July 15, 1997 Prospectus for
NEW YORK
MANNING & NAPIER VARIABLE ANNUITY
Including Eligible Fund Prospectuses for
MANNING & NAPIER INSURANCE FUND, INC.:
Manning & Napier Moderate Growth Portfolio
Manning & Napier Growth Portfolio
Manning & Napier Maximum Horizon Portfolio
Manning & Napier Small Cap Portfolio
Manning & Napier Equity Portfolio
Manning & Napier Bond Portfolio
STEINROE VARIABLE INVESTMENT TRUST:
Cash Income Fund
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Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
Issued by:
Liberty Life Assurance Company of Boston
175 Berkeley Street, Boston, MA 02117
Liberty Life Service Office
125 High Street, Boston, MA 02110-2712
[ ] Yes. I would like to receive the New York Manning & Napier Variable
Annuity Statement of Additional Information.
[ ] Yes. I would like to receive the Manning & Napier Insurance Fund, Inc.
Statement of Additional Information.
[ ] Yes. I would like to receive the SteinRoe Variable Investment Trust
Statement of Additional Information.
Name
Address
City, State Zip
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BUSINESS REPLY MAIL
FIRST CLASS MAIL PERMIT NO. 6719 BOSTON, MA
POSTAGE WILL BE PAID BY ADDRESSEE
LIBERTY LIFE SERVICE OFFICE
125 HIGH STREET
BOSTON, MA 02110-9773
NO POSTAGE
NECESSARY
IF MAILED
IN THE
UNITED STATES.
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GROUP FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
Variable Account J
OF
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
This Prospectus offers Group Variable Annuity Contracts (the "Contracts") and
the related Certificates (the "Certificates") that are designed to fund
benefits under certain group arrangements including those that qualify for
special tax treatment under the Internal Revenue Code of 1986 (the "Code").
As required by certain states, the Contracts may be offered as individual
contracts. Unless otherwise noted or the context so requires all references
to the Certificates include the Contracts and the individual Certificates.
The Certificates are offered on a flexible payment basis.
The variable annuity Contract (form number DVA(1)NY) and the Certificates
described in this prospectus provide for accumulation of Certificate Values
on a variable basis and payments of periodic annuity payments on a variable
or a fixed basis. The Certificates are designed for use by individuals for
retirement planning purposes.
This Prospectus generally describes the variable features of the Certificate.
Purchase Payments will be allocated to a segregated investment account of
Liberty Life Assurance Company of Boston ("Liberty Life"), designated
Variable Account J ("Variable Account").
The Variable Account invests in shares of the following Eligible Funds of
Manning & Napier Insurance Fund, Inc. ("Manning & Napier Insurance Fund") at
their net asset value: Manning & Napier Moderate Growth Portfolio ("MNMGP"),
Manning & Napier Growth Portfolio ("MNGP"), Manning & Napier Maximum Horizon
Portfolio ("MNMHP"), Manning & Napier Small Cap Portfolio ("MNSCP"), Manning
& Napier Equity Portfolio ("MNEP"), and Manning & Napier Bond Portfolio
("MNBP"). The Variable Account also invests in shares of the following
Eligible Fund of SteinRoe Variable Investment Trust ("SteinRoe Trust") at its
net asset value: Cash Income Fund ("CIF").
The Variable Account may offer other forms of the contracts and certificates
that have features, fees and charges which vary from the Certificates, and
that provide for investment in other Sub-accounts which invest in different
or additional mutual funds. Other contracts and certificates will be
described in separate prospectuses and statements of additional information.
A Statement of Additional Information dated the same as this prospectus has
been filed with the Securities and Exchange Commission and is herein
incorporated by reference. It is available, at no charge, by writing the
Principal Underwriter, Keyport Financial Services Corp. at 125 High Street,
Boston, MA 02110, by calling (800) 437-4466, or by returning the postcard on
the back cover of this prospectus. It may also be obtained by writing Manning
& Napier Insurance Fund, Inc. at P.O. Box 40610, Rochester, New York 14604,
or calling (800) 466-3863. A table of contents for the Statement of
Additional Information is on Page 17.
The Contract and Certificates: are not insured by the FDIC; are not a deposit
or other obligation of, or guaranteed by, the depository institution; and are
subject to investment risks, including the possible loss of principal amount
invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH THE INFORMATION A PROSPECTIVE INVESTOR SHOULD KNOW
BEFORE INVESTING. THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE OR JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED BY
LIBERTY LIFE TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING,
AND IF GIVEN OR MADE, SUCH UNAUTHORIZED INFORMATION OR REPRESENTATIONS SHOULD
NOT BE RELIED UPON.
The date of this prospectus is July 15, 1997
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TABLE OF CONTENTS
Page
Glossary of Special Terms 3
Summary of Expenses 4
Synopsis 5
Performance Information 5
Liberty Life and the Variable Account 6
Purchase Payments and Applications 6
Investments of the Variable Account 7
Allocations of Purchase Payments 7
Eligible Funds 7
Transfer of Variable Account Value 8
Substitution of Eligible Funds and Other
Variable Account Changes 9
Deductions 9
Deductions for Certificate Maintenance Charge 9
Deductions for Mortality and Expense Risk Charge 10
Deductions for Transfers of Variable Account Value 10
Deductions for Premium Taxes 10
Deductions for Income Taxes 10
Total Variable Account Expenses 10
Other Services 11
The Certificates 10
Variable Account Value 10
Valuation Periods 11
Net Investment Factor 11
Modification of the Certificate 11
Right to Revoke 11
Death Provisions for Non-Qualified Certificates 11
Death Provisions for Qualified Certificates 12
Certificate Ownership 12
Assignment 13
Partial Withdrawals and Surrender 13
Annuity Provisions 13
Annuity Benefits 13
Income Date and Annuity Option 13
Change in Income Date and Annuity Option 13
Annuity Options 13
Variable Annuity Payment Values 14
Proof of Age, Sex, and Survival of Annuitant 14
Suspension of Payments 14
Tax Status 15
Introduction 15
Taxation of Annuities in General 15
Qualified Plans 16
Individual Retirement Annuities 16
Variable Account Voting Privileges 16
Sales of the Certificates 17
Legal Proceedings 17
Inquiries by Certificate Owners 17
Table of Contents_Statement of Additional Information 17
Appendix A_Telephone Instructions 18
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GLOSSARY OF SPECIAL TERMS
Accumulation Unit: An accounting unit of measure used to calculate Variable
Account Value.
Annuitant: The Annuitant is the natural person to whom any annuity payments
will be made starting on the Income Date. The Annuitant may not be over age
80 on the Issue Date (age 75 for Qualified Certificates).
Certificate Anniversary: The same month and day as the Certificate Date in
each subsequent year of the Certificate.
Certificate Date: The effective date of the Certificate; it is shown on Page
3 of the Certificate Schedule.
Certificate Owner: The person (or persons in the case of joint ownership) who
possesses all the ownership rights under the Certificate. The primary
Certificate Owner may not be over age 80 on the Issue Date (age 75 for
Qualified Contracts and age 85 for a joint Owner).
Certificate Value: The Variable Account Value.
Certificate Withdrawal Value: The Certificate Value less any premium taxes
and Certificate Maintenance Charge.
Certificate Year: Any period of 12 months commencing with the Certificate
Date and each Certificate Anniversary thereafter shall be a Certificate Year.
Designated Beneficiary: The person who may be entitled to receive benefits
following the death of the Annuitant, Certificate Owner, or joint Certificate
Owner. The Designated Beneficiary will be the first person among the
following who is alive on the date of death: primary Certificate Owner; joint
Certificate Owner; primary beneficiary; contingent beneficiary; and if none
of the above is alive, the primary Certificate Owner's estate. If the
primary Certificate Owner and joint Certificate Owner are both alive, they
will be the Designated Beneficiary together.
Eligible Funds: The mutual funds that are eligible investments for the
Variable Account under the Certificates.
In Force: The status of the Certificate before the Income Date so long as it
is not totally surrendered, the Certificate Value under a Certificate does
not go to zero, and there has not been a death of the Annuitant or any
Certificate Owner that will cause the Certificate to end within at most five
years of the date of death.
Income Date: The date on which annuity payments are to begin.
Non-Qualified Certificate: Any Certificate that is not issued under a
Qualified Plan.
Office: Liberty Life's Service Office, which is 125 High Street, Boston,
Massachusetts 02110.
Qualified Certificate: Certificates issued under Qualified Plans.
Qualified Plan: A retirement plan established pursuant to the provisions of
Section 408(b) of the Internal Revenue Code.
Variable Account: A separate investment account of Liberty Life into which
Purchase Payments under the Certificates may be allocated. The Variable
Account is divided into Sub-Accounts ("Sub-Account") that correspond to the
Eligible Funds in which they invest.
Variable Account Value: The value of all Variable Account amounts accumulated
under the Certificate prior to the Income Date.
Written Request: A request written on a form satisfactory to Liberty Life,
signed by the Certificate Owner and a disinterested witness, and filed at
Liberty Life's Office.
SUMMARY OF EXPENSES
The expense summary format below, including the examples, was adopted by the
Securities and Exchange Commission to assist the owner of a variable annuity
certificate in understanding the transaction and operating expenses the owner
will directly or indirectly bear under a certificate. The values reflect
expenses of the Variable Account as well as the Eligible Funds under the
Certificates. The expenses shown for the Eligible Funds and the examples
should not be considered a representation of future expenses.
Certificate Owner Transaction Expenses
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of Purchase Payments): 0%
Maximum Total Certificate Owner Transaction Expenses1
(as a percentage of Purchase Payments): 0%
Certificate Maintenance Charge $35
Variable Account Annual Expenses
(as a percentage of average net assets)
Mortality and Expense Risk Charge: .35%
Total Variable Account Annual Expenses: .35%
Manning & Napier Insurance Fund and SteinRoe Trust Annual Expenses2
(as a percentage of average net assets)
Total
Fund Operating
Management Other Expenses (After
Fees Expenses Any Reimbursement)3
MNMGP 1.00% .20% 1.20%
MNGP 1.00% .20% 1.20%
MNMHP 1.00% .20% 1.20%
MNSCP 1.00% .20% 1.20%
MNEP 1.00% .20% 1.20%
MNBP .50% .35% .85%
CIF .50% .15% .65%
THE ABOVE EXPENSES FOR THE ELIGIBLE FUNDS WERE PROVIDED BY MANNING & NAPIER
INSURANCE FUND AND STEINROE TRUST. LIBERTY LIFE HAS NOT INDEPENDENTLY
VERIFIED THE ACCURACY OF THE INFORMATION.
Example _ Assuming surrender or annuitization of the Certificate at the end
of the periods shown4 or that the Certificate stays in force through the
periods shown.
A $1,000 investment in each Sub-Account listed would be subject to the
expenses shown, assuming 5% annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
MNMGP $16 $53 $96 $237
MNGP 16 53 96 237
MNMHP 16 53 96 237
MNSCP 16 53 96 237
MNEP 16 53 96 237
MNBP 13 42 76 189
CIF 11 36 65 161
1Liberty Life reserves the right to impose a transfer fee after prior notice
to Certificate Owners, but currently does not impose any charge. Premium
taxes are not shown. Liberty Life deducts the amount of premium taxes, if
any, when paid unless Liberty Life elects to defer such deduction.
2All Manning & Napier Insurance Fund and SteinRoe Trust expenses are for
1996. The Manning & Napier Insurance Fund expenses reflect the manager's
agreement to reimburse expenses above certain limits (see footnote 3).
3The managers of Manning & Napier Insurance Fund and SteinRoe Trust have
agreed to reimburse all expenses, including management fees, in excess of the
following percentage of the average annual net assets of each Eligible Fund,
so long as such reimbursement would not result in the Eligible Fund's
inability to qualify as a regulated investment company under the Internal
Revenue Code: MNMGP 1.2%, MNGP 1.2%, MNMHP 1.2%, MNSCP 1.2%, MNEP 1.2%, MNBP
.85%, CIF .65%. The Manning & Napier Insurance Fund manager's fee waiver and
assumption of expenses agreement is voluntary and may be terminated at any
time. The SteinRoe Trust manager's fee waiver and assumption of expenses
agreement is effective until April 30, 1998. The SteinRoe Trust's manager was
not required to reimburse expenses as of the date of this Prospectus. The
total percentages shown in the table for MNMHP, MNSCP, MNEP, MNGP, MNMGP, and
MNBP are after expense reimbursement. In the absence of any expense
reimbursement, each Fund's expenses in 1996 would have been 2.5%.
4The annuity is designed for retirement planning purposes. Surrenders prior
to the Income Date are not consistent with the long-term purposes of the
Certificate and the applicable tax laws.
The example should not be considered a representation of past or future
expenses and charges of the Sub-Accounts. Actual expenses may be greater or
less than those shown. Similarly, the assumed 5% annual rate of return is
not an estimate or a guarantee of future investment performance. See
"Deductions" in this Prospectus, "Management" in the prospectus for Manning &
Napier Insurance Fund, and "How the Funds are Managed" in the prospectus for
SteinRoe Trust.
SYNOPSIS
The following Synopsis should be read in conjunction with the detailed
information in this Prospectus and the Statement of Additional Information.
Please refer to the Glossary of Special Terms for the meaning of certain
defined terms. Variations from the information appearing in this Prospectus
due to individual state requirements are described in supplements which are
attached to this Prospectus, or in endorsements to the Certificates, as
appropriate.
The Certificate allows Certificate Owners to allocate Purchase Payments to
the Variable Account. The Variable Account is a separate investment account
maintained by Liberty Life. Certificate Owners may allocate payments to, and
receive annuity payments from the Variable Account. If the Certificate Owner
allocates payments to the Variable Account, the accumulation values and
annuity payments will fluctuate according to the investment experience of the
Sub-Accounts chosen.
The Certificate permits Purchase Payments to be made on a flexible Purchase
Payment basis. The minimum initial payment is $5,000. The minimum amount
for each subsequent payment is $1,000 or such lesser amount as Liberty Life
may permit from time to time. (See "Purchase Payments and Applications" on
Page 6.)
There are no deductions made from Purchase Payments for sales charges at the
time of purchase or upon surrender.
Liberty Life deducts a Mortality and Expense Risk Charge, which is equal on
an annual basis to .35% of the average daily net asset values in the Variable
Account attributable to the Contracts. (See "Deductions for Mortality and
Expense Risk Charge" on Page 10.)
Liberty Life deducts an annual Contract Maintenance Charge (currently $35.00)
from the Variable Account Value for administrative expenses. Prior to the
Income Date, Liberty Life reserves the right to change this charge for future
years. (See "Deductions for Certificate Maintenance Charge" on Page 9.)
Liberty Life reserves the right to deduct a charge of $25 for each transfer
in excess of 12 per Certificate Year but currently does not do so. (See
"Transfer of Variable Account Value" on Page 10.).
Premium taxes will be charged against the Certificate Value. Currently such
premium taxes range from 0% to 5.0%. (See "Deductions for Premium Taxes" on
Page 10.)
There are no federal income taxes on increases in the value of a Certificate
until a distribution occurs, in the form of a lump sum payment, annuity
payments, or the making of a gift or assignment of the Certificate. A
federal penalty tax (currently 10%) may also apply. (See "Tax Status" on
Page 15.)
The Certificate allows the Certificate Owner to revoke the Certificate
generally within 10 days of delivery (see "Right to Revoke" on Page 11).
Liberty Life will refund the Certificate Value as of the date the returned
Certificate is received by Liberty Life, plus any sales charges previously
deducted. The Certificate Owner thus will bear the investment risk during
the revocation period.
The full financial statements for Liberty Life are in the Statement of
Additional Information.
PERFORMANCE INFORMATION
The Variable Account may from time to time advertise certain performance
information concerning its various Sub-Accounts.
This performance information is not intended to indicate either past
performance under an actual Certificate or future performance.
