<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
MODIFIED SINGLE PAYMENT VARIABLE LIFE INSURANCE POLICIES
ALLMERICA ESTATE OPTIMIZER
This Prospectus provides important information about
PLEASE READ THIS Allmerica Estate Optimizer, a modified single payment
PROSPECTUS CAREFULLY variable life insurance contract issued by Allmerica
BEFORE INVESTING AND Financial Life Insurance and Annuity Company. The
KEEP IT FOR FUTURE contracts are funded through VEL Account III, a
REFERENCE. separate investment account of the Company that is
referred to as the Variable Account.
The Variable Account is subdivided into Sub-Accounts.
VARIABLE LIFE Each Sub-Account invests exclusively in shares of one
POLICIES INVOLVE of the following Funds of Allmerica Investment Trust,
RISKS INCLUDING Variable Insurance Products Fund, Variable Insurance
POSSIBLE LOSS OF Products Fund II, T. Rowe Price International Series,
PRINCIPAL. Inc., and Delaware Group Premium Fund, Inc.
<TABLE>
<C> <S> <C>
THIS PROSPECTUS MUST ALLMERICA INVESTMENT TRUST VARIABLE INSURANCE PRODUCTS FUND
BE ACCOMPANIED BY Select Aggressive Growth Fund Fidelity VIP Overseas Portfolio
PROSPECTUSES OF THE Select Capital Appreciation Fund Fidelity VIP Growth Portfolio
FUNDS. Select Value Opportunity Fund Fidelity VIP Equity-Income Portfolio
Select Emerging Markets Fund Fidelity VIP High Income Portfolio
Select International Equity Fund VARIABLE INSURANCE PRODUCTS FUND II
Select Growth Fund Fidelity VIP II Asset Manager Portfolio
Select Strategic Growth Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Growth Fund T. Rowe International Stock Portfolio
Equity Index Fund DELAWARE GROUP PREMIUM FUND, INC.
Select Growth and Income Fund DGPF International Equity Series
Investment Grade Income Fund
Select Income Fund
Government Bond Fund
Money Market Fund
</TABLE>
The Contract provides for life insurance coverage and
for the accumulation of a Contract Value, which will
accumulate on a variable basis. The Contract requires
the Contract Owner to make an initial payment of at
least $25,000.
Each Contract is a modified endowment contract for
THIS LIFE POLICY IS federal income tax purposes, except in certain
NOT: circumstances described in FEDERAL TAX
- A BANK DEPOSIT OR CONSIDERATIONS. A loan, distribution or other amounts
OBLIGATION; received from a modified endowment contract during
- FEDERALLY INSURED; the life of the Insured will be taxed to the extent
- ENDORSED BY ANY of accumulated income in the contract. Death Benefits
BANK OR under a modified endowment contract, however, are
GOVERNMENTAL generally not subject to federal income tax. See
AGENCY. FEDERAL TAX CONSIDERATIONS.
This Prospectus can also be obtained from the
Securities and Exchange Commission's website
(http://www.sec.gov).
IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING
INSURANCE WITH THE POLICY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<C> <S> <C>
CORRESPONDENCE MAY BE MAILED TO DATED MAY 1, 1999
ALLMERICA LIFE 440 LINCOLN STREET
P.O. BOX 8014 WORCESTER, MASSACHUSETTS 01653
BOSTON, MA 02266-8014 (508) 855-1000
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 3
SUMMARY............................................................................... 6
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND THE UNDERLYING FUNDS............ 13
INVESTMENT OBJECTIVES AND POLICIES.................................................... 15
INVESTMENT ADVISORY SERVICES.......................................................... 17
THE CONTRACT.......................................................................... 20
Applying for a Contract........................................................... 20
Free Look Period.................................................................. 20
Conversion Privilege.............................................................. 21
Payments.......................................................................... 21
Allocation of Payments............................................................ 21
Transfer Privilege................................................................ 22
Death Benefit..................................................................... 23
Guaranteed Death Benefit Rider.................................................... 24
Contract Value.................................................................... 25
Payment Options................................................................... 26
Optional Insurance Benefits....................................................... 26
Surrender......................................................................... 26
Partial Withdrawal................................................................ 27
CHARGES AND DEDUCTIONS................................................................ 27
Monthly Deductions................................................................ 27
Daily Deductions.................................................................. 28
Surrender Charge.................................................................. 29
Transfer Charges.................................................................. 30
CONTRACT LOANS........................................................................ 31
CONTRACT TERMINATION AND REINSTATEMENT................................................ 32
OTHER CONTRACT PROVISIONS............................................................. 33
FEDERAL TAX CONSIDERATIONS............................................................ 34
The Company and the Variable Account.............................................. 34
Taxation of the Contracts......................................................... 34
VOTING RIGHTS......................................................................... 36
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY....................................... 37
DISTRIBUTION.......................................................................... 38
REPORTS............................................................................... 38
SERVICES.............................................................................. 39
LEGAL PROCEEDINGS..................................................................... 39
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 39
FURTHER INFORMATION................................................................... 40
MORE INFORMATION ABOUT THE FIXED ACCOUNT.............................................. 40
INDEPENDENT ACCOUNTANTS............................................................... 41
YEAR 2000 DISCLOSURE.................................................................. 41
FINANCIAL STATEMENTS.................................................................. 42
APPENDIX A -- GUIDELINE MINIMUM SUM INSURED TABLE..................................... A-1
APPENDIX B -- OPTIONAL INSURANCE BENEFITS............................................. B-1
APPENDIX C -- PAYMENT OPTIONS......................................................... C-1
APPENDIX D -- ILLUSTRATIONS........................................................... D-1
APPENDIX E -- PERFORMANCE INFORMATION................................................. E-1
FINANCIAL STATEMENTS.................................................................. F-1
</TABLE>
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<PAGE>
SPECIAL TERMS
AGE: how old the Insured is on his/her last birthday measured on the Date of
Issue and each Contract anniversary.
ALLMERICA FINANCIAL: Allmerica Financial Life Insurance and Annuity Company.
"We," "our," "us," and "the Company" refer to Allmerica Financial Life Insurance
and Annuity Company in this prospectus.
BENEFICIARY: the person or persons you name to receive the Net Death Benefit
when the Insured dies.
CONTRACT OWNER: the person who may exercise all rights under the Contract, with
the consent of any irrevocable Beneficiary. "You" and "your" refer to the
Contract Owner in this prospectus.
CONTRACT VALUE: the total value of your Contract. It is the SUM of the:
- Value of the units of the Sub-Accounts credited to your Contract; PLUS
- Accumulation in the Fixed Account credited to the Contract.
DATE OF ISSUE: the date the Contract was issued, used to measure the Monthly
Processing Date, Contract months, Contract years and Contract anniversaries.
DEATH BENEFIT: the Face Amount (the amount of insurance determined by your
payment) or the Guideline Minimum Sum Insured, whichever is greater. After the
Final Payment Date, if the Guaranteed Death Benefit Rider is in effect, the
Death Benefit will be the greater of the Face Amount as of the Final Payment
Date or the Contract Value as of the date due proof of death is received by the
Company.
EVIDENCE OF INSURABILITY: information, including medical information, used to
decide the Insured's Underwriting Class.
FACE AMOUNT: the amount of insurance coverage. The Face Amount is shown in your
Contract.
FINAL PAYMENT DATE: the Contract anniversary before the Insured's 100th
birthday. After this date, no payments may be made and the Net Death Benefit is
the Contract Value less any Outstanding Loan.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed interest rate.
GENERAL ACCOUNT: all our assets other than those held in separate investment
accounts.
GUIDELINE MINIMUM SUM INSURED: the minimum death benefit required to qualify the
Contract as "life insurance" under federal tax laws. The guideline minimum sum
insured is the product of
- The Contract Value TIMES
- A percentage based on the Insured's age
GUIDELINE SINGLE PREMIUM: used to determine the Face Amount under the Contract.
INSURED: the person or persons covered under the Contract. If more than one
person is named, all provisions of the Contract that are based on the death of
the Insured will be based on the date of death of the last surviving Insured.
LOAN VALUE: the maximum amount you may borrow under the Contract.
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MONTHLY DEDUCTIONS: the amount of money that we deduct from the Contract Value
each month to pay for the Monthly Maintenance Fee, Administration Charge,
Monthly Insurance Protection Charge, Distribution Charge and the Federal and
State Payment Tax Charge.
MONTHLY INSURANCE PROTECTION CHARGE: the amount of money that we deduct from the
Contract Value each month to pay for the insurance.
MONTHLY PROCESSING DATE: the date, shown in your Contract, when Monthly
Deductions are deducted.
NET DEATH BENEFIT: Before the Final Payment Date the Net Death Benefit is:
- The Death Benefit; MINUS
- Any Outstanding Loan on the Insured's death rider charges and Monthly
Deductions due and unpaid through the Contract month in which the Insured
dies, as well as any partial withdrawal costs and surrender charges.
After the Final Payment Date, if the Guaranteed Death Benefit Rider is NOT in
effect, the Net Death Benefit is:
- The Contract Value; MINUS
- Any Outstanding Loan on the Insured's death.
If the Guaranteed Death Benefit Rider is in effect after the Final Payment Date,
the Death Benefit will be either the Face Amount as of the Final Payment Date or
the Contract Value as of the date due proof of death is received by the Company,
whichever is greater, reduced by an Outstanding Loan through the contract month
in which the Insured dies.
OUTSTANDING LOAN: all unpaid Contract loans plus loan interest due or accrued.
PRINCIPAL OFFICE: our office at 440 Lincoln Street, Worcester, Massachusetts
01653.
PRO-RATA ALLOCATION: an allocation among the Fixed Account and the Sub-Accounts
of the Variable Account in the same proportion that, on the date of allocation,
the Contract Value in the Fixed Account (other than value subject to Outstanding
Loan) and the Contract Value in each Sub-Account bear to the total Contract
Value.
SECOND-TO-DIE: the Contract may be issued as a joint survivorship
("Second-to-Die") Contract. Life insurance coverage is provided for two
Insureds, with death benefits payable at the death of the last surviving
Insured.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a Fund.
SURRENDER VALUE: the amount payable on a full surrender. It is the Contract
Value less any Outstanding Loan and surrender charges.
UNDERLYING FUNDS (FUNDS): the investment Funds of Allmerica Investment Trust
("Trust"), the Portfolios of Fidelity Variable Insurance Products Fund
("Fidelity VIP"), Fidelity Variable Insurance Products Fund II ("Fidelity VIP
II"), T. Rowe Price International Series, Inc. ("T. Rowe Price"), and the Series
of Delaware Group Premium Fund, Inc. ("DGPF") which are available under the
Contract.
UNDERWRITING CLASS: the insurance risk classification that we assign the Insured
based on the information in the application and other Evidence of Insurability
we consider. The Insured's underwriting class will affect the Monthly Insurance
Protection Charge.
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UNIT: a measure of your interest in a Sub-Account.
VALUATION DATE: any day on which the net asset value of the shares of any Funds
and Unit values of any Sub-Accounts are computed. Valuation dates currently
occur on:
- Each day the New York Stock Exchange is open for trading; and
- Other days (other than a day during which no payment, partial withdrawal
or surrender of a Contract was received) when there is a sufficient degree
of trading in a Fund's portfolio securities so that the current net asset
value of the Sub-Accounts may be materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ACCOUNT: VEL Account III, one of the Company's separate investment
accounts.
WRITTEN REQUEST: your request in writing, satisfactory to us, received at our
Principal Office.
5
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SUMMARY
WHAT IS THE CONTRACT'S OBJECTIVE?
The objective of the Contract is to give permanent life insurance protection and
to help you build assets tax-deferred. Benefits available through the Contract
include:
- A life insurance benefit that can protect your family;
- Payment options that can guarantee an income for life, if you want to use
your Contract for retirement income;
- A personalized investment portfolio you may tailor to meet your needs,
time frame and risk tolerance level;
- Experienced professional investment advisers; and
- Tax deferral on earnings while your money is accumulating.
The Contract combines features and benefits of traditional life insurance with
the advantages of professional money management. However, unlike the fixed
benefits of ordinary life insurance, the Contract Value will increase or
decrease depending on investment results. Unlike traditional insurance policies,
the Contract has no fixed schedule for payments.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is a contract between you and us. Each Contract has a Contract
Owner ("you"), the Insured and a Beneficiary. As Contract Owner, you make the
payment, choose investment allocations and select the Insured and Beneficiary.
The Insured is the person covered under the Contract. The Beneficiary is the
person who receives the Net Death Benefit when the Insured dies.
WHAT HAPPENS WHEN THE INSURED DIES?
We will pay the Net Death Benefit to the Beneficiary when the Insured dies while
the Contract is in effect. If the Contract was issued as a Second-to-Die
Contract, the Net Death Benefit will be paid on the death of the last surviving
Insured.
Before the Final Payment Date, the Death Benefit is either the Face Amount (the
amount of insurance determined by your payment) or the minimum death benefit
provided by the Guideline Minimum Sum Insured, whichever is greater. The Net
Death Benefit is the Death Benefit less any Outstanding Loan, rider charges and
Monthly Deductions due and unpaid through the Contract month in which the
Insured dies, as well as any partial withdrawals and surrender charges.
