACT VALUE: the total value of your Contract. It is the SUM of the:
-Value of the units of the Sub-Accounts credited to your Contract; PLUS
-Accumulation in the Fixed Account credited to the Contract.
DATE OF ISSUE: the date the Contract was issued, used to measure the Monthly
Processing Date, Contract months, Contract years and Contract anniversaries.
DEATH BENEFIT: the Face Amount (the amount of insurance determined by your
Payment) or the Guideline Minimum Sum Insured (the minimum death benefit federal
law requires), whichever is greater.
EVIDENCE OF INSURABILITY: information, including medical information, used to
decide the Insured's Underwriting Class.
FACE AMOUNT: the amount of insurance coverage. The Face Amount is shown in your
Contract.
FINAL PAYMENT DATE: the Contract anniversary before the Insured's 100th
birthday. After this date, no Payments may be made and the Net Death Benefit is
the Contract value less any Outstanding Loan.
FIXED ACCOUNT: a guaranteed account of the General Account that guarantees
principal and a fixed minimum interest rate.
FUNDS: the portfolios of The Palladian-SM- Trust and the fund of Allmerica
Investment Trust which are offered under the Contract. These are the Value
Portfolio, Growth Portfolio, International Growth Portfolio, Global Strategic
Income Portfolio, and Global Interactive/Telecomm Portfolio of The Palladian-SM-
Trust and the Money Market Fund of Allmerica Investment Trust.
GENERAL ACCOUNT: all our assets other than those held in separate investment
accounts.
GUIDELINE MINIMUM SUM INSURED: the minimum death benefit required to qualify the
Contract as "life insurance" under federal tax laws. The guideline minimum sum
insured is the PRODUCT of
-The Contract Value TIMES
-A percentage based on the Insured's age
GUIDELINE SINGLE PREMIUM: used to determine the Face Amount under the Contract.
ISSUANCE AND ACCEPTANCE: the date we mail the Contract if the application is
approved with no changes requiring your consent; otherwise, the date we receive
your written consent to any changes.
INSURED: the person or persons covered under the Contract. If more than one
person is named, all provisions of the Contract that are based on the death of
the Insured will be based on the date of death of the last surviving Insured.
LOAN VALUE: the maximum amount you may borrow under the Contract.
3
<PAGE>
MONTHLY DEDUCTIONS: the amount of money that we deduct from the Contract Value
each month to pay for the Monthly Maintenance Fee, Administration Charge,
Monthly Insurance Protection Charge, Distribution Charge and the Federal & State
Payment Tax Charge.
MONTHLY INSURANCE PROTECTION CHARGE: the amount of money that we deduct from the
Contract Value each month to pay for the insurance.
MONTHLY PROCESSING DATE: the date, shown in your Contract, when Monthly
Deductions are deducted.
NET DEATH BENEFIT: Before the Final Payment Date, the Net Death Benefit is:
-The Death Benefit; MINUS
-Any Outstanding Loan on the Insured's death, rider charges and Monthly
Deductions due and unpaid through the Contract month in which the Insured
dies, as well as any partial withdrawal costs and surrender charges.
After the Final Payment Date, the Net Death Benefit is:
-The Contract Value; MINUS
-Any Outstanding Loan on the Insured's death.
OUTSTANDING LOAN: all unpaid Contract loans plus loan interest due or accrued.
PAYMENT: the payment you must make to us.
PRINCIPAL OFFICE: our office at 440 Lincoln Street, Worcester, Massachusetts
01653.
PRO-RATA ALLOCATION: an allocation among the Fixed Account and the Sub-Accounts
of the Variable Account in the same proportion that, on the date of allocation,
the Contract Value in the Fixed Account (other than value subject to Outstanding
Loan) and the Contract Value in each Sub-Account bear to the total Contract
Value.
SECOND-TO-DIE: the Contract may be issued as a joint survivorship
("Second-to-Die") policy. Life insurance coverage is provided for two Insureds,
with death benefits payable at the death of the last surviving Insured.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a Fund.
SURRENDER VALUE: the amount payable on a full surrender. It is the Contract
Value less any Outstanding Loan and surrender charges.
UNDERWRITING CLASS: the insurance risk classification that we assign the Insured
based on the information in the application and other Evidence of Insurability
we consider. The Insured's underwriting class will affect the Monthly Insurance
Protection Charge.
UNIT: a measure of your interest in a Sub-Account.
VALUATION DATE: any day on which the net asset value of the shares of any Funds
and Unit values of any Sub-Accounts are computed. Valuation dates currently
occur on:
-Each day the New York Stock Exchange is open for trading; and
-Other days (other than a day during which no Payment, partial withdrawal or
surrender of a Contract was received) when there is a sufficient degree of
trading in a Fund's portfolio securities so that the current net asset
value of the Sub-Accounts may be materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ACCOUNT: Fulcrum Variable Life Separate Account, one of Allmerica
Financial's separate investment accounts.
WRITTEN REQUEST: your request in writing, satisfactory to us, received at our
Principal Office.
4
<PAGE>
SUMMARY
WHAT IS THE CONTRACT'S OBJECTIVE?
The objective of the Contract is to give permanent life insurance protection and
to help you build assets tax-deferred. Benefits available through the Contract
include:
- - A life insurance benefit that can protect your family;
- - Payment options that can guarantee an income for life, if you want to use your
Contract for retirement income;
- - A personalized investment portfolio you may tailor to meet your needs, time
frame and risk tolerance level;
- - Experienced professional investment advisers who are compensated on an
incentive fee basis; and
- - Tax deferral on earnings while your money is accumulating.
The Contract combines features and benefits of traditional life insurance with
the advantages of professional money management. However, unlike the fixed
benefits of ordinary life insurance, the Contract Value will increase or
decrease depending on investment results. Unlike traditional insurance policies,
the Contract has no fixed schedule for payments.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is a contract between you and us. Each Contract has a Contract
Owner ("you"), the Insured and a Beneficiary. As Contract Owner, you make the
payment, choose investment allocations and select the Insured and Beneficiary.
The Insured is the person covered under the Contract. The Beneficiary is the
person who receives the Net Death Benefit when the Insured dies.
WHAT HAPPENS WHEN THE INSURED DIES?
We will pay the Net Death Benefit to the Beneficiary when the Insured dies while
the Contract is in effect. If the Contract was issued as a Second-to-Die policy,
the Net Death Benefit will be paid on the death of the last surviving Insured.
The Death Benefit is the Face Amount (the amount of insurance determined by your
Payment) or the minimum death benefit federal tax law requires, whichever is
greater. The Net Death Benefit is the Death Benefit less any Outstanding Loan,
rider charges and Monthly Deductions due and unpaid through the Contract month
in which the Insured dies, as well as any partial withdrawals and surrender
charges. However, after the Final Payment Date, the Net Death Benefit is the
Contract Value less any Outstanding Loan. The Beneficiary may receive the Net
Death Benefit in a lump sum or under a payment option we offer.
CAN I EXAMINE THE CONTRACT?
Yes. You have the right to examine and cancel your Contract by returning it to
us or to one of our representatives within 10 days (or such later date as
required in your state) after you receive the Contract.
If your Contract provides for a full refund under its "Right to Cancel"
provision as required in your state, your refund will be your entire Payment.
If your Contract does not provide for a full refund, you will receive:
- - Amounts allocated to the Fixed Account; PLUS
- - The Contract Value in the Variable Account; PLUS
- - All fees, charges and taxes which have been imposed.
Your refund will be determined as of the Valuation Date that the Contract is
received at our Principal Office.
5
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WHAT ARE MY INVESTMENT CHOICES?
You currently have a choice of six Funds:
- - Value Portfolio of The Palladian-SM- Trust
Managed by GAMCO Investors, Inc.;
- - Growth Portfolio of The Palladian-SM- Trust
Managed by Stonehill Capital Management, Inc.;
- - International Growth Portfolio of The Palladian-SM- Trust,
Managed by Bee & Associates Incorporated;
- - Global Strategic Income Portfolio of The Palladian-SM- Trust,
Managed by Fischer Francis Trees & Watts, Inc.;
- - Global Interactive/Telecomm Portfolio of The Palladian-SM- Trust,
Managed by GAMCO Investors, Inc.; and
- - Money Market Fund of Allmerica Investment Trust,
Managed by Allmerica Asset Management, Inc.
This range of investment choices allows you to allocate your money among the
various Funds to meet your investment needs. If your Contract provides for a
full refund under its "Right to Cancel" provision as required in your state, we
will allocate all Sub-Account investments to the Money Market Fund. Relocation
will then be made to the Sub-Account investments you selected on the application
no later than the expiration of the Right to Cancel period.
The Contract also offers a Fixed Account. The Fixed Account is a guaranteed
account offering a minimum interest rate. It is part of the General Account of
the Company.
WHO ARE THE INVESTMENT ADVISERS?
THE PALLADIAN-SM- TRUST. Palladian-SM- Advisors, Inc. ("PAI") serves as overall
manager of The Palladian-SM- Trust and is responsible for general investment
supervisory services to the Portfolios. PAI has retained the services of Tremont
Partners, Inc. ("Tremont") to provide research concerning registered investment
advisers to be retained by Palladian-SM- as Portfolio Managers, to monitor and
assist PAI with the periodic reevaluation of existing Portfolio Managers and to
make periodic reports to PAI and The Palladian-SM- Trust.
The Portfolio Managers of the five Portfolios of The Palladian-SM- Trust are as
follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
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<S> <C>
Value Portfolio GAMCO Investors, Inc.
Growth Portfolio Stonehill Capital Management, Inc.
International Growth Portfolio Bee & Associates Incorporated
Global Strategic Income Portfolio Fischer Francis Trees & Watts, Inc.
Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
ALLMERICA INVESTMENT TRUST. Allmerica Investment Management Company, Inc. is
the investment manager of Allmerica Investment Trust and, subject to the
direction of its Board of Trustees, handles the day-to-day affairs of the Trust.
Allmerica Investment Management Company, Inc. has entered into a Sub-Adviser
Agreement with its affiliate, Allmerica Asset Management, Inc., for investment
management services for the Money Market Fund.
For more information, see "The Palladian-SM- Trust" and "Allmerica Investment
Trust."
6
<PAGE>
CAN I MAKE TRANSFERS AMONG THE FUNDS AND THE FIXED ACCOUNT?
Yes. You may transfer among the Funds and the Fixed Account, subject to our
consent and then current rules. You will incur no current taxes on transfers
while your money is in the Contract. You also may elect automatic account
rebalancing so that assets remain allocated according to a desired mix or choose
automatic dollar cost averaging to gradually move funds into one or more
Sub-Accounts. See "TRANSFER PRIVILEGE."
HOW MUCH CAN I INVEST AND HOW OFTEN?
The Contract requires a single payment on or before the Date of Issue.
Additional Payment(s) of at least $10,000 may be made as long as the total
Payments do not exceed the Maximum Payment amount specified in the Contract.
WHAT IF I NEED MY MONEY?
You may borrow up to the Loan Value of your Contract. The Loan Value is 90% of
your Contract Value less the surrender charge. You may also make partial
withdrawals and surrender the Contract for its Surrender Value.
The guaranteed annual interest rate credited to the Contract Value securing a
loan will be at least 4.0%. However, any portion of the Outstanding Loan that is
a preferred loan will be credited with not less than 5.50%.
We will allocate Contract loans among the Sub-Accounts and the Fixed Account
according to your instructions. If you do not make an allocation, we will make a
Pro-Rata Allocation. We will transfer the Contract Value in each Sub-Account
equal to the Contract loan to the Fixed Account.
You may surrender your Contract and receive its Surrender Value. You may make
partial withdrawals of $1,000 or more from the Contract Value, subject to
partial withdrawal costs and any applicable surrender charges. The Face Amount
is reduced by each partial withdrawal. We will not allow a partial withdrawal if
it would reduce the Contract Value below $25,000. A surrender or partial
withdrawal may have tax consequences. See "TAXATION OF CONTRACTS."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
Yes. There are several changes you can make after receiving your Contract,
within limits. You may
- - Cancel your Contract under its "Right to Cancel" provision;
- - Transfer your ownership to someone else;
- - Change the Beneficiary;
- - Change the allocation for any additional Payment, with no tax consequences
under current law;
- - Make transfers of the Contract Value among the Funds, with no taxes incurred
under current law; and
- - Add or remove the optional insurance benefits provided by the rider.
CAN I CONVERT MY CONTRACT INTO A NON-VARIABLE CONTRACT?
Yes. You can convert your Contract without charge during the first 24 months
after the Date of Issue. On conversion, we will transfer the Contract Value in
the Variable Account to the Fixed Account. We will allocate any future
payment(s) to the Fixed Account, unless you instruct us otherwise.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
The following charges will apply to your Contract under the circumstances
described. Some of these charges apply throughout the Contract's duration.
7
<PAGE>
We deduct the following monthly charges from the Contract Value:
- - a $2.50 Maintenance Fee from Contracts with a Contract Value of less than
$50,000 (See "Maintenance Fee.");
- - 0.40% on an annual basis for the administrative expenses (See "Administration
Charge.");
- - 0.20% to 2.50% (depending on the type of Contract and Underwriting Class) on
an annual basis for the cost of insurance (See "Monthly Insurance Protection
Charge."); and
For the first ten Contract years:
- - 0.30% on an annual basis for distribution expenses (See "Distribution Fee.");
and
- - 0.40% on an annual basis for federal, state and local taxes (See "Federal &
State Payment Tax Charge.").
The following daily charge is deducted from the Variable Account:
- - 0.90% on an annual basis for the mortality and expense risks (See "Mortality
and Expense Risk Charge.").
WHAT ARE THE EXPENSES AND FEES OF THE FUNDS?
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Funds. The levels of fees and expenses vary
among the Funds.
Beginning February 1, 1997, a performance-based management fee is in effect for
the five Portfolios of The Palladian-SM- Trust. The base fee is 2.00%, but the
actual fee may vary from between 0.00% to 4.00%, depending on the Portfolio's
performance. The base fee of 2.00% will be paid if the Portfolio's performance
(net of all fees and expenses, including the management fee) is between 1.5 and
3.0 percentage points higher than the applicable benchmark index. A fee of 4.00%
will be paid only if the Portfolio's performance (net of all fees and expenses,
including the management fee) is at least 7.5 percentage points higher than the
applicable benchmark index. No fee will apply if the Portfolio's performance is
more than 3.0 percentage points lower than the applicable benchmark index; see
the prospectus of The Palladian-SM- Trust for more details. Because of this
variation, expense information assuming fees of 0.00%, 2.00% and 4.00% is shown
below. The fee, however, could be any figure between 0.00% and 4.00%.
EXAMPLE 1 -- ASSUMING MANAGEMENT FEE OF 0.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the management fee to be 0.00% a Portfolio's performance, net of all fees
and expenses, would have to be more than 3.0 percentage points below the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- -------------------------------------------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Value Portfolio............................................... 0.00%(1) 0.70%(2) 0.70%
Growth Portfolio.............................................. 0.00%(1) 0.70%(2) 0.70%
International Growth Portfolio................................ 0.00%(1) 1.20%(2) 1.20%
Global Strategic Income Portfolio............................. 0.00%(1) 1.20%(2) 1.20%
Global Interactive/Telecomm Portfolio......................... 0.00%(1) 1.20%(2) 1.20%
Money Market Fund............................................. 0.28% 0.06%(3) 0.34%
</TABLE>
8
<PAGE>
EXAMPLE 2 -- ASSUMING MANAGEMENT FEE OF 2.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the management fee to be 2.00%, a Portfolio's performance, net of all fees
and expenses (including the management fee), would have to be between 1.5 and
3.0 percentage points higher than the benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- -------------------------------------------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Value Portfolio............................................... 2.00%(1) 0.70%(2) 2.70%
Growth Portfolio.............................................. 2.00%(1) 0.70%(2) 2.70%
International Growth Portfolio................................ 2.00%(1) 1.20%(2) 3.20%
Global Strategic Income Portfolio............................. 2.00%(1) 1.20%(2) 3.20%
Global Interactive/Telecomm Portfolio......................... 2.00%(1) 1.20%(2) 3.20%
Money Market Fund............................................. 0.28% 0.06%(3) 0.34%
</TABLE>
EXAMPLE 3 -- ASSUMING MANAGEMENT FEE OF 4.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the management fee to be 4.00%, a Portfolio's performance, net of all fees
and expenses (including the management fee), would have to be at least 7.5
percentage points higher than the benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- -------------------------------------------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Value Portfolio............................................... 4.00%(1) 0.70%(2) 4.70%
Growth Portfolio.............................................. 4.00%(1) 0.70%(2) 4.70%
International Growth Portfolio................................ 4.00%(1) 1.20%(2) 5.20%
Global Strategic Income Portfolio............................. 4.00%(1) 1.20%(2) 5.20%
Global Interactive/Telecomm Portfolio......................... 4.00%(1) 1.20%(2) 5.20%
Money Market Fund............................................. 0.28% 0.06%(3) 0.34%
</TABLE>
(1) Effective February 1, 1997, a performance-based management fee is in
effect, which fee may vary anywhere from 0.00% to 4.00%.
(2) The Manager has agreed to limit operating expenses and reimburse those
expenses to the extent that the Portfolio's "other expenses" (i.e., expenses
other than management fees) through at least December 31, 1997 exceed the
following expense limitations: Value Portfolio, 0.70%; Growth Portfolio, 0.70%;
International Growth Portfolio, 1.20%; Global Strategic Income Portfolio, 1.20%;
and Global Interactive/ Telecomm Portfolio, 1.20%. For the two years following
the date that the expense limitation ends, each Portfolio will reimburse the
Manager for any fees it waived or expenses it reimbursed pursuant to the expense
limitation, provided that such reimbursement would not cause the Portfolio's
"other expense" ratio to exceed the expense limitation set forth above. After
this two-year period, the Portfolio's reimbursement liability to the Manager
will cease. In addition, if at any time the investment management agreement
between the Manager and the Portfolios terminates, the Portfolio's reimbursement
liability to the Manager will cease.
(3) Under the Management Agreement with Allmerica Investment Trust, Allmerica
Investment Management Company, Inc. ("Manager") has declared a voluntary expense
limitation of 0.60% for the Money Market Fund. The total operating expenses of
the Money Market Fund was less than the expense limitation throughout 1996. The
declaration of a voluntary expense limitation in any year does not bind
Allmerica Investment to declare future expense limitations with respect to this
Fund.
The preceding expense information was provided to us by the Funds, and we have
not independently verified such information. These Fund expenses are not direct
charges against Sub-Account assets or reductions from Contract value; rather,
these Fund expenses are taken into consideration in computing each Fund's net
asset value, which is the share price used the calculate the unit values of the
Sub-Accounts.
9
<PAGE>
For more information concerning fees and expenses, see the prospectuses of The
Palladian-SM- Trust and Allmerica Investment Trust.
WHAT CHARGES DO I INCUR IF I SURRENDER MY CONTRACT OR MAKE
A PARTIAL WITHDRAWAL?
The charges below apply only if you surrender your Contract or make partial
withdrawals:
- - Surrender Charge -- This charge applies on full surrenders within ten Contract
years. The surrender charge begins at 9.75% of the Payment(s) and decreases to
0% by the tenth Contract year.
- - Partial Withdrawal Costs -- We deduct from the Contract Value the following
for partial withdrawals:
-A transaction fee of 2.0% of the amount withdrawn, not to exceed $25, for
each partial withdrawal for processing costs; and
-A surrender charge on a withdrawal exceeding the "Free 10% Withdrawal."