The Sub-Accounts may advertise total return information for various periods
of time. Total return performance information is based on the overall
percentage change in value of a hypothetical investment in the specific Sub-
Account over a given period of time.
Average annual total return information shows the average percentage change
in the value of an investment in the Sub-Account from the beginning date of
the measuring period to the end of that period. This standardized version of
average annual total return reflects all historical investment results, less
all charges and deductions applied against the Sub-Account and a Certificate.
Average total return does not take into account any premium taxes and would
be lower if these taxes were included.
In order to calculate average annual total return, Liberty Life divides the
change in value of a Sub-Account under a Certificate surrendered on a
particular date by a hypothetical $1,000 investment in the Sub-Account made
by the Certificate Owner at the beginning of the period illustrated. The
resulting total rate for the period is then annualized to obtain the average
annual percentage change during the period. Annualization assumes that the
application of a single rate of return each year during the period will
produce the ending value, taking into account the effect of compounding.
The Sub-Accounts may present additional total return information computed on
a different basis.
The Sub-Accounts may present total return information calculated by dividing
the change in a Sub-Account's Accumulation Unit value over a specified time
period by the Accumulation Unit value of that Sub-Account at the beginning of
the period. This computation results in a 12-month change rate or, for
longer periods, a total rate for the period which Liberty Life annualizes in
order to obtain the average annual percentage change in the Accumulation Unit
value for that period. The change percentages do not take into account the
Certificate Maintenance Charge and premium tax charges. The percentages
would be lower if these charges were included.
The CIF Sub-Account is a money market Sub-Account that also may advertise
yield and effective yield information. The yield of the Sub-Account refers
to the income generated by an investment in the Sub-Account over a
specifically identified 7-day period. This income is annualized by assuming
that the amount of income generated by the investment during that week is
generated each week over a 52-week period and is shown as a percentage. The
yield reflects the deduction of all charges assessed against the Sub-Account
and a Certificate but does not take into account premium tax charges. The
yield would be lower if these charges were included.
The effective yield of the CIF Sub-Account is calculated in a similar manner
but, when annualizing such yield, income earned by the Sub-Account is assumed
to be reinvested. This compounding effect causes effective yield to be
higher than yield.
LIBERTY LIFE AND THE VARIABLE ACCOUNT
Liberty Life Assurance Company of Boston was incorporated on September 17,
1963 as a stock life insurance company. Its executive and administrative
offices are at 175 Berkeley Street, Boston, Massachusetts 02117.
Liberty Life writes individual life insurance on both a participating and a
non-participating basis and group life and health insurance and individual
and group annuity contracts on a non-participating basis. The variable
annuity contracts described in this Prospectus are issued on a non-
participating basis. Liberty Life is licensed to do business in all states
and in the District of Columbia. However, the Contracts described in this
Prospectus are currently offered only in New York. Liberty Life has been
rated "A" by A.M. Best and Company, independent analysts of the insurance
industry. The Best's A rating is in the second highest rating category, which
also includes a lower rating of A-. Best's Ratings merely reflect Best's
opinion as to the relative financial strength of Liberty Life and Liberty
Life's ability to meet its contractual obligations to its policyholders. Even
though assets in the Variable Account are held separately from Liberty Life's
other assets, ratings of Liberty Life may still be relevant to Certificate
Owners since not all of Liberty Life's contractual obligations relate to
payments based on those segregated assets (e.g., see "Death Provisions" on
pages 11-12 for Liberty Life's obligation after certain deaths to increase
the Certificate Value if it is less than the guaranteed minimum death benefit
amount).
Liberty Life is a wholly-owned subsidiary of Liberty Mutual Insurance Company
and Liberty Mutual Fire Insurance Company. Liberty Mutual Insurance Company
is a multi-line insurance and financial services institution.
The Variable Account was established by Liberty Life pursuant to the
provisions of Massachusetts Law on June 2, 1997. The Variable Account meets
the definition of "separate account" under the federal securities laws. The
Variable Account was registered with the Securities and Exchange Commission
as a unit investment trust under the Investment Company Act of 1940. Such
registration does not involve supervision of the management of the Variable
Account or Liberty Life by the Securities and Exchange Commission.
Obligations under the Certificatess are the obligations of Liberty Life.
Although the assets of the Variable Account are the property of Liberty Life,
these assets are held separately from the other assets of Liberty Life and
are not chargeable with liabilities arising out of any other business Liberty
Life may conduct. Income, capital gains and/or capital losses, whether or not
realized, from assets allocated to the Variable Account are credited to or
charged against the Variable Account without regard to the income, capital
gains, and/or capital losses arising out of any other business Liberty Life
may conduct. Thus, Liberty Life does not guarantee the investment performance
of the Variable Account. The Variable Account Value and the amount of
variable annuity payments will vary with the investment performance of the
investments in the Variable Account.
PURCHASE PAYMENTS AND APPLICATIONS
The initial Purchase Payment is due on the Certificate Date. The minimum
initial Purchase Payment is $5,000. Additional Purchase Payments can be made
at the Certificate Owner's option. Each subsequent Purchase Payment must be
at least $1,000 or such lesser amount as Liberty Life may permit from time to
time. Liberty Life may reject any Purchase Payment.
When the application for a Certificate is in good order and it calls for
amounts to be allocated to the Variable Account, Liberty Life will apply the
initial Purchase Payment to the Variable Account and credit the Certificate
with Accumulation Units within two business days of receipt. If the
application for a Certificate is not in good order, Liberty Life will attempt
to get it in good order within five business days. If it is not complete at
the end of this period, Liberty Life will inform the applicant of the reason
for the delay and that the Purchase Payment will be returned immediately
unless the applicant specifically consents to Liberty Life's keeping the
Purchase Payment until the application is complete. Once the application is
complete, the Purchase Payment will be applied within two business days of
its completion. Liberty Life has reserved the right to reject any
application.
Liberty Life confirms, in writing, to the Certificate Owner the allocation of
all Purchase Payments and the re-allocation of values after any requested
transfer. Liberty Life must be notified immediately by the Certificate Owner
of any processing error.
Liberty Life will permit others to act on behalf of an applicant in certain
instances, including the following two examples. First, Liberty Life will
accept an application for a Certificate that contains a signature signed
under a power of attorney if a copy of that power of attorney is submitted
with the application. Second, if a Certificate is replacing an existing life
insurance or annuity policy that was issued either by Liberty Life or an
affiliated company, Liberty Life will issue a Certificate without having
previously received a signed application from the applicant. Certain dealers
or other authorized persons such as employers and Qualified Plan fiduciaries
will inform Liberty Life of an applicant's answers to the questions in the
application by telephone or by order ticket and cause the initial Purchase
Payment to be paid to Liberty Life. If the information is in good order,
Liberty Life will issue the Certificate with a copy of an application
completed with that information. The Certificate will be delivered to the
Certificate Owner with a letter from Liberty Life that will give the
Certificate Owner an opportunity to respond to Liberty Life if any of the
application information is incorrect. Alternatively, Liberty Life's letter
may request the Certificate Owner to confirm the correctness of the
information by signing either a copy of the application or a Certificate
delivery receipt that ratifies the application in all respects (in either
case, a copy of the signed document would be returned to Liberty Life for its
permanent records). All purchases are confirmed, in writing, to the
applicant by Liberty Life. Liberty Life's liability under a Certificate
extends only to amounts so confirmed.
INVESTMENTS OF THE VARIABLE ACCOUNT
Allocations of Purchase Payments
Purchase Payments applied to the Variable Account will be invested in one or
more of the Eligible Fund Sub-Accounts designated as permissible investments
in accordance with the selection made by the Certificate Owner in the
application. Any selection must specify the percentage of the Purchase
Payment that is allocated to each Sub-Account. The percentage for each Sub-
Account, if not zero, must be at least 10% and must be a whole number. A
Certificate Owner may change the allocation percentages without fee, penalty
or other charge. Allocation changes must be made by Written Request unless
the Certificate Owner has by Written Request authorized Liberty Life to
accept telephone allocation instructions from the Certificate Owner or from a
person acting for the Certificate Owner as an attorney-in-fact under a power
of attorney. By authorizing Liberty Life to accept telephone changes, a
Certificate Owner agrees to accept and be bound by the conditions and
procedures established by Liberty Life from time to time. The current
conditions and procedures are in Appendix A and Certificate Owners
authorizing telephone allocation instructions will be notified, in advance,
of any changes.
The Variable Account is segmented into Sub-Accounts. Each Sub-Account
contains the shares of one of the Eligible Funds and such shares are
purchased at net asset value. Eligible Funds and Sub-Accounts may be added
or withdrawn as permitted by applicable law. The Sub-Accounts in the
Variable Account and the corresponding Eligible Funds currently are as
follows:
Eligible Funds of Manning & Napier Insurance Fund Sub-Accounts
Manning & Napier Moderate Growth Portfolio ("MNMGP") MNMGP Sub-Account
Manning & Napier Growth Portfolio ("MNGP") MNGP Sub-Account
Manning & Napier Maximum Horizon Portfolio ("MNMHP") MNMHP Sub-Account
Manning & Napier Small Cap Portfolio ("MNSCP") MNSCP Sub-Account
Manning & Napier Equity Portfolio ("MNEP") MNEP Sub-Account
Manning & Napier Bond Portfolio ("MNBP") MNBP Sub-Account
Eligible Fund of SteinRoe Trust Sub-Account
Cash Income Fund ("CIF") CIF Sub-Account
Eligible Funds
The Eligible Funds which are the permissible investments of the Variable
Account are the separate funds of Manning & Napier Insurance Fund, the
separate funds of SteinRoe Trust, and any other mutual funds with which
Liberty Life and the Variable Account may enter into a participation
agreement for the purpose of making such mutual funds available as Eligible
Funds under certain Certificates.
Manning & Napier Insurance Fund is an open-end management investment company
that offers separate series (Portfolios). Manning & Napier Advisors, Inc.
("Manning & Napier Advisors"), 1100 Chase Square, Rochester, New York 14604,
acts as Manning & Napier Insurance Fund's investment adviser. Mr. William
Manning controls the Advisor by virtue of his ownership of the securities of
the Advisor. Manning & Napier Advisors also is generally responsible for
supervision of the overall business affairs of Manning & Napier Insurance
Fund, including supervision of service providers to the Fund and direction of
Manning & Napier Advisors' directors, officers or employees who may be
elected as officers of Manning & Napier Insurance Fund to serve as such.
Stein Roe & Farnham Incorporated ("Stein Roe"), One South Wacker Drive,
Chicago, Illinois 60606, is the investment adviser for the Eligible Fund of
SteinRoe Trust. In 1986, Stein Roe was organized and succeeded to the
business of Stein Roe & Farnham, a partnership. Stein Roe is an affiliate of
Liberty Life. Stein Roe and its predecessor have provided investment
advisory and administrative services since 1932.
The investment objectives of the Eligible Funds are briefly described below.
More detailed information, including investor considerations related to the
risks of investing in a particular Eligible Fund, may be found in the current
prospectus for that Fund. An investor should read that prospectus carefully
before selecting a Sub-Account that invests in an Eligible Fund. The
prospectus is available, at no charge, from a salesperson or by writing the
Principal Underwriter, Keyport Financial Services Corp. at 125 High Street,
Boston, MA 02110 or by calling (800) 437-4466. The prospectus may also be
obtained by writing Manning & Napier Insurance Fund, Inc., at P.O. Box 40610,
Rochester, NY 14604, or calling (800) 466-3863.
Eligible Funds of Manning & Napier Insurance
Fund and Variable Account Sub-Accounts Investment Objective
Manning & Napier Moderate Growth Portfolio
(MNMGP Sub-Account) Seeks with equal emphasis
long-term growth and
preservation of capital.
Manning & Napier Growth Portfolio
(MNGP Sub-Account) Seeks long-term growth of
capital. The secondary
objective is the
preservation of capital.
Manning & Napier Maximum Horizon Portfolio
(MNMHP Sub-Account) Seeks to achieve the high
level of long-term
capital growth typically
associated with the stock
market.
Manning & Napier Small Cap Portfolio
(MNSCP Sub-Account) Seeks to achieve long-term
growth of capital by
investing principally in
the equity securities of
small issuers.
Manning & Napier Equity Portfolio
(MNEP Sub-Account) Seeks long-term growth of
capital.
Manning & Napier Bond Portfolio
(MNBP Sub-Account) Seeks to maximize total
return in the form of
both income and capital
appreciation by investing
in fixed income
securities without regard
to maturity.
Eligible Fund of SteinRoe Trust and
Variable Account Sub-Account Investment Objective
Cash Income Fund (CIF Sub-Account) Seeks to provide high
current income from
short-term money market
instruments while
emphasizing preservation
of capital and
maintaining excellent
liquidity.
There is no assurance that the Eligible Funds will achieve their stated
objectives. The Manning & Napier Insurance Fund and SteinRoe Trust are
funding vehicles for variable annuity contracts and variable life insurance
policies offered by separate accounts of Liberty Life and of insurance
companies affiliated and unaffiliated with Liberty Life. The risks involved
in this "mixed and shared funding" are disclosed in the Manning & Napier
Insurance Fund and in the SteinRoe Trust prospectuses under the captions
"Sales And Redemptions" and "The Trust", respectively.
Transfer of Variable Account Value
Certificate Owners may transfer Variable Account Value from one Sub-Account
to another Sub-Account.
The Certificate allows Liberty Life to charge a transfer fee and to limit the
number of transfers that can be made in a specified time period. Certificate
Owners should be aware that transfer limitations may prevent a Certificate
Owner from making a transfer on the date he or she wants to, with the result
that the Certificate Owner's future Certificate Value may be lower than it
would have been had the transfer been made on the desired date. Currently,
Liberty Life has no limit on the number or frequency of transfers and it is
not charging a transfer fee, but reserves the right to charge $25 for each
transfer in excess of 12 per Certificate Year. However, for transfers under
different Certificates that are being requested under powers of attorney with
a common attorney-in-fact or that are, in Liberty Life's determination, based
on the recommendation of a common investment adviser or broker/dealer, there
is a transfer limitation of one transfer every 30 days.
Currently, Liberty Life is limiting each transfer to a maximum of $500,000.
All transfers requested for a Certificate on the same day will be treated as
a single transfer and the total combined transfer amount will be subject to
the $500,000 limitation. If the $500,000 limitation is exceeded, no amount
of the transfer will be executed by Liberty Life.
In applying the $500,000 limitation, Liberty Life may treat as one transfer
all transfers requested by a Certificate Owner for multiple Certificates he
or she owns. If the $500,000 limitation is exceeded for multiple transfers
requested on the same day that are treated as a single transfer, no amount of
the transfer will be executed by Liberty Life.
In applying the $500,000 limitation to transfers requested by a common
attorney-in-fact or investment adviser, Liberty Life will treat as one
transfer all transfers requested under different Certificates that are being
requested under powers of attorney with a common attorney-in-fact or that
are, in Liberty Life's determination, based on the recommendation of a common
investment adviser or broker/dealer. If the $500,000 limitation is exceeded
for multiple transfers requested on the same day that are treated as a single
transfer, no amount of the transfer will be executed by Liberty Life. If a
transfer is executed under one Certificate and, within the next 30 days, a
transfer request for another Certificate is determined by Liberty Life to be
related to the executed transfer under this paragraph's rules, the transfer
request will not be executed by Liberty Life. In order for it to be executed,
it would need to be requested again after the 30 day period has expired and
it, along with any other transfer requests that are collectively treated as a
single transfer, would need to total less than $500,000.
Liberty Life's interest in applying these limitations is to protect the
interests of both Certificate Owners who are not engaging in significant
transfer activity and Certificate Owners who are engaging in such activity.
Liberty Life has determined that the actions of Certificate Owners engaging
in significant transfer activity among Sub-Accounts may cause an adverse
effect on the performance of the Eligible Fund for the Sub-Account involved.