After the Final Payment Date, if the Guaranteed Death Benefit Rider is NOT in
effect, the Net Death Benefit is the Contract Value less any Outstanding Loan.
The Beneficiary may receive the Net Death Benefit in a lump sum or under one of
the Company's payment options. If the Guaranteed Death Benefit Rider is in
effect on the Final Payment Date, a Guaranteed Death Benefit will be provided
unless the Rider is subsequently terminated. The Guaranteed Death Benefit will
be either the Face or the Contract Value as of the date due proof of death is
received by the Company, which is greater, reduced by any Outstanding Loan
through the Contract month in which the insured dies. For more information, see
"Guaranteed Death Benefit Rider."
CAN I EXAMINE THE CONTRACT?
Yes. You have the right to examine and cancel your Contract by returning it to
us or to one of our representatives within 10 days (or such later date as
required in your state) after you receive the Contract.
6
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If your Contract provides for a full refund under its "Right to Cancel"
provision as required in your state, your refund will be your entire payment.
If your Contract does not provide for a full refund, you will receive:
- Amounts allocated to the Fixed Account; PLUS
- The value of the Units in the Variable Account; PLUS
- All fees, charges and taxes which have been imposed.
Your refund will be determined as of the Valuation Date that the Contract is
received at our Principal Office.
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits you to allocate payments to up to twenty Sub-Accounts of
the Variable Account. Each Sub-Account invests its assets in a corresponding
investment portfolio ("Fund") of Allmerica Investment Trust ("Trust"), Variable
Insurance Products Fund ("Fidelity VIP"), Variable Insurance Products Fund II
("Fidelity VIP II"), T. Rowe Price International Series, Inc. ("T. Rowe Price")
or Delaware Group Premium Fund, Inc. ("DGPF").
This range of investment choices allows you to allocate your money among the
various Funds to meet your investment needs. If your Contract provides for a
full refund under its "Right to Cancel" provision as required in your state, we
will allocate all Sub-Account investments to the Money Market Fund during the
Right to Cancel period. Reallocation will then be made to the Sub-Account
investments you selected on the application no later than the expiration of the
Right to Cancel period. For more information about your investment choices, see
WHO ARE THE INVESTMENT ADVISERS AND HOW ARE THEY SELECTED?, below.
The Contract also offers a Fixed Account. The Fixed Account is a guaranteed
account offering a minimum interest rate. It is part of the General Account of
the Company.
WHO ARE THE INVESTMENT ADVISERS AND HOW ARE THEY SELECTED?
BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension consulting firm,
assists the Company in the selection of the Contract's Funds. In addition, BARRA
RogersCasey assists the Trust in the selection of investment advisers for the
Funds of the Trust. BARRA RogersCasey provides consulting services to pension
plans representing hundreds of billions of dollars in total assets and, in its
consulting capacity, monitors the investment performance of over 1000 investment
advisers. BARRA RogersCasey also develops asset allocation strategies that
broker-dealers may elect to provide to their registered representatives in
assisting clients in developing diversified portfolios. BARRA RogersCasey is
wholly-controlled by BARRA, Inc. As a consultant, BARRA RogersCasey has no
decision-making authority with respect to the Funds, and is not responsible for
any investment advice provided to the Funds by Allmerica Financial Investment
Management Services, Inc. ("AFIMS") or the investment advisers.
AFIMS, an affiliate of the Company, is the investment manager of the Trust.
AFIMS has entered into agreements with investment advisers ("Sub-Advisers")
selected by AFIMS and the Trustees in consultation with BARRA RogersCasey. Each
investment adviser is selected by using strict objective, quantitative, and
qualitative criteria, with special emphasis on the investment adviser's record
in managing similar portfolios. In consultation with BARRA RogersCasey, a
committee monitors and evaluates the ongoing performance of all of the Funds.
The committee may recommend the replacement of an investment adviser of one of
the Funds of the Trust, or the addition or deletion of Funds. The committee
includes members who may be affiliated or unaffiliated with the Company and the
Trust. The Sub-Advisers (other than Allmerica Asset Management, Inc.) are not
affiliated with the Company or the Trust.
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Fidelity Management & Research Company ("FMR") is the investment adviser of
Fidelity VIP and Fidelity VIP II. FMR is one of America's largest investment
management organizations and has its principal business address at 82 Devonshire
Street, Boston, Massachusetts. It is composed of a number of different
companies, which provide a variety of financial services and products. FMR is
the original Fidelity company, founded in 1946. It provides a number of mutual
funds and other clients with investment research and portfolio management
services.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is the investment
adviser of T. Rowe Price. Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
one of the largest no-load international mutual fund asset managers with
approximately $32 billion (as of December 31, 1998) under management in its
offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. T.
Rowe Price Associates, Inc., an affiliate of Price-Fleming, serves as
Sub-Adviser of the Select Capital Appreciation Fund of the Trust.
Delaware International Advisers, Ltd. ("Delaware International") is the
investment adviser for the International Equity Series.
The following are the Investment Managers and Sub-Advisers of the Funds:
<TABLE>
<CAPTION>
FUND MANAGER
- -------------------------------------- --------------------------------------------
<S> <C>
Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Select Emerging Markets Fund Schroder Capital Management International
Inc.
T. Rowe Price International Stock Rowe Price-Fleming International, Inc.
Portfolio
Fidelity VIP Overseas Portfolio Fidelity Management & Research Company
Select International Equity Fund Bank of Ireland Asset Management (U.S.)
Limited
Delaware International Equity Series Delaware International Advisers, Ltd.
Fidelity VIP Growth Portfolio Fidelity Management & Research Company
Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Growth Fund Miller, Anderson, & Sherrerd
Equity Index Fund Allmerica Asset Management, Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management & Research Company
Select Growth and Income Fund J. P. Morgan Investment Management Inc.
Fidelity VIP II Asset Manager Fidelity Management & Research Company
Portfolio
Fidelity VIP High Income Portfolio Fidelity Management & Research Company
Investment Grade Income Fund Allmerica Asset Management, Inc.
Select Income Fund Standish, Ayer & Wood, Inc.
Government Bond Fund Allmerica Asset Management, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
CAN I MAKE TRANSFERS AMONG THE FUNDS AND THE FIXED ACCOUNT?
Yes. You may transfer among the Funds and the Fixed Account, subject to our
consent and then current rules. You will incur no current taxes on transfers
while your money is in the Contract. You also may elect automatic account
rebalancing so that assets remain allocated according to a desired mix or choose
automatic dollar cost averaging to gradually move funds into one or more
Sub-Accounts. See "Transfer Privilege."
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The first 12 transfers of Contract Value in a Contract year are free. A transfer
charge not to exceed $25 may apply for each additional transfer in the same
Contract year. This charge is for the costs of processing the transfer.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The Contract requires a single payment on or before the Date of Issue.
Additional payment(s) of at least $10,000 may be made as long as the total
payments do not exceed the maximum payment amount specified in the Contract.
WHAT IF I NEED MY MONEY?
You may borrow up to the Loan Value of your Contract. The Loan Value is 90% of
your Surrender Value. You may also make partial withdrawals and surrender the
Contract for its Surrender Value.
The guaranteed annual interest rate credited to the Contract Value securing a
loan will be at least 4.0%. However, any portion of the Outstanding Loan that is
a preferred loan will be credited with not less than 5.50%.
We will allocate Contract loans among the Sub-Accounts and the Fixed Account
according to your instructions. If you do not make an allocation, we will make a
Pro-rata Allocation. We will transfer the Contract Value in each Sub-Account
equal to the Contract loan to the Fixed Account.
You may surrender your Contract and receive its Surrender Value. You may make
partial withdrawals of $1,000 or more from the Contract Value, subject to a
partial withdrawal transaction fee and any applicable surrender charges. The
Face Amount is proportionately reduced by each partial withdrawal. We will not
allow a partial withdrawal if it would reduce the Contract Value below $25,000.
A surrender or partial withdrawal may have tax consequences. See "Taxation of
the Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
Yes. There are several changes you can make after receiving your Contract,
within limits. You may
- Cancel your Contract under its "Right to Cancel" provision;
- Transfer your ownership to someone else;
- Change the Beneficiary;
- Change the allocation for any additional payment, with no tax consequences
under current law;
- Make transfers of the Contract Value among the Funds, with no taxes
incurred under current law; and
- Add or remove the optional insurance benefits provided by rider.
CAN I CONVERT MY CONTRACT INTO A FIXED CONTRACT?
Yes. You can convert your Contract without charge during the first 24 months
after the Date of Issue. On conversion, we will transfer the Contract Value in
the Variable Account to the Fixed Account. We will allocate any future
payment(s) to the Fixed Account, unless you instruct us otherwise.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
The following charges will apply to your Contract under the circumstances
described. Some of these charges apply throughout the Contract's duration.
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We deduct the following monthly charges from the Contract Value:
- a $2.50 Maintenance Fee from Contracts with a Contract Value of less than
$100 (See "Maintenance Fee");
- 0.20% on an annual basis for the administrative expenses (See
"Administration Charge");
- a deduction for the cost of insurance, which varies depending on the type
of Contract and Underwriting Class (See "Monthly Insurance Protection
Charge"); and
- For the first ten Contract years only, 0.90% on an annual basis for
distribution expenses (See "Distribution Fee"); and
- For the first Contract year only, 1.50% on an annual basis for federal,
state and local taxes (See "Federal & State Payment Tax Charge").
The following daily charge is deducted from the Variable Account:
- 0.90% on an annual basis for the mortality and expense risks (See
"Mortality and Expense Risk Charge").
There are deductions from and expenses paid out of the assets of the Funds that
are described in the accompanying prospectuses.
WHAT ARE THE EXPENSES AND FEES OF THE FUNDS?
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Funds. The levels of fees and expenses vary
among the Funds. The following table shows the expenses of the Funds for 1998.
For more information concerning fees and expenses, see the prospectuses of the
Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND EXPENSES
(AFTER VOLUNTARY (AFTER APPLICABLE (AFTER WAIVERS/
UNDERLYING FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ---------------------------------------------------------- ------------------ ------------------ ----------------------
<S> <C> <C> <C>
Select Aggressive Growth Fund............................. 0.88% 0.07% 0.95%(1)(2)
Select Capital Appreciation Fund.......................... 0.94% 0.10% 1.04%(1)(2)
Select Value Opportunity Fund............................. 0.90%(1)* 0.08% 0.98%(1)(2)*
Select Emerging Markets Fund(@)........................... 1.00%* 1.19% 2.19%(1)(2)*
Select International Equity Fund.......................... 0.90% 0.12% 1.02%(1)(2)
DGPF International Equity Series.......................... 0.82%(4) 0.13% 0.95%(4)
Fidelity VIP Overseas Portfolio........................... 0.74% 0.17% 0.91%(3)
T. Rowe Price International Stock Portfolio............... 1.05% 0.00% 1.05%
Select Growth Fund........................................ 0.81%** 0.05% 0.86%(1)(2)**
Select Strategic Growth Fund(@)........................... 0.39%* 0.81% 1.20%(1)(2)*
Growth Fund............................................... 0.44% 0.05% 0.49%(1)(2)
Fidelity VIP Growth Portfolio............................. 0.59% 0.09% 0.68%(3)
Equity Index Fund......................................... 0.29% 0.07% 0.36%(1)
Select Growth and Income Fund............................. 0.68% 0.05% 0.73%(1)(2)
Fidelity VIP Equity-Income Portfolio...................... 0.49% 0.09% 0.58%(3)
Fidelity VIP II Asset Manager Portfolio................... 0.54% 0.10% 0.64%(3)
Fidelity VIP High Income Portfolio........................ 0.58% 0.12% 0.70%(3)
Investment Grade Income Fund.............................. 0.43% 0.09% 0.52%(1)
Select Income Fund........................................ 0.54%* 0.10% 0.64%(1)
Government Bond Fund...................................... 0.50% 0.14% 0.64%(1)
Money Market Fund......................................... 0.26% 0.06% 0.32%(1)
</TABLE>
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(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations on February 20, 1998. Expenses shown are annualized.
* Amount has been adjusted to reflect a voluntary expense limitation currently
in effect for Select Emerging Markets Fund, Select Value Opportunity Fund,
and Select Strategic Growth Fund. Without these adjustments, the Management
Fees and Total Fund Expenses would have been 1.35% and 2.54%, respectively,
for Select Emerging Markets Fund, 0.91% and 0.99%, respectively, for Select
Value Opportunity Fund, and 0.85% and 1.66%, respectively, for Select
Strategic Growth Fund.
** Effective June 1, 1998, the management fee rate for the Select Growth Fund
was revised. The Management Fee and Total Fund Expense ratios shown in the
table above have been adjusted to assume that the revised rates took effect
January 1, 1998.