The first 12 transfers of Contract Value in a Contract year are free. A transfer
charge not to exceed $25 may apply for each additional transfer in the same
Contract year. This charge is for the costs of processing the transfer.
WHAT ARE THE LAPSE AND REINSTATEMENT PROVISIONS OF MY CONTRACT?
The Contract will not lapse unless the Surrender Value on a Monthly Processing
Date is less than zero. There is a 62-day grace period in this situation. You
may reinstate your Contract within three years after the grace period, within
limits.
HOW IS MY CONTRACT TAXED?
The Contract has been designed to be a "modified endowment contract." However,
an exchange under Section 1035 of the Code of a life insurance contract entered
into before June 21, 1988 will not cause the this Contract to be treated as a
modified endowment contract if no additional payments are made and there is no
increase in the death benefit as a result of the exchange.
If the Contract is considered a modified endowment contract, all distributions
(including Contract loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis. Also, a 10% penalty tax may be imposed on
that part of a distribution that is includible in income. However, the Net Death
Benefit under the Contract is excludable from the gross income of the
Beneficiary. In some circumstances, federal estate tax may apply to the Net
Death Benefit or the Contract Value. See "TAXATION OF THE CONTRACT."
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Contract. This prospectus and the Contract provide
further detail. The Contract provides insurance protection for the named
Beneficiary. The Contract and its attached application are the entire agreement
between you and the Company.
10
<PAGE>
DESCRIPTION OF ALLMERICA FINANCIAL, THE VARIABLE ACCOUNT,
THE PALLADIAN-SM- TRUST AND ALLMERICA INVESTMENT TRUST
ALLMERICA FINANCIAL. Allmerica Financial is a life insurance company organized
under the laws of Delaware in 1974. We are an indirect, wholly owned subsidiary
of First Allmerica Financial Life Insurance Company, formerly named State Mutual
Life Assurance Company of America ("First Allmerica"). First Allmerica was
organized under the laws of Massachusetts in 1844 and is the fifth oldest life
insurance company in America. Our Principal Office is 440 Lincoln Street,
Worcester, Massachusetts 01653, Telephone 1-508-855-1000. We are subject to the
laws of the state of Delaware, to regulation by the Commissioner of Insurance of
Delaware, and to other laws and regulations where we are licensed to operate.
THE VARIABLE ACCOUNT. The Variable Account is a separate investment account
with six Sub-Accounts. Each Sub-Account invests in a Fund of The Palladian Trust
and Allmerica Investment Trust. The assets used to fund the variable part of the
Contracts are set aside in Sub-Accounts and are separate from our general
assets. We administer and account for each Sub-Account as part of our general
business. However, income, capital gains and capital losses are allocated to
each Sub-Account without regard to any of our other income, capital gains or
capital losses. Under Delaware law, the assets of the Variable Account may not
be charged with any liabilities arising out of any other business of ours.
Our Board of Directors authorized the Variable Account by vote on June 13, 1996.
The Variable Account meets the definition of "separate account" under federal
securities laws. It 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 SEC supervision of the
management or investment practices or policies of the Variable Account or of
Allmerica Financial. We reserve the right, subject to law, to change the names
of the Variable Account and the Sub-Accounts.
THE PALLADIAN-SM- TRUST. The Palladian-SM- Trust was established as a
Massachusetts business trust on September 8, 1993, and is registered with the
SEC as a management investment company. Five investment portfolios are currently
available under the Contract. The assets of each Portfolio are held separate
from the assets of the other Portfolios. Each Portfolio operates as a separate
investment vehicle and the income or losses of one Portfolio have no effect on
the investment performance of another Portfolio. Shares of The Palladian-SM-
Trust are not offered to the general public, but solely to separate accounts of
insurance companies for the purpose of providing a vehicle for the investment of
assets.
Palladian-SM- Advisors, Inc. ("PAI") serves as overall manager of The
Palladian-SM-Trust and is responsible for general investment supervisory
services to the Portfolios. The Palladian-SM- Trust and PAI have retained
several Portfolio Managers to manage the assets of each Portfolio. PAI has also
retained Tremont Advisors, Inc. ("Tremont"), as Portfolio Consultants, to
research, evaluate, recommend and monitor the Portfolio Managers. PAI is located
at 4225 Executive Square, Suite 355, La Jolla, California 92037.
The five Portfolios of The Palladian-SM- Trust and their respective Portfolio
Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ------------------------------------------------------------------------- ---------------------------------------
<S> <C>
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global Strategic Income Portfolio Fischer Francis Trees & Watts, Inc.
The Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
The Palladian-SM- Trust pays PAI and the Portfolio Managers a monthly fee (the
"management fee") based on the average daily net assets of each Portfolio. Each
Portfolio Manager is paid on an incentive fee basis, which could result in
either higher than average management fees or, possibly, no management fee at
all, depending on how well each Portfolio Manager performs. There are two
components to the management fee: the basic fee and the incentive fee. The
management fee is structured to vary based upon the Portfolio's performance
(after expenses) compared to that of an appropriate market benchmark selected
11
<PAGE>
for that Portfolio. The total advisory free for PAI, Tremont and the Portfolio
Managers for the first 12 months of operations is, for each Portfolio, 80% of
average daily net assets. As of February 1, 1997, the Management and Management
fee schedule provides for an incentive performance fee for superior performance,
and provides for lower fee for sub-par performance. The base fee will be 2.00%,
but may vary from 0.00% to 4.00% depending on the Portfolio's performance. Each
Portfolio Manager also has invested $1 million in the Portfolios it manages, so
it is managing a portion of its money along with your money. PAI is responsible
for paying the fee of Tremont, which is structured to vary based on how well the
Portfolio Managers perform. See the prospectus of The Palladian-SM- Trust for
more details.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust is an open-end,
diversified, management investment company registered with the SEC under the
1940 Act.
Allmerica Investment Trust was established as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various variable accounts established by the Company or other
affiliated insurance companies. The Money Market Fund of Allmerica Investment
Trust is available under the Contract; certain other funds of Allmerica
Investment Trust are not currently offered under the Contract. Shares of the
Trust are not offered to the general public but solely to such variable
accounts.
Allmerica Investment Management Company, Inc. ("AIMCO") is the investment
manager of Allmerica Investment Trust and, subject to the direction of the Board
of Trustees, handles the day-to-day affairs of the Trust. AIMCO has entered into
a Sub-Adviser Agreement with its affiliate, Allmerica Asset Management, Inc.
("AAM") for investment management services for the Money Market Fund. Under the
Sub-Adviser Agreement, AAM is authorized to engage in portfolio transactions on
behalf of the Money Market Fund, subject to such general or specific
instructions as may be given by the Trustees. The terms of the Sub-Adviser
Agreement cannot be materially changed without the approval of a majority in
interest of the shareholders of the Fund. Both AIMCO and AAM are located at 440
Lincoln Street, Worcester, Massachusetts, 01653.
Other than the expenses specifically assumed by AIMCO under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933, other fees payable to
the SEC, independent public accountant, legal and custodian fees, association
membership dues, taxes, interest, insurance premiums, brokerage commissions,
fees and expenses of the Trustees who are not affiliated with First Allmerica
and its affiliates and subsidiaries, expenses for proxies, prospectuses, reports
to shareholders and other expenses.
For providing its services under the Management Agreement, AIMCO will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of the Money Market Fund as follows: 0.35% on net asset value up to $50,000,000;
0.25% on the next $200,000,000; and 0.20% on the remainder. The fee is paid from
the assets of the Money Market Fund. AIMCO is solely responsible for the payment
of all fees for investment management services to AAM, which will be a fee of
0.10%, computed daily at an annual rate based on the average daily net asset
value of the Money Market Fund.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. MORE
DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND
RISKS, EXPENSES PAID BY THE FUNDS, AND OTHER RELEVANT INFORMATION REGARDING THE
FUNDS MAY BE FOUND IN THE PROSPECTUSES OF THE PALLADIAN-SM- TRUST AND ALLMERICA
INVESTMENT TRUST WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ CAREFULLY
BEFORE INVESTING. The Statements of Additional Information of Palladian-SM- and
the Trust are available upon request. There can be no assurance that the
investment objectives of the Funds can be achieved or that the value of a
Contract will equal or exceed the aggregate amount of the Payment(s) made under
the Contract.
VALUE PORTFOLIO seeks to make money for investors by investing primarily in
companies that the Portfolio Manager believes are undervalued and that by virtue
of anticipated developments may, in the Portfolio Manager's judgment, achieve
significant capital appreciation.
GROWTH PORTFOLIO seeks to make money for investors by investing primarily in
securities selected for their long-term growth prospects.
INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by investing
internationally for long-term capital appreciation, primarily in equity
securities.
GLOBAL STRATEGIC INCOME PORTFOLIO seeks to make money for investors by investing
for high current income and capital appreciation in a variety of domestic and
foreign fixed-income securities.
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
MONEY MARKET FUND seeks to obtain maximum current income consistent with the
preservation of capital and liquidity.
If there is a material change in the investment policy of a Fund, the Contract
Owner will be notified of the change. If the Contract Owner has Contract Value
allocated to that Fund, he or she may have the Contract Value reallocated
without charge to another Fund or to the Fixed Account, where available, on
Written Request received by the Company within sixty (60) days of the later of:
(1) the effective date of such change in the investment policy or (2) the
receipt of the notice of the Contract Owner's right to transfer.
THE CONTRACT
APPLICATION FOR A CONTRACT -- Individuals wishing to purchase a Contract must
complete an application and submit it to an authorized registered agent or to
Allmerica Financial at its Principal Office. We offer Contracts to applicants 89
years old and under. After receiving a completed application from a prospective
Contract Owner, we will begin underwriting to decide the insurability of the
proposed Insured. We may require medical examinations and other information
before deciding insurability. We issue a Contract only after underwriting has
been completed. We may reject an application that does not meet our underwriting
guidelines.
If a prospective Contract Owner makes the initial Payment with the application,
we will provide fixed conditional insurance during underwriting. The conditional
insurance will be based upon Death Benefit Factors shown in the Conditional
Insurance Agreement, up to a maximum of $500,000, depending on Age and
Underwriting Class. This coverage will continue for a maximum of 90 days from
the date of the application or, if required, the completed medical exam. If
death is by suicide, we will return only the Payment made.
If the initial Payment is not made with the application, on Contract delivery we
will require the initial Payment to place the insurance in force.
If you made the initial Payment before the date of Issuance and Acceptance, we
will allocate the Payment to our General Account within two business days of
receipt of the Payment at our Principal Office. IF WE
13
<PAGE>
ARE UNABLE TO ISSUE THE CONTRACT, WE WILL ISSUE AN ANNUITY CONTRACT. HOWEVER, IF
THE CONTRACT OWNER HAS ELECTED NOT TO RECEIVE THE ANNUITY CONTRACT ON THE
APPLICATION, THE PAYMENT WILL BE RETURNED TO THE CONTRACT OWNER WITHOUT
INTEREST.
If your application is approved and the Contract is issued and accepted, we will
allocate your Contract Value on Issuance and Acceptance according to your
instructions. However, if your Contract provides for a full refund of Payments
under its "Right to Cancel" provision as required in your state (see "THE
CONTRACT -- FREE LOOK PERIOD"), we will initially allocate your Sub-Account
investments to the Money Market Fund. We will reallocate all amounts according
to your investment choices no later than the expiration of the right to cancel
period.
FREE LOOK PERIOD -- The Contract provides for a free look period under the Right
to Cancel provision. You have the right to examine and cancel your Contract by
returning it to us or to one of our representatives on or before the tenth day
(or such later date as required in your state) after you receive the Contract.
If your Contract provides for a full refund under its "Right to Cancel"
provision as required in your state, your refund will be your entire Payment. If
your Contract does not provide for a full refund, you will receive:
-Amounts allocated to the Fixed Account; PLUS
-The Contract Value in the Variable Account: PLUS
-All fees, charges and taxes which have been imposed.
We may delay a refund of any Payment made by check until the check has cleared
your bank. Your refund will be determined as of the Valuation Date that the
Contract is received at our Principal Office.
CONVERSION PRIVILEGE -- Within 24 months of the Date of Issue, you can convert
your Contract into a non-variable Contract by transferring all Contract Value in
the Sub-Accounts to the Fixed Account. The conversion will take effect at the
end of the Valuation Period in which we receive, at our Principal Office, notice
of the conversion satisfactory to us. There is no charge for this conversion. We
will allocate any future Payment(s) to the Fixed Account, unless you instruct us
otherwise.
PAYMENTS -- The Contracts are designed for a large single Payment to be paid by
the Contract Owner on or before the Date of Issue. The minimum initial Payment
Allmerica Financial requires for a contract is $25,000. The initial Payment is
used to determine the Face Amount. The Face Amount will be determined by
treating the Payment as equal to 100% of the Guideline Single Premium. You may
indicate the desired Face Amount on the application. If the Face Amount
specified exceeds 100% of the Guideline Single Premium for the Payment amount,
the application will be amended and a Contract with a higher Face Amount will be
issued.
If the Face Amount specified is less than 80% of the Guideline Single Premium
for the Payment amount, the application will be amended and a Contract with a
lower Face Amount will be issued. The Contract Owner must agree to any amendment
to the application.
Under our underwriting rules, the Face Amount must be based on 100% of the
Guideline Single Premium to be eligible for simplified underwriting.
Payments are payable to Allmerica Financial. Payments may be made by mail to our
Principal Office or through our authorized representative. Any additional
Payment, after the initial Payment, is credited to the Variable Account or Fixed
Account on the date of receipt at the Principal Office.
The Contract limits the ability to make additional Payments. However, no
additional Payment may be less than $10,000 without our consent. Any additional
Payment(s) may not cause total Payments to exceed the Maximum Payment on the
specifications page of your Contract.
14
<PAGE>
Total Payments may not exceed the current maximum payment limits under federal
tax law. Where total Payments would exceed the current maximum payment limits,
we will only accept that part of a Payment that will make total Payments equal
the maximum. We will return any part of a Payment that is greater than that
amount. However, we will accept a Payment needed to prevent Contract lapse
during a Contract year. See "CONTRACT TERMINATION AND REINSTATEMENT."
ALLOCATION OF PAYMENTS -- In the application for your Contract, you decide the
initial allocation of the Payment among the Sub-Account and the Fixed Account.
You may allocate the Payment to one or more of the Sub-Accounts and/or the Fixed
Account. The minimum amount that you may allocate to a Sub-Account is 1.0% of
the Payment. Allocation percentages must be in whole numbers (for example,
33 1/3% may not be chosen) and must total 100%.
You may change the allocation of any future Payment by Written Request or
telephone request. You have the privilege to make telephone requests, unless you
elected not to have the privilege on the application. The policy of Allmerica
Financial and its representatives and affiliates are that they will not be
responsible for losses resulting from acting on telephone requests reasonably
believed to be genuine. We will use reasonable methods to confirm that
instructions communicated by telephone are genuine; otherwise, Allmerica
Financial may be liable for any losses from unauthorized or fraudulent
instructions. We require that callers on behalf of a Contract Owner identify
themselves by name and identify the Contract Owner by name, date of birth and
social security number. All telephone requests are tape recorded. An allocation
change will take effect on the date of receipt of the notice at the Principal
Office. No charge is currently imposed for changing Payment allocation
instructions. We reserve the right to impose a charge in the future, but
guarantee that the charge will not exceed $25.
The Contract Value in the Sub-Accounts will vary with investment experience. You
bear this investment risk. Investment performance may also affect the Death
Benefit. Review your allocations of Contract Value as market conditions and your
financial planning needs change.
TRANSFER PRIVILEGE -- At any time prior to the election of a Payment Option,
subject to our then current rules, you may transfer amounts among the
Sub-Accounts or between a Sub-Account and the Fixed Account. (You may not
transfer that portion of the Contract Value held in the Fixed Account that
secures a Contract loan.)
We will make transfers at your Written Request or telephone request, as
described in "THE CONTRACT -- ALLOCATION OF PAYMENTS." Transfers are effected at
the value next computed after receipt of the transfer order.
The first 12 transfers in a Contract year are free. After that, we will deduct a
transfer charge not to exceed $25 from amounts transferred in that Contract
year.
You may apply for automatic transfers from the Fixed Account, the Global
Strategic Income Sub-Account or the Money Market Sub-Account to one or more of
the other Sub-Accounts every one, two, three, six or twelve months. Each
automatic transfer must be at least $100. If the Fixed Account or the
Sub-Account from which the automatic transfer is to be made is zero, the
automatic transfer will cease. The Contract Owner must reapply for any future
automatic transfers.
You may also apply for automatic account rebalancing in order to allocate
Contract Value among the Sub-Accounts every one, two, three, six or twelve
months. The Fixed Account is not included in the automatic account rebalancing.
We will process automatic transfers or automatic rebalancing on the 15th of each
scheduled month. If the 15th is not a business day or is the Monthly Processing
Date, we will process the automatic transfer or automatic rebalancing on the
next business day.
The first automatic transfer counts as one transfer toward the 12 free transfers
allowed in each Contract year. Each subsequent automatic transfer is free and
does not reduce the remaining number of transfers
15
<PAGE>
that are free in a Contract year. Any transfers made for a conversion privilege,
Contract loan or material change in investment policy will not count toward the
12 free transfers.
The transfer privilege is subject to our consent. We reserve the right to impose
limits on transfers including, but not limited to, the:
-Minimum amount that may be transferred;
-Minimum amount that may remain in a Sub-Account following a transfer from
that Sub-Account;
-Minimum period between transfers involving the Fixed Account; and
-Maximum amounts that may be transferred from the Fixed Account.
Transfers involving the Fixed Account are currently permitted only if:
-There has been at least a ninety (90) day period since the last transfer
from the Fixed Account; and
-The amount transferred from the Fixed Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Contract Value.
These rules are subject to change by Allmerica Financial.
DEATH BENEFIT -- If the Contract is in force on the Insured's death, we will,
with due proof of death, pay the Net Death Benefit to the named Beneficiary. For
second-to-die Contracts, the Net Death Benefit is payable on the death of the
last surviving Insured. There is no Death Benefit payable on the death of the
first Insured to die. We will normally pay the Net Death Benefit within seven
days of receiving due proof of the Insured's death, but we may delay payment of
Net Death Benefits. See "OTHER CONTRACT PROVISIONS -- Delay of Benefit
Payments." The Beneficiary may receive the Net Death Benefit in a lump sum or
under a payment option, unless the payment option has been restricted by the
Contract owner. See "APPENDIX C -- PAYMENT OPTIONS."
Before the Final Payment Date, the Net Death Benefit is:
-The Death Benefit: MINUS
-Any Outstanding Loan, rider charges and Monthly Deductions due and unpaid
through the Contract month in which the Insured dies, as well as any
partial withdrawals and surrender charges.
After the Final Payment Date, the Net Death benefit is:
-The Contract Value; MINUS
-Any Outstanding Loan.
In most states, we will compute the Net Death Benefit on the date we receive due
proof of the Insured's death.
The Death Benefit is the GREATER of the:
-Face Amount; OR
-Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED -- The guideline minimum sum insured is a
percentage of the Contract Value as set forth in "APPENDIX A -- GUIDELINE
MINIMUM SUM INSURED TABLE." The guideline minimum sum insured is computed based
on federal tax regulations to ensure that the Contract qualifies as a life
insurance contract and that the insurance proceeds will be excluded from the
gross income of the Beneficiary.