The movement of Sub-Account values from one Sub-Account to another may
prevent the appropriate Eligible Fund from taking advantage of investment
opportunities because it must maintain a liquid position in order to handle
redemptions. Such movement may also cause a substantial increase in Fund
transaction costs which must be indirectly borne by Certificate Owners.
Certificate Owners will be notified, in advance, of the imposition of any
transfer fee or of a change in the limitation on the number of transfers. The
fee will not exceed the lesser of $25 and the cost of effecting a transfer.
Transfers must be made by Written Request unless the Certificate Owner has by
Written Request authorized Liberty Life to accept telephone transfer requests
from the Certificate Owner or from a person acting for the Certificate Owner
as an attorney-in-fact under a power of attorney. By authorizing Liberty
Life to accept telephone transfer instructions, a Certificate Owner agrees to
accept and be bound by the conditions and procedures established by Liberty
Life from time to time. The current conditions and procedures are in
Appendix A and Certificate Owners authorizing telephone transfers will be
notified, in advance, of any changes. Written transfer requests may be made
by a person acting for the Certificate Owner as an attorney-in-fact under a
power of attorney.
Transfer requests received by Liberty Life before the close of trading on the
New York Stock Exchange (currently 4:00 PM Eastern Time) will be initiated at
the close of business that day. Any requests received later will be
initiated at the close of the next business day. Each request from a
Certificate Owner to transfer value will be executed by both redeeming and
acquiring Accumulation Units on the day Liberty Life initiates the transfer.
If 100% of any Sub-Account's value is transferred and the allocation formula
for Purchase Payments includes that Sub-Account, then the allocation formula
for future Purchase Payments will automatically change unless the Certificate
Owner instructs otherwise. For example, if the allocation formula is 50% to
Sub-Account A and 50% to Sub-Account B and all of Sub-Account A's value is
transferred to Sub-Account B, the allocation formula will change to 100% to
Sub-Account B unless the Certificate Owner instructs otherwise.
Substitution of Eligible Funds and Other Variable Account Changes
If the shares of any of the Eligible Funds should no longer be available for
investment by the Variable Account or if in the judgment of Liberty Life's
management further investment in such fund shares should become inappropriate
in view of the purpose of the Certificate, Liberty Life may add or substitute
shares of another Eligible Fund or of another mutual fund for Eligible Fund
shares already purchased under the Certificate. No substitution of Fund
shares in any Sub-Account may take place without prior approval of the
Securities and Exchange Commission and notice to Certificate Owners, to the
extent required by the Investment Company Act of 1940.
Liberty Life has also reserved the right, subject to compliance with the law
as currently applicable or subsequently changed: (a) to operate the Variable
Account in any form permitted under the Investment Company Act of 1940 or in
any other form permitted by law; (b) to take any action necessary to comply
with or obtain and continue any exemptions from the Investment Company Act of
1940 or to comply with any other applicable law; (c) to transfer any assets
in any Sub-Account to another Sub-Account, or to one or more separate
investment accounts, or to Liberty Life's general account; or to add, combine
or remove Sub-Accounts in the Variable Account; and (d) to change the way
Liberty Life assesses charges, so long as the aggregate amount is not
increased beyond that currently charged to the Variable Account and the
Eligible Funds in connection with the Certificates.
DEDUCTIONS
Deductions for Certificate Maintenance Charge
Liberty Life has responsibility for all administration of the Certificates
and the Variable Account. Liberty Life has contracted to an affiliate the
actual day-to-day administration of the Certificates, for which it pays a
fee. This administration includes, but is not limited to, preparation of the
Certificates, maintenance of Certificate Owners' records, and all accounting,
valuation, regulatory and reporting requirements. Liberty Life assesses a
Certificate Maintenance Charge for such services during the accumulation and
annuity payment periods. At the present time the Certificate Maintenance
Charge is $35 per Certificate Year. PRIOR TO THE INCOME DATE THE CERTIFICATE
MAINTENANCE CHARGE IS NOT GUARANTEED AND MAY BE CHANGED BY LIBERTY LIFE.
Prior to the Income Date, the full amount of the charge will be deducted from
the Variable Account Value on each Certificate Anniversary and on the date of
any total surrender not falling on the Certificate Anniversary. On the
Income Date, a pro-rata portion of the charge due on the next Certificate
Anniversary will be deducted from the Variable Account Value. This pro-rata
charge covers the period from the prior Certificate Anniversary to the Income
Date. For example, if the Income Date occurs 73 days after that prior
anniversary, then one-fifth (i.e., 73 days/365 days) of the annual charge
would be deducted on the Income Date. The charge will be deducted from each
Sub-Account in the proportion that the value of each bears to the Variable
Account Value.
Once annuity payments begin on the Income Date or once they begin after
surrender benefits are applied under a settlement option, the yearly cost of
the Certificate Maintenance Charge for a payee's annuity will be the same as
the yearly amount in effect immediately before the annuity payments begin.
Liberty Life may not later change the amount of the Certificate Maintenance
Charge deducted from the annuity payments. The charge will be deducted on a
pro-rata basis from each annuity payment. For example, if annuity payments
are monthly, then one-twelfth of the annual charge will be deducted from each
payment.
Deductions for Mortality and Expense Risk Charge
Although variable annuity payments made to Annuitants will vary in accordance
with the investment performance of the investments of the Variable Account,
they will not be affected by the mortality experience (death rate) of persons
receiving such payments or of the general population. Liberty Life
guarantees the Death Benefits described below (see "Death Benefit"). Liberty
Life assumes an expense risk since the Certificate Maintenance Charge after
the Income Date will stay the same and not be affected by variations in
expenses.
To compensate it for assuming these mortality and expense risks, for each
Valuation Period Liberty Life deducts from each Sub-Account a Mortality and
Expense Risk Charge equal on an annual basis to .35% of the average daily net
asset value of the Sub-Account. The charge is deducted during both the
accumulation and annuity periods (i.e., both before and after the Income
Date). Less than the full charge will be deducted from Sub-Account values
attributable to Certificates issued to employees of Liberty Life and other
persons specified in "Sales of the Certificates".
Deductions for Transfers of Variable Account Value
The Certificate allows Liberty Life to charge a transfer fee. Currently no
fee is being charged. Certificate Owners will be notified, in advance, of
the imposition of any fee. The fee will not exceed the lesser of $25 and
the cost of effecting a transfer.
Deductions for Premium Taxes
Liberty Life deducts the amount of any premium taxes levied by any state or
governmental entity when paid unless Liberty Life elects to defer such
deduction. It is not possible to describe precisely the amount of premium
tax payable on any transaction involving the Certificate offered hereby.
Such premium taxes depend, among other things, on the type of Certificate
(Qualified or Non-Qualified), on the state of residence of the Certificate
Owner, the state of residence of the Annuitant, the status of Liberty Life
within such states, and the insurance tax laws of such states. For New York
Certificates, the current premium tax rate is 0%.
Deductions for Income Taxes
Liberty Life will deduct from any amount payable under the Certificate any
income taxes that a governmental authority requires Liberty Life to withhold
with respect to that amount. See "Income Tax Withholding".
Total Variable Account Expenses
The Variable Account's total expenses in relation to the Certificate will be
the Certificate Maintenance Charge and the Mortality and Expense Risk Charge.
The value of the assets in the Variable Account will reflect the value of
Eligible Fund shares and therefore the deductions from and expenses paid out
of the assets of the Eligible Funds. These deductions and expenses are
described in the Eligible Fund prospectus.
OTHER SERVICES
Liberty Life offers the following investment related program which is
available only prior to the Income Date: Systematic Withdrawal Program. This
Program has its own requirements, as discussed below. Liberty Life reserves
the right to terminate the Program.
If the Certificate Owner has submitted the required telephone authorization
form, certain changes may be made by telephone. The current conditions and
procedures are described in Appendix A.
Systematic Withdrawal Program. To the extent permitted by law, Liberty Life
will make monthly, quarterly, semi-annual or annual distributions of a
predetermined dollar amount to a Certificate Owner that has enrolled in the
Systematic Withdrawal Program. Under the Program, all distributions will be
made directly to the Certificate Owner and will be treated for federal tax
purposes as any other withdrawal or distribution of Certificate Value. (See
"Tax Status".) A Certificate Owner may specify the amount of each partial
withdrawal, subject to a minimum of $100.
Unless the Certificate Owner specifies the Sub-Account or Sub-Accounts from
which withdrawals of Certificate Value shall be made or if the amount in a
specified Sub-Account is less than the predetermined amount, Liberty Life
will make withdrawals under the Program from the Sub-Accounts in amounts
proportionate to the amounts in the Sub-Accounts. All withdrawals under the
Program will be effected by canceling the number of Accumulation Units equal
in value to the amount to be distributed to the Certificate Owner.
THE CERTIFICATES
Variable Account Value
The Variable Account Value for a Certificate is the sum of the value of each
Sub-Account to which values are allocated under a Certificate. The value of
each Sub-Account is determined at any time by multiplying the number of
Accumulation Units attributable to that Sub-Account by the Accumulation Unit
value for that Sub-Account at the time of determination. The Accumulation
Unit value is an accounting unit of measure used to determine the change in
an Accumulation Unit's value from Valuation Period to Valuation Period.
Each Purchase Payment that is made results in additional Accumulation Units
being credited to the Certificate and the appropriate Sub-Account thereunder.
The number of additional units for any Sub-Account will equal the amount
allocated to that Sub-Account divided by the Accumulation Unit value for that
Sub-Account at the time of investment.
Valuation Periods
The Variable Account is valued each Valuation Period using the net asset
value of the Eligible Fund shares. A Valuation Period is the period
commencing at the close of trading on the New York Stock Exchange on each
Valuation Date and ending at the close of trading for the next succeeding
Valuation Date. A Valuation Date is each day that the New York Stock
Exchange is open for business. The New York Stock Exchange is currently
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net Investment Factor
The Variable Account Value will fluctuate in accordance with the investment
results of the underlying Eligible Funds. In order to determine how these
fluctuations affect value, Liberty Life utilizes an Accumulation Unit value.
Each Sub-account has its own Accumulation Units and value per Unit. The Unit
value applicable during any Valuation Period is determined at the end of that
period.
When Liberty Life first purchased Eligible Fund shares on behalf of the
Variable Account, Liberty Life valued each Accumulation Unit at a specified
dollar amount. The Unit value for each Sub-Account in any Valuation Period
thereafter is determined by multiplying the value for the prior period by a
net investment factor. This factor may be greater or less than 1.0;
therefore, the Accumulation Unit may increase or decrease from Valuation
Period to Valuation Period. Liberty Life calculates a net investment factor
for each Sub-Account by dividing (a) by (b) and then subtracting (c) (i.e.,
(a/b) _ c), where:
(a) is equal to:
(i) the net asset value per share of the Eligible Fund at the end of
the Valuation Period; plus
(ii) the per share amount of any distribution made by the Eligible Fund
if the "ex-dividend" date occurs during that same Valuation Period.
(b) is the net asset value per share of the Eligible Fund at the end of the
prior Valuation Period.
(c) is equal to:
(i) the Valuation Period equivalent of the daily Mortality and
Expense Risk Charge; plus
(ii) a charge factor, if any, for any tax provision established by
Liberty Life as a result of the operations of that Sub-Account.
Modification of the Certificate
Only Liberty Life's President or Secretary may agree to alter the Certificate
or waive any of its terms. Any changes must be made in writing and with the
Certificate Owner's consent, except as may be required by applicable law.
Right to Revoke
The Certificate Owner may return the Certificate within 10 days after he or
she receives it by delivering or mailing it to either Liberty Life's Office
or Manning & Napier Insurance Fund, Inc. 1100 Chase Square, P.O. Box 40610,
Rochester, New York, 14604. The return of the Certificate by mail will be
effective when the postmark is affixed to a properly addressed and postage-
prepaid envelope. The returned Certificate will be treated as if Liberty
Life never issued it and Liberty Life will refund the Certificate Value.
DEATH PROVISIONS FOR NON-QUALIFIED CERTIFICATES
Death of Primary Owner, Joint Owner or Certain Non-Owner Annuitant
These provisions apply if, before the Income Date while the Certificate is In
Force, the primary Certificate Owner or any joint Certificate Owner dies
(whether or not the decedent is also the Annuitant) or the Annuitant dies
under a Certificate with a non-natural Certificate Owner such as a trust.
The Designated Beneficiary will control the Certificate after such a death.
If the decedent's surviving spouse (if any) is the sole Designated
Beneficiary, the surviving spouse will automatically become the new sole
primary Certificate Owner as of the decedent's date of the death. And, if
the Annuitant is the decedent, the new Annuitant will be any living
contingent annuitant, otherwise the surviving spouse. The Certificate can
stay in force until another death occurs (i.e., until the death of the
Annuitant, primary Certificate Owner or joint Certificate Owner). Except for
this paragraph, all "Death Provisions" will apply to that subsequent death.
In all other cases, the Certificate can continue up to five years from the
date of death. During this period, the Designated Beneficiary may exercise
all ownership rights, including the right to make transfers or partial
surrenders or the right to totally surrender the Certificate for its
Surrender Value. If the Certificate is still in effect at the end of the
five-year period, Liberty Life will automatically end it then by paying the
Certificate Value to the Designated Beneficiary. If the Designated
Beneficiary is not alive then, Liberty Life will pay any person(s) named by
the Designated Beneficiary in a Written Request; otherwise the Designated
Beneficiary's estate.
The covered person under this paragraph shall be the primary Certificate
Owner or, if there is a non-natural Certificate Owner such as a trust, the
Annuitant shall be the covered person. If the covered person dies, the
Certificate Value will be increased, as provided below, if it is less than
the Death Benefit Amount ("DBA"). The DBA is:
Death Benefit. The death benefit at issue is the initial Purchase Payment.
Thereafter, it is the prior death benefit plus any additional Purchase
Payments, less any partial withdrawals, including any applicable surrender
charge.
When Liberty Life receives due proof of the covered person's death, Liberty
Life will compare, as of the date of death, the Certificate Value to the DBA.
If the Certificate Value was less than the DBA, Liberty Life will increase
the current Certificate Value by the amount of the difference. Note that
while the amount of the difference is determined as of the date of death,
that amount is not added to the Certificate Value until Liberty Life receives
due proof of death. The amount to be credited will be allocated to the
Variable Account based on the Purchase Payment allocation selection that is
in effect when Liberty Life receives due proof of death. If the Certificate
is not surrendered, it will continue for the time period specified above.
Payment of Benefits. Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may direct by Written Request that Liberty Life
pay any benefit of $5,000 or more under an annuity payment option that meets
the following: (a) the first payment to the Designated Beneficiary must be
made no later than one year after the date of death; (b) payments must be
made over the life of the Designated Beneficiary or over a period not
extending beyond that person's life expectancy; and (c) any payment option
that provides for payments to continue after the death of the Designated
Beneficiary will not allow the successor payee to extend the period of time
over which the remaining payments are to be made.
Death of Certain Non-Certificate Owner Annuitant. These provisions apply if,
before the Income Date while the Certificate is In Force, (a) the Annuitant
dies, (b) the Annuitant is not a Certificate Owner, and (c) the Certificate
Owner is a natural person. The Certificate will continue in force after the
Annuitant's death. The new Annuitant will be any living contingent
annuitant, otherwise the primary Certificate Owner.
DEATH PROVISIONS FOR QUALIFIED CERTIFICATES
Death of Annuitant. If the Annuitant dies before the Income Date while the
Certificate is In Force, the Designated Beneficiary will control the
Certificate after such a death. The Certificate Value will be increased, as
provided below, if it is less than the Death Benefit Amount ("DBA") as
defined above. When Liberty Life receives due proof of the Annuitant's
death, Liberty Life will compare, as of the date of death, the Certificate
Value to the DBA. If the Certificate Value was less than the DBA, Liberty
Life will increase the current Certificate Value by the amount of the
difference. Note that while the amount of the difference is determined as of
the date of death, that amount is not added to the Certificate Value until
Liberty Life receives due proof of death. The amount to be credited will be
allocated to the Variable Account based on the Purchase Payment allocation
selection that is in effect when Liberty Life receives due proof of death.