(1) Until further notice, Allmerica Financial Investment Management Services,
Inc. ("AFIMS") has declared a voluntary expense limitation of 1.35% of
average net assets for Select Aggressive Growth Fund and Select Capital
Appreciation Fund, 1.25% for Select Value Opportunity Fund, 1.50% for Select
International Equity Fund, 1.20% for Growth Fund and Select Growth Fund,
1.10% for Select Growth and Income Fund, 1.00% for Select Income Fund,
Investment Grade Income Fund and Government Bond Fund, and 0.60% for Money
Market Fund, and Equity Index Fund. The total operating expenses of these
Funds of the Trust were less than their respective expense limitations
throughout 1998.
Until further notice, AFIMS has declared a voluntary expense limitation of
1.20% of average daily net assets for the Select Strategic Growth Fund. In
addition, AFIMS has agreed to voluntarily waive its management fee to the
extent that expenses of the Select Emerging Markets Fund exceed 2.00% of the
Fund's average daily net assets, except that such waiver shall not exceed
the net amount of management fees earned by AFIMS from the Fund after
subtracting fees paid by AFIMS to a sub-adviser.
Until further notice, the Select Value Opportunity Fund's management fee
rate has been voluntarily limited to an annual rate of 0.90% of average
daily net assets, and total expenses are limited to 1.25% of average daily
net assets.
The declaration of a voluntary management fee or expense limitation in any
year does not bind the Manager to declare future expense limitations with
respect to these Funds. These limitations may be terminated at any time.
(2) These funds have entered into agreements with brokers whereby brokers
rebate a portion of commissions. Had these amounts been treated as
reductions of expenses, the total annual fund operating expense ratios would
have been 2.19% for Select Emerging Markets Fund, 0.92% for Select
Aggressive Growth Fund, 1.02% for Select Capital Appreciation Fund, 0.94%
for Select Value Opportunity Fund, 1.01% for Select International Equity
Fund, 0.84% for Select Growth Fund, 1.14% for Select Strategic Growth Fund,
0.46% for Growth Fund and 0.70% for Select Growth and Income Fund.
(3) A portion of the brokerage commissions that certain funds paid were used to
reduce Fund expenses. In addition, certain funds, or Fidelity Management &
Research Company on behalf of certain funds, have entered into arrangements
with their custodian and transfer agent whereby credits realized as a result
of uninvested cash balances were used to reduce custodian expenses.
Including these reductions, the total operating expenses presented in the
table would have been 0.57% for Fidelity VIP Equity-Income Portfolio, and
0.66% for Fidelity VIP Growth Portfolio, 0.89% for Fidelity VIP Overseas
Portfolio and 0.63% for Fidelity VIP II Asset Manager Portfolio.
(4) Effective May 1, 1999, Delaware International Advisers Ltd., the investment
adviser for the DGPF International Equity Series, has agreed to limit total
annual expenses of the fund to 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 1999. The new limitation will
be in effect through October 31, 1999. For the fiscal year ended December
31, 1998, the actual ratio of total annual expenses was 0.88%.
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The Underlying Fund information above was provided by the Underlying Funds
and was not independently verified by the Company.
WHAT CHARGES DO I INCUR IF I SURRENDER MY CONTRACT OR MAKE A PARTIAL WITHDRAWAL?
The charges below apply only if you surrender your Contract or make partial
withdrawals:
- Surrender Charge -- A surrender charge on a withdrawal exceeding the "Free
10% Withdrawal," described below. This charge applies on surrenders or
partial withdrawals within ten Contract years from Date of Issue. The
surrender charge begins at 10.00% of the amount that exceeds the Free 10%
Withdrawal amount and decreases to 0% by the tenth Contract year.
- Partial Withdrawal Transaction Fee -- A transaction fee of 2.0% of the
amount withdrawn, not to exceed $25, for each partial withdrawal for
processing costs. The transaction fee applies to all partial withdrawals,
including a Withdrawal without a surrender charge.
WHAT ARE THE LAPSE AND REINSTATEMENT PROVISIONS OF MY CONTRACT?
The Contract will not lapse unless the Surrender Value on a Monthly Processing
Date is less than zero. There is a 62-day grace period in this situation. You
may reinstate your Contract within three years after the grace period, within
limits. If the Guaranteed Death Benefit Rider is in effect, the Contract will
not lapse. However, if the Guaranteed Death Benefit Rider terminates, the
Contract may then lapse. See "Guaranteed Death Benefit Rider."
HOW IS MY CONTRACT TAXED?
The Contract has been designed to be a "modified endowment contract." However,
under Section 1035 of the Internal Revenue Code of 1986, as amended ("Code") an
exchange of (1) a life insurance contract entered into before June 21, 1988 or
(2) a life insurance contract that is not itself a modified endowment contract,
will not cause this Contract to be treated as a modified endowment contract if
no additional payments are made and there is no increase in the death benefit as
a result of the exchange.
If the Contract is considered a modified endowment contract, all distributions
(including Contract loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis. Also, a 10% penalty tax may be imposed on
that part of a distribution that is includible in income. However, the Net Death
Benefit under the Contract is excludable from the gross income of the
Beneficiary. In some circumstances, federal estate tax may apply to the Net
Death Benefit or the Contract Value. See "Taxation of the Contracts."
THIS SUMMARY IS INTENDED TO PROVIDE ONLY A VERY BRIEF OVERVIEW OF THE MORE
SIGNIFICANT ASPECTS OF THE CONTRACT. THIS PROSPECTUS AND THE CONTRACT PROVIDE
FURTHER DETAIL. THE CONTRACT PROVIDES INSURANCE PROTECTION FOR THE NAMED
BENEFICIARY. THE CONTRACT AND ITS ATTACHED APPLICATION ARE THE ENTIRE AGREEMENT
BETWEEN YOU AND THE COMPANY.
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DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
Allmerica Financial Life Insurance and Annuity Company ("Company" or "Allmerica
Financial") is a life insurance company organized under the laws of Delaware in
1974. The Company is an indirect, wholly-owned subsidiary of First Allmerica
Financial Life Insurance Company ("First Allmerica"), which in turn is a
wholly-owned subsidiary of Allmerica Financial Corporation. First Allmerica was
organized under the laws of Massachusetts in 1844 and is the fifth oldest life
insurance company in America. Our principal office is 440 Lincoln Street,
Worcester, Massachusetts 01653, telephone 1-508-855-1000. We are subject to the
laws of the state of Delaware, to regulation by the Commissioner of Insurance of
Delaware, and to other laws and regulations where we are licensed to operate. As
of December 31, 1998, Allmerica Financial had over $14 billion in assets and
over $26 billion of life insurance in force.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account with twenty-one (21)
Sub-Accounts. You may have allocations in up to twenty (20) Sub-Accounts at one
time. Each Sub-Account invests in a Fund of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price or DGPF. The assets used to fund the variable part of the
Contracts are set aside in Sub-Accounts and are separate from our general
assets. We administer and account for each Sub-Account as part of our general
business. However, income, capital gains and capital losses are allocated to
each Sub-Account without regard to any of our other income, capital gains or
capital losses. Under Delaware law, the assets of the Variable Account may not
be charged with any liabilities arising out of any other business of ours.
Our Board of Directors authorized the Variable Account by vote on June 13, 1996.
The Variable Account meets the definition of "separate account" under federal
securities laws. It is registered with the Securities and Exchange Commission
("SEC") as a unit investment trust under the Investment Company Act of 1940
("1940 Act"). This registration does not involve SEC supervision of the
management or investment practices or policies of the Variable Account or of the
Company. We reserve the right, subject to law, to change the names of the
Variable Account and the Sub-Accounts.
THE TRUST
The Trust is an open-end, diversified management investment company registered
with the SEC under the 1940 Act. This registration does not involve SEC
supervision of the investments or investment policy of the Trust or its separate
investment portfolios.
First Allmerica established the Trust as a Massachusetts business trust on
October 11, 1984. The Trust is a vehicle for the investment of assets of various
separate accounts established by the Company, or other insurance companies.
Shares of the Trust are not offered to the public but solely to the separate
accounts. Fourteen different investment portfolios of the Trust are available
under the Contracts, each issuing a series of shares: Select Aggressive Growth
Fund, Select Capital Appreciation Fund, Select Value Opportunity Fund, Select
Emerging Markets Fund, Select International Equity Fund, Select Growth Fund,
Select Strategic Growth Fund, Growth Fund, Equity Index Fund, Select Growth and
Income Fund, Select Income Fund, Investment Grade Income Fund, Government Bond
Fund, and Money Market Fund. The assets of each Fund
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<PAGE>
are held separate from the assets of the other Funds. Each Fund operates as a
separate investment vehicle. The income or losses of one Fund have no effect on
the investment performance of another Fund. The Sub-Accounts reinvest dividends
and/or capital gains distributions received from a Fund in more shares of that
Fund as retained assets. Allmerica Financial Investment Management Services,
Inc. ("AFIMS") serves as investment manager of the Trust. AFIMS has entered into
agreements with other investment managers ("Sub-Advisers"), who manage the
investments of the Funds. See "Investment Advisory Services to the Trust."
FIDELITY VIP
Fidelity VIP, managed by Fidelity Management & Research Company ("FMR"), is an
open-end, diversified, management investment company organized as a
Massachusetts business trust on November 13, 1981, and registered with the SEC
under the 1940 Act. Four of its investment portfolios are available under the
Contract: Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income
Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. Fidelity Management is one of America's largest investment
management organizations, and has its principal business address at 82
Devonshire Street, Boston, Massachusetts. It is composed of a number of
different companies which provide a variety of financial services and products.
FMR is the original Fidelity company, founded in 1946. It provides a number of
mutual funds and other clients with investment research and portfolio management
services.
FIDELITY VIP II
Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR (see
discussion under "Fidelity VIP"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on March 21, 1988
and is registered with the SEC under the 1940 Act. One of its investment
portfolios is available under the Contract: the Fidelity VIP II Asset Manager
Portfolio.
T. ROWE PRICE
T. Rowe Price, managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"), is an open-end, diversified, management investment company
organized as a Maryland corporation in 1994 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the Contracts:
the T. Rowe Price International Stock Portfolio.
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified,
management investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of DGPF or its separate investment series. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Contract: the International Equity
Series. The investment adviser for the International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). See "Investment Advisory
Services to DGPF."
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. The
Funds are listed by general investment risk characteristics. MORE DETAILED
INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND RISKS,
EXPENSES PAID BY THE FUNDS AND OTHER RELEVANT INFORMATION REGARDING THE MAY BE
FOUND IN THEIR RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND
SHOULD BE READ CAREFULLY BEFORE INVESTING. The Statements of Additional
Information of the Funds are available upon request. There can be no assurance
that the investment objectives of the Funds can be achieved.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund of the
Trust seeks long-term growth of capital. Realization of income is not a
significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund invests
primarily in common stock of industries and companies which are believed to be
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund of the Trust
seeks long-term growth by investing primarily in a diversified portfolio of
common stocks of small and mid-size companies whose securities at the time of
purchase are considered by the Sub-Adviser to be undervalued.
SELECT EMERGING MARKETS FUND -- The Select Emerging Markets Fund of the Trust
seeks long-term growth of capital by investing in the world's emerging markets.
The Fund may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust seeks maximum long-term total return (capital appreciation and income)
primarily by investing in common stocks of established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
seeks long-term growth without undue risk to principal by investing primarily in
equity securities of foreign issuers providing the potential for capital
appreciation and income.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP seeks to
achieve capital appreciation. The Portfolio normally purchases common stocks,
although its investments are not restricted to any one type of security. Capital
appreciation also may be found in other types of securities, including bonds and
preferred stocks.
SELECT GROWTH FUND -- The Select Growth Fund of the Trust seeks to achieve
long-term growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
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SELECT STRATEGIC GROWTH FUND -- The Select Strategic Growth Fund of the Trust
seeks long-term growth of capital by investing primarily in common stocks of
established companies.
GROWTH FUND -- The Growth Fund of the Trust is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Growth Fund is to achieve long-term growth of capital. Realization of
current investment income, if any, is incidental to this objective.
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP seeks reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, the Portfolio also will consider the
potential for capital appreciation. The Portfolio's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the S&P 500. The
Portfolio may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities. See "Risks of Lower-Rated Debt
Securities" in the Fidelity VIP prospectus.
SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund of the Trust
seeks a combination of long-term growth of capital and current income. The Fund
will invest primarily in dividend-paying common stocks and securities
convertible into common stocks.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
fixed-income instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
seeks to obtain a high level of current income by investing primarily in
high-yielding, lower-rated fixed-income securities (commonly referred to as
"junk bonds"), while also considering growth of capital. These securities often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.
SELECT INCOME FUND -- The Select Income Fund of the Trust seeks a high level of
current income. The Fund will invest primarily in investment grade, fixed-income
securities.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
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CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Contract Value in that Sub-Account, the
Company will transfer it without charge on written request within sixty (60)
days of the later of (1) the effective date of such change in the investment
policy, or (2) your receipt of the notice of the right to transfer. You may then
change the percentages of your premium and deduction allocations.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The Trustees have responsibility for the supervision of the affairs of the
Trust. The Trustees have entered into a management agreement with Allmerica
Financial Investment Management Services, Inc. ("AFIMS"), an indirectly
wholly-owned subsidiary of First Allmerica Financial Life Insurance Company.