ILLUSTRATION -- In this illustration, assume that the Insured is under the age
of 40, and that there is no Outstanding Loan.
16
<PAGE>
A Contract with a $100,000 Face Amount will have a Death Benefit of $100,000.
However, because the Death Benefit must be equal to or greater than 250% of
Contract Value, if the Contract Value exceeds $40,000 the Death Benefit will
exceed the $100,000 Face Amount. In this example, each dollar of Contract Value
above $40,000 will increase the Death Benefit by $2.50. For example, a Contract
with a Contract Value of $50,000 will have a guideline minimum sum insured of
$125,000 ($50,000 x 2.50); Contract Value of $60,000 will produce a guideline
minimum sum insured of $150,000 ($60,000 x 2.50); and Contract Value of $75,000
will produce a guideline minimum sum insured of $187,500 ($75,000 x 2.50).
Similarly, if Contract Value exceeds $40,000, each dollar taken out of Contract
Value will reduce the Death Benefit by $2.50. If, for example, the Contract
Value is reduced from $60,000 to $50,000 because of partial withdrawals, charges
or negative investment performance, the Death Benefit will be reduced from
$150,000 to $125,000. If, however, the Contract Value multiplied by the
applicable percentage from the table in Appendix A is less than the Face Amount,
the Death Benefit will equal the Face Amount.
The applicable percentage becomes lower as the Insured's age increases. If the
Insured's age in the above example were, for example, 50 (rather than between
zero and 40), the applicable percentage would be 185%. The Death Benefit would
not exceed the $100,000 face amount unless the Contract Value exceeded $54,054
(rather than $40,000), and each dollar then added to or taken from Contract
Value would change the Death Benefit by $1.85.
CONTRACT VALUE -- The Contract Value is the total value of your Contract. It is
the SUM of:
-Your accumulation in the Fixed Account; PLUS
-The value of your Units in the Sub-Accounts.
There is no guaranteed minimum Contract Value. The Contract Value on any date
depends on variables that cannot be predetermined.
Your Contract Value is affected by the:
-Amount of your Payment(s);
-Interest credited in the Fixed Account;
-Investment performance of the Funds you select;
-Partial withdrawals;
-Loans, loan repayments and loan interest paid or credited; and
-Charges and deductions under the Contract.
COMPUTING CONTRACT VALUE -- We compute the Contract Value on the Date of Issue
and on each Valuation Date. On the Date of Issue, the Contract Value is:
-Your Payment plus any interest earned during the period it was allocated to
the General Account (see "The Contract -- Application for a Contract");
MINUS
-The Monthly Deductions due.
On each Valuation Date after the Date of Issue, the Contract Value is the SUM
of:
-Accumulations in the Fixed Account; PLUS
-The SUM of the PRODUCTS of:
-The number of Units in each Sub-Account; TIMES
-The value of a Unit in each Sub-Account on the Valuation Date.
THE UNIT -- We allocate each Payment to the Sub-Accounts you selected. We credit
allocations to the Sub-Accounts as Units. Units are credited separately for each
Sub-Account.
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<PAGE>
The number of Units of each Sub-Account credited to the Contract is the QUOTIENT
of:
-That part of the Payment allocated to the Sub-Account; DIVIDED BY
-The dollar value of a Unit on the Valuation Date the Payment is received at
our Principal Office.
The number of Units will remain fixed unless changed by a split of Unit value,
transfer, loan, partial withdrawal or surrender. Also, Monthly Deductions taken
from a Sub-Account will result in cancellation of Units equal in value to the
amount deducted.
The dollar value of a Unit of a Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. This
investment experience reflects the investment performance, expenses and charges
of the Fund in which the Sub-Account invests. The value of each Unit was set at
$1.00 on the first Valuation Date of each Sub-Account.
The value of a Unit on any Valuation Date is the PRODUCT of:
-The dollar value of the Unit on the preceding Valuation Date; TIMES
-The net investment factor.
NET INVESTMENT FACTOR -- The net investment factor measures the investment
performance of a Sub-Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is the result of:
-The net asset value per share of a Fund held in the Sub-Account determined
at the end of the current Valuation Period; PLUS
-The per share amount of any dividend or capital gain distributions made by
the Fund on shares in the Sub-Account if the "ex-dividend" date occurs
during the current Valuation Period; DIVIDED BY
-The net asset value per share of a Fund share held in the Sub-Account
determined as of the end of the immediately preceding Valuation Period;
MINUS
-The mortality and expense risk charge for each day in the Valuation Period,
currently at an annual rate of 0.90% of the daily net asset value of that
Sub-Account.
The net investment factor may be greater or less than one.
PAYMENT OPTIONS -- The Net Death Benefit payable may be paid in a single sum or
under one or more of the payment options then offered by Allmerica Financial.
See "APPENDIX C -- PAYMENT OPTIONS." These payment options also are available at
the Final Payment Date or if the Contract is surrendered. If no election is
made, we will pay the Net Death Benefit in a single sum.
OPTIONAL INSURANCE BENEFITS -- You may add an optional insurance benefit to the
Contract by rider, as described in "APPENDIX B -- OPTIONAL BENEFIT."
SURRENDER -- You may surrender the Contract and receive its Surrender Value. The
Surrender Value is:
-The Contract Value; MINUS
-Any Outstanding Loan and surrender charges.
We will compute the Surrender Value on the Valuation Date on which we receive
the Contract with a Written Request for surrender. We will deduct a surrender
charge if you surrender the Contract within 10 full Contract years of the Date
of Issue. See "CHARGES AND DEDUCTIONS -- SURRENDER CHARGE."
The Surrender Value may be paid in a lump sum or under a payment option then
offered by us. See "APPENDIX C -- PAYMENT OPTIONS." We will normally pay the
Surrender Value within seven days following our receipt of Written Request. We
may delay benefit payments under the circumstances described in "OTHER CONTRACT
PROVISIONS -- Delay of Benefit Payments."
For important tax consequences of a surrender, see "FEDERAL TAX CONSIDERATIONS."
18
<PAGE>
PARTIAL WITHDRAWAL -- You may withdraw part of the Contract Value of your
Contract on Written Request. Your Written Request must state the dollar amount
you wish to receive. You may allocate the amount withdrawn among the
Sub-Accounts and the Fixed Account. If you do not provide allocation
instructions, we will make a Pro-Rata Allocation. Each partial withdrawal must
be at least $1,000. We will not allow a partial withdrawal if it would reduce
the Contract Value below $25,000. The Face Amount is reduced proportionately
based on the ratio of the amount of the partial withdrawal and charges to the
Contract Value on the date of withdrawal.
On a partial withdrawal from a Sub-Account, we will cancel the number of Units
equal in value to the amount withdrawn. The amount withdrawn will be the amount
you requested plus the partial withdrawal costs and any applicable surrender
fee. See "CHARGES AND DEDUCTIONS -- SURRENDER CHARGES" and "CHARGES AND
DEDUCTIONS -PARTIAL WITHDRAWAL COSTS." We will normally pay the partial
withdrawal within seven days following our receipt of Written Request. We may
delay payment as described in "OTHER CONTRACT PROVISIONS -- Delay of Benefit
Payments."
For important tax consequences of partial withdrawals, see "FEDERAL TAX
CONSIDERATIONS."
CHARGES AND DEDUCTIONS
The following charges will apply to your Contract under the circumstances
described. Some of these charges apply throughout the Contract's duration.
No surrender charges or partial withdrawal charges are imposed, and no
commissions are paid where the Contract Owner as of the date of application is
within the following class of individuals:
- - All employees of First Allmerica and its affiliates and subsidiaries located
at First Allmerica's home office (or at off-site locations if such employees
are on First Allmerica's home office payroll); all employees and registered
representatives of any broker-dealer that has entered into a sales agreement
with us or Allmerica Investments, Inc. to sell the Contracts and any spouses
of the above persons or any children of the above persons.
MONTHLY DEDUCTIONS -- On the Monthly Processing Date, the Company will deduct an
amount to cover charges and expenses incurred in connection with the Contract.
This Monthly Deduction will be deducted by subtracting values from the Fixed
Account accumulation and/or canceling Units from each applicable Sub-Account in
the ratio that the Contract Value in the Sub-Account bears to the Contract
Value. The amount of the Monthly Deduction will vary from month to month. If the
Contract Value is not sufficient to cover the Monthly Deduction which is due,
the Contract may lapse. (See "CONTRACT TERMINATION AND REINSTATEMENT.") The
Monthly Deduction is comprised of the following charges:
- - MAINTENANCE FEE: The Company will make a deduction of $2.50 from any Contract
with less than $50,000 in Contract Value to cover charges and expenses
incurred in connection with the Contract. This charge is to reimburse the
Company for expenses related to issuance and maintenance of the Contract. The
Company does not intend to profit from this charge.
- - ADMINISTRATION CHARGE: The Company imposes a monthly charge at an annual rate
of 0.40% of the Contract Value. This charge is to reimburse us for
administrative expenses incurred in the administration of the Contract. It is
not expected to be a source of profit.
- - MONTHLY INSURANCE PROTECTION CHARGE: Immediately after the Contract is issued,
the Death Benefit will be greater than the Payment. While the Contract is in
force, prior to the Final Payment Date, the Death Benefit will generally be
greater than the Contract Value. To enable us to pay this excess of the Death
Benefit over the Contract Value, a monthly cost of insurance charge is
deducted. This charge varies between an annual rate of 0.20% and 2.50% of the
Contract Value depending on the type of Contract and the Underwriting Class.
In no event will the current deduction for the cost of insurance exceed the
guaranteed maximum insurance protection rates set forth in the Contract. These
guaranteed rates are based on the Commissioners 1980 Standard Ordinary
Mortality Tables, Tobacco User or Non-Tobacco
19
<PAGE>
User (Mortality Table B for unisex Contracts and Mortality Table D for
second-to-die Contracts) and the Insured's sex and age. The Tables used for
this purpose set forth different mortality estimates for males and females and
for tobacco user and non-tobacco user. Any change in the insurance protection
rates will apply to all Insured of the same age, sex and Underwriting Class
whose Contracts have been in force for the same period.
The Underwriting Class of an Insured will affect the insurance protection rate.
We currently place Insureds into standard Underwriting Classes and non-standard
Underwriting Classes. The Underwriting Classes are also divided into two
categories: tobacco user and non-tobacco user. We will place Insureds under the
age of 18 at the Date of Issue in a standard or non-standard Underwriting Class.
We will then classify the Insured as a non-tobacco user.
- - DISTRIBUTION EXPENSE: During the first ten Contract years, we make a monthly
deduction to compensate for a portion of the sales expense which are incurred
by us with respect to the Contracts. This charge is equal to 0.30% of the
Contract Value. We will monitor distribution charges, federal tax charges and
the sales charge portion of the surrender fee deducted under a Contract to
ensure that the sum of these charges will never exceed 9% of the Payment(s)
made under the Contract.
- - FEDERAL & STATE PAYMENT TAX CHARGE: During the first ten Contract years, we
make a monthly deduction to compensate the Company for the increase in federal
tax liability from the application of Section 848 of the Internal Revenue Code
and to offset the average premium tax the Company is expected to pay to
various state and local jurisdictions but will not necessarily equal the
premium tax paid by us for a particular Contract. The Company expects to pay
an average premium tax of approximately 2.5% of premiums in all states,
although such rates can generally range from 0% to 4%. The Company does not
intend to profit from the premium tax portion of this charge.
DAILY DEDUCTIONS -- We assess each Sub-Account with a charge for mortality and
expense risks we assume. Fund expenses are also reflected in the Variable
Account.
- - MORTALITY AND EXPENSE RISK CHARGE: We impose a daily charge at a current
annual rate of 0.90% of the average daily net asset value of each Sub-Account.
This charge compensates us for assuming mortality and expense risks for
variable interests in the Contracts. The mortality risk we assume is that
Insureds may live for a shorter time than anticipated. If this happens, we
will pay more Net Death Benefits than anticipated. The expense risk we assume
is that the expenses incurred in issuing and administering the Contracts will
exceed those compensated by the maintenance fee and administration charges in
the Contracts. If the charge for mortality and expense risks is not sufficient
to cover mortality experience and expenses, we will absorb the losses. If the
charge turns out to be higher than mortality and expense risk expenses, the
difference will be a profit to us. If the charge provides us with a profit,
the profit will be available for our use to pay distribution, sales and other
expenses.
- - FUND EXPENSES: The value of the Units of the Sub-Accounts will reflect the
investment management fee and other expenses of the Funds whose shares the
Sub-Accounts purchase. The prospectuses and statements of additional
information of PalladianSM and the Trust contain more information concerning
the fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should income taxes be imposed, we may make deductions from the
Sub-Accounts to pay the taxes. See "FEDERAL TAX CONSIDERATIONS."
SURRENDER CHARGE -- The Contract's contingent surrender charge is a deferred
sales charge and an unrecovered payment tax charge. The deferred sales charge
compensates us for distribution expenses, including commissions to our
representatives, advertising and the printing of prospectuses and sales
20
<PAGE>
literature. The unrecovered payment tax charge is designed to reimburse us for
the unrecovered federal and state taxes the Company has paid.
<TABLE>
<CAPTION>
CONTRACT YEAR* 1 2 3 4 5 6 7 8 9 10+
- -------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred Sale Charge 7.50% 7.50% 6.00% 6.00% 4.50% 4.50% 3.00% 3.00% 1.50% 0%
Unrecovered Payment
Tax Charge 2.25% 2.00% 1.75% 1.25% 1.50% 1.00% 0.75% 0.50% 0.25% 0%
--
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Surrender
Charge 9.75% 9.50% 7.75% 7.25% 5.75% 5.50% 3.75% 3.50% 1.75% 0%
</TABLE>
The surrender charge applies for ten Contract years. We impose the surrender
charge only if, during its duration, you request a full surrender or a partial
withdrawal in excess of the free withdrawal amount.
* For a Contract that lapses and reinstates, see "REINSTATEMENT."
PARTIAL WITHDRAWAL COSTS -- For each partial withdrawal, we deduct a transaction
fee of 2.0% of the amount withdrawn, not to exceed $25. This fee is intended to
reimburse us for the cost of processing the withdrawal.
A partial withdrawal charge may also be deducted from Contract Value. However,
in any Contract year, you may withdraw, without a partial withdrawal charge, up
to:
-10% of the Contract Value; MINUS
-The total of any prior free withdrawals in the same Contract year ("Free
10% Withdrawal.")
The right to make the Free 10% Withdrawal is not cumulative from Contract year
to Contract year. For example, if only 8% of Contract Value were withdrawn in
the second Contract year, the amount you could withdraw in future Contract years
would not be increased by the amount you did not withdraw in the second Contract
year.
We impose any applicable surrender charge on any withdrawal greater than the
Free 10% Withdrawal.
TRANSFER CHARGES -- The first 12 transfers in a Contract year are free. After
that, we may deduct a transfer charge not to exceed $25 from amounts transferred
in that Contract year. This charge reimburses us for the administrative costs of
processing the transfer.
If you apply for automatic transfers, the first automatic transfer counts as one
transfer. Each future automatic transfer is without charge and does not reduce
the remaining number of transfers that may be made without charge.
Each of the following transfers of Contract Value from the Sub-Accounts to the
Fixed Account is free and does not count as one of the 12 free transfers in a
Contract year:
-A conversion within the first 24 months from Date of Issue;
-A transfer to the Fixed Account to secure a loan; and
-A transfer from the Fixed Account as a results of a loan repayment.
CONTRACT LOANS
You may borrow money secured by your Contract Value, both during and after the
first Contract year. The total amount you may borrow is the Loan Value. The Loan
Value is 90% of the Contract Value minus any surender charges.
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<PAGE>
The minimum loan is $1,000. The maximum loan is the Loan Value minus any
Outstanding Loan. We will usually pay the loan within seven days after we
receive the Written Request. We may delay the payment of loans as stated in
"OTHER CONTRACT PROVISIONS -- Delay of Payments."
We will allocate the loan among the Sub-Accounts and the Fixed Account according
to your instructions. If you do not make an allocation, we will make a Pro-Rata
Allocation. We will transfer Contract Value in each Sub-Account equal to the
Contract loan to the Fixed Account. We will not count this transfer as a
transfer subject to the transfer charge.
Contract Value equal to the Outstanding Loan will earn monthly interest in the
Fixed Account at an annual rate of at least 4.0%.
PREFERRED LOAN OPTION -- Any portion of the Outstanding Loan that represents
earnings in this Contract, a loan from an exchanged life insurance policy that
was as carried over to this Contract or the gain in the exchanged life insurance
policy that was carried over to this Contract may be treated as a preferred
loan. The available percentage of the gain carried over from an exchanged policy
less any policy loan carried over which will be eligible for preferred loan
treatment is as follows:
<TABLE>
<CAPTION>
BEGINNING OF
CONTRACT YEAR 1 2 3 4 5 6 7 8 9
- ---------------------------- --- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unloaned Gain Available 0% 10% 20% 30% 40% 50% 60% 70% 80%
<CAPTION>
BEGINNING OF
CONTRACT YEAR 10 11
- ---------------------------- --------- ---------
<S> <C> <C>
Unloaned Gain Available 90% 100%
</TABLE>
The guaranteed annual interest rate credited to the Contract Value securing a
preferred loan will be at least 5.5%.
LOAN INTEREST CHARGED -- Interest accrues daily at the annual rate of 6.0%.
Interest is due and payable in arrears at the end of each Contract year or for
as short a period as the loan may exist. Interest not paid when due will be
added to the Outstanding Loan by transferring Contract Value equal to the
interest due to the Fixed Account. The interest due will bear interest at the
same rate.
REPAYMENT OF OUTSTANDING LOAN -- You may pay any loans before Contract lapse. We
will allocate that part of the Contract Value in the Fixed Account that secured
a repaid loan to the Sub-Accounts and Fixed Account according to your
instructions. If you do not make a repayment allocation, we will allocate
Contract Value according to your most recent Payment allocation instructions.
However, loan repayments allocated to the Variable Account cannot exceed
Contract Value previously transferred from the Variable Account to secure the
outstanding loan.
If the Outstanding Loan exceeds the Contract Value less the surrender charge,
the Contract will terminate. We will mail a notice of termination to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Contract will terminate with no
value. See "CONTRACT TERMINATION AND REINSTATEMENT."
EFFECT OF CONTRACT LOANS -- Contract loans will permanently affect the Contract
Value and Surrender Value, and may permanently affect the Death Benefit. The
effect could be favorable or unfavorable, depending on whether the investment
performance of the Sub-Accounts is less than or greater than the interest
credited to the Contract Value in the Fixed Account that secures the loan.
We will deduct any Outstanding Loan from the proceeds payable when the Insured
dies or from a surrender.
CONTRACT TERMINATION AND REINSTATEMENT
TERMINATION -- The Contract will terminate if on a Monthly Processing Date the
Surrender Value is less than $0 (zero.) If this situation occurs, the Contract
will be in default. You will then have a grace period of 62 days, measured from
the date of default, to make a Payment sufficient to prevent termination. On the
date of default, we will send a notice to you and to any assignee of record. The
notice will state the Payment due and the date by which it must be paid.
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<PAGE>
Failure to make a sufficient Payment within the grace period will result in the
Contract terminating without value. If the Insured dies during the grace period,
we will deduct from the Net Death Benefit any overdue charges.