If the Certificate is not surrendered, it may continue for the time period
permitted by the Internal Revenue Code provisions applicable to the
particular Qualified Plan. During this period, the Designated Beneficiary
may exercise all ownership rights, including the right to make transfers or
partial withdrawals or the right to totally surrender the Certificate for its
Certificate Withdrawal Value. If the Certificate is still in effect at the
end of the period, Liberty Life will automatically end it then by paying the
Certificate Withdrawal Value to the Designated Beneficiary. If the
Designated Beneficiary is not alive then, Liberty Life will pay any person(s)
named by the Designated Beneficiary in a Written Request; otherwise the
Designated Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may direct by Written Request that Liberty Life
pay any benefit of $5,000 or more under an annuity payment option that meets
the following: (a) the first payment to the Designated Beneficiary must be
made no later than one year after the date of death; (b) payments must be
made over the life of the Designated Beneficiary or over a period not
extending beyond that person's life expectancy; and (c) any payment option
that provides for payments to continue after the death of the Designated
Beneficiary will not allow the successor payee to extend the period of time
over which the remaining payments are to be made.
CERTIFICATE OWNERSHIP
The Certificate Owner shall be the person designated in the application. The
Certificate Owner may exercise all the rights of the Certificate. Joint
Certificate Owners are permitted but not contingent Certificate Owners.
The Certificate Owner may by Written Request change the Certificate Owner,
primary beneficiary, contingent beneficiary or contingent annuitant. An
irrevocably-named person may be changed only with the written consent of such
person.
Because a change of Certificate Owner by means of a gift (i.e., a transfer
without full and adequate consideration) may be a taxable event, a
Certificate Owner should consult a competent tax adviser as to the tax
consequences resulting from such a transfer.
Any Qualified Certificate may have limitations on transfer of ownership. A
Certificate Owner should consult the Plan Administrator and a competent tax
adviser as to the tax consequences resulting from such a transfer.
ASSIGNMENT
The Certificate Owner may assign the Certificate at any time. A copy of any
assignment must be filed with Liberty Life. The Certificate Owner's rights
and those of any revocably-named person will be subject to the assignment.
Any Qualified Certificate may have limitations on assignability.
Because an assignment may be a taxable event, a Certificate Owner should
consult a competent tax adviser as to the tax consequences resulting from any
such assignment.
PARTIAL WITHDRAWALS AND SURRENDER
The Certificate Owner may make partial withdrawals from the Certificate.
Liberty Life must receive a Written Request and the minimum amount to be
withdrawn must be at least $300 or such lesser amount as Liberty Life may
permit in conjunction with a periodic withdrawal program. If the Certificate
Value after a partial withdrawal would be below $2,500, Liberty Life will
treat the request as a withdrawal of only the excess amount over $2,500.
Unless the request specifies otherwise, the total amount withdrawn will be
deducted from all Sub-Accounts of the Variable Account in the ratio that the
value in each Sub-Account bears to the total Variable Account Value.
The Certificate Owner may totally surrender the Certificate by making a
Written Request. Surrendering the Certificate will end it. Upon surrender,
the Certificate Owner will receive the Certificate Withdrawal Value.
Liberty Life will pay the amount of any surrender within seven days of
receipt of such request. Alternatively, the Certificate Owner may purchase
for himself or herself an annuity payment option with any surrender benefit
of at least $5,000. Liberty Life's consent is needed to choose an option if
the Certificate Owner is not a natural person.
Annuity Options based on life contingencies cannot be surrendered after
annuity payments have begun. Option A, which is not based on life
contingencies, may be surrendered if a variable payout has been selected.
Because of the potential tax consequences of a full or partial surrender, a
Certificate Owner should consult a competent tax adviser regarding a
surrender.
ANNUITY PROVISIONS
Annuity Benefits
If the Annuitant is alive on the Income Date and the Certificate is In Force,
payments will begin under the annuity option or options the Certificate Owner
has chosen. The amount of the payments will be determined by applying the
Certificate Value (less any premium taxes not previously deducted and less
any applicable Certificate Maintenance Charge) on the Income Date in
accordance with the option selected.
Income Date and Annuity Option
The Certificate Owner may select an Income Date and Annuity Option at the
time of application. If the Certificate Owner does not select a Annuity
Option, Option B will automatically be designated. If the Certificate Owner
does not select an Income Date for the Annuitant, the Income Date will
automatically be the Annuitant's 90th birthday.
Change in Income Date and Annuity Option
The Certificate Owner may choose or change an Annuity Option or the Income
Date by making a Written Request to Liberty Life at least 30 days prior to
the Income Date. However, any Income Date must be: (a) for fixed annuity
options, not earlier than the first Certificate Anniversary; and (b) not
later than the Annuitant's 90th birthday or any maximum date permitted under
state law.
Annuity Options
The Annuity Options are:
Option A: Income for a Fixed Number of Years;
Option B: Life Income with 10 Years of Payments Guaranteed; and
Option C: Joint and Last Survivor Income.
Other options may be arranged by mutual consent. Each option is available in
two forms--as a variable annuity for use with the Variable Account and as a
fixed annuity for use with Liberty Life's general account. Variable annuity
payments will fluctuate while fixed annuity payments will not. The dollar
amount of each fixed annuity payment will be determined by dividing the
amount being applied to a fixed annuity option by $1,000 and multiplying the
result by the greater of: (a) the applicable factor shown in the appropriate
table in the Certificate; or (b) the factor currently offered by Liberty Life
at the time annuity payments begin. This current factor may be based on the
sex of the payee unless to do so would be prohibited by law.
If no Annuity Option is selected, Option B will automatically be applied.
Unless the Certificate Owner chooses otherwise, Variable Account Value, less
any premium taxes not previously deducted and less any applicable Certificate
Maintenance Charge will be applied in its entirety to a variable annuity
option. Whether variable or fixed, the same amount applied to each option
will produce a different initial annuity payment as well as different
subsequent payments.
The payee is the person who will receive the sum payable under a payment
option. Any payment option that provides for payments to continue after the
death of the payee will not allow the successor payee to extend the period of
time over which the remaining payments are to be made.
If the amount available to apply under any variable or fixed option is less
than $5,000, Liberty Life has reserved the right to pay such amount in one
sum to the payee in lieu of the payment otherwise provided for.
Annuity payments will be made monthly unless quarterly, semi-annual or annual
payments are chosen by Written Request. However, if any payment provided for
would be or becomes less than $100, Liberty Life has the right to reduce the
frequency of payments to such an interval as will result in each payment
being at least $100.
Option A: Income For a Fixed Number of Years. Liberty Life will pay an
annuity for a chosen number of years, not fewer than 5 nor over 50 (a period
of years over 30 may be chosen only if it does not exceed the difference
between age 100 and the Annuitant's age on the date of the first payment).
At any time while variable annuity payments are being made, the payee may
elect to receive the following amount: (a) the present value of the remaining
payments, commuted at the interest rate used to create the annuity factor for
this option (this interest rate is 5% per year, unless 3% per year is chosen
by Written Request at the time the option is selected). Instead of receiving
a lump sum, the payee can elect another payment option. If, at the death of
the payee, Option A payments have been made for less than the chosen number
of years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the interest rate used to
create the annuity factor for this option. For the variable annuity,
this interest rate is 5% per year, unless 3% per year had been chosen by
the payee at the time the option was selected.
The Mortality and Expense Risk Charge is deducted during the Option A payment
period if a variable payout has been selected, but Liberty Life has no
mortality risk during this period.
If annual payments are chosen for Option A and a variable payout has been
selected, Liberty Life has available a "stabilizing" payment option that can
be chosen. Each annual payment will be determined as described in "Variable
Annuity Payment Values". Each annual payment will then be placed in Liberty
Life's general account, from which it will be paid out in twelve equal
monthly payments. The sum of the twelve monthly payments will exceed the
annual payment amount because of an interest rate factor used by Liberty Life
that will vary from year to year. The commutation method described above for
calculating the present value of remaining payments applies to the annual
payments. Any monthly payments remaining before the next annual payment will
be commuted at the interest rate used to determine that year's monthly
payments.
See "Annuity Payments" for the manner in which Option A may be taxed.
Option B: Life Income with 10 Years of Payments Guaranteed. Liberty Life
will pay an annuity during the lifetime of the payee. If, at the death of
the payee, payments have been made for less than 10 years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the interest rate used to
create the annuity factor for this option. For the variable annuity,
this interest rate is 5% per year, unless 3% per year had been chosen by
the payee at the time the option was selected.
The amount of the annuity payments will depend on the age of the payee on
the Income Date and it may also depend on the payee's sex.
Option C: Joint and Last Survivor Income. Liberty Life will pay an annuity
for as long as either the payee or a designated second natural person is
alive. The amount of the annuity payments will depend on the age of both
persons on the Income Date and it may also depend on each person's sex. IT
IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF BOTH
PAYEES DIE AFTER THE RECEIPT OF THE FIRST PAYMENT OR TO RECEIVE ONLY TWO
ANNUITY PAYMENTS IF BOTH PAYEES DIE AFTER RECEIPT OF THE SECOND PAYMENT AND
SO ON.
Variable Annuity Payment Values
The amount of the first variable annuity payment is determined by Liberty
Life using an annuity purchase rate that is based on an assumed annual
investment return of 5% per year, unless 3% is chosen by Written Request.
Subsequent variable annuity payments will fluctuate in amount and reflect
whether the actual investment return of the selected Sub-Account(s) (after
deducting the Mortality and Expense Risk Charge) is better or worse than the
assumed investment return. The total dollar amount of each variable annuity
payment will be equal to: (a) the sum of all Sub-Account payments; less (b)
the pro-rata amount of the annual Certificate Maintenance Charge. Currently,
a payee can instruct Liberty Life to change the Sub-Account(s) used to
determine the amount of the variable annuity payments once every 6 months.
Proof of Age, Sex, and Survival of Annuitant
Liberty Life may require proof of age, sex or survival of any payee upon
whose age, sex or survival payments depend. If the age or sex has been
misstated, Liberty Life will compute the amount payable based on the correct
age and sex. If income payments have begun, any underpayments Liberty Life
may have made will be paid in full with the next annuity payment. Any
overpayments, unless repaid in one sum, will be deducted from future annuity
payments until Liberty Life is repaid in full.
SUSPENSION OF PAYMENTS
Liberty Life reserves the right to suspend or postpone any type of payment
from the Variable Account for any period when: (a) the New York Stock
Exchange is closed other than customary weekend or holiday closings; (b)
trading on the Exchange is restricted; (c) an emergency exists as a result of
which it is not reasonably practicable to dispose of securities held in the
Variable Account or determine their value; or (d) the Securities and Exchange
Commission permits delay for the protection of security holders. The
applicable rules and regulations of the Securities and Exchange Commission
shall govern as to whether the conditions described in (b) and (c) exist.
TAX STATUS
Introduction
The Certificate is designed for use by individuals in retirement plans which
may or may not be Qualified Plans under the provisions of the Internal
Revenue Code (the "Code"). The ultimate effect of federal income taxes on
the Certificate Value, on annuity payments, and on the economic benefit to
the Certificate Owner, Annuitant or Designated Beneficiary depends on the
type of retirement plan for which the Certificate is purchased and upon the
tax and employment status of the individual concerned. The discussion
contained herein is general in nature and is not intended as tax advice.
Each person concerned should consult a competent tax adviser. No attempt is
made to consider any applicable state or other tax laws. Moreover, the
discussion herein is based upon Liberty Life's understanding of current
federal income tax laws as they are currently interpreted. No representation
is made regarding the likelihood of continuation of those current federal
income tax laws or of the current interpretations by the Internal Revenue
Service.
Taxation of Annuities in General
Section 72 of the Code governs taxation of annuities in general. There are
no income taxes on increases in the value of a Certificate until a
distribution occurs, in the form of a full surrender, a partial surrender, an
assignment or gift of the Certificate, or annuity payments. A trust or other
entity owning a Non-Qualified Certificate other than as an agent for an
individual is taxed differently; increases in the value of a Certificate are
taxed yearly whether or not a distribution occurs.
Surrenders, Assignments and Gifts. A Certificate Owner who fully surrenders
his or her Certificate is taxed on the portion of the payment that exceeds
his or her cost basis in the Certificate. For Non-Qualified Certificates,
the cost basis is generally the amount of the Purchase Payments made for the
Certificate and the taxable portion of the surrender payment is taxed as
ordinary income. For Qualified Certificates, the cost basis is generally
zero and the taxable portion of the surrender payment is generally taxed as
ordinary income subject to special 5-year income averaging for lump-sum
distributions received before January 1, 2000. A Designated Beneficiary
receiving a lump sum surrender benefit after the death of the Annuitant or
Certificate Owner is taxed on the portion of the amount that exceeds the
Certificate Owner's cost basis in the Certificate. If the Designated
Beneficiary elects to receive annuity payments within 60 days of the
decedent's death, different tax rules apply. See "Annuity Payments" below.
For Non-Qualified Certificates, the tax treatment applicable to Designated
Beneficiaries may be contrasted with the income-tax-free treatment applicable
to persons inheriting and then selling mutual fund shares with a date-of-
death value in excess of their basis.
Partial withdrawals received under Non-Qualified Certificates prior to
annuitization are first included in gross income to the extent Certificate
Value exceeds Purchase Payments. Then, to the extent the Certificate Value
does not exceed Purchase Payments, such withdrawals are treated as a non-
taxable return of principal to the Certificate Owner. For partial
withdrawals under a Qualified Certificate, payments are treated first as a
non-taxable return of principal up to the cost basis and then a taxable
return of income. Since the cost basis of Qualified Certificates is generally
zero, partial surrender amounts will generally be fully taxed as ordinary
income.
A Certificate Owner who assigns or pledges a Non-Qualified Certificate is
treated as if he or she had received the amount assigned or pledged and thus
is subject to taxation under the rules applicable to partial withdrawals or
surrenders. A Certificate Owner who gives away the Certificate (i.e.,
transfers it without full and adequate consideration) to anyone other than
his or her spouse is treated for income tax purposes as if he or she had
fully surrendered the Certificate.
A special computational rule applies if Liberty Life issues to the
Certificate Owner, during any calendar year, (a) two or more Certificates or
(b) one or more Certificates and one or more of Liberty Life's other annuity
contracts. Under this rule, the amount of any distribution includable in the
Certificate Owner's gross income is to be determined under Section 72(e) of
the Code by treating all the Liberty Life contracts as one contract. Liberty
Life believes that this means the amount of any distribution under one
Certificate will be includable in gross income to the extent that at the time
of distribution the sum of the values for all the Certificates or contracts
exceeds the sum of the cost bases for all the contracts.
Annuity Payments. The non-taxable portion of each variable annuity payment
is determined by dividing the cost basis of the Certificate that is allocated
to variable payments by the total number of expected payments while the non-
taxable portion of each fixed annuity payment is determined by an "exclusion
ratio" formula which establishes the ratio that the cost basis of the
Certificate that is allocated to fixed payments bears to the total expected
value of annuity payments for the term of the annuity. The remaining portion
of each payment is taxable. Such taxable portion is taxed at ordinary income
rates. For Qualified Certificates, the cost basis is generally zero. With
annuity payments based on life contingencies, the payments will become fully
taxable once the payee lives longer than the life expectancy used to
calculate the non-taxable portion of the prior payments. Because variable
annuity payments can increase over time and because certain payment options
provide for a lump sum right of commutation, it is possible that the IRS
could determine that variable annuity payments should not be taxed as
described above but instead should be taxed as if they were received under an
agreement to pay interest. This determination would result in a higher
amount (up to 100%) of certain payments being taxable.