AFIMS, subject to Trustee review, is responsible for the daily affairs of the
Trust and the general management of the Funds. AFIMS performs administrative and
management services for the Trust, furnishes to the Trust all necessary office
space, facilities and equipment, and pays the compensation, if any, of officers
and Trustees who are affiliated with AFIMS.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- Costs to register and qualify the Trust's shares under the Securities Act
of 1933 ("1933 Act")
- Other fees payable to the SEC
- Independent public accountant, legal and custodian fees
- Association membership dues, taxes, interest, insurance payments and
brokerage commissions
- Fees and expenses of the Trustees who are not affiliated with AFIMS
- Expenses for proxies, prospectuses, reports to shareholders and other
expenses
Under the management agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and the Trustees in
consultation with BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension
consulting firm. The cost of such consultation services is borne by AFIMS. As a
consultant, BARRA RogersCasey has no decision-making authority with respect to
the Funds, and is not responsible for any advice provided to the Funds by AFIMS
or the Sub-Advisers.
Under each Sub-Adviser agreement, the Sub-Adviser is authorized to engage in
portfolio transactions on behalf of the Fund, subject to the Trustees'
instructions. The Sub-Advisers (other than Allmerica Asset Management, Inc.) are
not affiliated with the Company or the Trust.
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For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
<TABLE>
<S> <C> <C>
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Emerging Markets Fund * 1.35%
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Strategic Growth Fund * 0.85%
Growth Fund First $100 million 0.60%
Next $150 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Select Income Fund First $50 million 0.60%
Next $50 million 0.55%
Over $100 million 0.45%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Select Emerging Markets Fund, Select Strategic Growth Fund, and
Government Bond Fund, the investment management fee does not vary according to
the level of assets in the Fund.
AFIMS's fee, computed for each Fund of the Trust, will be paid from the assets
of such Fund. Pursuant to the Management Agreement with the Trust, AFIMS has
entered into agreements (Sub-Adviser Agreements) with other investment advisers
(Sub-Advisers) under which each Sub-Adviser manages the investments of one or
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more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. AFIMS is solely responsible for the payment of all fees for investment
management services to the Sub-Advisers.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds and
fees paid to the Sub-Advisers by AFIMS, and should be read in conjunction with
this Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II
For managing investments and business affairs, each Portfolio pays a monthly
management fee to FMR. The prospectuses of Fidelity VIP and Fidelity VIP II
contain additional information concerning the Portfolios, including information
about additional expenses paid by the Portfolios, and should be read in
conjunction with this Prospectus.
The fee for each fund is calculated by adding a group fee rate to an individual
fund fee rate, multiplying the result by the fund's monthly average net assets,
and dividing by twelve.
The Fidelity VIP High Income Portfolio's annual fee rate is made up of the sum
of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis, this rate cannot rise above 0.37%,
and drops as total assets under management increase.
2. An individual fund fee rate of 0.45% for the Fidelity VIP High Income
Portfolio.
The fee rates of the Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity
VIP II Asset Manager and Fidelity VIP Overseas Portfolios each are made up of
two components:
1. A group fee rate based on the average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.52%, and
drops as total assets under mamagement increase.
2. An individual fund fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas Portfolio.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82% of
its average net assets. The Fidelity VIP Equity-Income Portfolio may have a fee
as high as 0.72% of its average net assets. The Fidelity VIP Growth Portfolio
may have a fee as high as 0.82% of its average net assets. The Fidelity VIP II
Asset Manager Portfolio may have a fee as high as 0.77% of its average net
assets. The Fidelity VIP Overseas Portfolio may have a fee as high as 0.97% of
its average net assets. The actual fee rate may be less depending on the total
assets in the funds advised by FMR.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded
in 1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of the largest no-load international mutual
fund asset managers, with approximately $32 billion (as of December 31, 1998)
under management in its offices in Baltimore, London, Tokyo, Hong Kong,
Singapore and Buenos Aires. T. Rowe Price Associates, Inc., an affiliate of
Price-Fleming, serves as Sub-Adviser to the Select Capital Appreciation Fund of
the Trust.
To cover investment management and operating expenses, the T. Rowe Price
International Stock Portfolio pays Price-Fleming a single, all-inclusive fee of
1.05% of its average daily net assets.
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INVESTMENT ADVISORY SERVICES TO DGPF
Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is based on the average daily net assets of the
Series as follows: 0.85% on the first $500 million, 0.80% on the next $500
million, 0.75% on the next $1,500 million and 0.70% on net assets in excess of
$2,500 million.
THE CONTRACT
APPLYING FOR A CONTRACT
Individuals wishing to purchase a Contract must complete an application and
submit it to an authorized representative or to the Company at its Principal
Office. We offer Contracts to applicants 89 years old and under. After receiving
a completed application from a prospective Contract Owner, we will begin
underwriting to decide the insurability of the proposed Insured. We may require
medical examinations and other information before deciding insurability. We
issue a Contract only after underwriting has been completed. We may reject an
application that does not meet our underwriting guidelines.
If a prospective Contract Owner makes the initial payment with the application,
we will provide fixed conditional insurance during underwriting. The conditional
insurance will be based upon Death Benefit Factors shown in the Conditional
Insurance Agreement, up to a maximum of $500,000, depending on Age and
Underwriting Class. This coverage will continue for a maximum of 90 days from
the date of the application or, if required, the completed medical exam. If
death is by suicide, we will return only the payment made. If the initial
payment is not made with the application, on Contract delivery we will require
the initial payment to place the insurance in force.
If you made the initial payment before the date of Issuance and Acceptance, we
will allocate the payment to our Fixed Account within two business days of
receipt of the payment at our Principal Office. IF WE ARE UNABLE TO ISSUE THE
CONTRACT, THE PAYMENT WILL BE RETURNED TO THE CONTRACT OWNER WITHOUT INTEREST.
If your application is approved and the Contract is issued and accepted, we will
allocate your Contract Value on Issuance and Acceptance according to your
instructions. However, if your Contract provides for a full refund of payments
under its "Right to Cancel" provision as required in your state (see THE
CONTRACT -- "Free Look Period," below), we will initially allocate your
Sub-Account investments to the Money Market Fund. We will reallocate all amounts
according to your investment choices no later than the expiration of the right
to cancel period.
If your initial payment is equal to the amount of the Guideline Single Premium,
the contract will be issued with the Guaranteed Death Benefit Rider at no
additional cost. If the Guaranteed Death Benefit Rider is in effect on the Final
Payment Date, a guaranteed Net Death Benefit will be provided thereafter unless
the Guaranteed Death Benefit Rider is terminated. (See THE CONTRACT -- "Death
Benefit" -- "Guaranteed Death Benefit Rider," below.)
FREE LOOK PERIOD
The Contract provides for a free look period under the "Right to Cancel"
provision. You have the right to examine and cancel your Contract by returning
it to us or to one of our representatives on or before the tenth day (or such
later date as required in your state) after you receive the Contract.
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If your Contract provides for a full refund under its "Right to Cancel"
provision as required in your state, your refund will be your entire payment. If
your Contract does not provide for a full refund, you will receive:
- Amounts allocated to the Fixed Account; PLUS
- The Contract Value in the Variable Account; PLUS
- All fees, charges and taxes which have been imposed.
We may delay a refund of any payment made by check until the check has cleared
your bank. Your refund will be determined as of the Valuation Date that the
Contract is received at our Principal Office.
CONVERSION PRIVILEGE
Within 24 months of the Date of Issue, you can convert your Contract into a
fixed Contract by transferring all Contract Value in the Sub-Accounts to the
Fixed Account. The conversion will take effect at the end of the Valuation
Period in which we receive, at our Principal Office, notice of the conversion
satisfactory to us. There is no charge for this conversion. We will allocate any
future payment(s) to the Fixed Account, unless you instruct us otherwise.
PAYMENTS
The Contracts are designed for a large single payment to be paid by the Contract
Owner on or before the Date of Issue. The minimum initial payment is $25,000.
The initial payment is used to determine the Face Amount. The Face Amount will
be determined by treating the payment as equal to 100% of the Guideline Single
Premium. You may indicate the desired Face Amount on the application. If the
Face Amount specified exceeds 100% of the Guideline Single Premium for the
payment amount, the application will be amended and a Contract with a higher
Face Amount will be issued.
If the Face Amount specified is less than 80% of the Guideline Single Premium
for the payment amount, the application will be amended and a Contract with a
lower Face Amount will be issued. The Contract Owner must agree to any amendment
to the application.
Under our underwriting rules, the Face Amount must be based on 100% of the
Guideline Single Premium to be eligible for simplified underwriting.
Payments are payable to the Company. Payments may be made by mail to our
Principal Office or through our authorized representative. Any additional
payment, after the initial payment, is credited to the Variable Account or Fixed
Account on the date of receipt at the Principal Office.
The Contract limits the ability to make additional payments. However, no
additional payment may be less than $10,000 without our consent. Any additional
payment(s) may not cause total payments to exceed the maximum payment on the
specifications page of your Contract.
Total payments may not exceed the current maximum payment limits under federal
tax law. Where total payments would exceed the current maximum payment limits,
we will only accept that part of a payment that will make total payments equal
the maximum. We will return any part of a payment that is greater than that
amount. However, we will accept a payment needed to prevent Contract lapse
during a Contract year. See CONTRACT TERMINATION AND REINSTATEMENT.
ALLOCATION OF PAYMENTS
In the application for your Contract, you decide the initial allocation of the
payment among the Sub-Accounts and the Fixed Account. You may allocate the
payment to one or more of the Sub-Accounts and/or the Fixed
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Account, but may not have Contract Value in more than twenty (20) Sub-Accounts
at one time. The minimum amount that you may allocate to a Sub-Account is 1.00%
of the payment. Allocation percentages must be in whole numbers (for example,
33 1/3% may not be chosen) and must total 100%.
You may change the allocation of any future payment by Written Request or
telephone request. You have the privilege to make telephone requests, unless you
elected not to have the privilege on the application. The policy of the Company
and its representatives and affiliates is that they will not be responsible for
losses resulting from acting on telephone requests reasonably believed to be
genuine. We will use reasonable methods to confirm that instructions
communicated by telephone are genuine; otherwise, the Company may be liable for
any losses from unauthorized or fraudulent instructions. We may require that
callers on behalf of a Contract Owner identify themselves by name and identify
the Contract Owner by name, date of birth, Social Security number or PIN number.
All telephone requests are tape recorded. An allocation change will take effect
on the date of receipt of the notice at the Principal Office. No charge is
currently imposed for changing payment allocation instructions. We reserve the
right to impose a charge in the future, but guarantee that the charge will not
exceed $25.
The Contract Value in the Sub-Accounts will vary with investment experience. You
bear this investment risk. Investment performance may also affect the Death
Benefit. Review your allocations of Contract Value as market conditions and your
financial planning needs change.
TRANSFER PRIVILEGE
At any time prior to the election of a payment option, subject to our then
current rules, you may transfer amounts among the Sub-Accounts or between a
Sub-Account and the Fixed Account. (You may not transfer that portion of the
Contract Value held in the Fixed Account that secures a Contract loan.)
We will make transfers at your Written Request or telephone request, as
described in THE CONTRACT -- "Allocation of Payments." Transfers are effected at
the value next computed after receipt of the transfer order.
The first 12 transfers in a Contract year are free. After that, we will deduct a
transfer charge not to exceed $25 from amounts transferred in that Contract
year.
Transfers to and from the Fixed Account are currently permitted only if:
- There has been at least a ninety (90) day period since the last transfer
from the Fixed Account; and
- The amount transferred from the Fixed Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Contract Value
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may have automatic transfers of at least $100 made on a periodic basis:
- from the Fixed Account of the Sub-Account which invests in the Money
Market Fund of the Trust to one or more of the other Sub-Accounts
("Dollar-Cost Averaging Option"), or
- to reallocate Contract Value among the Sub-Accounts ("Automatic Account
Rebalancing Option").
Automatic transfers may be made every one, three, six or twelve months.
Generally, all transfers will be processed on the 15th of each scheduled month.
If the 15th is not a business day, however, or is the Monthly Processing Date,
the automatic transfer will be processed on the next business day. The
Dollar-Cost Averaging Option and the Automatic Account Rebalancing Option may
not be in effect at the same time. The Fixed Account is not included in
Automatic Account Rebalancing.
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If the Contract Value in the Sub-Account from which the automatic transfer is to
be made is reduced to zero, the automatic transfer option will terminate. The
Contract Owner must reapply for any future automatic transfers.
The first automatic transfer counts as one transfer toward the 12 free transfers
allowed in each Contract year. Each subsequent automatic transfer is free and
does not reduce the remaining number of transfers that are free in a Contract
year. Any transfers made for a conversion privilege, Contract loan or material
change in investment policy will not count toward the 12 free transfers.
ASSET ALLOCATION MODEL REALLOCATIONS
If a Contract Owner elects to follow an asset allocation strategy, the Contract
Owner may preauthorize transfers in accordance with the chosen strategy. The
Company may provide administrative or other support services to independent
third parties who provide recommendations as to such allocation strategies.