REINSTATEMENT -- A terminated Contract may be reinstated within three years of
the date of default and before the Final Payment Date. The reinstatement takes
effect on the Monthly Processing Date following the date you submit to us:
-Written application for reinstatement;
-Evidence of Insurability showing that the Insured is insurable according to
our current underwriting rules;
-A Payment that is large enough to cover the cost of all Contract charges
that were due and unpaid during the grace period;
-A Payment that is large enough to keep the Contract in force for three
months; and
-A Payment or reinstatement of any loan against the Contract that existed at
the end of the grace period.
Contracts which have been surrendered may not be reinstated.
SURRENDER CHARGE -- For the purpose of measuring the surrender charge period,
the contract will be reinstated as of the date of default. The surrender charge
on the date of reinstatement is the surrender charge that would have been in
effect on the date of default.
CONTRACT VALUE ON REINSTATEMENT -- The Contract Value on the date of
reinstatement is:
-The Payment made to reinstate the Contract and interest earned from the
date the Payment was received at our Principal Office; PLUS
-The Contract Value less any Outstanding Loan on the date of default (not to
exceed the surrender charge on the date of reinstatement); MINUS
-The Monthly Deductions due on the date of reinstatement.
You may reinstate any Outstanding Loan.
OTHER CONTRACT PROVISIONS
CONTRACT OWNER -- The Contract Owner named on the specifications page of the
Contract is the Insured unless another Contract Owner has been named in the
application. As Contract Owner, you are entitled to exercise all rights under
your Contract while the Insured is alive, with the consent of any irrevocable
Beneficiary.
BENEFICIARY -- The Beneficiary is the person or persons to whom the Net Death
Benefit is payable on the Insured's death. Unless otherwise stated in the
Contract, the Beneficiary has no rights in the Contract before the Insured dies.
While the Insured is alive, you may change the Beneficiary, unless you have
declared the Beneficiary to be irrevocable. If no Beneficiary is alive when the
Insured dies, the Contract Owner (or the Contract Owner's estate) will be the
Beneficiary. If more than one Beneficiary is alive when the Insured dies, we
will pay each Beneficiary in equal shares, unless you have chosen otherwise.
Where there is more than one Beneficiary, the interest of a Beneficiary who dies
before the Insured will pass to surviving Beneficiaries proportionately, unless
the Contract owner has requested otherwise.
ASSIGNMENT -- You may assign a Contract as collateral or make an absolute
assignment. All Contract rights will be transferred as to the assignee's
interest. The consent of the assignee may be required to make changes in Payment
allocations, make transfers or to exercise other rights under the Contract. We
are not bound by an assignment or release thereof, unless it is in writing and
recorded at our Principal Office. When recorded, the assignment will take effect
on the date the Written Request was signed. Any rights the
23
<PAGE>
assignment creates will be subject to any payments we made or actions we took
before the assignment is recorded. We are not responsible for determining the
validity of any assignment or release.
The following Contract provisions may vary by state.
LIMIT ON RIGHT TO CONTEST THE CONTRACT -- We cannot challenge the validity of
your Contract if the Insured was alive after the Contract had been in force for
two years from the Date of Issue.
SUICIDE -- The Net Death Benefit will not be paid if the Insured commits
suicide, while sane or insane, within two years from the Date of Issue. Instead,
we will pay the Beneficiary all Payments made for the Contract, without
interest, less any Outstanding Loan and partial withdrawals.
MISSTATEMENT OF AGE OR SEX -- If the Insured's age or sex is not correctly
stated in the Contract application, we will adjust benefits under the Contract
to reflect the correct age and sex. The adjustment will be based upon the ratio
of the Maximum Payment for the Contract to the Maximum Payment for the Contract
issued for the correct Age or sex. We will not reduce the Death Benefit to less
than the Guideline Minimum Sum Insured. For a unisex Contract, there is no
adjusted benefit for misstatement of sex.
DELAY OF PAYMENTS -- Amounts payable from the Variable Account for surrender,
partial withdrawals, Net Death Benefit, Contract loans and transfers may be
postponed whenever:
-The New York Stock Exchange is closed other than customary weekend and
holiday closings;
-The SEC restricts trading on the New York Stock Exchange; or
-The SEC determines an emergency exists, so that disposal of securities is
not reasonably practicable or it is not reasonably practicable to compute
the value of the Variable Account's net assets.
We may delay paying any amount derived from a Payment you made by check until
the check has cleared your bank.
We reserve the right to defer amounts payable from the Fixed Account. This delay
may not exceed six months. However, if payment is delayed for 30 days or more,
we will pay interest at least equal to an effective annual yield of 3.0% per
year for the deferment. Amounts from the Fixed Account used to make payments on
contracts that we or our affiliates issue will not be delayed.
FEDERAL TAX CONSIDERATIONS
The following summary of federal tax considerations is based on our
understanding of the present federal income tax laws as they are currently
interpreted. Legislation may be proposed which, if passed, could adversely and
possibly retroactively affect the taxation of the Contracts. This summary is not
exhaustive, does not purport to cover all situations, and is not intended as tax
advice. We do not address tax provisions that may apply if the Contract Owner is
a corporation or the Trustee of an employee benefit plan. You should consult a
qualified tax adviser to apply the law to your circumstances.
ALLMERICA FINANCIAL AND THE VARIABLE ACCOUNT -- Allmerica Financial is taxed as
a life insurance company under Subchapter L of the Internal Revenue Code
("Code"). We file a consolidated tax return with our parent and affiliates. We
do not currently charge for any income tax on the earnings or realized capital
gains in the Variable Account. We do not currently charge for federal income
taxes respecting the Variable Account. A charge may apply in the future for any
federal income taxes we incur. The charge may become necessary, for example, if
there is a change in our tax status. Any charge would be designed to cover the
federal income taxes on the investment results of the Variable Account.
Under current laws, Allmerica Financial may incur state and local taxes besides
premium taxes. These taxes are not currently significant. If there is a material
change in these taxes affecting the Variable Account, we may charge for taxes
paid or for tax reserves.
TAXATION OF THE CONTRACTS -- We believe that the Contracts described in this
prospectus are life insurance contracts under Section 7702 of the Code. Section
7702 affects the taxation of life insurance
24
<PAGE>
contracts and places limits on the relationship of the Contract Value to the
Death Benefit. As a life insurance contract, the Net Death Benefit of the
Contract is excludable from the gross income of the Beneficiary. Also, any
increase in Contract Value is not taxable until received by you or your
designee. Although the Company believes the Contracts are in compliance with
Section 7702 of the Code, the manner in which Section 7702 should be applied to
a last survivorship life insurance contract is not directly addressed by Section
7702. In absence of final regulations or other guidance issued under Section
7702, there is necessarily some uncertainty whether a Contract will meet the
Section 7702 definition of a life insurance contract. This is true particularly
if the Contract Owner pays the full amount of payments permitted under the
Contract. A Contract Owner contemplating the payment of such amounts should do
so only after consulting a tax advisor. If a Contract were determined not to be
a life insurance contract under Section 7702, it would not have most of the tax
advantages normally provided by a life insurance contract.
A life insurance contract is treated as a "modified endowment contract" under
Section 7702A of the Code if it meets the definition of life insurance in
Section 7702 but fails the "seven-pay test" of Section 7702A. The seven-pay test
provides that payments can not be paid at a rate more rapidly than allowed by
the payment of seven annual payments using specified computational rules
provided in Section 7702A.
If the Contract is considered a modified endowment contract, distributions
(including Contract loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis and includible in gross income to the extent
that the Surrender Value exceeds the Contract Owner's investment in the
Contract. Any other amounts will be treated as a return of capital up to the
Contract Owner's basis in the Contract. A 10% tax is imposed on that part of any
distribution that is includible in income, unless the distribution is:
-Made after the taxpayer becomes disabled;
-Made after the taxpayer attains age 59 1/2; or
-Part of a series of substantially equal periodic payments for the
taxpayer's life or life expectancy or joint life expectancies of the
taxpayer and beneficiary.
Allmerica Financial has designed this Contract to meet the definition of a
modified endowment contract.
Any Contract received in exchange for a modified endowment contract will also be
a modified endowment contract. However, an exchange under Section 1035 of the
Code of a life insurance contract entered into before June 21, 1988 will not
cause the new Contract to be treated as a modified endowment contract if no
additional payments are made and there is no increase in the death benefit as a
result of the exchange.
All modified endowment contracts issued by the same insurance company to the
same Contract Owner during any 12-month period will be treated as a single
modified endowment contract in computing taxable distributions.
Consumer interest paid on Contract loans under an individually owned Contract is
not tax deductible. A business may deduct interest on loans up $50,000 subject
to a prescribed maximum amount, provided that the Insured is a "key person" of
that business. The Code defines "key person" to mean an officer or a 20% owner.
Federal tax law requires that the investment of each Sub-Account funding the
Contracts is adequately diversified according to Treasury regulations. Although
we do not have control over the investments of the Funds, we believe that the
Funds currently meet the Treasury's diversification requirements. We will
monitor continued compliance with these requirements.
The Treasury Department has announced that previous regulations on
diversification do not provide guidance concerning the extent to which Contract
Owners may direct their investments to divisions of a separate investment
account. Regulations may provide guidance in the future. The Contracts or our
administrative rules may be modified as necessary to prevent a Contract Owner
from being considered the owner of the assets of the Variable Account.
25
<PAGE>
VOTING RIGHTS
Where the law requires, we will vote Fund shares that each Sub-Account holds
according to instructions received from Contract Owners with Contract Value in
the Sub-Account. If, under the 1940 Act or its rules, we may vote shares in our
own right, whether or not the shares relate to the Contracts, we reserve the
right to do so.
We will provide each person having a voting interest in a Fund with proxy
materials and voting instructions. We will vote shares held in each Sub-Account
for which no timely instructions are received in proportion to all instructions
received for the Sub-Account. We will also vote in the same proportion our
shares held in the Variable Account that do not relate to the Contracts.
We will compute the number of votes that a Contract Owner has the right to
instruct on the record date established for the Fund. This number is the
quotient of:
-Each Contract Owner's Contract Value in the Sub-Account; divided by
-The net asset value of one share in the Fund in which the assets of the
Sub-Account are invested.
We may disregard voting instructions Contract Owners or the Trustees initiate in
favor of any change in the investment policies or in any investment adviser or
principal underwriter. Our disapproval of any change must be reasonable. A
change in investment policies or investment adviser must be based on a good
faith determination that the change would be contrary to state law or otherwise
is improper under the objectives and purposes of the funds. If we do disregard
voting instructions, we will include a summary of and reasons for that action in
the next report to Contract Owners.
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<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice President, First Allmerica
Director and Vice President
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel, First Allmerica
Secretary and Counsel
John F. Kelly Director of First Allmerica since 1996; Senior Vice President, General
Director Counsel and Assistant Secretary, First Allmerica
James R. McAuliffe Director of First Allmerica since 1996; President and CEO, Citizens
Director Insurance Company of America since 1995; Vice President and Chief
Investment Officer, First Allmerica, 1986 to 1994.
John F. O'Brien Director, Chairman of the Board, President and Chief Executive Officer
Director and Chairman of the Board of First Allmerica
Edward J. Parry, III Vice President and Treasurer, First Allmerica since 1993; Assistant
Vice President, Treasurer and Vice President, 1992 to 1993; Manager, Price Waterhouse, 1987 to 1992
Chief Financial Officer
Richard M. Reilly Director of First Allmerica since 1996; Vice President, First
Director, President and Allmerica; Director and President, Allmerica Investments, Inc.;
Chief Executive Officer Director and President Allmerica Investment Management Company, Inc.
since 1992, Director and Executive Vice President, 1990 to 1992.
Larry C. Renfro Director of First Allmerica since 1996; Vice President, First Allmerica
Director
Phillip E. Soule Director of First Allmerica since 1996; Vice President, First Allmerica
Director
Eric A. Simonsen Director of First Allmerica since 1996; Vice President and Chief
Director and Vice President Financial Officer, First Allmerica
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect wholly owned subsidiary of First
Allmerica, acts as the principal underwriter and general distributor of the
Contracts. Allmerica Investments, Inc. is registered with the SEC as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. ("NASD"). Broker-dealers sell the Contracts through their registered
representatives who are appointed by us.
We pay to broker-dealers who sell the Contract commissions based on a commission
schedule. After the Date of Issue, commissions will not exceed 8.5% of the
Payment. After Contract year 10, we pay broker-dealer a persistency bonus and
commence paying annual compensation of up to 0.25% of unloaned Contract Value.
Alternative commission schedules are available with lower commission amounts
based upon the age of the Contract Owner To the extent permitted by NASD rules,
promotional incentives or payments may also be provided to broker-dealers based
on sales volumes, the assumption of wholesaling functions or other sales-related
criteria. Other payments may be made for other services that do not directly
involve the sale of the Contracts. These services may include the recruitment
and training of personnel, production of promotional literature, and similar
services.
We intend to recoup commissions and other sales expenses through a combination
of the contingent surrender charge and investment earnings on amounts allocated
under the Contracts to the Fixed Account.
27
<PAGE>
Commissions paid on the Contracts, including other incentives or payments, are
not charged to Contract Owners or to the Separate Account.
REPORTS
We will maintain the records for the Variable Account. We will promptly send you
statements of transactions under your Contract, including:
-Payments;
-Transfers among Sub-Accounts and the Fixed Account;
-Partial withdrawals;
-Increases in loan amount or loan repayments;
-Lapse or termination for any reason; and
-Reinstatement.
We will send an annual statement to you that will summarize all of the above
transactions and deductions of charges during the Contract year. It will also
set forth the status of the Death Benefit, Contract Value, Surrender Value,
amounts in the Sub-Accounts and Fixed Account, and any Contract loans. We will
send you reports containing financial statements and other information for the
Variable Account, Palladian-SM- and the Trust as the 1940 Act requires.
PERFORMANCE INFORMATION
The Contracts were first offered to the public in 1996. However, Allmerica
Financial may advertise "Total Return" and "Average Annual Total Return"
performance information based on the periods that the Funds 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 and the
Funds.
Total return and average annual total return are based on the hypothetical
profile of a representative Contract Owner and historical earnings and are not
intended to indicate future performance. "Total return" is the total income
generated net of certain expenses and charges. "Average annual total return" is
net of the same expenses and charges, but reflects the hypothetical return
compounded annually. This hypothetical return is equal to cumulative return had
performance been constant over the entire period. Average annual total returns
are not the same as yearly results and tend to smooth out variations in the
Fund's return.
Performance information under the Contracts is net of Fund expenses, Monthly
Deductions and surrender charges. We take a representative Contract Owner and
assume that:
-The Insured is a male Age 36, standard (non-tobacco user) Underwriting
Class;
-The Contract Owner had allocations in each of the Sub-Accounts for the Fund
durations shown; and
-There was a full surrender at the end of the applicable period.
We may compare performance information for a Sub-Account in reports and
promotional literature to:
-Standard & Poor's 500 Stock Index ("S&P 500");
-Dow Jones Industrial Average ("DJIA");
-Shearson Lehman Aggregate Bond Index;
-Other unmanaged indices of unmanaged securities widely regarded by
investors as representative of the securities markets;
28
<PAGE>
-Other groups of variable life separate accounts or other investment
products tracked by Lipper Analytical Services;
-Other services, companies, publications, or persons such as Morningstar,
Inc., who rank the investment products on performance or other criteria;
and
-The Consumer Price Index.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for insurance and administrative charges, separate account
charges and fund management costs and expenses. Performance information for any
Sub-Account reflects only the performance of a hypothetical investment in the
Sub-Account during a period. It is not representative of what may be achieved in
the future. However, performance information may be helpful in reviewing market
conditions during a period and in considering a fund's success in meeting its
investment objectives.
In advertising, sales literature, publications or other materials, we may give
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 and automatic account rebalancing);
-The advantages and disadvantages of investing in tax-deferred and taxable
investments;
-Customer profiles and hypothetical Payment 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 the financial instruments.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
FUND IN WHICH A 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.
LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Variable Account or its
assets. Allmerica Financial is not involved in any litigation that is materially
important to its total assets.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to law, to make additions to, deletions from, or
substitutions for the shares that are held in the Sub-Accounts. We may redeem
the shares of a Fund and substitute shares of another registered open-end
management company, if:
-The shares of the Fund are no longer available for investment: OR
-In our judgment further investment in the Fund would be improper based on
the purposes of the Variable Account or the affected Sub-Account.
Where the 1940 Act or other law requires, we will not substitute any shares
respecting a Contract interest in a Sub-Account without notice to Contract
Owners and prior approval of the SEC and state insurance authorities. The
Variable Account may, as the law allows, purchase other securities for other
contracts or allow a conversion between contracts on a Contract Owner's request.
29
<PAGE>
We reserve the right to establish additional Sub-Accounts funded by a new fund
or by another investment company. Subject to law, we may, in our sole
discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts.
Shares of the Funds are issued to other separate accounts of Allmerica Financial
and its affiliates that fund variable annuity contracts ("mixed funding.")
Shares of the Portfolios of Palladian-SM- 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. Allmerica Financial,
Palladian-SM- and the Trust do not believe that mixed funding is currently
disadvantageous to either variable life insurance Contract Owners or variable
annuity contract owners. Allmerica Financial will monitor events to identify any
material conflicts among Contract Owners because of mixed funding. If the
Company concludes that separate funds should be established for variable life
and variable annuity separate accounts, we will bear the expenses.
We may change the Contract to reflect a substitution or other change and will
notify Contract Owners of the change. Subject to any approvals the law may
require, the variable account or any sub-accounts may be:
-Operated as a management company under the 1940 Act;
-Deregistered under the 1940 Act if registration is no longer required; OR
-Combined with other sub-accounts or our other separate accounts.
FURTHER INFORMATION
We have filed a registration statement for this offering under the Securities
Act of 1933 ("1933 Act") with the SEC. Under SEC rules and regulations, we have
omitted from this prospectus parts of the registration statement and amendments.
Statements contained in this prospectus are summaries of the Contract and other
legal documents. The complete documents and omitted information may be obtained
from the SEC's principal office in Washington, D.C., on payment of the SEC's
prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of Allmerica Financial prepared in accordance with
generally accepted accounting principles as of and for the year ended December
31, 1996, and the statutory basis financial statements of Allmerica Financial
for 1995 and for each of the three years in the period ended December 31, 1995
included in this prospectus 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 Allmerica Financial included herein should be
considered only as bearing on the ability of Allmerica Financial to meet its
obligations under the Contracts.
MORE INFORMATION ABOUT THE FIXED ACCOUNT
This prospectus serves as a disclosure document only for the aspects of the
Contract relating to the Variable Account. For complete details on the Fixed
Account, read the Contract itself. The Fixed Account and other interests in the
General Account are not regulated under the 1933 Act or the 1940 Act because of
exemption and exclusionary provisions. 1933 Act provisions on the accuracy and
completeness of statements made in prospectuses may apply to information on the
fixed part of the Contract and the Fixed Account. The SEC has not reviewed the
disclosures in this section of the prospectus.
GENERAL DESCRIPTION -- You may allocate part or all of your Payment to
accumulate at a fixed rate of interest in the Fixed Account. The Fixed Account
is a part of our General Account. The General Account is made up of all of our
general assets other than those allocated to any separate account. Allocations
to the Fixed Account become part of our General Account assets and are used to
support insurance and annuity obligations.