With respect to the "stabilizing" payment option available under Annuity
Option A, pursuant to which each annual payment is placed in Liberty Life's
general account and paid out with interest in twelve equal monthly payments,
it is possible the IRS could determine that receipt of the first monthly
payout of each annual payment is constructive receipt of the entire annual
payment. Thus, the total taxable amount for each annual payment would be
accelerated to the time of the first monthly payout and reported in the tax
year in which the first monthly payout is received.
Penalty Tax. Payments received by Certificate Owners, Annuitants, and
Designated Beneficiaries under Certificates may be subject to both ordinary
income taxes and a penalty tax equal to 10% of the amount received that is
includable in income. The penalty tax is not imposed on amounts received:
(a) after the taxpayer attains age 59 1/2; (b) in a series of substantially
equal payments made for life or life expectancy; (c) after the death of the
Certificate Owner (or, where the Certificate Owner is not a human being,
after the death of the Annuitant); (d) if the taxpayer becomes totally and
permanently disabled; or (e) under a Non-Qualified Certificate's annuity
payment option that provides for a series of substantially equal payments,
provided only one Purchase Payment is made to the Certificate, the
Certificate is not issued as a result of a Section 1035 exchange, and the
first annuity payment begins in the first Certificate Year.
Income Tax Withholding. Liberty Life is required to withhold federal income
taxes on taxable amounts paid under Certificates unless the recipient elects
not to have withholding apply. Liberty Life will notify recipients of their
right to elect not to have withholding apply.
Section 1035 Exchanges. A Non-Qualified Certificate may be purchased with
proceeds from the surrender of an existing annuity contract. Such a
transaction may qualify as a tax-free exchange pursuant to Section 1035 of
the Code. It is Liberty Life's understanding that in such an event: (a) the
new Certificate will be subject to the distribution-at-death rules described
in "Death Provisions for Non-Qualified Certificates"; (b) Purchase Payments
made between August 14, 1982 and January 18, 1985 and the income allocable to
them will, following an exchange, no longer be covered by a "grandfathered"
exception to the penalty tax for a distribution of income that is allocable
to an investment made over ten years prior to the distribution; and (c)
Purchase Payments made before August 14, 1982 and the income allocable to
them will, following an exchange, continue to receive the following
"grandfathered" tax treatment under prior law: (i) the penalty tax does not
apply to any distribution; (ii) partial withdrawals are treated first as a
non-taxable return of principal and then a taxable return of income; and
(iii) assignments are not treated as surrenders subject to taxation. Liberty
Life's understanding of the above is principally based on legislative reports
prepared by the Staff of the Congressional Joint Committee on Taxation.
Diversification Standards. The U.S. Secretary of the Treasury has issued
regulations that set standards for diversification of the investments
underlying variable annuity contracts (other than pension plan contracts).
The Eligible Funds are designed to be managed to meet the diversification
requirements for the Certificate as those requirements may change from time
to time. If the diversification requirements are not satisfied, the
Certificate would not be treated as an annuity contract. As a consequence to
the Certificate Owner, income earned on a Certificate (including previously
non-taxable income earned in prior years) would be taxable to the Certificate
Owner in the year in which diversification requirements were not satisfied.
As a further consequence, Liberty Life would be subjected to federal income
taxes on assets in the Variable Account.
The Secretary of the Treasury announced in September 1986 that he expects to
issue regulations which will prescribe the circumstances in which a
Certificate Owner's control of the investments of a segregated asset account
may cause the Certificate Owner, rather than the insurance company, to be
treated as the owner of the assets of the account. The regulations could
impose requirements that are not reflected in the Certificate. Liberty Life,
however, has reserved certain rights to alter the Certificate and investment
alternatives so as to comply with such regulations. Since the regulations
have not been issued, there can be no assurance as to the content of such
regulations or even whether application of the regulations will be
prospective. For these reasons, Certificate Owners are urged to consult with
their own tax advisers.
Qualified Plans
The Certificate is designed for use with Qualified Plans. The tax rules
applicable to participants in Qualified Plans vary according to the type of
plan and the terms and conditions of the plan itself. Therefore, no attempt
is made herein to provide more than general information about the use of the
Certificate with Qualified Plans. Participants under a Qualified Plan as
well as Certificate Owners, Annuitants, and Designated Beneficiaries are
cautioned that the rights of any person to any benefits under a Qualified
Plan may be subject to the terms and conditions of the plan regardless of the
terms and conditions of the Certificate issued in connection therewith.
Following is a brief description of the type of Qualified Plans offered and
of the use of the Certificate in connection therewith. Purchasers of the
Certificate should seek competent advice concerning the terms and conditions
of the particular Qualified Plan and use of the Certificate with that Plan.
Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity."
These Individual Retirement Annuities are subject to limitations on the
amount which may be contributed, the persons who may be eligible, and on the
time when distributions may commence. In addition, distributions from
certain types of Qualified Plans may be placed on a tax-deferred basis into
an Individual Retirement Annuity.
VARIABLE ACCOUNT VOTING PRIVILEGES
In accordance with its view of present applicable law, Liberty Life will vote
the shares of the Eligible Funds held in the Variable Account at regular and
special meetings of the shareholders of the Eligible Funds in accordance with
instructions received from persons having the voting interest in the Variable
Account. Liberty Life will vote shares for which it has not received
instructions in the same proportion as it votes shares for which it has
received instructions.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation thereof should change, and
as a result Liberty Life determines that it is permitted to vote the shares
of the Eligible Funds in its own right, it may elect to do so.
The person having the voting interest under a Certificate prior to the Income
Date shall be the Certificate Owner. The number of shares held in each Sub-
Account which are attributable to each Certificate Owner is determined by
dividing the Certificate Owner's Variable Account Value in each Sub-Account
by the net asset value of the applicable share of the Eligible Fund. The
person having the voting interest after the Income Date under an annuity
payment option shall be the payee. The number of shares held in the Variable
Account which are attributable to each payee is determined by dividing the
reserve for the annuity payments by the net asset value of one share. During
the annuity payment period, the votes attributable to a payee decrease as the
reserves underlying the payments decrease.
The number of shares in which a person has a voting interest will be
determined as of the date coincident with the date established by the
respective Eligible Fund for determining shareholders eligible to vote at the
meeting of the Fund and voting instructions will be solicited by written
communication prior to such meeting in accordance with the procedures
established by the Eligible Fund.
Each person having the voting interest in the Variable Account will receive
periodic reports relating to the Eligible Fund(s) in which he or she has an
interest, proxy material and a form with which to give such voting
instructions with respect to the proportion of the Eligible Fund shares held
in the Variable Account corresponding to his or her interest in the Variable
Account.
SALES OF THE CERTIFICATES
Keyport Financial Services Corp. ("KFSC") serves as the Principal Underwriter
for the Certificate described in this Prospectus. The Certificate will be
sold by salespersons who represent Liberty Life Assurance Company of Boston,
an affiliate of KFSC, as variable annuity agents and who are registered
representatives of broker/dealers who have entered into distribution
agreements with KFSC. KFSC is registered under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers,
Inc. It is located at 125 High Street, Boston, Massachusetts 02110.
Different Certificates may be sold (1) to a person who is an officer,
director, or employee of Liberty Life, or an affiliate of Liberty Life, a
trustee or officer of an Eligible Fund, or an employee or associated person
of an entity which has entered into a sales agreement with the Principal
Underwriter for the distribution of Certificates or (2) to any Qualified Plan
established for such a person. Such Certificates may be different from the
Certificates sold to others in that they are not subject to the deduction for
the Certificate Maintenance Charge.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account or the Principal
Underwriter are a party. Liberty Life is engaged in various kinds of routine
litigation which in its judgment is not of material importance in relation to
the total capital and surplus of Liberty Life.
INQUIRIES BY CERTIFICATE OWNERS
Certificate Owners with questions about their Certificates may either write
Liberty Life's Service Office, 125 High Street, Boston, MA 02110, or call
(800) 367-3653 or write Manning & Napier Insurance Fund, Inc. at P.O. Box
40610 Rochester, New York 14604 or call (800) 466-3863.
TABLE OF CONTENTS-STATEMENT OF ADDITIONAL INFORMATION
Page
Liberty Life Assurance Company of Boston 2
Variable Annuity Benefits 2
Variable Annuity Payment Values 2
Re-Allocating Sub-Account Payments 4
Safekeeping of Assets 4
Principal Underwriter 4
Experts 4
Investment Performance 5
Yields for Cash Income Fund (CIF) Sub-Account 6
Financial Statements 7
Liberty Life Assurance Company Of Boston 9
<PAGE>
APPENDIX A
TELEPHONE INSTRUCTIONS
Telephone Transfers of Certificate Values
1. If there are joint Certificate Owners, both must authorize Liberty Life
and Manning & Napier Insurance Fund, Inc. ("Manning & Napier Insurance Fund")
to accept telephone instructions but either Certificate Owner can give
telephone instructions.
2. All callers will be required to identify themselves. Liberty Life
reserves the right to refuse to act upon any telephone instructions in cases
where the caller has not sufficiently identified himself/herself to Liberty
Life's or Manning & Napier Insurance Fund's satisfaction.
3. Neither Liberty Life, Manning & Napier Insurance Fund, nor any person
acting on its behalf shall be subject to any claim, loss, liability, cost or
expense if it or such person acted in good faith upon a telephone
instruction, including one that is unauthorized or fraudulent; however,
Liberty Life and/or Manning & Napier Insurance Fund will employ reasonable
procedures to confirm that a telephone instruction is genuine and, if Liberty
Life and/or Manning & Napier Insurance Fund does not, Liberty Life and/or
Manning & Napier Insurance Fund may be liable for losses due to an
unauthorized or fraudulent instruction. The Certificate Owner thus bears the
risk that an unauthorized or fraudulent instruction that is executed may
cause the Certificate Value to be lower than it would be had no instruction
been executed.
4. All conversations will be recorded with disclosure at the time of the
call.
5. The application for the Certificate may allow a Certificate Owner to
create a power of attorney by authorizing another person to give telephone
instructions. Unless prohibited by state law, such power will be treated as
durable in nature and shall not be affected by the subsequent incapacity,
disability or incompetency of the Certificate Owner. Either Liberty Life,
Manning & Napier Insurance Fund or the authorized person may cease to honor
the power by sending written notice to the Certificate Owner at the
Certificate Owner's last known address. Neither Liberty Life, Manning &
Napier Insurance Fund nor any person acting on its behalf shall be subject to
liability for any act executed in good faith reliance upon a power of
attorney.
6. Telephone authorization shall continue in force until (a) Liberty Life
and/or Manning & Napier Insurance Fund receives the Certificate Owner's
written revocation, (b) Liberty Life and/or Manning & Napier Insurance Fund
discontinues the privilege, or (c) Liberty Life and/or Manning & Napier
Insurance Fund receives written evidence that the Certificate Owner has
entered into a market timing or asset allocation agreement with an investment
adviser or with a broker/dealer.
7. Telephone transfer instructions received by Liberty Life at 800-367-3653
and/or Manning & Napier Insurance Fund at (800) 466-3863 before the close of
trading on the New York Stock Exchange (currently 4:00 P.M. Eastern Time)
will be initiated that day based on the unit value prices calculated at the
close of that day. Instructions received after the close of trading on the
NYSE will be initiated the following business day.
8. Once instructions are accepted by Liberty Life and/or Manning & Napier
Insurance Fund, they may not be canceled.
9. All transfers must be made in accordance with the terms of the
Certificate and current prospectus. If the transfer instructions are not in
good order, Liberty Life and/or Manning & Napier Insurance Fund will not
execute the transfer and will notify the caller within 48 hours.
10. If 100% of any Sub-Account's value is transferred and the allocation
formula for Purchase Payments includes that Sub-Account, then the allocation
formula for future Purchase Payments will change accordingly unless Liberty
Life receives telephone instructions to the contrary. For example, if the
allocation formula is 50% to Sub-Account A and 50% to Sub-Account B and all
of Sub-Account A's value is transferred to Sub-Account B, the allocation
formula will change to 100% to Sub-Account B unless Liberty Life is
instructed otherwise.
Telephone Changes to Purchase Payment Allocation Percentages
Numbers 1-6 above are applicable.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
GROUP FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VARIABLE ACCOUNT J
OF
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON ("Liberty Life")
This Statement of Additional Information is not a prospectus but it relates
to, and should be read in conjunction with, the Manning & Napier variable
annuity prospectus dated July 15, 1997. The prospectus is available, at no
charge, by writing Keyport Financial Services Corp. at 125 High Street,
Boston, MA 02110 or by calling (800) 437-4466. It may also be obtained by
writing Manning & Napier Insurance Fund, Inc. at P.O. Box 40610, Rochester,
New York 14604, or by calling (800) 466-3868.
TABLE OF CONTENTS
Page
Liberty Life Assurance Company of Boston...................................2
Variable Annuity Benefits..................................................2
Variable Annuity Payment Values..........................................2
Re-Allocating Sub-Account Payments.......................................4
Safekeeping of Assets......................................................4
Principal Underwriter......................................................4
Experts....................................................................4
Investment Performance.....................................................5
Yields for Cash Income Fund (CIF) Sub-Account............................6
Financial Statements.......................................................7
Liberty Life Assurance Company of Boston.................................9
The date of this statement of additional information is July 15, 1997.
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
Liberty Mutual Insurance Company ("Liberty Mutual") and Liberty Mutual Fire
Insurance Company ("Liberty Mutual Fire") are the ultimate corporate parents
of Liberty Life. Liberty Mutual and Liberty Mutual Fire ultimately control
Liberty Life through the following intervening holding company subsidiary:
Liberty Mutual Property-Casualty Holding Corporation. Liberty Mutual
Insurance Company is a multi-line insurance company. For additional
information about Liberty Life, see page 8 of the prospectus.
VARIABLE ANNUITY BENEFITS
Variable Annuity Payment Values
For each variable payment option, the total dollar amount of each periodic
payment will be equal to: (a) the sum of all Sub-Account payments; less (b)
the pro-rata amount of the annual Certificate Maintenance Charge.
The first payment for each Sub-Account will be determined by deducting any
applicable Certificate Maintenance Charge and any applicable state premium
taxes and then dividing the remaining value of that Sub-Account by $1,000 and
multiplying the result by the greater of: (a) the applicable factor from the
Certificate's annuity table for the particular payment option; or (b) the
factor currently offered by Liberty Life at the time annuity payments begin.
This current factor may be based on the sex of the payee unless to do so
would be prohibited by law.
The number of Annuity Units for each Sub-Account will be determined by
dividing such first payment by the Sub-Account Annuity Unit value for the
Valuation Period that includes the date of the first payment. The number of
Annuity Units remains fixed for the annuity payment period. Each Sub-Account
payment after the first one will be determined by multiplying (a) by (b),
where: (a) is the number of Sub-Account Annuity Units; and (b) is the Sub-
Account Annuity Unit value for the Valuation Period that includes the date of
the particular payment.
Variable annuity payments will fluctuate in accordance with the investment
results of the underlying Eligible Funds. In order to determine how these
fluctuations affect annuity payments, Liberty Life uses an Annuity Unit
value. Each Sub-Account has its own Annuity Units and value per Unit. The
Annuity Unit value applicable during any Valuation Period is determined at
the end of such period.
When Liberty Life first purchased Eligible Fund shares on behalf of the
Variable Account, Liberty Life valued each Annuity Unit for each Sub-Account
at a specified dollar amount. The Unit value for each Sub-Account in any
Valuation Period thereafter is determined by multiplying the value for the
prior period by a net investment factor. This factor may be greater or less
than 1.0; therefore, the Annuity Unit may increase or decrease from Valuation
Period to Valuation Period. For each assumed annual investment rate (AIR),
Liberty Life calculates a net investment factor for each Sub-Account by
dividing (a) by (b), where:
(a) is equal to the net investment factor as defined in the
prospectus; and
(b) is the assumed investment factor for the current Valuation
Period. The assumed investment factor adjusts for the interest
assumed in determining the first variable annuity payment. Such
factor for any Valuation Period shall be the accumulated value, at
the end of such period, of $1.00 deposited at the beginning of such
period at the assumed annual investment rate (AIR). The AIR for
Annuity Units based on the Certificate's annuity tables is 5% per
year. An AIR of 3% per year is also currently available upon
Written Request.