However, the Company does not engage any third parties to offer investment
allocation services of any type under this Contract, does not endorse or review
any investment allocations recommendations made by such third parties, and is
not responsible for the investment allocations and transfers transacted on the
Contract Owner's behalf. The Company does not charge for providing additional
asset allocation support services. Additional information concerning asset
allocation programs for which the Company is currently providing support
services may be obtained from a registered representative or the Company.
TRANSFER PRIVILEGES SUBJECT TO POSSIBLE LIMITS
All of the transfer privileges described above are subject to our consent. We
reserve the right to impose limits on transfers including, but not limited to,
the:
- Minimum amount that may be transferred;
- Minimum amount that may remain in a Sub-Account following a transfer from
that Sub-Account;
- Minimum period between transfers involving the Fixed Account; and
- Maximum amounts that may be transferred from the Fixed Account.
These rules are subject to change by the Company.
DEATH BENEFIT (WITHOUT GUARANTEED DEATH BENEFIT RIDER)
If the Contract is in force on the Insured's death, we will, with due proof of
death, pay the Net Death Benefit to the named Beneficiary. For Second-to-Die
Contracts, the Net Death Benefit is payable on the death of the last surviving
Insured. There is no Death Benefit payable on the death of the first Insured to
die. We will normally pay the Net Death Benefit within seven days of receiving
due proof of the Insured's death, but we may delay payment of Net Death
Benefits. See OTHER CONTRACT PROVISIONS -- "Delay of Payments." The Beneficiary
may receive the Net Death Benefit in a lump sum or under a payment option,
unless the payment option has been restricted by the Contract Owner. See
APPENDIX C -- PAYMENT OPTIONS.
The Death Benefit is the GREATER of the:
- Face Amount OR
- Minimum Sum Insured.
Before the Final Payment Date the Net Death Benefit is:
- The Death Benefit; MINUS
- Any Outstanding Loan, rider charges and Monthly Deductions due and unpaid
through the Contract month in which the Insured dies, as well as any
partial withdrawals and surrender charges.
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After the Final Payment Date, the Net Death benefit is:
- The Contract Value; MINUS
- Any Outstanding Loan.
In most states, we will compute the Net Death Benefit on the date we receive due
proof of the Insured's death.
GUARANTEED DEATH BENEFIT RIDER (NOT AVAILABLE IN ALL STATES) -- If at the time
of issue the Contract Owner has made payments equal to 100% of the Guideline
Single Premium, a Guaranteed Death Benefit Rider will be added to the Contract
at no additional charge. The Contract will not lapse while the Guaranteed Death
Benefit Rider is in force. The Death Benefit before the Final Payment Date will
be the greater of the
- Face Amount OR
- Minimum Sum Insured.
If the Guaranteed Death Benefit Rider is in effect on the Final Payment Date, a
guaranteed Net Death Benefit will be provided thereafter unless the Guaranteed
Death Benefit Rider is terminated, as described below. The guaranteed Net Death
Benefit will be:
- the GREATER of (a) the Face Amount as of the Final Payment Date or (b) the
Contract Value as of the date due proof of death is received by the
Company,
- REDUCED by the Outstanding Loan, if any, through the contract month in
which the Insured dies.
The Guaranteed Death Benefit Rider will terminate (AND MAY NOT BE REINSTATED) on
the first to occur of the following:
- Foreclosure of the Outstanding Loan, if any; OR
- Any contract change that results in a negative guideline level premium; OR
- A request for a partial withdrawal or preferred loan after the Final
Payment Date; OR
- Upon your written request.
MINIMUM SUM INSURED -- The minimum sum insured is a percentage of the Contract
Value as set forth in APPENDIX A -- GUIDELINE MINIMUM SUM INSURED TABLE. The
minimum sum insured is computed based on federal tax regulations to ensure that
the Contract qualifies as a life insurance Contract and that the insurance
proceeds will be excluded from the gross income of the Beneficiary. The minimum
sum insured under this Contract meets or exceeds the IRS Guideline Minimum Sum
Insured.
ILLUSTRATION -- In this illustration, assume that the Insured is under the age
of 40, and that there is no Outstanding Loan.
A Contract with a $100,000 Face Amount will have a Death Benefit of $100,000.
However, because the Death Benefit must be equal to or greater than 265% of
Contract Value, if the Contract Value exceeds $37,740 the Death Benefit will
exceed the $100,000 Face Amount. In this example, each dollar of Contract Value
above $37,740 will increase the Death Benefit by $2.65. For example, a Contract
with a Contract Value of $50,000 will have a guideline minimum sum insured of
$132,500 ($50,000 X 2.65); Contract Value of $60,000 will produce a guideline
minimum sum insured of $159,000 ($60,000 X 2.65); and Contract Value of $75,000
will produce a guideline minimum sum insured of $198,750 ($75,000 X 2.65).
Similarly, if Contract Value exceeds $37,740, each dollar taken out of Contract
Value will reduce the Death Benefit by $2.65. If, for example, the Contract
Value is reduced from $60,000 to $50,000 because of partial withdrawals, charges
or negative investment performance, the Death Benefit will be reduced from
$159,000
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to $132,500. If, however, the Contract Value multiplied by the applicable
percentage from the table in Appendix A is less than the Face Amount, the Death
Benefit will equal the Face Amount.
The applicable percentage becomes lower as the Insured's age increases. If the
Insured's age in the above example were, for example, 50 (rather than between
zero and 40), the applicable percentage would be 200%. The Death Benefit would
not exceed the $100,000 Face Amount unless the Contract Value exceeded $50,000
(rather than $37,740), and each dollar then added to or taken from Contract
Value would change the Death Benefit by $2.00.
CONTRACT VALUE
The Contract Value is the total value of your Contract. It is the SUM of:
- Your accumulation in the Fixed Account; PLUS
- The value of your Units in the Sub-Accounts.
There is no guaranteed minimum Contract Value. The Contract Value on any date
depends on variables that cannot be predetermined.
- Your Contract Value is affected by the:
- Amount of your payment(s);
- Interest credited in the Fixed Account;
- Investment performance of the Funds you select;
- Partial withdrawals;
- Loans, loan repayments and loan interest paid or credited; and
- Charges and deductions under the Contract.
COMPUTING CONTRACT VALUE -- We compute the Contract Value on the Date of Issue
and on each Valuation Date. On the Date of Issue, the Contract Value is:
- Your payment plus any interest earned during the underwriting period it
was allocated to the Fixed Account (see THE CONTRACT -- "Applying for a
Contract"); MINUS
- The Monthly Deductions due.
On each Valuation Date after the Date of Issue, the Contract Value is the SUM
of:
- Accumulations in the Fixed Account; PLUS
- The SUM of the PRODUCTS of:
- The number of Units in each Sub-Account; TIMES
- The value of a Unit in each Sub-Account on the Valuation Date.
THE UNIT -- We allocate each payment to the Sub-Accounts you selected. We credit
allocations to the Sub-Accounts as Units. Units are credited separately for each
Sub-Account.
The number of Units of each Sub-Account credited to the Contract is the QUOTIENT
of:
- That part of the payment allocated to the Sub-Account; DIVIDED BY
- The dollar value of a Unit on the Valuation Date the payment is received
at our Principal Office.
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The number of Units will remain fixed unless changed by a split of Unit value,
transfer, loan, partial withdrawal or surrender. Also, Monthly Deductions taken
from a Sub-Account will result in cancellation of Units equal in value to the
amount deducted.
The dollar value of a Unit of a Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. This
investment experience reflects the investment performance, expenses and charges
of the Fund in which the Sub-Account invests. The value of each Unit was set at
$1.00 on the first Valuation Date of each Sub-Account.
The value of a Unit on any Valuation Date is the PRODUCT of:
- The dollar value of the Unit on the preceding Valuation Date; TIMES
- The Net Investment Factor.
NET INVESTMENT FACTOR -- The net investment factor measures the investment
performance of a Sub-Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is the result of:
- The net asset value per share of a Fund held in the Sub-Account determined
at the end of the current Valuation Period; PLUS
- The per share amount of any dividend or capital gain distributions made by
the Fund on shares in the Sub-Account if the "ex-dividend" date occurs
during the current Valuation Period; DIVIDED BY
- The net asset value per share of a Fund share held in the Sub-Account
determined as of the end of the immediately preceding Valuation Period;
MINUS
- The mortality and expense risk charge for each day in the Valuation
Period, currently at an annual rate of 0.90% of the daily net asset value
of that Sub-Account.
The net investment factor may be greater or less than one.
PAYMENT OPTIONS
The Net Death Benefit payable may be paid in a single sum or under one or more
of the payment options then offered by the Company. See APPENDIX C -- PAYMENT
OPTIONS. These payment options also are available at the Final Payment Date or
if the Contract is surrendered. If no election is made, we will pay the Net
Death Benefit in a single sum.
OPTIONAL INSURANCE BENEFITS
You may add an optional insurance benefit to the Contract by rider, as described
in APPENDIX B -- OPTIONAL INSURANCE BENEFITS.
SURRENDER
You may surrender the Contract and receive its Surrender Value. The Surrender
Value is:
- The Contract Value; MINUS
- Any Outstanding Loan and surrender charges.
We will compute the Surrender Value on the Valuation Date on which we receive
the Contract with a Written Request for surrender. We will deduct a surrender
charge if you surrender the Contract within 10 full Contract years of the Date
of Issue. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
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The Surrender Value may be paid in a lump sum or under a payment option then
offered by us. See APPENDIX C -- PAYMENT OPTIONS. We will normally pay the
Surrender Value within seven days following our receipt of Written Request. We
may delay benefit payments under the circumstances described in OTHER CONTRACT
PROVISIONS -- "Delay of Payments."
For important tax consequences of a surrender, see FEDERAL TAX CONSIDERATIONS.
PARTIAL WITHDRAWAL
You may withdraw part of the Contract Value of your Contract on Written Request.
Your Written Request must state the dollar amount you wish to receive. You may
allocate the amount withdrawn among the Sub-Accounts and the Fixed Account. If
you do not provide allocation instructions, we will make a Pro-rata Allocation.
Each partial withdrawal must be at least $1,000. We will not allow a partial
withdrawal if it would reduce the Contract Value below $25,000. The Face Amount
is reduced proportionately based on the ratio of the amount of the partial
withdrawal and charges to the Contract Value on the date of withdrawal.
On a partial withdrawal from a Sub-Account, we will cancel the number of Units
equal in value to the amount withdrawn. The amount withdrawn will be the amount
you requested plus the partial withdrawal costs and any applicable surrender
fee. See CHARGES AND DEDUCTIONS -- "Surrender Charge" and CHARGES AND DEDUCTIONS
- -- "Partial Withdrawal Costs." We will normally pay the partial withdrawal
within seven days following our receipt of the written request. We may delay
payment as described in OTHER CONTRACT PROVISIONS -- "Delay of Payments."
For important tax consequences of partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.
CHARGES AND DEDUCTIONS
The following charges will apply to your Contract under the circumstances
described. Some of these charges apply throughout the Contract's duration.
No surrender charges are imposed, and no commissions are paid, where the Insured
as of the date of application is within the following class of individuals:
- All employees of First Allmerica and its affiliates and subsidiaries
located at First Allmerica's home office (or at off-site locations if such
employees are on First Allmerica's home office payroll); all Directors of
First Allmerica and its affiliates and subsidiaries, all employees and
registered representatives of any broker-dealer that has entered into a
sales agreement with us or Allmerica Investments, Inc. to sell the
Contracts and any spouses or children of the above persons. However, such
Insureds will be subject to the Distribution Expense Charge.
MONTHLY DEDUCTIONS
On the Monthly Processing Date, the Company will deduct an amount to cover
charges and expenses incurred in connection with the Contract. This Monthly
Deduction will be deducted by subtracting values from the Fixed Account
accumulation and/or canceling Units from each applicable Sub-Account in the
ratio that the Contract Value in the Sub-Account bears to the Contract Value.
The amount of the Monthly Deduction will vary from month to month. If the
Contract Value is not sufficient to cover the Monthly Deduction which is due,
the Contract may lapse. (See CONTRACT TERMINATION AND REINSTATEMENT.) The
Monthly Deduction is comprised of the following charges:
- MAINTENANCE FEE: The Company will make a deduction of $2.50 from any
Contract with less than $100 in Contract Value to cover charges and
expenses incurred in connection with the Contract. This charge is to
reimburse the Company for expenses related to issuance and maintenance of
the Contract. The Company does not intend to profit from this charge.
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- ADMINISTRATION CHARGE: The Company imposes a monthly charge at an annual
rate of 0.20% of the Contract Value. This charge is to reimburse us for
administrative expenses incurred in the administration of the Contract. It
is not expected to be a source of profit.
- MONTHLY INSURANCE PROTECTION CHARGE: Immediately after the Contract is
issued, the Death Benefit will be greater than the payment. While the
Contract is in force, prior to the Final Payment Date, the Death Benefit
will generally be greater than the Contract Value. To enable us to pay
this excess of the Death Benefit over the Contract Value, a monthly cost
of insurance charge is deducted. This charge varies depending on the type
of Contract and the Underwriting Class. In no event will the current
deduction for the cost of insurance exceed the guaranteed maximum
insurance protection rates set forth in the Contract. These guaranteed
rates are based on the Commissioners 1980 Standard Ordinary Mortality
Tables, Tobacco User or Non-Tobacco User (Mortality Table B for unisex
Contracts and Mortality Table D for Second-to-Die Contracts) and the
Insured's sex and Age. The Tables used for this purpose set forth
different mortality estimates for males and females and for tobacco user
and non-tobacco user. Any change in the insurance protection rates will
apply to all Insured of the same Age, sex and Underwriting Class whose
Contracts have been in force for the same period.