30
<PAGE>
FIXED ACCOUNT INTEREST -- We guarantee amounts allocated to the Fixed Account as
to principal and a minimum rate of interest. The minimum interest we will credit
on amounts allocated to the Fixed Account is 4.0% compounded annually. "Excess
interest" may or may not be credited at our sole discretion. We will guarantee
initial rates on amounts allocated to the Fixed Account, either as a Payment or
a transfer, to the next Contract anniversary.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CONTRACT LOANS -- If a Contract
is surrendered or if a partial withdrawal is made, a surrender charge and/or
partial withdrawal charge may be imposed. We deduct partial withdrawals from
Contract Value allocated to the Fixed Account on a last-in/ first out basis.
The first 12 transfers in a Contract year are free. After that, we may deduct a
transfer charge not to exceed $25 for each transfer in that Contract year. The
transfer privilege is subject to our consent and to our then current rules.
Contract loans may also be made from the Contract Value in the Fixed Account. We
will credit that part of the Contract value that is equal to any Outstanding
Loan with interest at an effective annual yield of at least 4.0% (5.5% for
preferred loans).
We may delay transfers, surrenders, partial withdrawals, Net Death Benefits and
Contract loans up to six months. However, if payment is delayed for 30 days or
more, we will pay interest at least equal to an effective annual yield of 3.0%
per year for the deferment. Amounts from the Fixed Account used to make payments
on contracts that we or our affiliates issue will not be delayed.
FINANCIAL STATEMENTS
Financial Statements for Allmerica Financial are included in this Prospectus,
starting on the next page. The financial statements of Allmerica Financial
should be considered only as bearing on our ability to meet our obligations
under the Contract. They should not be considered as bearing on the investment
performance of the assets held in the Variable Account.
31
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying balance sheet and the related statement of
income, of shareholder's equity, and of cash flows present fairly, in all
material respects, the financial position of Allmerica Financial Life Insurance
and Annuity Company at December 31, 1996, and the results of their operations
and their cash flows for the year 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 audit. We conducted our audit 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 audit provides a
reasonable basis for the opinion expressed above.
[SIG]
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
REVENUES
Premiums..................................... $ 32.7
Universal life and investment product
policy fees............................... 176.2
Net investment income...................... 171.7
Net realized investment losses............. (3.6)
Other income............................... 0.9
---------
Total revenues......................... 377.9
---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 192.6
Policy acquisition expenses................ 49.9
Other operating expenses................... 86.6
---------
Total benefits, losses and expenses.... 329.1
---------
Income before federal income taxes............. 48.8
---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 26.9
Deferred................................... (9.8)
---------
Total federal income tax expense....... 17.1
---------
Net income..................................... $ 31.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------------------- ----------
<S> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$1,660.2).......................................... $ 1,698.0
Equity securities-at fair value (cost of $33.0)..... 41.5
Mortgage loans...................................... 221.6
Real estate......................................... 26.1
Policy loans........................................ 131.7
Other long-term investments......................... 7.9
----------
Total investments............................... 2,126.8
----------
Cash and cash equivalents............................. 18.8
Accrued investment income............................. 37.7
Deferred policy acquisition costs..................... 632.7
----------
Reinsurance receivables:
Future policy benefits.............................. 68.1
Outstanding claims, losses and loss adjustment
expenses........................................... 3.5
Other............................................... 0.9
----------
Total reinsurance receivables................... 72.5
----------
Other assets.......................................... 8.2
Separate account assets............................... 4,524.0
----------
Total assets.................................... $ 7,420.7
----------
----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,163.0
Outstanding claims, losses and loss adjustment
expenses........................................... 15.4
Unearned premiums................................... 2.7
Contractholder deposit funds and other policy
liabilities........................................ 32.8
----------
Total policy liabilities and accruals........... 2,213.9
----------
Expenses and taxes payable............................ 77.3
Deferred federal income taxes......................... 60.2
Separate account liabilities.......................... 4,523.6
----------
Total liabilities............................... 6,875.0
----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,518 shares issued and outstanding..... 2.5
Additional paid-in-capital............................ 346.3
Unrealized appreciation on investments, net........... 20.5
Retained earnings..................................... 176.4
----------
Total shareholder's equity...................... 545.7
----------
Total liabilities and shareholder's equity...... $ 7,420.7
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
COMMON STOCK
Balance at beginning of year............... $ 2.5
Issued during year......................... --
---------
Balance at end of year..................... 2.5
---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 324.3
Contributed from parent.................... 22.0
---------
Balance at end of year..................... 346.3
---------
RETAINED EARNINGS
Balance at beginning of year............... 144.7
Net income................................. 31.7
---------
Balance at end of year..................... 176.4
---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 23.8
---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities.......... (5.1)
(Provision) benefit for deferred
federal income taxes................... 1.8
---------
(3.3)
---------
Balance at end of year................. 20.5
---------
Total shareholder's equity......... $ 545.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------- ----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 31.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized losses................. 3.6
Net amortization and depreciation... 3.5
Deferred federal income taxes
(benefits).......................... (9.8)
Change in deferred policy
acquisition costs................... (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable............................. (0.2)
Change in accrued investment
income.............................. 1.2
Change in policy liabilities and
accruals, net....................... (39.9)
Change in reinsurance receivable.... (1.5)
Change in expenses and taxes
payable............................. 32.3
Separate account activity, net...... 10.5
Other, net.......................... (0.2)
----------
Net cash provided by operating
activities................... (35.6)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 809.4
Proceeds from disposals of equity
securities............................. 1.5
Proceeds from disposals of other
investments............................ 17.5
Proceeds from mortgages matured or
collected.............................. 34.0
Purchase of available-for-sale fixed
maturities............................. (795.8)
Purchase of equity securities........... (13.2)
Purchase of other investments........... (36.2)
Other investing activities, net......... (2.1)
----------
Net cash (used in) provided by
investing activities......... 15.1
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in........................ 22.0
----------
Net cash provided by financing
activities................... 22.0
----------
Net change in cash and cash equivalents..... 1.5
Cash and cash equivalents, beginning of
year....................................... 17.3
----------
Cash and cash equivalents, end of year...... $ 18.8
----------
----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.4
Income taxes paid....................... $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation, which is wholly owned by First
Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by FAFLIC in accordance with a policy
established by vote of FAFLIC's Board of Directors.
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. VALUATION OF INVESTMENTS
The Company classifies all debt and equity securities as available-for-sale.
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.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. 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, and investment and loan
commitments. 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.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. 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.
Acquisition costs related to universal life and group variable 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.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. 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. 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.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Individual health benefit liabilities for active lives are estimated using the
net level premium method, and assumptions as to future morbidity, withdrawals
and interest which provide a margin for adverse deviation. Benefit liabilities
for disabled lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned on
a pro-rata basis over the contract period. The unexpired portion of these
premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products 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.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual 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 and group variable 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 benefits in excess of fund values and net investment income credited to
universal life fund values.
I. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
life-nonlife 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.
The Board of Directors has delegated to AFC management the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated life-nonlife return
of AFC is calculated on a separate return basis. Any current tax liability is
paid to AFC. Tax benefits resulting from taxable operating losses or credits of
AFC's subsidiaries are not reimbursed to the subsidiary until such losses or
credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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.
J. 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. The adoption of this statement has not
had a material effect on the financial statements.
2. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale fixed maturities and equity
securities were as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</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, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. In addition,
fixed maturities, excluding those securities on deposit in New York, with an
amortized cost of $4.2 million were on deposit with various state and
governmental authorities at December 31, 1996.
There were no contractual fixed maturity investment commitments at December 31,
1996.
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
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
the obligations back to the issuers. Mortgage backed securities are included in
the category representing their ultimate maturity.
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 129.2 $ 130.0
Due after one year through five years....................... 459.0 473.4
Due after five years through ten years...................... 735.1 751.1
Due after ten years......................................... 336.9 343.5
--------- ---------
Total................................................... $1,660.2 $1,698.0
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ ------------------ ----- ------
<S> <C> <C> <C>
1996
Fixed maturities............................................ $496.6 $4.3 $8.3
------- ----- ------
Equity securities........................................... $ 1.5 $0.4 $0.1
------- ----- ------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1996
Net appreciation (depreciation), beginning of year.......... $ 20.4 $ 3.4 $ 23.8
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities.............................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. 9.0 -- 9.0
Provision for deferred federal income taxes............... 4.1 (2.3) 1.8
---------- ------ ------
(7.7) 4.4 (3.3)
---------- ------ ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $2.2 million.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC'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.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Mortgage loans.......................... $221.6
------
Real estate:
Held for sale......................... 26.1
Held for production of income......... --
------
Total real estate................... 26.1
------
Total mortgage loans and real estate.... $247.7
------
------
</TABLE>
Reserves for mortgage loans were $9.5 million at December 31, 1996.
During 1996, non-cash investing activities included real estate acquired through
foreclosure of mortgage loans, which had a fair value of $0.9 million.
At December 31, 1996, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $16.0 million. These
commitments generally expire within one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Property type:
Office building....................... $ 86.1
Residential........................... 39.0
Retail................................ 55.9
Industrial / warehouse................ 52.6
Other................................. 25.3
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
Geographic region:
South Atlantic........................ $ 72.9
Pacific............................... 37.0
East North Central.................... 58.3
Middle Atlantic....................... 35.0
West South Central.................... 5.7
New England........................... 21.9
Other................................. 28.1
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
</TABLE>
At December 31, 1996, scheduled mortgage loan maturities were as follows: 1997
- -- $58.6 million; 1998 -- $53.1 million; 1999 -- $21.5 million; 2000 -- $52.3
million; 2001 -- $7.7 million; and $28.4 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 1996, the Company refinanced $7.8 million of mortgage loans
based on terms which differed from those granted to new borrowers.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Mortgage loans........... $12.5 $4.5 $7.5 $ 9.5
Real estate.............. 2.1 -- 0.4 1.7
---------- --------- ---------- ----------
Total................ $14.6 $4.5 $7.9 $11.2
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The carrying value of impaired loans was $21.5 million with related reserves of
$7.3 million as of December 31, 1996. All impaired loans were reserved as of
December 31, 1996.
The average carrying value of impaired loans was $26.3 million, with related
interest income while such loans were impaired, of $3.4 million as of December
31, 1996.
D. OTHER
At December 31, 1996, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
3. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- ------
<S> <C>
Fixed maturities............................. $137.2
Mortgage loans............................... 22.0
Equity securities............................ 0.7
Policy loans................................. 10.2
Real estate.................................. 6.2
Other long-term investments.................. 0.8
Short-term investments....................... 1.4
------
Gross investment income...................... 178.5
Less investment expenses..................... (6.8)
------
Net investment income........................ $171.7
------
------
</TABLE>
At December 31, 1996, mortgage loans on non-accrual status were $5.0 million,
including restructured loans of $2.6 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 $0.1 million in
1996. There were no fixed maturities on non-accrual status at December 31, 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $25.4 million at December 31, 1996. Interest income on
restructured mortgage loans that would have been recorded in accordance with the
original terms of such loans amounted to $3.6 million in 1996. Actual interest
income on these loans included in net investment income aggregated $2.2 million
in 1996.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1996.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Fixed maturities............................. $(3.3)
Mortgage loans............................... (3.2)
Equity securities............................ 0.3
Real estate.................................. 2.5
Other........................................ 0.1
-----
Net realized investment losses............... $(3.6)
-----
-----
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were $496.6
million in 1996. Realized gains on such sales were $4.3 million, and realized
losses were $8.3 million for 1996.
4. 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 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.
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.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses. reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet 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 investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 CARRYING FAIR
(IN MILLIONS) VALUE VALUE
- --------------------------------------------- --------- --------
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 18.8 $ 18.8
Fixed maturities........................... 1,698.0 1,698.0
Equity securities.......................... 41.5 41.5
Mortgage loans............................. 221.6 229.3
Policy loans............................... 131.7 131.7
Reinsurance receivables.................... 72.5 72.5
--------- --------
$2,184.1 $2,191.8
--------- --------
--------- --------
FINANCIAL LIABILITIES
Individual annuity contracts............... 910.2 703.6
Supplemental contracts without life
contingencies............................ 15.9 15.9
Other individual contract deposit funds.... 0.3 0.3
--------- --------
$ 926.4 $ 719.8
--------- --------
--------- --------
</TABLE>
5. DEBT
During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.
Interest expense was $3.4 million in 1996, relating to interest payments on
repurchase agreements, and is recorded in other operating expenses.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. 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 statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Federal income tax expense (benefit)
Current.................................... $26.9
Deferred................................... (9.8)
-----
Total........................................ $17.1
-----
-----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
The deferred tax (assets) liabilities are comprised of the following at December
31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -------
<S> <C>
Deferred tax (assets) liabilities
Loss reserves.............................. (137.0)
Deferred acquisition costs................. 186.9
Investments, net........................... 14.2
Bad debt reserve........................... (1.1)
Other, net................................. (2.8)
-------
Deferred tax liability, net.................. $ 60.2
-------
-------
</TABLE>
Gross deferred income tax liabilities totaled $201.1 million at December 31,
1996. Gross deferred income tax assets totaled $140.9 million at December 31,
1996.
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.
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 life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. 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.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $112.4 million in 1996. The net amounts payable to FAFLIC
and affiliates for accrued expenses and various other liabilities and
receivables were $13.3 million at December 31, 1996.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1997, AFLIAC could pay dividends of $11.9 million to FAFLIC
without prior approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from 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 effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
Life insurance premiums:
Direct....................................... $ 53.3
Assumed...................................... 3.1
Ceded........................................ (23.7)
---------
Net premiums................................... $ 32.7
---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 206.4
Assumed...................................... 4.5
Ceded........................................ (18.3)
---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 192.6
---------
---------
</TABLE>
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
-------------------------------------------------- --------
<S> <C>
Balance at beginning of year...................... $ 555.7
Acquisition expenses deferred................... 116.6
Amortized to expense during the year............ (49.9)
Adjustment to equity during the year............ 10.3
--------
Balance at end of year............................ $ 632.7
--------
--------
</TABLE>
11. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. 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 future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$178.6 million at December 31, 1996. Accident and health claim liabilities have
been re-estimated for all prior years and were increased by $3.2 million in
1996.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
The Company has been named a defendant in various 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 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.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
life insurance companies primarily because policy acquisition costs are expensed
when incurred, investment reserves are based on different assumptions, 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) 1996
--------------------------------------------------- ---------
<S> <C>
Statutory net income............................... $ 5.4
Statutory Surplus.................................. $ 234.0
---------
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income business under a 100%
coinsurance agreement to Metropolitan Life Insurance Company. The consummation
of the transaction is subject to the negotiation of definitive arrangements and
regulatory approvals and is expected to occur on or before October 1, 1997. In
connection with this transaction, the Company has recorded an after-tax charge
of $35 million net income in the first quarter of 1997 related to the
reinsurance of this business.
F-18
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(FORMERLY SMA LIFE ASSURANCE COMPANY)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DECEMBER 31, 1995
<TABLE>
<S> <C>
Statutory Financial Statements
Report of Independent Accountants..................................................... F-2
Statement of Assets, Liabilities, Surplus and Other Funds............................. F-4
Statement of Operations and Changes in Capital and Surplus............................ F-5
Statement of Cash Flows............................................................... F-6
Notes to Statutory Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
F-2
<PAGE>
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
Page 2
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
[LOGO]
Price Waterhouse LLP
Boston, MA
February 5, 1996
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
AS OF DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
Cash......................................... $ 7,791 $ 7,248
Investments:
Bonds...................................... 1,659,575 1,595,275
Stocks..................................... 18,132 12,283
Mortgage loans............................. 239,522 295,532
Policy loans............................... 122,696 116,600
Real estate................................ 40,967 51,288
Short term investments..................... 3,500 45,239
Other invested assets...................... 40,196 27,443
---------- ----------
Total cash and investments............. 2,132,379 2,150,908
Premiums deferred and uncollected............ (1,231) 5,452
Investment income due and accrued............ 38,413 39,442
Other assets................................. 6,060 10,569
Assets held in separate accounts............. 2,978,409 1,869,695
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves.............................. $ 856,239 $ 890,880
Annuity and other fund reserves............ 865,216 928,325
Accident and health reserves............... 167,246 121,580
Claims payable............................. 11,047 11,720
---------- ----------
Total policy liabilities............... 1,899,748 1,952,505
Expenses and taxes payable................... 20,824 17,484
Other liabilities............................ 27,499 36,466
Asset valuation reserve...................... 31,556 20,786
Obligations related to separate account
business.................................... 2,967,547 1,859,502
---------- ----------
Total liabilities...................... 4,947,174 3,886,743
---------- ----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized -- 10,000 shares
Issued and outstanding -- 2,517
shares................................... 2,517 2,517
Paid-in surplus............................ 199,307 199,307
Unassigned surplus (deficit)............... 4,282 (13,621)
Special contingency reserves............... 750 1,120
---------- ----------
Total surplus and other funds.......... 206,856 189,323
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and other considerations:
Life..................................... $ 156,864 $ 195,633 $ 189,285
Annuities................................ 729,222 707,172 660,143
Accident and health...................... 31,790 31,927 35,718
Reinsurance commissions and reserve
adjustments............................ 20,198 4,195 2,309
----------- ----------- -----------
Total premiums and other
considerations....................... 938,074 938,927 887,455
Net investment income...................... 167,470 170,430 177,612
Realized capital losses, net of tax........ (2,295) (17,172) (7,225)
Other revenue.............................. 37,466 26,065 19,055
----------- ----------- -----------
Total revenue.......................... 1,140,715 1,118,250 1,076,897
----------- ----------- -----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits.... 391,254 331,418 275,290
Increase (decrease) in policy reserves... (22,669) 40,113 15,292
----------- ----------- -----------
Total policy benefits.................. 368,585 371,531 290,582
Operating and selling expenses............. 150,215 164,175 160,928
Taxes, except capital gains tax............ 26,536 22,846 19,066
Net transfers to separate accounts......... 556,856 553,295 586,539
----------- ----------- -----------
Total policy benefits and operating
expenses............................. 1,102,192 1,111,847 1,057,115
----------- ----------- -----------
NET INCOME................................... 38,523 6,403 19,782
Capital and Surplus, Beginning of Year....... 189,323 182,216 171,941
Unrealized capital gains (losses) on
investments.............................. 8,279 12,170 (9,052)
Transfer from (to) asset valuation
reserve.................................. (10,770) (9,822) 1,974
Other adjustments.......................... (18,499) (1,644) (2,429)
----------- ----------- -----------
CAPITAL AND SURPLUS, END OF YEAR............. $ 206,856 $ 189,323 $ 182,216
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Premiums, deposits and other income......... $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded........................ 20,693 3,279 22,185
Net investment income...................... 170,949 173,294 182,843
Net increase in policy loans............... (6,096) (7,585) (7,812)
Benefits to policyholders and
beneficiaries............................ (393,472) (330,900) (298,612)
Operating and selling expenses and taxes... (153,504) (193,796) (171,533)
Net transfers to separate accounts......... (608,480) (600,760) (634,021)
Federal income tax (excluding tax on
capital gains)........................... (6,771) (19,603) (4,828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
Real estate and other invested assets.... (11,929) (24,544) (2,392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
-Bonds considered to be "available-for-sale" or "trading" are not carried
at fair value and changes in fair value are not recognized through
surplus or the statement of operations, respectively;
-The Asset Valuation Reserve, represents a reserve against possible
losses on investments and is recorded as a liability through a charge to
surplus. The Interest Maintenance Reserve is designed to include
deferred realized gains and losses (net of applicable federal income
taxes) due to interest rate changes and is also recorded as a liability,
however, the deferred net realized investment gains and losses are
amortized into future income generally over the original period to
maturity of the assets sold. These liabilities are not required under
generally accepted accounting principles;
-Total premiums, deposits and benefits on certain investment-type
contracts are reflected in the statement of operations, instead of using
the deposit method of accounting;
-Policy acquisition costs, such as commissions, premium taxes and other
items, are not deferred and amortized in relation to the revenue/gross
profit streams from the related contracts;
-Benefit reserves are determined using statutorily prescribed interest,
morbidity and mortality assumptions instead of using more realistic
expense, interest, morbidity, mortality and voluntary withdrawal
assumptions with provision made for adverse deviation;
-Amounts recoverable from reinsurers for unpaid losses are not recorded
as assets, but as offsets against the respective liabilities;
-Deferred federal income taxes are not provided for temporary differences
between amounts reported in the financial statements and those included
in the tax returns;
-Certain adjustments related to prior years are recorded as direct
charges or credits to surplus;
-Certain assets, designated as "non-admitted" assets (principally agents'
balances), are not recorded as assets, but are charged to surplus; and,
F-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
-Costs related to other postretirement benefits are recognized only for
employees that are fully vested.