With a particular AIR, payments after the first one will increase or decrease
from month to month based on whether the actual annualized investment return
of the selected Sub-Account(s) (after deducting the Mortality and Expense
Risk Charge) is better or worse than the assumed AIR percentage. If a given
amount of Sub-Account value is applied to a particular payment option, the
initial payment will be smaller if a 3% AIR is selected instead of a 5% AIR
but, all other things being equal, the subsequent 3% AIR payments have the
potential for increasing in amount by a larger percentage and for decreasing
in amount by a smaller percentage. For example, consider what would happen
if the actual annualized investment return (see the first sentence of this
paragraph) is 9%, 5%, 3%, or 0% between the time of the first and second
payments. With an actual 9% return, the 3% AIR and 5% AIR payments would
both increase in amount but the 3% AIR payment would increase by a larger
percentage. With an actual 5% return, the 3% AIR payment would increase in
amount while the 5% AIR payment would stay the same. With an actual return
of 3%, the 3% AIR payment would stay the same while the 5% AIR payment would
decrease in amount. Finally, with an actual return of 0%, the 3% AIR and 5%
AIR payments would both decrease in amount but the 3% AIR payment would
decrease by a smaller percentage. Note that the changes in payment amounts
described above are on a percentage basis and thus do not illustrate when, if
ever, the 3% AIR payment amount might become larger than the 5% AIR payment
amount. Note though that if Option A (Income for a Fixed Number of Years) is
selected and payments continue for the entire period, the 3% AIR payment
amount will start out being smaller than the 5% AIR payment amount but
eventually the 3% AIR payment amount will become larger than the 5% AIR
payment amount.
Re-Allocating Sub-Account Payments
The number of Annuity Units for each Sub-Account under any variable annuity
option will remain fixed during the entire annuity payment period unless the
payee makes a written request for a change. Currently, a payee can instruct
Liberty Life to change the Sub-Account(s) used to determine the amount of
the variable annuity payments 1 time every 6 months. The payee's request
must specify the percentage of the annuity payment that is to be based on the
investment performance of each Sub-Account. The percentage for each Sub-
Account, if not zero, must be at least 10% and must be a whole number. At
the end of the Valuation Period during which Liberty Life receives the
request, Liberty Life will: (a) value the Annuity Units for each Sub-Account
to create a total annuity value; (b) apply the new percentages the payee has
selected to this total value; and (c) recompute the number of Annuity Units
for each Sub-Account. This new number of units will remain fixed for the
remainder of the payment period unless the payee requests another change.
SAFEKEEPING OF ASSETS
Liberty Life is responsible for the safekeeping of the assets of the Variable
Account.
Liberty Life has responsibility for providing all administration of the
Certificates and the Variable Account. This administration includes, but is
not limited to, preparation of the Contracts and Certificates, maintenance of
Certificate Owners' records, and all accounting, valuation, regulatory and
reporting requirements. Liberty Life has contracted with Keyport Life
Insurance Company, an affiliate, to provide all administration for the
Contracts and Certificates, as its agent. Keyport Life Insurance Company's
compensation is based on the number of Certificates and on the Certificate
Value of these Certificates.
PRINCIPAL UNDERWRITER
The Certificates, which are offered continuously, are distributed by Keyport
Financial Services Corp. ("KFSC"), which is an affiliate of Liberty Life.
EXPERTS
The financial statements of Liberty Life Assurance Company of Boston at
December 31, 1996, and for the year then ended appearing in this Statement of
Additional Information have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The financial statements of Liberty Life Assurance Company of Boston as of
December 31, 1995 and for each of the years in the two-year period ended
December 31, 1995 have been included herein in reliance on the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
INVESTMENT PERFORMANCE
The Variable Account may from time to time quote performance information
concerning its various Sub-Accounts. A Sub-Account's performance may also be
compared to the performance of sub-accounts used with variable annuities
offered by other insurance companies. This comparative information may be
expressed as a ranking prepared by Financial Planning Resources, Inc. of
Miami, FL (The VARDS Report), Lipper Analytical Services, Inc., or by
Morningstar, Inc. of Chicago, IL (Morningstar's Variable Annuity Performance
Report), which are independent services that compare the performance of
variable annuity sub-accounts. The rankings are done on the basis of changes
in accumulation unit values over time and do not take into account any
charges (such as sales charges or administrative charges) that are deducted
directly from contract values.
Ibbotson Associates of Chicago, IL provides historical returns from 1926 on
capital markets in the United States. The Variable Account may quote the
performance of its Sub-Accounts in conjunction with the long-term performance
of capital markets in order to illustrate general long-term risk versus
reward investment scenarios. Capital markets tracked by Ibbotson Associates
include common stocks, small company stocks, long-term corporate bonds, long-
term government bonds, U.S. Treasury Bills, and the U.S. inflation rate.
Historical total returns are determined by Ibbotson Associates for: Large
Company Stocks, represented by the Standard and Poor's Composite Price Index
(an unmanaged weighted index of 90 stocks prior to March 1957 and 500 stocks
thereafter of industrial, transportation, utility and financial companies
widely regarded by investors as representative of the stock market); Small
Company Stocks, represented by the fifth capitalization quintile (i.e., the
ninth and tenth deciles) of stocks on the New York Stock Exchange for 1926-
1981 and by the performance of the Dimensional Fund Advisors Small Company
9/10 (for ninth and tenth deciles) Fund thereafter; Long Term Corporate
Bonds, represented beginning in 1969 by the Salomon Brothers Long-Term High-
Grade Corporate Bond Index, which is an unmanaged index of nearly all Aaa and
Aa rated bonds, represented for 1946-1968 by backdating the Salomon Brothers
Index using Salomon Brothers' monthly yield data with a methodology similar
to that used by Salomon Brothers in computing its Index, and represented for
1925-1945 through the use of the Standard and Poor's monthly High-Grade
Corporate Composite yield data, assuming a 4% coupon and a 20-year maturity;
Long-Term Government Bonds, measured each year using a portfolio containing
one U.S. government bond with a term of approximately twenty years and a
reasonably current coupon; U.S. Treasury Bills, measured by rolling over each
month a one-bill portfolio containing, at the beginning of each month, the
shortest-term bill having not less than one month to maturity; Inflation,
measured by the Consumer Price Index for all Urban Consumers, not seasonably
adjusted, since January, 1978 and by the Consumer Price Index before then.
The stock capital markets may be contrasted with the corporate bond and U.S.
government securities capital markets. Unlike an investment in stock, an
investment in a bond that is held to maturity provides a fixed rate of
return. Bonds have a senior priority to common stocks in the event the
issuer is liquidated and interest on bonds is generally paid by the issuer
before it makes any distributions to common stock owners. Bonds rated in the
two highest rating categories are considered high quality and present minimal
risk of default. An additional advantage of investing in U.S. government
bonds and Treasury bills is that they are backed by the full faith and credit
of the U.S. government and thus have virtually no risk of default. Although
government securities fluctuate in price, they are highly liquid.
Yields for Cash Income Fund (CIF) Sub-Account
Yield and effective yield percentages for the CIF Sub-Account are calculated
using the method prescribed by the Securities and Exchange Commission. Both
yields reflect the deduction of the annual 0.35% asset-based Certificate
charge. Both yields also reflect, on an allocated basis, the Certificate's
annual $35 Certificate Maintenance Charge. Both yields do not reflect
premium tax charges. The yields would be lower if these charges were
included. The following are the standardized formulas:
Yield equals: (A - B - 1) X 365
C 7
Effective Yield Equals: (A - B)365/7 - 1
C
Where:
A = the Accumulation Unit value at the end of the 7-day period.
B = hypothetical Certificate Maintenance Charge for the 7-day period.
The assumed annual CIF charge is equal to the $35 Certificate charge
multiplied by a fraction equal to the average number of
Certificates with CIF Sub-Account value during the 7-day period
divided by the average total number of Certificates during the 7-day
period. This annual amount is converted to a 7-day charge by
multiplying it by 7/365. It is then equated to an Accumulation Unit
size basis by multiplying it by a fraction equal to the average value
of one CIF Accumulation Unit during the 7-day period divided by the
average Certificate Value in CIF Sub-Account during the 7-day period.
C = the Accumulation Unit value at the beginning of the 7-day period.
The yield formula assumes that the weekly net income generated by an
investment in the CIF Sub-Account will continue over an entire year. The
effective yield formula also annualizes seven days of net income but it
assumes that the net income is reinvested over the year. This compounding
effect causes effective yield to be higher than the yield.
FINANCIAL STATEMENTS
The Variable Account has not yet commenced operations and therefore no
financial statements are included. The financial statements of Liberty Life
are provided as relevant to its ability to meet its financial obligations
under the Certificates.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
Report of Independent Auditors
The Board of Directors
Liberty Life Assurance Company of Boston
We have audited the accompanying balance sheet of Liberty Life Assurance
Company of Boston (the Company) as of December 31, 1996, and the related
statements of income, stockholders' equity, and cash flows for the year then
ended. 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Liberty Life Assurance
Company of Boston at December 31, 1996, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
February 28, 1997 /s/ Ernst & Young LLP
Boston, Massachusetts
<PAGE>
Independent Auditors' Report
The Board of Directors
Liberty Life Assurance Company of Boston:
We have audited the accompanying balance sheet of Liberty Life Assurance
Company of Boston as of December 31, 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the years in the two-
year period then ended. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Liberty Life Assurance
Company of Boston as of December 31, 1995 and the results of its operations
and its cash flows for each of the years in the two-year period then ended,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
<PAGE>
Liberty Life Assurance Company of Boston
Balance Sheets
December 31
1996 1995
(In Thousands)
Assets
Investments:
Fixed maturities, available for sale $1,737,187 $1,522,447
Equity securities, available for sale 4,122 4,191
Policy loans 45,345 40,672
Short-term investments 78,715 121,471
Other invested assets 38,281 32,339
Total investments 1,903,650 1,721,120
Cash and cash equivalents 34,372 64,801
Amounts recoverable from reinsurers 48,800 36,919
Premiums receivable 8,421 4,974
Investment income due and accrued 20,820 17,275
Deferred policy acquisition costs 77,424 62,762
Other assets 7,050 7,545
Assets held in separate accounts 1,097,040 899,519
Total assets $3,197,577 $2,814,915
Liabilities and Stockholders' Equity:
Liabilities:
Future Policy benefits $ 936,842 $ 809,042
Policyholders' and beneficiaries' funds 548,153 441,619
Policy and contract claims 30,394 19,344
Dividends to policyholders 12,919 12,309
Experience rating refund reserves 2,400 1,190
Liability for participating policies 68,504 65,256
Federal income taxes payable 542 -
Deferred federal income taxes 73,973 93,158
Due to Parent 8,907 9,334
Accrued expenses and other liabilities 117,144 191,894
Liabilities related to separate accounts 1,097,040 899,519
Total liabilities 2,896,818 2,542,665
Stockholders' equity:
Common stock, $312.50 par value; 8,000
shares authorized, issued and outstanding 2,500 2,500
Additional paid-in capital 52,500 2,500
Net unrealized gains on investments,
net of federal income taxes of $43,793
and $66,391 81,330 122,875
Cumulative foreign currency translations,
net of federal income taxes of $612 and $515 1,139 957
Retained earnings 163,290 143,418
Total stockholders' equity 300,759 272,250
Total liabilities and stockholders' equity $3,197,577 $2,814,915
See accompanying notes to financial statements.
<PAGE>
Liberty Life Assurance Company of Boston
Statements of Income
Year Ended December 31
1996 1995 1994
(In Thousands)
Revenues:
Premiums, net $283,965 $197,017 $130,606
Net investment income 122,527 108,721 97,022
Realized gains on investments 6,722 5,091 3,043
Contractholder charges and assessments 5,759 5,428 4,943
Other revenues 4,469 4,323 3,776
Total revenues 423,442 320,580 239,390
Benefits and expenses:
Death and other policy benefits 173,281 126,029 110,158
Recoveries from reinsurers on ceded claims (11,454) (10,489) (5,858)
Provision for future policy benefits and
other policy liabilities 121,347 88,903 41,609
Interest credited to policyholders 32,252 27,527 18,347
Change in deferred policy acquisition
costs (15,247) (11,101) (9,921)
General expenses 69,926 52,555 38,381
Insurance taxes and licenses 6,956 4,997 3,550
Dividends to policyholders 12,610 12,277 11,671
Total benefits and expenses 389,671 290,698 207,937
Income from continuing operations before
federal income taxes and earnings of
participating policies 33,771 29,882 31,453
Federal income taxes 10,327 10,782 11,003
Income from continuing operations before
earnings of participating policies 23,444 19,100 20,450
Earnings of participating policies net
of federal income tax benefit of $2,514
in 1996, $2,581 in 1995 and $835 in 1994 3,247 3,397 1,545
Income from continuing operations 20,197 15,703 18,905
Discontinued operations:
Loss from operations on discontinued
group health, net of federal income
(benefits) taxes of ($175) in 1996,($1,236)
in 1995 and $100 in 1994 (325) (2,267) 24
Net income $ 19,872 $ 13,436 $ 18,929
See accompanying notes to financial statements.
<PAGE>
Liberty Life Assurance Company of Boston
Statements of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
(In Thousands)
Net
Unrealized Cumulative
Additional Gains Foreign
Common Paid-In (Losses) on Currency Retained
Stock Capital Investments Translations Earnings Total
Balance at
January 1, 1994 $2,500 2,500 105,774 203 111,053 $222,030
Net income 18,929 18,929
Net unrealized
gains (losses) on
investments, net
of deferred
federal income
taxes of ($425) (93,500) (93,500)
Cumulative foreign
currency translations,
net of deferred
federal income taxes
of ($140) 260 260
Balance at
December 31, 1994 2,500 2,500 12,274 463 129,982 147,719
Net income 13,436 13,436
Net unrealized
gains (losses) on
investments, net
of deferred
federal income
taxes of ($59,758) 110,601 110,601
Cumulative foreign
currency translations,
net of deferred
federal income taxes
of ($267) 494 494
Balance at
December 31, 1995 2,500 2,500 122,875 957 143,418 272,250
Additional Paid-In
Capital 50,000 50,000
Net income 19,872 19,872
Net unrealized
gains (losses) on
investments, net
of deferred
federal income
taxes of $22,598 (41,545) (41,545)
Cumulative foreign
currency translations,
net of deferred federal
income taxes
of ($97) 182 182
Balance at
December 31, 1996 $2,500 52,500 81,330 1,139 163,290 $300,759
See accompanying notes to financial statements.