The Underwriting Class of an Insured will affect the insurance protection rate.
We currently place Insureds into standard Underwriting Classes and non-standard
Underwriting Classes. The Underwriting Classes are also divided into two
categories: tobacco user and non-tobacco user. We will place Insureds under the
age of 18 at the Date of Issue in a standard or non-standard Underwriting Class.
We will then classify the Insured as a non-tobacco user.
- DISTRIBUTION EXPENSE: During the first ten Contract years, we make a
monthly deduction to compensate for a portion of the sales expense which
are incurred by us with respect to the Contracts. This charge is equal to
an annual rate of 0.90% of the Contract Value.
- FEDERAL AND STATE PAYMENT TAX CHARGE: During the first Contract year, we
make a monthly deduction to partially compensate the Company for the
increase in federal tax liability from the application of Section 848 of
the Internal Revenue Code and to offset a portion of the average premium
tax the Company is expected to pay to various state and local
jurisdictions. This charge is equal to an annual rate of 1.50% of the
Contract Value. The Company does not intend to profit from the premium tax
portion of this charge. Premium taxes vary from state-to-state, ranging
from zero to 5%. The deduction may be higher or lower than the actual
premium tax imposed by the applicable jurisdiction, and is made whether or
not any premium tax applies.
DAILY DEDUCTIONS
We assess each Sub-Account with a charge for mortality and expense risks we
assume. Fund expenses are also reflected in the Variable Account.
- MORTALITY AND EXPENSE RISK CHARGE: We impose a daily charge at a current
annual rate of 0.90% of the average daily net asset value of each
Sub-Account. This charge compensates us for assuming mortality and expense
risks for variable interests in the Contracts.
The mortality risk we assume is that Insureds may live for a shorter time than
anticipated. If this happens, we will pay more Net Death Benefits than
anticipated. The expense risk we assume is that the expenses incurred in issuing
and administering the Contracts will exceed those compensated by the maintenance
fee and administration charges in the Contracts. If the charge for mortality and
expense risks is not sufficient to cover mortality experience and expenses, we
will absorb the losses. If the charge turns out to be higher than mortality and
expense risk expenses, the difference will be a profit to us. If the charge
provides us with a profit, the profit will be available for our use to pay
distribution, sales and other expenses.
- FUND EXPENSES -- The value of the Units of the Sub-Accounts will reflect
the investment advisory fee and other expenses of the Funds whose shares
the Sub-Accounts purchase. The prospectuses and
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statements of additional information of the Funds contain more information
concerning the fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should income taxes be imposed, we may make deductions from the
Sub-Accounts to pay the taxes. See FEDERAL TAX CONSIDERATIONS.
SURRENDER CHARGE
A contingent surrender charge is deducted from Contract Value in the case of
surrender and/or a partial withdrawal for up to 10 years from Date of Issue of
the Contract. The payments you make for the Contract are the maximum amount
subject to a surrender charge. Certain withdrawals may be made without surrender
charges, but any part of a withdrawal that is assessed a surrender charge
reduces the remaining payments that will be subject to a surrender charge in the
future.
In any Contract year, you may withdraw, without a surrender charge, up to:
- 10% of the Contract Value at the time of the withdrawal, MINUS
- The total of any prior free withdrawals in the same Contract year ("Free
10% Withdrawal.")
The 10% Free Withdrawal amount applies to both partial withdrawals and a full
surrender of the Contract.
We will apply a surrender charge only to the amount by which your requested
withdrawal exceeds the remaining 10% Free Withdrawal amount for that Contract
year. This excess withdrawal amount, which is subject to a surrender charge
based on the table below, reduces the remaining amount of your payments that
will be subject to a surrender charge in the future. If the amount of the
remaining payments that are subject to a surrender charge is reduced to zero, we
will no longer assess a surrender charge, even if the surrender or partial
withdrawal is within 10 years of the Contract's Date of Issue. During the first
Contract year, the surrender charge could be as much as 10% of your purchase
payments. See the EXAMPLES, below.
The surrender charge applicable to the excess withdrawal amount will depend upon
the number of years that the Contract has been in force, based on the following
schedule:
<TABLE>
<CAPTION>
Contract Year* 1 2 3 4 5 6 7 8 9 10+
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surrender
Charge 10.00% 9.25% 8.50% 7.75% 7.00% 6.25% 4.75% 3.25% 1.50% 0%
</TABLE>
* For a Contract that lapses and reinstates, see CONTRACT TERMINATION AND
REINSTATEMENT.
The amount withdrawn from Contract Value equals the amount you request plus the
contingent surrender charge and the partial withdrawal transaction fee
(described below).
The right to make the Free 10% Withdrawal is not cumulative from Contract year
to Contract year. For example, if you withdraw only 8% of Contract Value in the
second Contract year, the amount you could withdraw in future Contract years
would not be increased by the amount you did not withdraw in the second Contract
year.
PARTIAL WITHDRAWAL TRANSACTION FEE
For each partial withdrawal (including a Free 10% Withdrawal), we deduct a
transaction fee of 2.0% of the amount withdrawn, not to exceed $25. This fee is
intended to reimburse us for the cost of processing the partial withdrawal. The
transaction fee applies to all partial withdrawals, including a Withdrawal
without a surrender charge (described below).
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EXAMPLES
In each example below, it is assumed that you have not taken any loans from the
Contract.
EXAMPLE 1. Assume that you made an initial payment of $100,000 to the Contract,
and that the Contract Value is $120,000 when you request a full surrender of the
Contract eight months later. The amount of the Free 10% Withdrawal is $12,000
(10% of Contract Value). The amount of the Contract Value that is subject to a
surrender charge is $108,000 (the $120,000 Contract Value minus the Free 10%
Withdrawal of $12,000). However, the amount of the surrender charge is capped at
$10,000 (the first year surrender charge of 10% times your $100,000 payment to
the Contract). The Surrender Value is $110,000 (the Contract Value of $120,000
minus the surrender charge of $10,000).
EXAMPLE 2. Assume that you made an initial payment of $100,000 for the Contract,
and that you request a partial withdrawal of $15,000 at the beginning of the
fifth Contract year when the Contract Value is $130,000. The amount of the Free
10% Withdrawal is $13,000 (10% of the Contract Value). The amount of the partial
withdrawal that is subject to a surrender charge is $2,000 (the $15,000 you
requested minus the Free 10% Withdrawal of $13,000). The amount of the surrender
charge is $140 ($2,000 times the 7.00% surrender charge applicable in the fifth
Contract year). The remaining Contract Value is $114,835 (the $130,000 Contract
Value at the time of the withdrawal minus the $15,000 you requested, the $140
surrender charge, and the $25 partial withdrawal transaction fee). The amount of
the Contract Value that is subject to a surrender charge is $98,000 (your
$100,000 initial payment minus the $2,000 that was subject to the surrender
charge).
Assume that, later in the same year, your Contract Value has grown to $150,000
and you make a request for a partial withdrawal of $10,000. The amount of the
Free 10% Withdrawal is $2,000 (the $15,000 that is 10% of Contract Value at the
time of withdrawal minus the prior Free 10% Withdrawal in that year of $13,000).
The amount of the withdrawal that is subject to a surrender charge is $8,000
(the $10,000 you requested minus the current Free 10% Withdrawal of $2,000). The
amount of the surrender charge is $560 ($8,000 times the 7.00% surrender charge
applicable in the fifth contract year). The remaining Contract Value is $139,415
(the $150,000 Contract Value at the time of the withdrawal minus the $10,000 you
requested, the $560 surrender charge, and the $25 partial withdrawal transaction
fee). The amount of the Contract Value that is subject to a surrender charge is
now $90,000 (the $98,000 of the initial payment that was still subject to a
surrender charge after the first withdrawal minus the $8,000 that is subject to
the surrender charge at the second withdrawal).
TRANSFER CHARGES
The first 12 transfers in a Contract year are free. After that, we may deduct a
transfer charge not to exceed $25 from amounts transferred in that Contract
year. This charge reimburses us for the administrative costs of processing the
transfer.
If you apply for automatic transfers, the first automatic transfer counts as one
transfer. Each future automatic transfer is without charge and does not reduce
the remaining number of transfers that may be made without charge in that
Contract year or in later Contract years. However, if you change your
instructions for automatic transfers, the first automatic transfer thereafter
will count as one transfer.
Each of the following transfers of Contract Value from the Sub-Accounts to the
Fixed Account is free and does not count as one of the 12 free transfers in a
Contract year:
- A conversion within the first 24 months from Date of Issue;
- A transfer to the Fixed Account to secure a loan; and
- A transfer from the Fixed Account as a results of a loan repayment.
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CONTRACT LOANS
You may borrow money secured by your Contract Value, both during and after the
first Contract year. The total amount you may borrow is the Loan Value. The Loan
Value is 90% of the Contract Value minus any surrender charges. Contract Value
equal to the Outstanding Loan will earn monthly interest in the Fixed Account at
an annual rate of at least 4.0%.
The minimum loan amount is $1,000. The maximum loan is the Loan Value minus any
Outstanding Loan. We will usually pay the loan within seven days after we
receive the Written Request. We may delay the payment of loans as stated in
OTHER CONTRACT PROVISIONS -- "Delay of Payments."
We will allocate the loan among the Sub-Accounts and the Fixed Account according
to your instructions. If you do not make an allocation, we will make a Pro-rata
Allocation. We will transfer Contract Value in each Sub-Account equal to the
Contract loan to the Fixed Account. We will not count this transfer as a
transfer subject to the transfer charge.
PREFERRED LOAN OPTION
Any portion of the Outstanding Loan that represents earnings in this Contract, a
loan from an exchanged life insurance policy that was as carried over to this
Contract or the gain in the exchanged life insurance policy that was carried
over to this Contract may be treated as a preferred loan. The available
percentage of the gain carried over from an exchanged policy less any policy
loan carried over which will be eligible for preferred loan treatment is as
follows:
<TABLE>
<CAPTION>
Beginning of
Contract Year 1 2 3 4 5 6 7 8 9
--- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unloaned Gain 0% 10% 20% 30% 40% 50% 60% 70% 80%
Available
<CAPTION>
Beginning of
Contract Year 10 11
--- ---------
<S> <C> <C>
Unloaned Gain 90% 100%
Available
</TABLE>
The guaranteed annual interest rate credited to the Contract Value securing a
preferred loan will be at least 5.5%.
LOAN INTEREST CHARGED
Interest accrues daily at the annual rate of 6.0%. Interest is due and payable
in arrears at the end of each Contract year or for as short a period as the loan
may exist. Interest not paid when due will be added to the Outstanding Loan by
transferring Contract Value equal to the interest due to the Fixed Account. The
interest due will bear interest at the same rate.
REPAYMENT OF OUTSTANDING LOAN
You may pay any loans before Contract lapse. We will allocate that part of the
Contract Value in the Fixed Account that secured a repaid loan to the
Sub-Accounts and Fixed Account according to your instructions. If you do not
make a repayment allocation, we will allocate Contract Value according to your
most recent payment allocation instructions. However, loan repayments allocated
to the Variable Account cannot exceed Contract Value previously transferred from
the Variable Account to secure the outstanding loan.
If the Outstanding Loan exceeds the Contract Value less the surrender charge,
the Contract will terminate. We will mail a notice of termination to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Contract will terminate with no
value. See CONTRACT TERMINATION AND REINSTATEMENT.
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<PAGE>
EFFECT OF CONTRACT LOANS
Contract loans will permanently affect the Contract Value and Surrender Value,
and may permanently affect the Death Benefit. The effect could be favorable or
unfavorable, depending on whether the investment performance of the Sub-Accounts
is less than or greater than the interest credited to the Contract Value in the
Fixed Account that secures the loan. We will deduct any Outstanding Loan from
the proceeds payable when the Insured dies or from a surrender.
CONTRACT TERMINATION AND REINSTATEMENT
TERMINATION
Unless the Guaranteed Death Benefit Rider is in effect, the Contract will
terminate if on a Monthly Processing Date the Surrender Value is less than $0
(zero.) If this situation occurs, the Contract will be in default. You will then
have a grace period of 62 days, measured from the date of default, to make a
payment sufficient to prevent termination. On the date of default, we will send
a notice to you and to any assignee of record. The notice will state the payment
due and the date by which it must be paid. Failure to make a sufficient payment
within the grace period will result in the Contract terminating without value.
If the Insured dies during the grace period, we will deduct from the Net Death
Benefit any overdue charges. See THE CONTRACT -- "Guaranteed Death Benefit
Rider."