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC 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.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are carried
generally at cost and common stocks are carried at market value. Policy loans
are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for 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 determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS In the normal course of business, the Company enters into
transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS Separate account assets and liabilities represent segregated
funds administered and invested by the Company for the benefit of certain
variable annuity and variable life contract holders. 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 contract holders 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 capital and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in force.
These liabilities are computed based upon mortality, morbidity and interest rate
assumptions applicable to these coverages, including provision for adverse
deviation. Reserves are computed using interest rates ranging from 3% to 6% for
individual life insurance policies, 3% to 5 1/2% for
F-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
accident and health policies and 3 1/2% to 9 1/2% for annuity contracts.
Mortality, morbidity and withdrawal assumptions for all policies are based on
the Company's own experience and industry standards. The assumptions vary by
plan, age at issue, year of issue and duration. Claims reserves are computed
based on historical experience modified for expected trends in frequency and
severity. Withdrawal characteristics of annuity and other fund reserves vary by
contract. At December 31, 1995 and 1994, approximately 84% and 77%,
respectively, of the contracts (included in both the general account and
separate accounts of the Company) were not subject to discretionary withdrawal
or were subject to withdrawal at book value less surrender charge.
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.
FEDERAL INCOME TAXES AFC, its life insurance subsidiaries, First Allmerica and
Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife 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 taxable operating 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.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
F-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 2 -- INVESTMENTS
BONDS The carrying value and fair value of investments in bonds are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds.................................. $ 67,039 $ 3,063 $ -- $ 70,102
State, local and government agency bonds.................. 13,607 2,290 23 15,874
Foreign government bonds.................................. 12,121 772 249 12,644
Corporate securities...................................... 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities................................ 95,385 951 -- 96,336
---------- ------------- ------------- ----------
Total..................................................... $1,659,574 $62,912 $ 6,457 $1,715,939
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds.................................. $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds.................. 1,110 54 -- 1,164
Foreign government bonds.................................. 31,863 83 3,735 28,211
Corporate securities...................................... 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities................................ 81,780 268 1,737 80,311
---------- ------------- ------------- ----------
Total..................................................... $1,595,275 $ 8,558 $62,245 $1,541,588
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
</TABLE>
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will 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 obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) VALUE VALUE
--------------------
<S> <C> <C>
Due in one year or less................. $ 250,578 $ 258,436
Due after one year through five years... 736,003 763,179
Due after five years through ten
years.................................. 538,897 558,445
Due after ten years..................... 134,097 135,880
--------------------
Total................................... $1,659,575 $1,715,940
--------------------
--------------------
</TABLE>
MORTGAGE LOANS AND REAL ESTATE Mortgage loans and real estate investments, 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 are generally no more than 75% of the property value
F-10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
at the time the original loan is made. At December 31, 1995 and 1994, mortgage
loan and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
<CAPTION>
GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
South Atlantic.......................... $ 86,410 $ 92,934
East North Central...................... 55,991 72,704
Middle Atlantic......................... 38,666 48,688
Pacific................................. 32,803 39,892
West North Central...................... 21,486 27,377
Mountain................................ 9,939 12,211
New England............................. 24,886 26,613
East South Central...................... 5,487 6,224
West South Central...................... 4,821 20,177
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
NET INVESTMENT INCOME The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $122,318 $123,495 $126,729
Stocks....................................... 1,653 1,799 953
Mortgage loans............................... 26,356 31,945 40,823
Real estate.................................. 9,139 8,425 9,493
Policy loans................................. 9,486 8,797 8,215
Other investments............................ 3,951 1,651 674
Short term investments....................... 2,252 1,378 840
-------- -------- --------
175,155 177,490 187,727
Less investment expenses................... 9,703 9,138 11,026
-------- -------- --------
Net investment income, before IMR
amortization................................ 165,452 168,352 176,701
IMR amortization........................... 2,018 2,078 911
-------- -------- --------
Net investment income........................ $167,470 $170,430 $177,612
-------- -------- --------
-------- -------- --------
</TABLE>
F-11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
REALIZED CAPITAL GAINS AND LOSSES Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $ 727 $ 645 $ 10,133
Stocks....................................... (263) (62) 16
Mortgage loans............................... (1,083) (17,142) (83)
Real estate.................................. (1,892) 605 (2,044)
-------- -------- --------
(2,511) (15,954) 8,022
Less income tax.............................. 400 968 3,296
-------- -------- --------
Net realized capital gains (losses) before
transfer to IMR............................. (2,911) (16,922) 4,726
Net realized capital gains transferred to
IMR......................................... 616 (250) (11,951)
-------- -------- --------
Net realized capital gains (losses).......... $ (2,295) $(17,172) $ (7,225)
-------- -------- --------
-------- -------- --------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $.5 million, respectively, were realized on those
sales.
NOTE 3 -- FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized 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.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS The carrying amounts reported in the statement
of assets, liabilities, surplus and other funds approximate fair value.
BONDS 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.
STOCKS Fair values are based on quoted market prices, if available. If a quoted
market price is not available, fair values are estimated using independent
pricing sources or internally developed pricing models.
MORTGAGE LOANS Fair values are estimated by discounting the future contractual
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. The fair value of below investment grade
mortgage loans is limited to the lesser of the present value of the cash flows
or book value.
F-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
POLICY LOANS The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash.................................. $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments................ 3,500 3,500 45,239 45,239
Bonds................................. 1,659,575 1,715,940 1,595,275 1,541,588
Stocks................................ 18,132 18,414 12,283 12,590
Mortgage loans........................ 239,522 250,196 295,532 291,704
Policy loans.......................... 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts.......... 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies....................... 16,796 16,796 16,673 16,673
Other contract deposit funds............ 632 632 1,105 1,105
</TABLE>
NOTE 4 -- FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4 million,
$13.1 million and $8.6 million, respectively, which include taxes applicable to
realized capital gains of $.4 million, $1.0 million and $3.3 million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS has
completed its examination of all of the consolidated federal income tax returns
through 1988. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
F-13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 5 -- REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Reinsurance premiums assumed................. $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded................... 42,914 17,430 14,798
Deduction from insurance liability including
reinsurance recoverable on unpaid claims.... 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance. Premiums
ceded and reinsurance credits taken under this agreement amounted to $25.4
million and $20.7 million, respectively. At December 31, 1995, the deduction
from insurance liability, including reinsurance recoverable on unpaid claims
under this agreement was $12.7 million.
NOTE 6 -- ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities as
new information becomes available and further events occur which may impact the
resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
NOTE 7 -- DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company. Pursuant
to Delaware's statute, the maximum amount of dividends and other distributions
that an insurer may pay in any twelve month period, without the prior approval
of the Delaware Commissioner of Insurance, is limited to the greater of (i) 10%
of its 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 (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
F-14
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
Commissioner of Insurance. At January 1, 1996, the Company could pay dividends
of $4.3 million to First Allmerica, without prior approval.
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 -- FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New York.
In connection with the withdrawal First Allmerica, which is licensed in New
York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company 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 the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 -- LITIGATION
The Company has been named a defendant in various 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 financial statements.
F-15
<PAGE>
APPENDIX A -- GUIDELINE MINIMUM SUM INSURED TABLE
The guideline minimum sum insured is a percentage of the Contract Value as set
forth below, according to federal tax regulations:
GUIDELINE MINIMUM SUM INSURED
<TABLE>
<CAPTION>
AGE OF INSURED PERCENTAGE OF
ON DATE OF DEATH CONTRACT VALUE
- -------------------------------------------------------------------------------------------------- ---------------
<S> <C>
40 and under...................................................................................... 250%
45................................................................................................ 215%
50................................................................................................ 185%
55................................................................................................ 150%
60................................................................................................ 130%
65................................................................................................ 120%
70................................................................................................ 115%
75................................................................................................ 105%
80................................................................................................ 105%
85................................................................................................ 105%
90................................................................................................ 105%
95 and above...................................................................................... 100%
</TABLE>
For the ages not listed, the progression between the listed ages is linear.
A-1
<PAGE>
APPENDIX B -- OPTIONAL INSURANCE BENEFITS
This Appendix provides only a summary of other insurance benefits available by
rider. For more information, contact your representative.
OPTION TO ACCELERATE BENEFITS ENDORSEMENT
This endorsement allows part of the Contract proceeds to be available before
death if the Insured becomes terminally ill or is permanently confined to a
nursing home.
A-2
<PAGE>
APPENDIX C -- PAYMENT OPTIONS
PAYMENT OPTIONS -- On written request, the surrender value or all or part of any
payable Net Death Benefit may be paid under one or more payment options then
offered by Allmerica Financial. If you do not make an election, we will pay the
benefits in a single sum. If a payment option is selected, the beneficiary may
pay to us any amount that would otherwise be deducted from the Death Benefit. A
certificate will be provided to the payee describing the payment option
selected.
The amounts payable under a payment option are paid from the General Account.
These amounts are not based on the investment experience of the Variable
Account. The amounts payable under these options, for each $1,000 applied, will
be:
(a) the rate per $1,000 of benefit based on our non-guaranteed current benefit
option rates for this class of Contracts, or
(b) the rate in your Contract for the applicable benefit option, whichever is
greater.
If you choose a benefit option, the beneficiary may, when filing a proof of
claim, pay us any amount that otherwise would be deducted from the proceeds.
- - OPTION A: BENEFITS FOR A SPECIFIED NUMBER OF YEARS -- We will make equal
payments for any selected number of years up to 30 years. These payments may
be made annually, semi-annually, quarterly or monthly, whichever you choose.
- - OPTION B: LIFETIME MONTHLY BENEFIT -- Benefits are based on the age of the
person who receives the money (called the payee) on the date the first payment
will be made. You may choose one of the three following options to specify
when benefits will cease:
-when the payee dies with no further benefits due (Life Annuity);
-when the payee dies but not before the total benefit payments made by us
equals the amount applied under this option (Life Annuity with Installment
Refund); or
-when the payee dies but not before 10 years have elapsed from the date of
the first payment (Life Annuity with Payments Guaranteed for 10 years).
- - OPTION C: INTEREST BENEFITS -- We will pay interest at a rate we determine
each year. It will not be less than 3% per year. We will make payments
annually, semi-annually, quarterly, or monthly, whichever is preferred. These
benefits will stop when the amount left has been withdrawn. If the payee dies,
any unpaid balance plus accrued interest will be paid in a lump sum.
- - OPTION D: BENEFITS FOR A SPECIFIED AMOUNT -- Interest will be credited to the
unpaid balance and we will make payments until the unpaid balance is gone. We
will credit interest at a rate we determine each year, but not less than 3%.
We will make payments annually, semi-annually, quarterly, or monthly,
whichever is preferred. The benefit level chosen must provide for an annual
benefit of at least 8% of the amount applied.
- - OPTION E: LIFETIME MONTHLY BENEFITS FOR TWO PAYEES -- We will pay a benefit
jointly to two payees during their joint lifetime.
After one payee dies, the benefits to the survivor will be:
-the same as the original amount, or
-in an amount equal to 2/3 of the original amount.
Benefits are based on the payees' ages on the date the first payment is due.
Benefits will end when the second payee dies.
SELECTION OF PAYMENT OPTIONS -- The amount applied under any one option for any
one payee must be at least $5,000. The periodic payment for any one payee must
be at least $50. Subject to the
A-3
<PAGE>
Contract Owner and beneficiary provisions, any option selection may be changed
before the Net Death Benefit become payable. If you make no selection, the
beneficiary may select an option when the Net Death Benefit becomes payable.
If the amount of the monthly benefit under Option B for the age of the payee is
the same for different periods certain, the payee will be entitled to the
longest period certain for the payee's age.
You may give the beneficiary the right to change from Option C or D to any other
option at any time. If Option C or D is chosen by the payee when this contract
becomes a claim, the payee may reserve the right to change to any other option.
The payee who elects to change options must be the payee under the option
selected.
ADDITIONAL DEPOSITS -- An additional deposit may be added to any proceeds when
they are applied under Option B and E. We reserve the right to limit the amount
of any additional deposit. We may levy a charge of no more than 3% on any
additional deposits.
RIGHTS AND LIMITATIONS -- A payee has no right to assign any amount payable
under any option, nor to demand a lump sum benefit in place of any amount
payable under Options B or E. A payee will have the right to receive a lump sum
in place of installments under Option A. The payee must provide us with a
Written Request to reserve this right. If the right to receive a lump sum is
exercised, we will determine the lump sum benefit at the same interest rates
used to calculate the installments. The amount left under Option C and any
unpaid balance under Option D, may be withdrawn only as noted in the Written
Request selecting the option.
A corporate or fiduciary payee may select only Option A, C or D, subject to our
approval.
PAYMENT DATES -- The first payment under any option, except Option C, will be
due on the date this contract matures, by death or otherwise, unless another
date is designated. Benefits under Option C begin at the end of the first
benefit period.
The last payment under any option will be made as stated in the option's
description. However, if a payee under Options B or E dies before the due date
of the second monthly payment, the amount applied, minus the first monthly
payment, will be paid in a lump sum or under any option other than Option E.
This payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
BENEFIT RATES -- The Benefit Option Tables in your Contract show benefit amounts
for Option A, B and E. If you choose one of these options, either within five
years of the date of surrender or the date the proceeds are otherwise payable,
we will apply either the benefit rates listed in the Tables, or the rates we use
on the date the proceeds are paid, whichever is more favorable. Benefits that
begin more than five years after that date, or as a result of additional
deposits, will be based on the rates we use on the date the first benefit is
due.
A-4
<PAGE>
APPENDIX D -- ILLUSTRATIONS OF DEATH BENEFIT, CONTRACT VALUES
AND ACCUMULATED PAYMENTS
The following tables illustrate the way in which a Contract's Death Benefit and
Contract Value could vary over an extended period.
ASSUMPTIONS
The tables illustrate a Contract issued to a male, age 55, qualifying for the
non-tobacco user discount, and a second-to-die Contract issued to a male, age
65, qualifying for the non-tobacco user discount and a female, age 65,
qualifying for the non-tobacco user discount. The tables illustrate the
guaranteed insurance protection rates and the current insurance protection rates
as presently in effect. ON REQUEST, WE WILL PROVIDE A COMPARABLE ILLUSTRATION
BASED ON THE PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASS, AND A
SPECIFIED PAYMENT.
Contract Values are based on the assumptions that no Contract loans have been
made, that no partial withdrawals have been made, and that no more than 12
transfers have been made in any Contract year (so that no transaction or
transfer charges have been incurred).
The tables assume that the initial payment is allocated to and remains in the
Variable Account for the entire period shown. They are based on hypothetical
gross investment rates of return for the fund (i.e., investment income and
capital gains and losses, realized or unrealized) equal to constant Gross Annual
Rates of 0%, 6%, and 12%. The second column of the tables show the amount that
would accumulate if the initial Payment was invested to earn interest, at 5%
compounded annually.
The Contract Values and Death Benefit would be different from those shown even
if the gross annual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below the averages for individual
Contract years. The values would also be different depending on the allocation
of the Contract's total Contract Value among the Sub-Accounts, if the rates of
return averaged 0%, 6% or 12%, but the rates of each fund varied above and below
the averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Benefit and Contract Values take into account
the daily deduction of the mortality and expense risk charge and the deduction
from Contract Value for the Monthly Deductions. The amounts shown in the tables
also take into account fund advisory fees and operating expenses, based on the
assumptions described below. The tables reflect an average of the Management Fee
and Other Fund Expenses for all of the underlying Funds.
MONEY MARKET FUND OF ALLMERICA INVESTMENT TRUST. The advisory fee for the Money
Market Fund of Allmerica Investment Trust does not vary by performance, and in
1996 was 0.28%. Total Fund Expenses for the Money Market Fund in 1996 were
0.34%. Under the Management Agreement with Allmerica Investment Trust, Allmerica
Investment Management Company, Inc. has declared a voluntary expense limitation
of 0.60% for the Money Market Fund, but the expenses of the Money Market Fund
did not exceed the cap in 1996.
PORTFOLIOS OF THE PALLADIAN-SM- TRUST. Each of the Portfolios of The
Palladian-SM- Trust pays a monthly Management Fee, which varies based on the
relationships of the Portfolio's performance (after the deduction of Portfolio
expenses) to the performance of a specific Benchmark Index. Each Management Fee
is determined by reference to the Adjusted Return of the Portfolio. The Adjusted
Return = [Gross Return - Benchmark Return] - Other Fund Expenses (not including
the Management Fee). For the purposes of the illustrations, the Adjusted Return
of a Portfolio may be used to determine the applicable Management Fee, as
indicated in the table of Adjusted Returns and Management Fees, below. FOR MORE
INFORMATION, SEE THE PROSPECTUS OF THE PALLADIAN-SM- TRUST.
A-5
<PAGE>
PERFORMANCE BENCHMARKS AND OTHER FUND EXPENSES OF THE PALLADIAN-SM- PORTFOLIOS
<TABLE>
<CAPTION>
AVERAGED OTHER FUND
BENCHMARK BENCHMARK EXPENSES
PORTFOLIO INDEX RETURN (12/31/96)#
- ------------------------------ -------------------------------------------------------- ----------- -----------
<S> <C> <C> <C>
Value S&P 500 Composite Stock Price Index 10.50%* 0.70%
Growth S&P 500 Composite Stock Price Index 10.50%* 0.70%
International Growth Morgan Stanley Capital International (EAFE) Index 9.37%** 1.20%
Global Strategic Income JP Morgan Global Government Bond Index, Unhedged 10.36%* 1.20%
Global Interactive/ Telecomm S&P 500 Composite Stock Price Index 10.50%** 1.20%
</TABLE>
* The Benchmark Index has been averaged over 40 years.
** The Benchmark Index has been averaged over 5 years
# Palladian-SM- Advisors, Inc. has agreed to limit operating expenses and
reimburse those expenses to the extent that the Portfolio's "other expenses"
(i.e., expenses other than management fees) from September 11, 1996 through
at least December 31, 1997 exceed the following expense limitations: Value
Portfolio, 0.70%; Growth Portfolio, 0.70%; International Growth Portfolio,
1.20%; Global Strategic Income Portfolio, 1.20%; and Global
Interactive/Telecomm Portfolio, 1.20%. FOR MORE INFORMATION, SEE THE
PROSPECTUS OF THE PALLADIAN-SM- TRUST.