<PAGE>
Liberty Life Assurance Company of Boston
Statements of Cash Flows
Years ended December 31
1996 1995 1994
(In Thousands)
Cash flows from operating activities:
Premiums collected $ 280,613 $ 197,607 $ 127,716
Investment income received 98,899 89,412 80,817
Other considerations received 10,331 9,421 22,599
Policyholder claims paid (124,297) (96,494) (123,676)
Surrender benefits paid (33,748) (5,927) (5,317)
Policyholder dividends paid (12,008) (11,685) (11,081)
General expenses paid (67,834) (56,736) (41,915)
Insurance taxes and licenses paid (3,959) (6,000) (6,346)
Federal income taxes paid, including
capital gains taxes (5,858) (12,878) (4,897)
Intercompany net receipts (426) 9,201 (16,620)
Other receipts (payments) 12,218 (2,782) (6,904)
Net cash flows provided by operating
activities 153,931 113,139 14,376
Cash flows from investing activities:
Proceeds from fixed maturities sold 128,493 41,763 66,835
Proceeds from fixed maturities matured 91,292 75,084 124,347
Cost of fixed maturities acquired (480,206) (224,725) (315,121)
Proceeds from equity securities sold 125,997 87,449 45,632
Cost of equity securities acquired (122,197) (86,390) (45,898)
Change in policy loans (4,673) (4,087) (3,827)
Investment cash in transit 126 (182) 34
Proceeds from short-term investments
sold or matured 833,144 485,257 902,371
Cost of short-term investments acquired (790,040) (566,870) (879,643)
Proceeds from other long-term investments
sold 5,997 4,320 2,657
Cost of other long-term investments
acquired (6,904) (13,427) (5,772)
Net cash used in investing activities (218,971) (201,808) (108,385)
Cash flows from financing activities:
Additional paid-in capital 50,000 - -
Policyholders' deposits on investment
contracts 139,579 62,019 124,565
Policyholders' withdrawals from
investment contracts (65,343) (62,314) (30,608)
Change in securities loaned (89,625) 148,710 93,957
Net cash provided by financing activities 34,611 148,415 (52)
Change in cash and cash equivalents (30,429) 59,746 5,107
Cash and cash equivalents,
beginning of year 64,801 5,055
Cash and cash equivalents, end of year $ 34,372 $ 64,801 $ 5,055
Reconciliation of net income to net cash
flows from operating activities:
Net income $ 19,872 $ 13,436 $ 18,929
Adjustments to reconcile net income to
net cash flows from operating
activities:
Realized capital gains on investments (6,722) (5,091) (3,211)
Accretion of bond discount (20,271) (17,822) (16,297)
Interest credited to policyholders 32,252 27,543 18,347
Changes in assets and liabilities:
Proceeds from securities loaned 89,625 (148,710) -
Amounts recoverable from reinsurers (11,881) 4,897 (16,735)
Premiums receivable (3,447) 413 (418)
Investment income due and accrued (3,545) (1,409) (1,336)
Deferred policy acquisition costs (15,247) (10,888) (9,921)
Other assets 495 1,354 (1,846)
Future policy benefits 127,800 88,924 45,660
Policy and contract claims 11,050 (1,523) (494)
Dividends to policyholders 610 567 590
Experience rating refund liabilities 1,210 (510) 550
Liability for participating policies 3,248 3,397 1,544
Federal income taxes payable 542 (5,830) 4,643
Deferred federal income taxes 3,805 3,235 1,563
Due to Parent (427) 9,201 (16,620)
Accrued expenses and other liabilities (75,038) 151,955 (5,454)
Net cash flows provided by
operating activities $ 153,931 $ 113,139 $ 14,376
See accompanying notes to financial statements.
<PAGE>
Liberty Life Assurance Company of Boston
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(In Thousands)
1. Nature of Operations and Significant Accounting Policies
Organization
Liberty Life Assurance Company of Boston ("The Company") is domiciled in the
Commonwealth of Massachusetts. The Company is directly owned 100% by Liberty
Mutual Property-Casualty Holding Corporation, a subsidiary directly owned 90%
by Liberty Mutual Insurance Company and 10% by Liberty Mutual Fire Insurance
Company ("Liberty Mutual").
The Company insures life, annuity and accident and health risks for groups
and individuals. The Company also issues structured settlement contracts and
administers separate account contracts. The Company is licensed and sells its
products in all 50 states, the District of Columbia, and Canada.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. 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 as of the date of the financial
statements, and the reported amounts of revenues and expenses during the
year. Actual amounts could subsequently differ from such estimates.
Investments
Fixed maturity and equity securities are classified as available for sale and
are carried at fair value. Unrealized gains and losses on fixed maturity and
equity securities are reported as a separate component of stockholders'
equity, net of applicable deferred income taxes.
For the mortgage-backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments over the estimated economic life of the
security. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments and any resulting adjustments are
included in investment income.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Other invested assets, specifically investments in limited partnerships, are
accounted for using the equity method.
Policy loans are reported at unpaid loan balances.
Realized capital gains and losses are determined on the specific
identification basis.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. Such
costs include commissions, costs of policy underwriting, and variable agency
expenses. Acquisition costs related to traditional life insurance and certain
long-duration group accident and health insurance, to the extent recoverable
from future policy revenues, are deferred and amortized over the premium-
paying period of the related policies using assumptions consistent with those
used in computing policy benefit reserves. For universal life insurance and
investment products, to the extent recoverable from future gross profits,
deferred policy acquisition costs are amortized generally in proportion to
the present value of expected gross profits from surrender charges and
investment, mortality, and expense margins. Deferred policy acquisition costs
are adjusted for amounts relating to unrealized gains and losses on fixed
maturity and equity securities the Company has designated as available for
sale. This adjustment, net of tax, is included with the change in net
unrealized gains or losses that is credited or charged directly to
stockholders' equity. Deferred policy acquisition costs have decreased for
this adjustment by $585 and $2,834 at December 31, 1996 and 1995,
respectively.
The Company began deferring acquisition costs relating to group life and
disability insurance as of January 1, 1995. Costs relating to these policies
are amortized straight line over a five year period. Anticipated premium
revenue was estimated using the same assumptions which were used for
computing liabilities for future policy benefits.
Recognition of Traditional Life Premium Revenue and Related Expenses
Premiums on traditional life insurance policies are recognized as revenue
when due. Benefits and expenses are associated with premiums so as to result
in the recognition of profits over the life of the policies. This association
is accomplished by providing liabilities for future policy benefits and the
deferral and subsequent amortization of acquisition costs.
Recognition of Universal Life Revenue and Policy Account Balances
Revenues from universal life policies represent investment income from the
related invested assets and amounts assessed against policyholders. Included
in such assessments are mortality charges, surrender charges paid and
administrative fees. Policy account balances consist of consideration
received plus credited interest, less accumulated policyholder charges,
assessments and withdrawals. Credited interest rates were between 5.75% and
6.3% in 1996 and between 6.3% and 6.5% in 1995 and 1994.
Investment Contracts
The Company writes certain annuity and structured settlement contracts
without mortality risk which are accounted for as investment contracts.
Revenues for investment contracts consist of investment income from the
related invested assets, with profits recognized to the extent investment
income earned exceeds the amount credited to the contract. This method of
computing the liability for future policy benefits effectively results in
recognition of profits over the benefit period. Policy account balances
consist of consideration received plus credited interest less policyholder
withdrawals. Credited interest rates were between 5.35% and 7.05% in 1996,
between 5.6% and 7.25% in 1995, and between 5.0% and 5.25% in 1994 for
annuity contracts. Credited interest rates were between 6.2% and 11.4% in
1996, 1995 and 1994 for structured settlement contracts.
Future Policy Benefits
Liabilities for future policy benefits for traditional life policies have
been computed using the net level premium method based on estimated future
investment yield, mortality and withdrawal experience. Interest rate
assumptions were between 4.5% and 10.25% for all years of issue. Mortality
assumptions have been calculated principally on an experience multiple
applied to the 1955-60 and 1965-70 Select and Ultimate Basic Tables for
issued prior to 1986, the 1986 Bragg Non-Smoker/Smoker Select and Ultimate
Basic Tables for 1986 to 1992 issues, and the 1991 Bragg Non-Smoker/Smoker
Select and Ultimate Basic Tables for 1993 and subsequent issues. Withdrawal
assumptions are generally based on the Company's experience.
The liability for future policy benefits with respect to structured
settlement contracts with life contingencies and single premium group
annuities (group pension) is determined based on interest crediting rates
between 6.2% and 11.4%, and the mortality assumptions are based on the 1971
GAM and IAM tables.
Future policy benefits for long-term disability cases are computed using the
1987 Commissioners' Group Disability Table adjusted for the Company's
experience.
Policy and Contract Claims
Accident and health business policy and contract claims principally include
claims in course of settlement and claims incurred but not reported, which
are determined based on a formula derived as a result of the Company's past
experience. Claims liabilities may be more or less than the amounts paid when
the claims are ultimately settled. Such differences are considered changes in
estimates and are recorded in the statement of income in the year the claims
are settled.
Reinsurance
All assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis in the accompanying balance sheets. The
accompanying statements of operations reflect premiums, benefits and
settlement expenses net of reinsurance ceded.
Reinsurance premiums, commissions, expense reimbursements, benefits and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for original policies issued and the terms of
the reinsurance contracts.
Federal Income Taxes
The Company has adopted the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes
the enactment date.
Participating Policies
Participating policies approximate 33% and 35% of life insurance in force at
December 31, 1996 and 1995, respectively, and 18% and 56% of individual life
insurance premium revenue in 1996 and 1995, respectively. Dividends to
participating policyholders are calculated as the sum of the difference
between the assumed mortality, interest and loading, and the actual
experience of the Company relating to participating policyholders. As a
result of statutory regulations, the major portion of earnings from
participating policies inures to the benefit of the participating
policyholders and is not available to stockholders. Undistributed earnings of
the participating block of business is represented by the liability for
participating policies in the accompanying balance sheets. The payment of
dividends to stockholders is further restricted by insurance laws of the
Commonwealth of Massachusetts.
Foreign Currency Translations
The Company enters into certain transactions that are denominated in a
currency other than the U.S. dollar. Functional currencies are assigned to
foreign currencies. The resulting translation adjustments from such
transactions are accumulated and then converted to U.S. dollars. The
unrealized gain or loss from this translation is recorded as a separate
component of stockholders' equity, net of deferred federal income taxes. The
translations are calculated using current exchange rates for the balance
sheet and average exchange rates for the statement of operations.
Separate Accounts
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for
annuity contracts, and for which the contractholder, rather than Liberty Life
Assurance, bears the investment risk. Separate account contractholders have
no claim against the assets of the general account of Liberty Life Assurance.
Separate account assets are reported at market value. The operations of the
separate accounts are not included in the accompanying financial statements.
Fees charged on separate account policyholder deposits are included in other
income.
Reclassification
Certain 1995 balances have been reclassified to permit comparison with the
1996 presentation.
2. Investments
Fixed Maturities
The amortized cost, gross unrealized gains and losses, and fair value of
investments in fixed maturities are summarized as follows:
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S government
corporations and agencies $ 408,214 $ 86,080 $ (1,195) $ 493,099
Debt securities issued by
foreign governments 24,762 87 (256) 24,593
Corporate securities 614,901 29,667 (3,864) 640,704
U.S. government guaranteed
mortgage-backed securities 567,343 16,402 (4,954) 578,791
Total fixed maturities $1,615,220 $132,236 $(10,269) $1,737,187
At December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S government
corporations and agencies $ 380,296 $116,737 $ (37) $ 496,996
Debt securities issued by
foreign governments 19,651 1,839 (7) 21,483
Corporate securities 313,686 18,727 (2,797) 329,616
U.S. government guaranteed
mortgage-backed securities 621,282 53,523 (453) 674,352
Total fixed maturities $1,334,915 $190,826 $ (3,294) $1,522,447
The amortized cost and fair value of the Company's investment in fixed
maturities by contractual maturity is summarized as follows:
At December 31, 1996
Amortized Fair
Cost Value
Maturity in one year or less $ 29,651 $ 30,279
Maturity after one year through five years 169,258 172,798
Maturity after five years through ten years 313,404 335,973
Maturity after ten years 535,564 619,346
U.S. government guaranteed mortgage-
backed securities 567,343 578,791
Total fixed maturities $1,615,220 $1,737,187
The expected maturities in the foregoing table may differ from contractual
maturities because certain borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Gross gains of $1,462 and $811, and gross losses of $1,411, and $445 were
realized on the sales of fixed maturities respectively.
At December 31, 1996, bonds with an admitted asset value of $14,232 were on
deposit with state insurance departments to satisfy regulatory requirements.
Equity Securities and Other Invested Assets
Unrealized gains and losses on investments in equity securities, available
for sale and other invested assets are recorded in a separate component of
stockholders' equity and do not affect operations. The cost, gross unrealized
gains and losses on, and the fair value of, those investments are summarized
as follows:
At December 31, 1996
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
Equity securities $ 3,098 $ 1,241 $ (217) $ 4,122
Other invested assets 32,729 6,462 (910) 38,281
Total $35,827 $ 7,703 $(1,127) $42,403
At December 31, 1995
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
Equity securities $ 3,086 $ 1,105 -- $ 4,191
Other invested assets 28,874 4,045 $ (580) 32,339
Total $31,960 $ 5,150 $ (580) $36,530
Net Investment Income
Major categories of the Company's net investment income are summarized as
follows:
Year ended December 31
1996 1995 1994
Investment income:
Fixed maturities $118,365 $104,779 $ 95,837
Equity securities 83 214 22
Policy loans 2,672 2,397 2,111
Short-term investments and cash equivalents 1,633 2,034 1,711
Other invested assets 1,476 878 342
Gross investment income 124,229 110,302 100,023
Less: Investment expenses 1,702 1,581 1,942
Discontinued operations -- -- 1,059
Net investment income $122,527 $108,721 $ 97,022
Realized Capital Gains on Investments
Realized capital gains on investments were derived from the following
sources:
Year ended December 31
1996 1995 1994
Fixed maturities $ 61 $ 366 $ 1,752
Equity securities 3,812 3,441 434
Short-term investments -- -- (4)
Other invested assets 2,849 1,284 1,029
Less: Discontinued operations -- 168
Realized capital gains on investments $ 6,722 $ 5,091 $ 3,043
Concentration of Investments
There were no investments in a single entity's fixed maturities in excess of
ten percent of stockholders' equity at December 31, 1996 and 1995,
respectively.
3. Reinsurance
Certain premiums and benefits are assumed from and ceded to other insurance
companies under various reinsurance agreements. Reinsurance assumed is not
significant. The ceded reinsurance agreements provide the Company with
increased capacity to write larger risks and maintain its exposure to loss
within capital resources.
The Company generally reinsures risks on life insurance policies over two
hundred fifty thousand dollars as well as selected risks of lesser amounts.
Life insurance in force and premium information is summarized as follows:
Year ended December 31, 1996
Assumed Ceded to
Direct From Other Other Net
Amount Companies Companies Amount
Life insurance in force $25,127,732 $64,767 $1,699,677 $23,492,822
Premiums:
Group life and disability $ 193,209 $ 55 10,070 183,194
Individual life and annuity 103,191 2,939 5,536 100,594
Group pension 177 - - 177
Total premiums $ 296,577 $ 2,994 $ 15,606 $ 283,965
Year ended December 31, 1995
Assumed Ceded to
Direct From Other Other Net
Amount Companies Companies Amount
Life insurance in force $17,374,371 $56,753 $1,110,191 $16,320,933
Premiums:
Group life and disability $ 105,415 $ 68 $ 12,223 $ 93,260
Individual life and annuity 103,732 123 2,477 101,378
Group pension 2,379 - - 2,379
Total premiums $ 211,526 $ 191 $ 14,700 $ 197,017
Amounts payable or recoverable for reinsurance on policy and contract
liabilities are not subject to periodic or maximum limits. At December 31,
1996, the Company's reinsurance recoverables are not material and no
individual reinsurer owed the Company an amount that was equal to or greater
than 3% of the Company's surplus.
Amounts recoverable from reinsurers are presented as an asset in the
accompanying financial statements and are summarized as follows:
At December 31
1996 1995
Group life and health $ 25,952 $ 19,377
Individual life and annuity 22,848 17,542
Total amounts recoverable from reinsurers $ 48,800 $ 36,919
4. Federal Income Taxes
The Company is included in a consolidated federal income tax return with
Liberty Mutual and its other subsidiaries. Under a written tax sharing
agreement, approved by the Board of Directors, Liberty Mutual collects from
and refunds to the subsidiaries the amount of taxes or benefits determined as
if Liberty Mutual and the subsidiaries filed separate returns.