REINSTATEMENT
A terminated Contract may be reinstated within three years of the date of
default and before the Final Payment Date. The reinstatement takes effect on the
Monthly Processing Date following the date you submit to us:
- Written application for reinstatement;
- Evidence of Insurability showing that the Insured is insurable according
to our current underwriting rules;
- A payment that is large enough to cover the cost of all Contract charges
that were due and unpaid during the grace period;
- A payment that is large enough to keep the Contract in force for three
months; and
- A payment or reinstatement of any loan against the Contract that existed
at the end of the grace period.
- Contracts which have been surrendered may not be reinstated. The
Guaranteed Death Benefit Rider may not be reinstated.
SURRENDER CHARGE -- For the purpose of measuring the surrender charge period,
the Contract will be reinstated as of the date of default. The surrender charge
on the date of reinstatement is the surrender charge that would have been in
effect on the date of default.
CONTRACT VALUE ON REINSTATEMENT -- The Contract Value on the date of
reinstatement is:
- The payment made to reinstate the Contract and interest earned from the
date the payment was received at our Principal Office; PLUS
- The Contract Value less any Outstanding Loan on the date of default; MINUS
- The Monthly Deductions due on the date of reinstatement.
You may reinstate any Outstanding Loan.
32
<PAGE>
OTHER CONTRACT PROVISIONS
CONTRACT OWNER
The Contract Owner named on the specifications page of the Contract is the
Insured unless another Contract Owner has been named in the application. As
Contract Owner, you are entitled to exercise all rights under your Contract
while the Insured is alive, with the consent of any irrevocable Beneficiary.
BENEFICIARY
The Beneficiary is the person or persons to whom the Net Death Benefit is
payable on the Insured's death. Unless otherwise stated in the Contract, the
Beneficiary has no rights in the Contract before the Insured dies. While the
Insured is alive, you may change the Beneficiary, unless you have declared the
Beneficiary to be irrevocable. If no Beneficiary is alive when the Insured dies,
the Contract Owner (or the Contract Owner's estate) will be the Beneficiary. If
more than one Beneficiary is alive when the Insured dies, we will pay each
Beneficiary in equal shares, unless you have chosen otherwise. Where there is
more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionally, unless the Contract
Owner has requested otherwise.
ASSIGNMENT
You may assign a Contract as collateral or make an absolute assignment. All
Contract rights will be transferred as to the assignee's interest. The consent
of the assignee may be required to make changes in payment allocations, make
transfers or to exercise other rights under the Contract. We are not bound by an
assignment or release thereof, unless it is in writing and recorded at our
Principal Office. When recorded, the assignment will take effect on the date the
Written Request was signed. Any rights the assignment creates will be subject to
any payments we made or actions we took before the assignment is recorded. We
are not responsible for determining the validity of any assignment or release.
THE FOLLOWING CONTRACT PROVISIONS MAY VARY BY STATE.
LIMIT ON RIGHT TO CHALLENGE THE CONTRACT
We cannot challenge the validity of your Contract if the Insured was alive after
the Contract had been in force for two years from the Date of Issue.
SUICIDE
The Net Death Benefit will not be paid if the Insured commits suicide within two
years from the Date of Issue. Instead, we will pay the Beneficiary all payments
made for the Contract, without interest, less any Outstanding Loan and partial
withdrawals.
MISSTATEMENT OF AGE OR SEX
If the Insured's Age or sex is not correctly stated in the Contract application,
we will adjust the Death Benefit and Face Amount under the Contract to reflect
the correct Age and sex. The adjustment will be based upon the ratio of the
maximum payment for the Contract to the maximum payment for the Contract issued
for the correct Age or sex. We will not reduce the Death Benefit to less than
the Guideline Minimum Sum Insured. For a unisex Contract, there is no adjusted
benefit for misstatement of sex.
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<PAGE>
DELAY OF PAYMENTS
We may delay paying any amounts derived from a payment you made by check until
the check has cleared your bank. Amounts payable from the Variable Account for
surrender, partial withdrawals, Net Death Benefit, Contract loans and transfers
may be postponed whenever:
- The New York Stock Exchange is closed other than customary weekend and
holiday closings;
- The SEC restricts trading on the New York Stock Exchange; OR
- The SEC determines an emergency exists, so that disposal of securities is
not reasonably practicable or it is not reasonably practicable to compute
the value of the Variable Account's net assets.
We reserve the right to defer amounts payable from the Fixed Account. This delay
may not exceed six months. However, if payment is delayed for 30 days or more,
we will pay interest at least equal to an effective annual yield of 3.0% per
year for the deferment. Amounts from the Fixed Account used to make payments on
Contracts that we or our affiliates issue will not be delayed.
FEDERAL TAX CONSIDERATIONS
The following summary of federal tax considerations is based on our
understanding of the present federal income tax laws as they are currently
interpreted. Legislation may be proposed which, if passed, could adversely and
possibly retroactively affect the taxation of the Contracts. This summary is not
exhaustive, does not purport to cover all situations, and is not intended as tax
advice. We do not address tax provisions that may apply if the Contract Owner is
a corporation or the Trustee of an employee benefit plan. You should consult a
qualified tax adviser to apply the law to your circumstances.
THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the
Internal Revenue Code. We file a consolidated tax return with our parent and
affiliates. We do not currently charge for any income tax on the earnings or
realized capital gains in the Variable Account. We do not currently charge for
federal income taxes with respect to the Variable Account. A charge may apply in
the future for any federal income taxes we incur. The charge may become
necessary, for example, if there is a change in our tax status. Any charge would
be designed to cover the federal income taxes on the investment results of the
Variable Account.
Under current laws, the Company may incur state and local taxes besides premium
taxes. These taxes are not currently significant. If there is a material change
in these taxes affecting the Variable Account, we may charge for taxes paid or
for tax reserves.
TAXATION OF THE CONTRACTS
We believe that the Contracts described in this prospectus are life insurance
contracts under Section 7702 of the Code. Section 7702 affects the taxation of
life insurance contracts and places limits on the total amount of premiums and
on the relationship of the Contract Value to the Death Benefit. As a life
insurance contract, the Net Death Benefit of the Contract is excludable from the
gross income of the Beneficiary. Also, any increase in Contract Value is not
taxable until received by you or your designee. Although the Company believes
the Contracts are in compliance with Section 7702 of the Code, the manner in
which Section 7702 should be applied to a last survivorship life insurance
contract is not directly addressed by Section 7702. In absence of final
regulations or other guidance issued under Section 7702, there is necessarily
some uncertainty whether a Contract will meet the Section 7702 definition of a
life insurance contract. This is true particularly if the Contract Owner pays
the full amount of payments permitted under the Contract. A Contract Owner
contemplating the payment of such amounts should do so only after consulting a
tax advisor. If a Contract were
34
<PAGE>
determined not to be a life insurance contract under Section 7702, it would not
have most of the tax advantages normally provided by a life insurance contract.
MODIFIED ENDOWMENT CONTRACTS
A life insurance Contract is treated as a "modified endowment contract" under
Section 7702A of the Code if it meets the definition of life insurance in
Section 7702 but fails the "seven-pay test" of Section 7702A. The seven-pay test
provides that payments can not be paid at a rate more rapidly than allowed by
the payment of seven annual payments using specified computational rules
provided in Section 7702A.
If the Contract is considered a modified endowment contract, distributions
(including Contract loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis and includible in gross income to the extent
that the Surrender Value exceeds the Contract Owner's investment in the
Contract. Any other amounts will be treated as a return of capital up to the
Contract Owner's basis in the Contract. A 10% tax is imposed on that part of any
distribution that is includible in income, unless the distribution is:
- Made after the taxpayer becomes disabled;
- Made after the taxpayer attains age 59 1/2; OR
- Part of a series of substantially equal periodic payments for the
taxpayer's life or life expectancy or joint life expectancies of the
taxpayer and beneficiary.
The Company has designed this Contract to meet the definition of a modified
endowment contract.
Any contract received in exchange for a modified endowment contract will also be
a modified endowment contract. However, an exchange under Section 1035 of the
Code of (1) a life insurance contract entered into before June 21, 1988 or (2) a
life insurance contract that is not itself a modified endowment Contract, will
not cause the new Contract to be treated as a modified endowment contract if no
additional payments are paid and there is no increase in the death benefit as a
result of the exchange.
All modified endowment contracts issued by the same insurance company to the
same Contract Owner during any 12-month period will be treated as a single
modified endowment contract in computing taxable distributions.
CONTRACT LOANS
Consumer interest paid on Contract loans under an individually owned Contract is
not tax deductible. A business may deduct interest on loans up to $50,000
subject to a prescribed maximum amount, provided that the Insured is a "key
person" of that business. The Code defines "key person" to mean an officer or a
20% owner.
Federal tax law requires that the investment of each Sub-Account funding the
Contracts is adequately diversified according to Treasury regulations. Although
we do not have control over the investments of the Funds, we believe that the
Funds currently meet the Treasury's diversification requirements. We will
monitor continued compliance with these requirements.
The Treasury Department has announced that previous regulations on
diversification do not provide guidance concerning the extent to which Contract
Owners may direct their investments to divisions of a separate investment
account. Regulations may provide guidance in the future. The Contracts or our
administrative rules may be modified as necessary to prevent a Contract Owner
from being considered the owner of the assets of the Variable Account.
35
<PAGE>
VOTING RIGHTS
Where the law requires, we will vote Fund shares that each Sub-Account holds
according to instructions received from Contract Owners with Contract Value in
the Sub-Account. If, under the 1940 Act or its rules, we may vote shares in our
own right, whether or not the shares relate to the Contracts, we reserve the
right to do so.
We will provide each person having a voting interest in a Fund with proxy
materials and voting instructions. We will vote shares held in each Sub-Account
for which no timely instructions are received in proportion to all instructions
received for the Sub-Account. We will also vote in the same proportion our
shares held in the Variable Account that do not relate to the Contracts.
We will compute the number of votes that a Contract Owner has the right to
instruct on the record date established for the Fund. This number is the
quotient of:
- Each Contract Owner's Contract Value in the Sub-Account; divided by
- The net asset value of one share in the Fund in which the assets of the
Sub-Account are invested.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that Fund shares be voted so as
(1) to cause to change in the sub-classification or investment objective of one
or more of the Funds, or (2) to approve or disapprove an investment advisory
contract for the Funds. In addition, we may disregard voting instructions that
are in favor of any change in the investment policies or in any investment
adviser or principal underwriter if the change has been initiated by Contract
Owners or the Trustees. Our disapproval of any such change must be reasonable
and, in the case of a change in investment policies or investment adviser, based
on a good faith determination that such change would be contrary to state law or
otherwise is inappropriate in light of the objectives and purposes of the Funds.
In the event we do disregard voting instructions, a summary of and the reasons
for that action will be included in the next periodic report to Contract Owners.
36
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING PAST FIVE
NAME AND POSITION WITH COMPANY YEARS
- --------------------------------------------- ---------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since
Director 1984) and Assistant Secretary (since 1992) of
First Allmerica
Abigail M. Armstrong Secretary (since 1996) and Counsel (since
Secretary and Counsel 1991) of First Allmerica; Secretary (since
1988) and Counsel (since 1994) of Allmerica
Investments, Inc.; and Secretary (since 1990)
of Allmerica Financial Investment Management
Services, Inc.
Warren E. Barnes Vice President (since 1996) and Corporate
Vice President and Corporate Controller Controller (since 1998) of First Allmerica
Robert E. Bruce Director and Chief Information Officer (since
Director and Chief Information Officer 1997) and Vice President (since 1995) of
First Allmerica; and Corporate Manager (1979
to 1995) of Digital Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since
Director, Vice President and Chief 1996) and Vice President (since 1991) of
Investment Officer First Allmerica; and Vice President (since
1998) of Allmerica Financial Investment
Management Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President
Director, Vice President and General (since 1986), General Counsel (since 1981)
Counsel and Assistant Secretary (since 1991) of First
Allmerica; Director (since 1985) of Allmerica
Investments, Inc.; and Director (since 1990)
of Allmerica Financial Investment Management
Services, Inc.
J. Barry May Director (since 1996) of First Allmerica;
Director Director and President (since 1996) of The
Hanover Insurance Company; and Vice President
1993 to 1996) of The Hanover Insurance
Company
James R. McAuliffe Director (since 1996) of First Allmerica;
Director Director (since 1992), President (since 1994)
and Chief Executive Officer (since 1996) of
Citizens Insurance Company of America
John F. O'Brien Director, President and Chief Executive
Director and Chairman of the Board Officer (since 1989) of First Allmerica;
Director (since 1989) of Allmerica
Investments, Inc.; and Director and Chairman
of the Board (since 1990) of Allmerica
Financial Investment Management Services,
Inc.
Edward J. Parry, III Director and Chief Financial Officer (since
Director, Vice President, Chief Financial 1996) and Vice President and Treasurer (since
Officer and Treasurer 1993) of First Allmerica; Treasurer (since
1993) of Allmerica Investments, Inc.; and
Treasurer (since 1993) of Allmerica Financial
Investment Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President
Director, President and Chief Executive (since 1990) of First Allmerica; Director
Officer (since 1990) of Allmerica Investments, Inc.;
and Director and President (since 1998) of
Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of
Director First Allmerica; Chief Executive Officer
(1996 to 1998) of Travelers Property &
Casualty; Senior Vice President (1993 to
1996) of Aetna Life & Casualty Company
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING PAST FIVE
NAME AND POSITION WITH COMPANY YEARS
- --------------------------------------------- ---------------------------------------------
<S> <C>
Eric A. Simonsen Director (since 1996) and Vice President
Director and Vice President (since 1990) of First Allmerica; Director
(since 1991) of Allmerica Investments, Inc.;
and Director (since 1991) of Allmerica
Financial Investment Management Services,
Inc.