TABLE OF ADJUSTED RETURNS AND MANAGEMENT FEES
<TABLE>
<CAPTION>
ADJUSTED MANAGEMENT
RETURN FEE
- ---------------------------------------------------------------------------------------------------- -------------
<S> <C>
Over -2.5% but less than -0.5%...................................................................... 0.5%
- -0.5% or greater but less than 1.5%................................................................. 1.0%
1.5% or greater but less than 3.5%.................................................................. 1.5%
3.5% or greater but less than 5.5%.................................................................. 2.0%
5.5% or greater but less than 7.5%.................................................................. 2.5%
7.5% or greater but less than 9.5%.................................................................. 3.0%
9.5% or greater but less than 11.5%................................................................. 3.5%
11.5% or greater.................................................................................... 4.0%
</TABLE>
EXAMPLE OF CALCULATION OF PALLADIAN MANAGEMENT FEES:
The Management Fee is based on the Adjusted Return of a Portfolio: Adjusted
Return = [Gross Return - Benchmark Return] - Other Fund Expenses (not including
the Management Fee). A hypothetical 12% Gross Rate of Return for the Value
Portfolio, with a 10.50% Benchmark Return, would result in an Adjusted Return of
0.80% and a Total Management Fee equal to 1.00%, as follows:
<TABLE>
<S> <C> <C>
Step 1: 12% Gross Rate of Return LESS 10.50% Benchmark
Return = 1.50%
LESS Other Fund Expenses = 0.70%
---------
Adjusted Return 0.80%
</TABLE>
Step 2: An Adjusted Return of 0.80% would result in a total Management Fee equal
to 1.00% (see Table of Adjusted Returns and Management Fees, above).
FOR THE PURPOSES OF THE ILLUSTRATIONS, THE AVERAGED BENCHMARK RETURNS HAVE BEEN
DETERMINED BY AVERAGING THE PERFORMANCE OF THE APPLICABLE BENCHMARK INDEX OVER
AN EXTENDED NUMBER OF YEARS. THE ACTUAL BENCHMARK RETURNS WILL VARY, AND
THEREFORE THE ACTUAL MANAGEMENT FEES MAY ALSO VARY, EVEN IF THE ACTUAL
PERFORMANCE OF THE PORTFOLIOS DID NOT CHANGE. For instance, in the above
example, if the actual Benchmark Return of the S&P 500 were 8% in a 12-month
period, the Adjusted Return for the Value Portfolio would be 3.30% (because 12%
- - 8% - 0.70% = 3.30%), and the Management Fee (from the Table of Adjusted
Returns and Management Fees, above) would be 1.5%.
A-6
<PAGE>
FOR MORE INFORMATION CONCERNING THE CALCULATION OF THE MANAGEMENT FEES OF THE
PALLADIAN-SM- PORTFOLIOS, SEE THE PROSPECTUS FOR THE PALLADIAN-SM- TRUST.
CALCULATION OF MANAGEMENT FEE AND TOTAL FUND EXPENSES ASSUMPTIONS IN THE
ILLUSTRATIONS:
In the Illustrations, the average Management Fee is assumed to be 0.05% at 0%
Gross Rate of Return, 0.05% at 6% Gross Rate of Return, and 0.88% at 12% Gross
Rate of Return. The average of Other Fund Expenses is 0.84%.
The averages of the Management Fees have been determined as follows:
1. The assumed Management Fee is determined for each of the Portfolios by
comparing each of the 0%, 6% and 12% Gross Rates of Return to the applicable
Averaged Benchmark Return, as indicated in the examples above.
2. The average Management Fee used in the Illustrations at each Gross Rate of
Return is the average of Management Fee for all of the underlying Funds,
including the Money Market Fund.
CALCULATIONS AT 0% GROSS RATE OF RETURN:
<TABLE>
<CAPTION>
(B) (C) (D) (E) (G)
GROSS AVERAGED OTHER ADJUSTED (F) TOTAL FUND
(A) RATE OF BENCHMARK FUND RETURN MANAGEMENT EXPENSES
PORTFOLIO/FUND RETURN RETURN EXPENSES (B-C-D) FEE (D + F)
- ----------------------------------------- ----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Value 0% 10.50% 0.70% -11.20% 0.00% 0.70%
Growth 0% 10.50% 0.70% -11.20% 0.00% 0.70%
International 0% 9.37% 1.20% -10.57% 0.00% 1.20%
Global Income 0% 10.36% 1.20% -11.56% 0.00% 1.20%
Global Telecomm 0% 10.50% 1.20% -11.70% 0.00% 1.20%
Money Market N/A N/A 0.06% N/A 0.28% 0.34%
</TABLE>
Average of Other Fund Expenses (D): 0.84%
Average of Management Fees (F): 0.05%
Average of Total Fund Expenses (G): 0.89%
CALCULATIONS AT 6% GROSS RATE OF RETURN:
<TABLE>
<CAPTION>
(B) (C) (D) (E) (G)
GROSS AVERAGED OTHER ADJUSTED (F) TOTAL FUND
(A) RATE OF BENCHMARK FUND RETURN MANAGEMENT EXPENSES
PORTFOLIO/FUND RETURN RETURN EXPENSES (B-C-D) FEE (D + F)
- ------------------------------------------ ----------- ----------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Value 6% 10.50% 0.70% -5.20% 0.00% 0.70%
Growth 6% 10.50% 0.70% -5.20% 0.00% 0.70%
International 6% 9.37% 1.20% -4.57% 0.00% 1.20%
Global Income 6% 10.36% 1.20% -5.56% 0.00% 1.20%
Global Telecomm 6% 10.50% 1.20% -5.70% 0.00% 1.20%
Money Market N/A N/A 0.06% N/A 0.28% 0.34%
</TABLE>
Average of Other Fund Expenses (D): 0.84%
Average of Management Fees (F): 0.05%
Average of Total Fund Expenses (G): 0.89%
A-7
<PAGE>
CALCULATIONS AT 12% GROSS RATE OF RETURN:
<TABLE>
<CAPTION>
(B) (C) (D) (E) (G)
GROSS AVERAGED OTHER ADJUSTED (F) TOTAL FUND
(A) RATE OF BENCHMARK FUND RETURN MANAGEMENT EXPENSES
PORTFOLIO/FUND RETURN RETURN EXPENSES (B-C-D) FEE (D + F)
- -------------------------------------------- ----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Value 12% 10.50% 0.70% 0.80% 1.00% 1.70%
Growth 12% 10.50% 0.70% 0.80% 1.00% 1.70%
International 12% 9.37% 1.20% 1.43% 1.00% 2.20%
Global Income 12% 10.36% 1.20% 0.44% 1.00% 2.20%
Global Telecomm 12% 10.50% 1.20% 0.30% 1.00% 2.20%
Money Market N/A N/A 0.06% N/A 0.28% 0.34%
</TABLE>
Average of Other Fund Expenses (D): 0.84%
Average of Management Fees: 0.88%
Average of Total Fund Expenses: 1.72%
NET ANNUAL RATES OF INVESTMENT
Applying the mortality and expense risk charge of 0.90% and the average
Management Fees and Other Fund Expenses of 0.89% and 1.72%, respectively, the
Gross Annual Return of 0%, 6% and 12% would produce net annual rates of -1.79%,
4.21% and 9.38%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Variable Account since no charges are currently made.
However, if in the future the charges are made, to produce the illustrated Death
Benefits and Contract Value, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by an amount sufficient to cover the tax charges.
A-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
$25,000 Payment
Male Non-Tobacco User Age 55
Face Amount = $67,803
BASED ON CURRENT MONTHLY DEDUCTIONS
<TABLE>
<CAPTION>
PAYMENTS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
MADE PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------------- ------------------------------------- ------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,696 24,133 67,803 23,171 25,608 67,803 24,442 26,880
2 27,563 20,920 23,295 67,803 23,857 26,232 67,803 26,528 28,903
3 28,941 20,548 22,486 67,803 24,935 26,872 67,803 29,143 31,081
4 30,388 19,828 21,703 67,803 25,653 27,528 67,803 31,550 33,425
5 31,907 19,509 20,947 67,803 26,764 28,202 67,803 34,511 35,948
6 33,502 18,841 20,216 67,803 27,517 28,892 67,803 37,290 38,665
7 35,178 18,572 19,509 67,803 28,662 29,600 67,803 40,651 41,589
8 36,936 17,951 18,826 67,803 29,451 30,326 67,803 43,861 44,736
9 38,783 17,729 18,166 67,803 30,633 31,070 67,803 47,687 48,124
10 40,722 17,528 17,528 67,803 31,834 31,834 67,803 51,784 51,784
11 42,758 17,031 17,031 67,803 32,846 32,846 67,803 56,135 56,135
12 44,896 16,546 16,546 67,803 33,891 33,891 67,803 60,864 60,864
13 47,141 16,075 16,075 67,803 34,971 34,971 67,803 65,980 65,980
14 49,498 15,616 15,616 67,803 36,086 36,086 67,803 71,522 71,522
15 51,973 15,170 15,170 67,803 37,238 37,238 67,803 77,530 77,530
16 54,572 14,735 14,735 67,803 38,428 38,428 67,803 84,042 84,042
17 57,300 14,312 14,312 67,803 39,656 39,656 67,803 91,102 91,102
18 60,165 13,900 13,900 67,803 40,925 40,925 67,803 98,754 98,754
19 63,174 13,500 13,500 67,803 42,235 42,235 67,803 107,088 107,088
20 66,332 13,110 13,110 67,803 43,588 43,588 67,803 116,197 116,197
21 69,649 12,730 12,730 67,803 44,986 44,986 67,803 126,185 126,185
22 73,132 12,361 12,361 67,803 46,429 46,429 67,803 136,984 136,984
23 76,788 12,001 12,001 67,803 47,919 47,919 67,803 148,653 148,653
24 80,627 11,651 11,651 67,803 49,459 49,459 67,803 161,254 161,254
25 84,659 11,310 11,310 67,803 51,066 51,066 67,803 174,851 174,851
26 88,892 10,979 10,979 67,803 52,739 52,739 67,803 189,538 189,538
27 93,336 10,656 10,656 67,803 54,467 54,467 67,803 205,459 205,459
28 98,003 10,342 10,342 67,803 56,251 56,251 67,803 222,717 222,717
29 102,903 10,036 10,036 67,803 58,094 58,094 67,803 241,425 241,425
30 108,049 9,739 9,739 67,803 59,998 59,998 67,803 261,704 261,704
31 113,451 9,449 9,449 67,803 61,963 61,963 67,803 283,686 283,686
32 119,124 9,167 9,167 67,803 63,993 63,993 67,803 307,515 307,515
33 125,080 8,893 8,893 67,803 66,090 66,090 67,803 333,346 333,346
34 131,334 8,626 8,626 67,803 68,255 68,255 67,803 361,347 361,347
35 137,900 8,366 8,366 67,803 70,491 70,491 67,803 391,699 391,699
<CAPTION>
CONTRACT DEATH
YEAR BENEFIT
- ------------- ---------
<S> <C>
1 67,803
2 67,803
3 67,803
4 67,803
5 67,803
6 67,803
7 67,803
8 67,803
9 67,803
10 67,803
11 67,803
12 72,428
13 77,856
14 83,681
15 89,935
16 96,649
17 102,945
18 109,617
19 116,726
20 124,331
21 132,494
22 143,833
23 156,085
24 169,317
25 183,593
26 199,015
27 215,732
28 233,853
29 253,496
30 274,789
31 297,871
32 322,891
33 350,013
34 379,414
35 411,284
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
A-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
$25,000 Payment
Male Non-Tobacco User Age 55
Face Amount = $67,803
BASED ON GUARANTEED MONTHLY DEDUCTIONS
<TABLE>
<CAPTION>
PAYMENTS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
MADE PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------------- ------------------------------------- ------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,486 23,906 67,803 22,945 25,383 67,803 24,218 26,656
2 27,563 20,422 22,797 67,803 23,369 25,744 67,803 26,051 28,426
3 28,941 19,730 21,668 67,803 24,141 26,079 67,803 28,382 30,319
4 30,388 18,640 20,515 67,803 24,512 26,387 67,803 30,476 32,351
5 31,907 17,889 19,326 67,803 25,219 26,656 67,803 33,092 34,530
6 33,502 16,724 18,099 67,803 25,512 26,887 67,803 35,500 36,875
7 35,178 15,882 16,819 67,803 26,131 27,069 67,803 38,464 39,401
8 36,936 14,603 15,478 67,803 26,318 27,193 67,803 41,255 42,130
9 38,783 13,621 14,059 67,803 26,811 27,248 67,803 44,646 45,084
10 40,722 12,538 12,538 67,803 27,217 27,217 67,803 48,289 48,289
11 42,758 10,993 10,993 67,803 27,289 27,289 67,803 52,173 52,173
12 44,896 9,310 9,310 67,803 27,266 27,266 67,803 56,481 56,481
13 47,141 7,465 7,465 67,803 27,131 27,131 67,803 61,223 61,223
14 49,498 5,433 5,433 67,803 26,865 26,865 67,803 66,355 66,355
15 51,973 3,187 3,187 67,803 26,448 26,448 67,803 71,903 71,903
16 54,572 677 677 67,803 25,845 25,845 67,803 77,899 77,899
17 57,300 0 0 67,803 25,011 25,011 67,803 84,412 84,412
18 60,165 0 0 67,803 23,897 23,897 67,803 91,497 91,497
19 63,174 0 0 67,803 22,431 22,431 67,803 99,219 99,219
20 66,332 0 0 67,803 20,539 20,539 67,803 107,658 107,658
21 69,649 0 0 67,803 18,131 18,131 67,803 116,912 116,912
22 73,132 0 0 67,803 15,100 15,100 67,803 126,917 126,917
23 76,788 0 0 67,803 11,304 11,304 67,803 137,729 137,729
24 80,627 0 0 67,803 6,569 6,569 67,803 149,404 149,404
25 84,659 0 0 67,803 655 655 67,803 162,002 162,002
26 88,892 0 0 67,803 0 0 67,803 175,579 175,579
27 93,336 0 0 67,803 0 0 67,803 190,195 190,195
28 98,003 0 0 67,803 0 0 67,803 205,904 205,904
29 102,903 0 0 67,803 0 0 67,803 222,759 222,759
30 108,049 0 0 67,803 0 0 67,803 240,815 240,815
31 113,451 0 0 67,803 0 0 67,803 260,130 260,130
32 119,124 0 0 67,803 0 0 67,803 280,760 280,760
33 125,080 0 0 67,803 0 0 67,803 302,764 302,764
34 131,334 0 0 67,803 0 0 67,803 326,202 326,202
35 137,900 0 0 67,803 0 0 67,803 351,125 351,125
<CAPTION>
CONTRACT DEATH
YEAR BENEFIT
- ------------- ---------
<S> <C>
1 67,803
2 67,803
3 67,803
4 67,803
5 67,803
6 67,803
7 67,803
8 67,803
9 67,803
10 67,803
11 67,803
12 67,803
13 72,243
14 77,636
15 83,408
16 89,584
17 95,385
18 101,562
19 108,149
20 115,194
21 122,757
22 133,263
23 146,615
24 156,874
25 170,102
26 184,358
27 199,705
28 216,199
29 233,897
30 252,856
31 273,137
32 294,798
33 317,902
34 342,512
35 368,682
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
A-10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
$25,000 Payment
Male Non-Tobacco User Age 65
Female Non-Tobacco User Age 65
Face Amount = $66,006
BASED ON CURRENT MONTHLY DEDUCTIONS
<TABLE>
<CAPTION>
PAYMENTS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
MADE PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------------- ------------------------------------- ------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,804 24,241 66,006 23,286 25,724 66,006 24,564 27,001
2 27,563 21,098 23,473 66,006 24,065 26,440 66,006 26,762 29,137
3 28,941 20,788 22,726 66,006 25,229 27,166 66,006 29,490 31,427
4 30,388 20,126 22,001 66,006 26,039 27,914 66,006 32,024 33,899
5 31,907 19,861 21,299 66,006 27,245 28,683 66,006 35,131 36,569
6 33,502 19,243 20,618 66,006 28,098 29,473 66,006 38,076 39,451
7 35,178 19,020 19,957 66,006 29,349 30,287 66,006 41,625 42,563
8 36,936 18,442 19,317 66,006 30,249 31,124 66,006 45,047 45,922
9 38,783 18,259 18,697 66,006 31,547 31,985 66,006 49,112 49,549
10 40,722 18,095 18,095 66,006 32,870 32,870 66,006 53,491 53,491
11 42,758 17,636 17,636 66,006 34,018 34,018 66,006 58,159 58,159
12 44,896 17,187 17,187 66,006 35,208 35,208 66,006 63,241 63,241
13 47,141 16,748 16,748 66,006 36,440 36,440 66,006 68,786 68,786
14 49,498 16,321 16,321 66,006 37,716 37,716 66,006 74,792 74,792
15 51,973 15,903 15,903 66,006 39,038 39,038 66,006 81,318 81,318
16 54,572 15,495 15,495 66,006 40,408 40,408 66,006 88,414 88,414
17 57,300 15.097 15,097 66,006 41,827 41,827 66,006 96,128 96,128
18 60,165 14,709 14,709 66,006 43,296 43,296 66,006 104,516 104,516
19 63,174 14,329 14,329 66,006 44,818 44,818 66,006 113,636 113,636
20 66,332 13,959 13,959 66,006 46,395 46,395 66,006 123,551 123,551
21 69,649 13,598 13,598 66,006 48,029 48,029 66,006 134,332 134,332
22 73,132 13,245 13,245 66,006 49,721 49,721 66,006 146,053 146,053
23 76,788 12,900 12,900 66,006 51,499 51,499 66,006 158,797 158,797
24 80,627 12,564 12,564 66,006 53,346 53,346 66,006 172,653 172,653
25 84,659 12,236 12,236 66,006 55,259 55,259 66,006 187,718 187,718
26 88,892 11,915 11,915 66,006 57,241 57,241 66,006 204,098 204,098
27 93,336 11,602 11,602 66,006 59,294 59,294 66,006 221,906 221,906
28 98,003 11,297 11,297 66,006 61,420 61,420 66,006 241,269 241,269
29 102,903 10,998 10,998 66,006 63,623 63,623 66,006 262,321 262,321
30 108,049 10,707 10,707 66,006 65,905 65,905 66,564 285,210 285,210
31 113,451 10,423 10,423 66,006 68,401 68,401 68,401 310,718 310,718
32 119,124 10,146 10,146 66,006 70,996 70,996 70,996 338,506 338,506
33 125,080 9,875 9,875 66,006 73,690 73,690 73,690 368,779 368,779
34 131,334 9,610 9,610 66,006 76,485 76,485 76,485 401,760 401,760
35 137,900 9,352 9,352 66,006 79,387 79,387 79,387 437,691 437,691
<CAPTION>
CONTRACT DEATH
YEAR BENEFIT
- ------------- ---------
<S> <C>
1 66,006
2 66,006
3 66,006
4 66,006
5 66,006
6 66,006
7 66,006
8 66,006
9 66,006
10 66,006
11 66,006
12 66,402
13 72,225
14 78,532
15 85,384
16 92,835
17 100,935
18 109,742
19 119,318
20 129,729
21 141,048
22 153,356
23 166,737
24 181,286
25 197,104
26 214,303
27 230,783
28 248,507
29 267,568
30 288,062
31 310,718
32 338,506
33 368,779
34 401,760
35 437,691
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
A-11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
$25,000 Payment
Male Non-Tobacco User Age 65
Female Non-Tobacco User Age 65
Face Amount = $66,006
BASED ON GUARANTEED MONTHLY DEDUCTIONS
<TABLE>
<CAPTION>
PAYMENTS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
MADE PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------------- ------------------------------------- ------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,804 24,241 66,006 23,286 25,724 66,006 24,564 27,001
2 27,563 21,098 23,473 66,006 24,065 26,440 66,006 26,762 29,137
3 28,941 20,750 22,688 66,006 25,204 27,142 66,006 29,478 31,416
4 30,388 20,001 21,876 66,006 25,949 27,824 66,006 31,973 33,848
5 31,907 19,589 21,026 66,006 27,040 28,477 66,006 35,006 36,443
6 33,502 18,750 20,125 66,006 27,718 29,093 66,006 37,841 39,216
7 35,178 18,217 19,154 66,006 28,719 29,657 66,006 41,243 42,180
8 36,936 17,214 18,089 66,006 29,278 30,153 66,006 44,481 45,356
9 38,783 16,460 16,899 66,006 30,121 30,559 66,006 48,329 48,766
10 40,722 15,544 15,544 66,006 30,850 30,850 66,006 52,463 52,463
11 42,758 14,090 14,090 66,006 31,223 31,223 66,006 56,894 56,894
12 44,896 12,372 12,372 66,006 31,438 31,438 66,006 61,788 61,788
13 47,141 10,333 10,333 66,006 31,462 31,462 66,006 67,200 67,200