Federal income tax expense (benefit) attributable to income from operations
was composed of the following:
Year ended December 31
1996 1995 1994
Continuing operations:
Current $ 7,011 $ 7,848 $ 9,559
Deferred 3,316 2,934 1,444
Federal income tax (benefit) expense $10,327 10,782 $11,003
Year ended December 31
1996 1995 1994
Discontinued operations:
Current $ (175) $ (1,236) $ (19)
Deferred 0 0 119
Federal income tax (benefit) expense $ (175) $ (1,236) $ 100
A reconciliation of federal income tax expense as recorded in the statements
of income with expected federal income tax expense computed at the applicable
federal tax rate of 35% is summarized as follows:
Year ended December 31
1996 1995 1994
Expected income tax expense $ 11,820 $ 10,458 $11,009
Adjustments to income taxes resulting from:
Reconciliation of prior year tax return (1,226) 401 -
Other, net (267) (77) (6)
Federal income tax expense $ 10,327 $10,782 $11,003
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred liabilities are summarized as
follows:
Year ended December 31
1996 1995 1994
Deferred tax assets:
Dividends to policyholders $ 3,349 $ 3,230 $ 3,242
Experience rating reserves - 14 102
Unearned interest on policy loans 303 283 -
Unearned group premium adjustment 962 585 448
Accrued surrender charges on deposit funds 401 - -
1987 disability reserve tax adjustment - 215 334
Other 60 29 281
Total deferred tax assets 5,075 4,356 4,407
Deferred tax liabilities:
Future policy benefits (11,760) (11,181) (12,002)
Deferred acquisition costs (18,818) (16,201) (13,742)
Bonds purchased at market discount (2,273) (1,769) (1,509)
Bonds market valuation adjustment (41,493) (64,788) (5,916)
Unrealized gain on other long-term
investments (2,300) (1,603) (717)
Reconciliation of taxes on other long-term
investments (951) (829) (134)
Cumulative foreign currency translations (612) (515) (248)
Deferred and uncollected premium adjustment (653) (565) (337)
Experience rating reserves (133) 0 0
Other (55) (63) -
Total deferred tax liabilities $(79,048) $(97,514) $(34,605)
Net deferred tax liability $(73,973) $(93,158) $(30,198)
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will
realize the benefit of the deferred tax assets, and, therefore, no such
valuation allowance has been established.
Prior to 1984, a portion of the Company's income was not taxed, but was
accumulated in a "policyholders' surplus account". In the event that those
amounts are distributed to stockholders', or the balance of the account
exceeds certain limitations under the Internal Revenue Code, the excess
amounts would become taxable at current rates. The policyholders' surplus
account balance at December 31, 1996 was approximately $4,000. Management
does not intend to take actions nor does management expect any events to
occur that would cause federal income taxes to become payable on that amount.
However, if such taxes were assessed, the amount of taxes payable would be
approximately $1,400.
5. Unpaid Claims Liability for Group Accident and Health Business
The following table provides a reconciliation of the beginning and ending
balances of unpaid claim liabilities, net of reinsurance recoverables:
Year ended December 31
1996 1995
Unpaid claim liabilities, at beginning of year $ 102,089 $ 76,630
Less: reinsurance recoverables 203 444
Net balance at beginning of year 101,886 76,186
Claims incurred related to:
Current year 104,526 52,747
Prior years 18,176 6,813
Total incurred 122,702 59,560
Claims paid related to:
Current year 34,342 15,413
Prior years 27,449 18,447
Total paid 61,791 33,860
Net balance at end of year 162,797 101,886
Plus: reinsurance recoverables 238 203
Balance, Unpaid claim liabilities,at end of year $ 163,035 $ 102,089
During 1996, approximately $17,000 of long-term disability business was
accepted from unaffiliated companies through buyout contracts. In return for
future premiums, as underwritten by the Company, the Company accepted the
risk for covered lines under those contacts, including certain claims which
were already in payment status. These claims, which were incurred in 1995 or
earlier, were not included in the December 31, 1995 claim reserves and
liabilities but are included as prior years incurred claims at December 31,
1996. The claims incurred related to prior years increased by $6,813 in 1995
due to changes in estimates of prior year insured events.
6. Risk-Based Capital and Retained Earnings
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1996, the Company meets the RBC requirements.
The payment of dividends by the Company to stockholders is limited and cannot
be made except from earned profits. The maximum amount of dividends that may
be paid by life insurance companies without prior approval of the
Commonwealth of Massachusetts Insurance Commissioner is subject to
restrictions relating to statutory surplus and net gain from operations.
According to a resolution voted by the Board of Directors of Liberty Life
Assurance, not more than the larger of 10% of statutory profits on
participating business or fifty cents per thousand dollars of participating
business in force in a given year may accrue to the benefit of stockholders.
The amount of statutory unassigned surplus (deficit) held for the benefit of
participating policyholders is $(1,245) and for the stockholders is $83,428
at December 31, 1996. Dividends paid to policyholders were $12,008 and there
were no dividends paid to stockholders in 1996.
7. Commitments and Contingencies
The Company is named as a defendant in various legal actions arising
principally from claims made under insurance policies and contracts. Those
actions are considered by the Company in estimating reserves for policy and
contract liabilities. The Company's management believes that the resolution
of those actions will not have a material effect on the Company's financial
position or results of operations.
The Company is subject to insurance guaranty fund laws in the states in which
it does business. These laws assess insurance companies amounts to be used to
pay benefits to policyholders and claimants of insolvent insurance companies.
Many states allow these assessments to be credited against future premium
taxes. At December 31, 1996 and 1995, the Company has accrued $888 and $842,
respectively, of premium tax deductions. The Company recognizes its
obligations for guaranty fund assessments when it receives notice that an
amount is payable to a guaranty fund. Expenses incurred for guaranty fund
assessments were $150 and $472 in 1996 and 1995, respectively.
8. Separate Accounts
Separate Accounts held by the Company represent primarily funds which are
administered for pension plans. The assets consist of common stock, long-term
bonds, real estate and short-term investments. Except for long-term bonds
which are carried at amortized cost, the assets are carried at estimated fair
value. Investment income and changes in asset values do not affect the
operating results of the Company. Separate Accounts business is maintained
independently from the general account of the Company. The Company provides
administrative services for these contracts. Fees earned by the Company
related to these contracts included in other considerations were $1,503 and
$1,434 for the years ended December 31, 1996 and 1995, respectively.
9. Employee Benefits
The Company shares personnel with Liberty Mutual which has a non-contributory
defined benefit pension plan covering employees who have attained age twenty-
one and have completed one year of service. Benefits are based on years of
service and the employee's "final average compensation" which is the
employee's average annual compensation for the highest five consecutive
calendar years during the ten years immediately preceding retirement. Liberty
Mutual's funding and accounting policies are to contribute annually the
maximum amount that can be deducted for federal income tax purposes and to
charge such contributions to expense in the year deductible for income tax
purposes. Liberty Mutual's pension cost charged to operations for the entire
plan in 1996 and 1995 was $15,541 and $26,432 respectively. The Company's
allocated pension cost in 1996 and 1995 was $395 and $628, respectively.
As of January 1, 1996 and 1995, the actuarial present value of accumulated
vested and nonvested benefits for the entire plan, based on a valuation
interest rate of 8% in 1996 and 1995, approximated $657,550 and $607,595,
respectively, and the net assets, at fair market value, available for plan
benefits approximated $994,643 and $776,859 in 1996 and 1995, respectively.
Assets of the plan consist primarily of investments in life insurance company
separate accounts and a collective investment trust fund. At January 1, 1996
and 1995, separate account investments of the Company, included in plan
assets at fair market value, amounted to approximately $696,384 and $521,220
respectively.
10. Postretirement Benefits
Liberty Mutual provides certain health care and life insurance benefits
("postretirement") for retired employees. Substantially all employees may
become eligible for these benefits if they reach retirement age while working
for the Liberty Companies. Alternatively, retirees may elect certain prepaid
health care benefit plans. Life insurance benefits are based upon a
participant's final compensation subject to the plan maximum.
Liberty Mutual records the costs of its postretirement benefits by the
accrual accounting method and has elected to amortize its transition
obligation for retirees and fully eligible or vested employees over 20 years.
The unamortized transition obligation was $155,840 and $165,580 at December
31, 1996 and 1995, respectively.
Net postretirement benefit costs for Liberty Mutual were approximately
$26,239 in 1996 and $30,979 in 1995 and includes the expected cost of such
benefits for newly eligible or vested employees, interest cost, gains and
losses arising from differences between actuarial assumptions and actual
experience, and amortization of the transition obligation. Liberty Mutual
made payments of $13,000 in 1996 and $14,000 in 1995, as claims were
incurred.
At December 31, 1996 and December 31, 1995, the accrued unfunded
postretirement benefit obligation for Liberty Mutual's retirees and other
fully eligible plan participants was $59,023 and $45,848, respectively. The
accumulated benefit obligation for non-vested employees was $96,742 and
$86,357 at December 31, 1996 and 1995, respectively. The discount rates used
in determining the accumulated postretirement benefit obligation were 7.25%
and 7% in 1996 and 1995, respectively, and the health care cost trend rates
were 10.75% and 11.25%, graded to 5% over 10 years, in 1996 and 1995,
respectively.
The Company's share of postretirement benefit costs were approximately $236
and $282 for 1996 and 1995, respectively.
The health care cost trend rate assumption has a significant effect on the
amount reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the postretirement
benefit obligation of the entire plan as of December 31, 1996 by
approximately $13,899, and the estimated eligibility cost and interest cost
components of net periodic postretirement benefit cost for 1996 by
approximately $1,699.
11. Related Party Transactions
Under a Service Agreement between the Company and Liberty Mutual, the latter
provides personnel, office space, equipment, computer processing and other
services. The Company reimburses Liberty Mutual for these services at cost,
and for any other special services supplied at the Company's request.
Substantially all of the Company's insurance expenses incurred in 1996 and
1995 related to this agreement.
The Company insures the group term life and disability risks for Liberty
Mutual employees. Premiums associated with these policies amounted to $13,903
and $14,755 in 1996 and 1995, respectively.
The Company insures key officers of Liberty Mutual Group under an Optional
Life Insurance Plan. Premiums associated with this plan amounted to $4,967
and $4,278 in 1996 and 1995, respectively.
Liberty Mutual purchased structured settlement annuity contracts, with and
without life contingencies, from the Company. Premiums under these contracts
amounted to $91,754 and $78,567 in 1996 and 1995, respectively. The related
policy and contract reserves with respect to all structured settlement
annuity contracts purchased by Liberty Mutual amounted to $441,220 and
$386,565 at December 31, 1996 and 1995, respectively.
Liberty Mutual deposited $16,107 and $2,761 with the Company in 1996 and
1995, respectively, to fund certain Liberty Mutual environmental claim
transactions. Such amounts have been included in deposit type fund revenues
for the years ended December 31, 1996 and 1995, as well as in the liability
for premium and other deposit funds.
In 1996, Keyport Life Insurance Company began ceding 100% of the premiums and
benefits of certain structured settlement annuity contracts, with and without
life contingencies, to the Company. Premiums under these contracts amounted
to $3,194 in 1996. The related policy and contract reserves with respect to
these structured settlement annuity contracts assumed by the Company amounted
to $2,601 at December 31, 1996.
12. Fair Value of Financial Instruments
Fair values generally represent quoted market value prices for securities
traded in the public marketplace, or analytically determined values using bid
or closing prices for securities not traded in the public marketplace.
The following methods and assumptions were used by the Company in estimating
the "fair value" disclosures for financial instruments in the accompanying
financial statements and notes thereto:
Fixed Maturities
Fair values for publicly traded fixed maturities are determined using values
reported by an independent pricing service. Fair values of private placement
fixed maturities are determined by obtaining market indications from various
broker-dealers.
Cash and Short-term Investments
The carrying amounts reported in the accompanying balance sheets for these
financial instruments approximate their fair values.
Policy Loans
The carrying amounts reported in the accompanying balance sheets for these
financial instruments approximate their fair values.
Investment Contracts
The fair values for the Company's liabilities under investment-type insurance
contracts are estimated using discounted cash flow calculations, based on
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
Policy Account Balances
The fair values of the Company's liabilities for insurance contracts other
than investment-type contracts are not required to be disclosed. However, the
fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk, such
that the Company's exposure to changing interest rates is minimized through
the matching of investment maturities with amounts due under insurance
contracts.
The carrying amount and fair value of the Company's financial instruments are
summarized a follows:
December 31, 1996 December 31, 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Fixed maturities $1,737,187 $1,737,187 $1,522,447 $1,522,447
Equity securities 4,122 4,122 4,191 4,191
Other invested assets 38,281 38,281 32,339 32,339
Policy loans 45,345 45,345 40,672 40,672
Short-term investments 78,715 78,715 121,471 121,471
Individual and group annuities 153,927 153,742 150,562 149,223
Other policyholder funds
left on deposit 8,009 8,009 7,527 7,527
13. Deferred Policy Acquisition Costs
Details with respect to deferred policy acquisition costs are summarized as
follows:
Year ended December 31
1996 1995
Balance, beginning of year $ 62,762 $ 54,283
Additions 16,114 14,143
Amortization (867) (2,830)
Valuation adjustment for unrealized
gain on fixed maturities (585) (2,834)
Balance, end of year $ 77,424 $ 62,762
14. Segment Information
Revenues and income from continuing operations before federal income taxes
and earnings of participating policies for each of the Company's segments are
summarized as follows:
Year ended December 31
1996 1995 1994
Revenues from continuing operations:
Group life and disability $203,911 $108,132 $ 84,872
Individual life and annuity 186,696 175,960 116,966
Group pension 32,835 36,488 37,552
Total revenues from continuing operations $423,442 $320,580 $239,390
Income from continuing operations before federal
income taxes and earnings from participating
policies:
Group life and disability $ 8,377 $ 5,723 $ 11,559
Individual life and annuity 24,319 22,444 18,284
Group pension 1,075 1,715 1,610
Total income from continuing operations
before federal income taxes and
earnings of participating policies $ 33,771 $ 29,882 $ 31,453
15. Reconciliation to Statutory-Basis Accounting
The Company is required to file statutory financial statements with state
insurance regulatory authorities. Accounting principles used to prepare
statutory financial statements differ from the financial statements reported
herein which are prepared on the basis of generally accepted accounting
principles.
Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included in
the accompanying financial statements are summarized as follows:
Year ended December 31
Net income: 1996 1995 1994
Statutory basis, net income $ 3,554 $ 6,952 $ 4,289
Increases/(decreases)
Deferred policy acquisition costs 15,247 11,101 9,921
Policy reserves 9,631 2,779 8,971
Participating policies (3,248) (3,397) (1,545)
Deferred federal income taxes (3,316) (2,934) (1,563)
Deferred premiums (1,859) (1,763) (1,644)
Interest maintenance reserve (526) (439) 687
Other 389 1,137 (187)
Net income as reported herein $ 19,872 $ 13,436 $ 18,929
Year ended December 31
Stockholders' equity: 1996 1995 1994
Statutory basis, capital and surplus $137,933 $ 84,441 $ 76,434
Increases/(decreases)
Deferred policy acquisition costs 77,424 65,597 54,283
Policy reserves 102,214 92,583 88,531
Participating policies (68,504) (65,256) (61,859)
Asset valuation reserve 11,773 9,372 6,969
Interest maintenance reserve 4,327 4,853 5,292
Deferred federal income taxes (73,973) (93,158) (30,198)
Deferred premiums (17,346) (15,487) (9,970)
Net unrealized gain on fixed maturities 121,967 184,696 17,077
Other 4,944 4,609 1,160
Stockholders' equity as reported herein $300,759 $272,250 $147,719
16. Discontinued Operations
On December 31, 1993, the Company discontinued its Group Medical insured and
administrative services line of business. Substantially all of the insured
operating assets and future policy liabilities, as of December 31, 1993, were
ceded to Liberty Mutual effective January 1, 1994, until the termination date
of the contracts. After termination there is no additional insurance risk
associated with this particular line of business and all insured operating
assets and future policy liabilities will be extinguished.