14 49,498 7,904 7,904 66,006 31,255 31,255 66,006 73,068 73,068
15 51,973 4,993 4,993 66,006 30,765 30,765 66,006 79,419 79,419
16 54,572 1,475 1,475 66,066 29,915 29,915 66,006 86,286 86,286
17 57,300 0 0 66,066 28,606 28,606 66,006 93,701 93,701
18 60,165 0 0 66,066 26,694 26,694 66,006 101,694 101,694
19 63,174 0 0 66,066 23,990 23,990 66,006 110,296 110,296
20 66,332 0 0 66,066 20,232 20,232 66,006 119,537 119,537
21 69,649 0 0 66,066 15,067 15,067 66,006 129,446 129,446
22 73,132 0 0 66,066 7,990 7,990 66,006 140,052 140,052
23 76,788 0 0 66,066 0 0 66,006 151,384 151,384
24 80,627 0 0 66,066 0 0 66,006 163,467 163,467
25 84,659 0 0 66,066 0 0 66,006 176,323 176,323
26 88,892 0 0 66,066 0 0 66,006 189,970 189,970
27 93,336 0 0 66,066 0 0 66,006 204,920 204,920
28 98,003 0 0 66,066 0 0 66,006 221,404 221,404
29 102,903 0 0 66,066 0 0 66,006 239,713 239,713
30 108,049 0 0 66,066 0 0 66,006 260,224 260,224
31 113,451 0 0 66,066 0 0 66,006 283,496 283,496
32 119,124 0 0 66,066 0 0 66,006 308,850 308,850
33 125,080 0 0 66,066 0 0 66,006 336,472 336,472
34 131,334 0 0 66,066 0 0 66,006 366,563 366,563
35 137,900 0 0 66,066 0 0 66,006 399,346 399,346
<CAPTION>
CONTRACT DEATH
YEAR BENEFIT
- ------------- ---------
<S> <C>
1 66,006
2 66,006
3 66,006
4 66,006
5 66,006
6 66,006
7 66,006
8 66,006
9 66,006
10 66,006
11 66,006
12 66,006
13 70,560
14 76,721
15 83,390
16 90,601
17 98,386
18 106,778
19 115,810
20 125,513
21 135,918
22 147,055
23 158,953
24 171,640
25 185,139
26 199,468
27 213,116
28 228,047
29 244,507
30 262,826
31 283,496
32 308,850
33 336,472
34 366,563
35 399,346
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
A-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
$25,000 Payment
Unisex Non-smoker Age 55
Face Amount = $69,861
BASED ON CURRENT MONTHLY DEDUCTIONS
<TABLE>
<CAPTION>
PAYMENTS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
MADE PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------------- ------------------------------------- ------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,696 24,133 69,861 23,171 25,608 69,861 24,442 26,880
2 27,563 20,920 23,295 69,861 23,857 26,232 69,861 26,528 28,903
3 28,941 20,548 24,486 69,861 24,935 26,872 69,861 29,143 31,081
4 30,388 19,828 21,703 69,861 25,653 27,528 69,861 31,550 33,425
5 31,907 19,509 20,947 69,861 26,764 28,202 69,861 34,511 35,948
6 33,502 18,841 20,216 69,861 27,517 28,892 69,861 37,290 38,665
7 35,178 18,572 19,509 69,861 28,662 29,600 69,861 40,651 41,589
8 36,936 17,951 18,826 69,861 29,451 30,326 69,861 43,861 44,736
9 38,783 17,729 18,166 69,861 30,633 31,070 69,861 47,687 48,124
10 40,722 17,528 17,528 69,861 31,834 31,834 69,861 51,784 51,784
11 42,758 17,031 17,031 69,861 32,846 32,846 69,861 56,134 56,134
12 44,896 16,546 16,546 69,861 33,891 33,891 69,861 60,870 60,870
13 47,141 16,075 16,075 69,861 34,971 34,971 69,861 66,013 66,013
14 49,498 15,616 15,616 69,861 36,086 36,086 69,861 71,577 71,577
15 51,973 15,170 15,170 69,861 37,238 37,238 69,861 77,596 77,596
16 54,572 14,735 14,735 69,861 38,428 38,428 69,861 84,114 84,114
17 57,300 14,312 14,312 69,861 39,656 39,656 69,861 91,185 91,185
18 60,165 13,900 13,900 69,861 40,925 40,925 69,861 98,882 98,882
19 63,174 13,500 13,500 69,861 42,235 42,235 69,861 107,272 107,272
20 66,332 13,110 13,110 69,861 43,588 43,588 69,861 116,437 116,437
21 69,649 12,730 12,730 69,861 44,986 44,986 69,861 126,480 126,480
22 73,132 12,361 12,361 69,861 46,429 46,429 69,861 137,346 137,346
23 76,788 12,001 12,001 69,861 47,919 47,919 69,861 149,095 149,095
24 80,627 11,651 11,651 69,861 49,459 49,459 69,861 161,791 161,791
25 84,659 11,310 11,310 69,861 51,066 51,066 69,861 175,501 175,501
26 88,892 10,979 10,979 69,861 52,739 52,739 69,861 190,290 190,290
27 93,336 10,656 10,656 69,861 54,467 54,467 69,861 206,274 206,274
28 98,003 10,342 10,342 69,861 56,251 56,251 69,861 223,601 223,601
29 102,903 10,036 10,036 69,861 58,094 58,094 69,861 242,383 242,383
30 108,049 9,739 9,739 69,861 59,998 59,998 69,861 262,742 262,742
31 113,451 9,449 9,449 69,861 61,963 61,963 69,861 284,812 284,812
32 119,124 9,167 9,167 69,861 63,993 63,993 69,861 308,736 308,736
33 125,080 8,893 8,893 69,861 66,090 66,090 69,861 334,669 334,669
34 131,334 8,626 8,626 69,861 68,255 68,255 71,668 362,781 362,781
35 137,900 8,366 8,366 69,861 70,491 70,491 74,016 393,254 393,254
<CAPTION>
CONTRACT DEATH
YEAR BENEFIT
- ------------- ---------
<S> <C>
1 69,861
2 69,861
3 69,861
4 69,861
5 69,861
6 69,861
7 69,861
8 69,861
9 69,861
10 69,861
11 69,861
12 72,436
13 77,895
14 83,745
15 90,011
16 96,731
17 103,039
18 109,759
19 116,926
20 124,587
21 132,804
22 144,213
23 156,549
24 196,881
25 184,276
26 199,804
27 216,588
28 234,781
29 254,502
30 275,879
31 299,053
32 324,173
33 351,403
34 380,920
35 412,916
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
A-13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
$25,000 Payment
Unisex Non-smoker Age 55
Face Amount = $69,861
BASED ON GUARANTEED MONTHLYTHLY DEDUCTIONS
<TABLE>
<CAPTION>
PAYMENTS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
MADE PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------------- ------------------------------------- ------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,468 23,905 69,861 22,944 25,382 69,861 24,217 26,655
2 27,563 20,420 22,795 69,861 23,366 25,741 69,861 26,046 28,421
3 28,941 19,736 21,674 69,861 24,144 26,081 69,861 28,381 30,318
4 30,388 18,652 20,527 69,861 24,518 26,393 69,861 30,476 32,351
5 31,907 17,918 19,355 69,861 25,237 26,675 69,861 33,098 34,536
6 33,502 16,774 18,149 69,861 25,546 26,921 69,861 35,512 36,887
7 35,178 15,957 16,895 69,861 26,183 27,120 69,861 38,481 39,419
8 36,936 14,708 15,583 69,861 26,390 27,265 69,861 41,276 42,151
9 38,783 13,760 14,197 69,861 29,906 27,343 69,861 44,667 45,104
10 40,722 12,722 12,722 69,861 27,342 27,342 69,861 48,307 48,307
11 42,758 11,227 11,227 69,861 27,448 27,448 69,861 52,179 52,179
12 44,896 9,607 9,607 69,861 27,467 27,467 69,861 56,465 56,465
13 47,141 7,840 7,840 69,861 27,381 27,381 69,861 61,205 61,205
14 49,498 5,908 5,908 69,861 27,179 27,179 69,861 66,364 66,364
15 51,973 3,777 3,777 69,861 26,836 26,836 69,861 71,943 71,943
16 54,572 1,394 1,394 69,861 26,313 26,313 69,861 77,978 77,978
17 57,300 0 0 69,861 25,582 25,582 69,861 84,534 84,534
18 60,165 0 0 69,861 24,604 24,604 69,861 91,669 91,669
19 63,174 0 0 69,861 23,311 23,311 69,861 99,447 99,447
20 66,332 0 0 69,861 21,633 21,633 69,861 107,943 107,943
21 69,649 0 0 69,861 19,488 19,488 69,861 117,254 117,254
22 73,132 0 0 69,861 16,784 16,784 69,861 127,327 127,327
23 76,788 0 0 69,861 13,405 13,405 69,861 138,219 138,219
24 80,627 0 0 69,861 9,202 9,202 69,861 149,990 149,990
25 84,659 0 0 69,861 3,965 3,965 69,861 162,699 162,699
26 88,892 0 0 69,861 0 0 69,861 176,409 176,409
27 93,336 0 0 69,861 0 0 69,861 191,180 191,180
28 98,003 0 0 69,861 0 0 69,861 207,070 207,070
29 102,903 0 0 69,861 0 0 69,861 224,136 224,136
30 108,049 0 0 69,861 0 0 69,861 242,439 242,439
31 113,451 0 0 69,861 0 0 69,861 262,039 262,039
32 119,124 0 0 69,861 0 0 69,861 282,996 282,996
33 125,080 0 0 69,861 0 0 69,861 305,372 305,372
34 131,334 0 0 69,861 0 0 69,861 329,225 329,225
35 137,900 0 0 69,861 0 0 69,861 354,610 354,610
<CAPTION>
CONTRACT DEATH
YEAR BENEFIT
- ------------- ---------
<S> <C>
1 69,861
2 69,861
3 69,861
4 69,861
5 69,861
6 69,861
7 69,861
8 69,861
9 69,861
10 69,861
11 69,861
12 69,861
13 72,222
14 77,646
15 83,456
16 89,675
17 95,523
18 101,753
19 108,397
20 115,500
21 123,117
22 133,693
23 145,130
24 157,489
25 170,834
26 185,230
27 200,739
28 217,423
29 235,343
30 254,561
31 275,141
32 297,146
33 320,640
34 345,687
35 372,340
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
A-14
<PAGE>
Part II
UNDERTAKING TO FILE REPORTS
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.
RULE 484 UNDERTAKING
Article VIII of Registrant's Bylaws provides: Each Director and each Officer of
the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation against
all expenses actually and necessarily incurred by him in the defense or
reasonable settlement of any action, suit, or proceeding in which he is made a
party by reason of his being or having been a Director or Officer of the
Corporation, including any sums paid in settlement or to discharge judgment,
except in relation to matters as to which he shall be finally adjudged in such
action, suit, or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the 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, the 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 Act and will be governed by the final adjudication of
such issue.
RULE 6e-3(T) REPRESENTATIONS, DESCRIPTIONS AND UNDERTAKINGS
The Company hereby represents that the aggregate fees and charges under the
Contracts offered through this registration statement are reasonable in
relation to the services rendered, the expenses expected to be incurred, and
the risks assumed by Allmerica Financial Life Insurance and Annuity Company.
<PAGE>
CONTENTS OF THE REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of ____ pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484 under the Securities Act of 1933.
Representatives, descriptions and undertaking pursuant to Rule
6e-3(T)(b)(13)(iii)(F) under the Investment Company Act of 1940 (the "1940
Act").
The signatures.
<PAGE>
Written consents of the following persons:
1. Price Waterhouse LLP
2. Opinion of Counsel
3. Actuarial Consent
The following exhibits:
1. Exhibit 1
(Exhibits required by paragraph A of the instructions to Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors of the
Company dated June 13, 1996 establishing the Fulcrum Variable
Life Separate Account was filed in Registrant's Initial
Registration Statement on November 5, 1996, and is incorporated by
reference herein.
(2) Not Applicable.
(3)(a) Form of Underwriting and Administrative Services
Agreement between the Company and Allmerica
Investments, Inc. was filed in Registrant's Initial Registration
Statement on November 5, 1996, and is incorporated by reference
herein.
(4) Not Applicable.
(5) Policy Form was filed in Registrant's Initial Registration
Statement on November 5, 1996, and is incorporated by reference
herein.
(6)(a) Company's Articles of Incorporation was filed in Registrant's
Initial Registration Statement on __________, 1996, and is
incorporated by reference herein.
(b) Company's Restated ByLaws was filed in Registrant's Initial
Registration Statement on __________, 1996, and is incorporated
by reference herein.
(7) Not Applicable.
(8)(a) Form of Participation Agreement with Allmerica Investment Trust
was previously filed by the Company on June 3, 1987 in
Registration Statement No. 33-14672, and is incorporated herein
by reference.
(B) Participation Agreement among The Palladian Trust, Western
Capital Financial Group, Inc. and the Company is filed herewith.
(9) Not Applicable.
(10) Application Form was filed in Registrant's Initial Registration
Statement on __________, 1996, and is incorporated by
reference herein.
2. Form of Policy and Policy riders as set forth in Exhibit 1 above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
<PAGE>
7. Procedures Memorandum pursuant to Rule 6e-3(T)(b)(12)(ii) under
the 1940 Act which includes conversion procedures pursuant to Rule
6e-3(T)(b)(13)(v)(B) was previously filed in Registrant's Initial
Registration Statement on November 5, 1996, and is incorporated by
reference herein.
8. Consent of Independent Accountants is filed herewith
10. Wholesaling Agreement was previously filed in Registrant's Initial
Registration Statement on November 5, 1996, and is incorporated by
reference herein.
<PAGE>
Exhibit Table
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Pre-Effective
Amendment to the Registration Statement to be signed by the undersigned, in
the City of Worcester, and Commonwealth of Massachusetts, on the 30th day of
May, 1997.
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By /s/ Abigail M. Armstrong
---------------------------------------
Abigail M. Armstrong, Secretary
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ John F. O'Brien Director and Chairman of the Board
- ----------------------------------
John F. O'Brien
/s/ Bruce C. Anderson Director
- ----------------------------------
Bruce C. Anderson
/s/ Kruno Huitzingh Director, Vice President and
- ---------------------------------- Chief Information Officer
Kruno Huitzingh
/s/ John P. Kavanaugh Director and Vice President
- ----------------------------------
John P. Kavanaugh
/s/ John F. Kelly Director May 30, 1997
- ----------------------------------
John F. Kelly
/s/ James R. McAuliffe Director
- ----------------------------------
James R. McAuliffe
/s/ Edward J. Parry, III Vice President, Treasurer and
- ---------------------------------- Chief Accounting Officer
Edward J. Parry, III
/s/ Richard M. Reilly Director, President and
- ---------------------------------- Chief Executive Officer
Richard M. Reilly
/s/ Larry C. Renfro Director
- ----------------------------------
Larry C. Renfro
/s/ Eric A. Simonsen Director, Vice President and
- ---------------------------------- Chief Financial Officer
Eric A. Simonsen
/s/ Phillip E. Soule Director
- ----------------------------------
Phillip E. Soule
</TABLE>
<PAGE>
May 30, 1997
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of the
Pre-Effective Amendment to the Registration Statement of the Fulcrum Variable
Life Separate Account on Form N-8B-2 under the Investment Company Act of 1940
and on Form S-6 under the Securities Act of 1933, with respect to the
variable life policies funded by the Fulcrum Variable Life Separate Account.
I am of the following opinion:
1. Fulcrum Variable Life Separate Account is a separate account of the Company
validly existing pursuant to the Delaware Insurance Code and the
regulations issued thereunder.
2. The assets held in Fulcrum Variable Life Separate Account equal to the
reserves and other policy liabilities of the Policies which are supported
by the Fulcrum Variable Life Separate Account are not chargeable with
liabilities arising out of any other business the Company many conduct.
3. The Variable Life policies, when issued in accordance with the Prospectus
contained in the S-6 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 Pre-Effective Amendment to the Registration Statement of Fulcrum Variable
Life Separate Account filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Counsel
<PAGE>
May 30, 1997
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
Gentlemen:
This opinion is furnished in connection with the filing by Allmerica
Financial Life Insurance and Annuity Company of Pre-Effective Amendment to
the Registration Statement on Form S-6 under the Securities Act of 1933 with
respect to the modified single payment variable life insurance contracts
("Contracts") allocated to its SPVUL Account. The prospectus included in the
Pre-Effective Amendment to the Registration Statement describes the
Contracts. I am familiar with and have provided actuarial advice concerning
the preparation of the Pre-Effective Amendment to the Registration Statement,
including exhibits.
In my professional opinion, the illustration of death benefits and cash
values included in Appendix C of the prospectus, based on the assumptions
stated in the illustrations, are consistent with the provisions of the
Contract. The rate structure of the Contracts has not been designed so as to
make the relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to a prospective purchaser of a
Contract for Insureds age 55 than to prospective purchasers of Contracts for
Insureds at other ages or underwriting classes. I am also of the opinion that
the aggregate fees and charges under the Contracts are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the risks
assumed by Allmerica Financial Life Insurance and Annuity Company.
I hereby consent to the use of this opinion as an exhibit to the
Pre-Effective Amendment to the Registration Statement.
Sincerely,
/s/ William H. Mawdsley
William H. Mawdsley, FSA, MAAA
Vice President and Actuary
<PAGE>
EXHIBIT 8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Pre-Effective Amendment No. 1 to the Registration Statement of the Fulcrum
Variable Life Separate Account of Allmerica Financial Life Insurance and
Annuity Company on Form S-6 of our report dated February 3, 1997, relating to
the financial statements of Allmerica Financial Life Insurance and Annuity
Company, and our report dated February 5, 1996 relating to the statutory
basis financial statements of Allmerica Financial Life Insurance and Annuity
Company, both of which appear in such Prospectus. We also consent to the
reference to us under the heading "Independent Accountants" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
June 3, 1997