Phillip E. Soule Director (since 1996) and Vice President
Director (since 1987) of First Allmerica
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect wholly-owned subsidiary of First
Allmerica, acts as the principal underwriter and general distributor of the
Contracts. Allmerica Investments, Inc. is registered with the SEC as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. ("NASD"). Broker-dealers sell the Contracts through their registered
representatives who are appointed by us.
The Company pays commissions not to exceed 5.5% of the payment to broker-dealers
which sell the Contracts. Alternative commission schedules are available with
lower initial commission amounts, plus ongoing annual compensation of up to
1.00% of Contract Value. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to broker-dealers based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Other payments may be made for other services that do not directly
involve the sale of the Contracts. These services may include the recruitment
and training of personnel, production of promotional literature, and similar
services.
We intend to recoup commissions and other sales expenses through a combination
of the contingent surrender charge, the distribution expense charge, and
investment earnings on amounts allocated under the Contracts to the Fixed
Account in excess of the interest credited on amounts in the Fixed Account.
Commissions paid on the Contracts, including other incentives or payments, are
not charged to Contract Owners or to the Separate Account.
REPORTS
We will maintain the records for the Variable Account. We will promptly send you
statements of transactions under your Contract, including:
- Payments;
- Transfers among Sub-Accounts and the Fixed Account;
- Partial withdrawals;
- Increases in loan amount or loan repayments;
- Lapse or termination for any reason; and
- Reinstatement.
We will send an annual statement to you that will summarize all of the above
transactions and deductions of charges during the Contract year. It will also
set forth the status of the Death Benefit, Contract Value, Surrender Value,
amounts in the Sub-Accounts and Fixed Account, and any Contract loans. We will
send you reports containing financial statements and other information for the
Variable Account and the Funds as the 1940 Act requires.
38
<PAGE>
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Funds in return for providing certain services to Contract
Owners. Currently, the Company receives service fees with respect to the
Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity
VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity VIP II
Asset Manager Portfolio, at an annual rate of 0.10% of the aggregate net asset
value, respectively, of the shares held by the Variable Account. With respect to
the T. Rowe Price International Stock Portfolio, the Company receives service
fees at an annual rate of 0.15% per annum of the aggregate net asset value of
shares held by the Variable Account. The Company may in the future render
services for which it will receive compensation from the investment advisers or
other service providers of other Funds.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and
Allmerica Investments, Inc. are not involved in any litigation that is of
material importance in relation to their total assets or that relates to the
Variable Account.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to law, to make additions to, deletions from, or
substitutions for the shares that are held in the Sub-Accounts. We may redeem
the shares of a Fund and substitute shares of another registered open-end
management company, if:
- The shares of the Fund are no longer available for investment; OR
- In our judgment further investment in the Fund would be improper based on
the purposes of the Variable Account or the affected Sub-Account.
Where the 1940 Act or other law requires, we will not substitute any shares
respecting a Contract interest in a Sub-Account without notice to Contract
Owners and prior approval of the SEC and state insurance authorities. The
Variable Account may, as the law allows, purchase other securities for other
contracts or allow a conversion between contracts on a Contract Owner's request.
We reserve the right to establish additional Sub-Accounts funded by a new fund
or by another investment company. Subject to law, we may, in our sole
discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts.
Shares of the Funds are issued to other separate accounts of the Company and its
affiliates that fund variable annuity Contracts ("mixed funding"). Shares of the
Funds may also be issued to other unaffiliated insurance companies ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life contract owners or variable
annuity contract owners. The Company and the Funds do not believe that mixed
funding is currently disadvantageous to either variable life insurance contract
owners or variable annuity contract owners. The Company will monitor events to
identify any material conflicts among contract owners because of mixed funding.
If the Company concludes that separate funds should be established for variable
life and variable annuity separate accounts, we will bear the expenses.
We may change the Contract to reflect a substitution or other change and will
notify Contract Owners of the change. Subject to any approvals the law may
require, the Variable Account or any Sub-Accounts may be:
- Operated as a management company under the 1940 Act;
- Deregistered under the 1940 Act if registration is no longer required; OR
- Combined with other sub-accounts or our other separate accounts.
39
<PAGE>
FURTHER INFORMATION
We have filed a registration statement under the Securities Act of 1933 ("1933
Act") for this offering with the SEC. Under SEC rules and regulations, we have
omitted from this prospectus parts of the registration statement and amendments.
Statements contained in this prospectus are summaries of the Contract and other
legal documents. The complete documents and omitted information may be obtained
from the SEC's principal office in Washington, D.C., on payment of the SEC's
prescribed fees.
MORE INFORMATION ABOUT THE FIXED ACCOUNT
This prospectus serves as a disclosure document only for the aspects of the
Contract relating to the Variable Account. For complete details on the Fixed
Account, read the Contract itself. The Fixed Account and other interests in the
Fixed Account are not regulated under the 1933 Act or the 1940 Act because of
exemption and exclusionary provisions. 1933 Act provisions on the accuracy and
completeness of statements made in prospectuses may apply to information on the
fixed part of the Contract and the Fixed Account. The SEC has not reviewed the
disclosures in this section of the prospectus.
GENERAL DESCRIPTION
You may allocate part or all of your payment to accumulate at a fixed rate of
interest in the Fixed Account. The Fixed Account is a part of our General
Account. The General Account is made up of all of our general assets other than
those allocated to any separate account. Allocations to the Fixed Account become
part of our General Account assets and are used to support insurance and annuity
obligations.
FIXED ACCOUNT INTEREST
We guarantee amounts allocated to the Fixed Account as to principal and a
minimum rate of interest. The minimum interest we will credit on amounts
allocated to the Fixed Account is 4.0% compounded annually. "Excess interest"
may or may not be credited at our sole discretion. We will guarantee initial
rates on amounts allocated to the Fixed Account, either as a payment or a
transfer, to the next Contract anniversary.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CONTRACT LOANS
If a Contract is surrendered or if a partial withdrawal is made, a surrender
charge and/or partial withdrawal charge may be imposed. We deduct partial
withdrawals from Contract Value allocated to the Fixed Account on a
last-in/first out basis.
The first 12 transfers in a Contract year are free. After that, we may deduct a
transfer charge not to exceed $25 for each transfer in that Contract year. The
transfer privilege is subject to our consent and to our then current rules.
Contract loans may also be made from the Contract Value in the Fixed Account. We
will credit that part of the Contract Value that is equal to any Outstanding
Loan with interest at an effective annual yield of at least 4.0% (5.5% for
preferred loans).
We may delay transfers, surrenders, partial withdrawals, Net Death Benefits and
Contract loans up to six months. However, if payment is delayed for 30 days or
more, we will pay interest at least equal to an effective annual yield of 3.0%
per year for the deferment. Amounts from the Fixed Account used to make payments
on Contracts that we or our affiliates issue will not be delayed.
40
<PAGE>
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, and the financial
statements of VEL Account III of the Company as of December 31, 1998 and for the
periods indicated, included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policy.
YEAR 2000 DISCLOSURE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. Although the Company does not believe that there is a
material contingency associated with the Year 2000 project, there can be no
assurance that exposure for material contingencies will not arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project, through December 31, 1998. The total remaining cost of
the project is estimated between $20-30 million.
41
<PAGE>
FINANCIAL STATEMENTS
Financial Statements for the Company are included in this Prospectus, starting
immediately after the Appendices. The financial statements of the Company should
be considered only as bearing on our ability to meet our obligations under the
Contract. They should not be considered as bearing on the investment performance
of the assets held in the Variable Account.
42
<PAGE>
APPENDIX A -- MINIMUM SUM INSURED TABLE
The minimum sum insured is a percentage of the Contract Value as set forth
below. The minimum sum insured meets or exceeds the minimum guideline sum
insured according to federal tax regulations:
MINIMUM SUM INSURED
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Contract Value
------------------ -----------------
<S> <C>
0-40.................................................... 265%
45...................................................... 230%
50...................................................... 200%
55...................................................... 165%
60...................................................... 145%
65...................................................... 135%
70...................................................... 130%
71...................................................... 128%
72...................................................... 127%
75...................................................... 127%
80...................................................... 127%
85...................................................... 127%
90...................................................... 127%
91...................................................... 127%
92...................................................... 127%
93...................................................... 127%
94...................................................... 127%
95...................................................... 127%
96...................................................... 120%
97...................................................... 113%
98...................................................... 106%
99...................................................... 100%
</TABLE>
For the ages not listed, the progression between the listed ages is linear.
A-1
<PAGE>
APPENDIX B -- OPTIONAL INSURANCE BENEFITS
This Appendix provides only a summary of other insurance benefits available by
rider. For more information, contact your representative. Certain riders may not
be available in all states.
OPTION TO ACCELERATE BENEFITS (LIVING BENEFITS) RIDER
This rider allows part of the Contract proceeds to be available before death
if the Insured becomes terminally ill or is permanently confined to a
nursing home.
LIFE INSURANCE 1035 EXCHANGE RIDER
This rider provides preferred loan rates to: (a) any outstanding loan
carried over from an exchanged policy, the proceeds of which are applied to
purchase the Contract; and (b) a percentage of the gain under the exchanged
policy, less the outstanding policy loans carried over to the Contract, as
of the date of exchange.
GUARANTEED DEATH BENEFIT RIDER
This rider provides a guaranteed Net Death Benefit which is the GREATER of
(a) the Face Amount as of the Final Payment Date or (b) the Contract Value
as of the date due proof of death is received by the Company, REDUCED by the
Outstanding Loan, if any, through the Contract month in which the Insured
dies. If the Contract Owner pays an initial payment equal to the Guideline
Single Premium, the Contract will be issued with the Guaranteed Death
Benefit Rider at no additional charge. The rider may terminate under certain
circumstances.
B-1
<PAGE>
APPENDIX C -- PAYMENT OPTIONS
PAYMENT OPTIONS -- On Written Request, the Surrender Value or all or part of any
payable Net Death Benefit may be paid under one or more payment options then
offered by the Company. If you do not make an election, we will pay the benefits
in a single sum. If a payment option is selected, the beneficiary may pay to us
any amount that would otherwise be deducted from the Death Benefit. A
certificate will be provided to the payee describing the payment option
selected.
The amounts payable under a payment option are paid from the Fixed Account.
These amounts are not based on the investment experience of the Variable
Account. The amounts payable under these options, for each $1,000 applied, will
be:
(a) the rate per $1,000 of benefit based on our non-guaranteed current benefit
option rates for this class of Contracts, or
(b) the rate in your Contract for the applicable benefit option, whichever is
greater.
If you choose a benefit option, the Beneficiary may, when filing a proof of
claim, pay us any amount that otherwise would be deducted from the proceeds.
- - OPTION A: BENEFITS FOR A SPECIFIED NUMBER OF YEARS -- We will make equal
payments for any selected number of years up to 30 years. These payments may
be made annually, semi-annually, quarterly or monthly, whichever you choose.
- - OPTION B: LIFETIME MONTHLY BENEFIT -- Benefits are based on the age of the
person who receives the money (called the payee) on the date the first payment
will be made. You may choose one of the three following options to specify
when benefits will cease:
- when the payee dies with no further benefits due (Life Annuity);
- when the payee dies but not before the total benefit payments made by us
equals the amount applied under this option (Life Annuity with Installment
Refund); or
- when the payee dies but not before 10 years have elapsed from the date of
the first payment (Life Annuity with Payments Guaranteed for 10 years).
- - OPTION C: INTEREST BENEFITS -- We will pay interest at a rate we determine
each year. It will not be less than 3% per year. We will make payments
annually, semi-annually, quarterly, or monthly, whichever is preferred. These
benefits will stop when the amount left has been withdrawn. If the payee dies,
any unpaid balance plus accrued interest will be paid in a lump sum.
- - OPTION D: BENEFITS FOR A SPECIFIED AMOUNT -- Interest will be credited to the
unpaid balance and we will make payments until the unpaid balance is gone. We
will credit interest at a rate we determine each year, but not less than 3%.
We will make payments annually, semi-annually, quarterly, or monthly,
whichever is preferred. The benefit level chosen must provide for an annual
benefit of at least 8% of the amount applied.
- - OPTION E: LIFETIME MONTHLY BENEFITS FOR TWO PAYEES -- We will pay a benefit
jointly to two payees during their joint lifetime. After one payee dies, the
benefits to the survivor will be:
- the same as the original amount, or
- in an amount equal to 2/3 of the original amount.
Benefits are based on the payees' ages on the date the first payment is due.
Benefits will end when the second payee dies.
SELECTION OF PAYMENT OPTIONS -- The amount applied under any one option for any
one payee must be at least $5,000. The periodic payment for any one payee must
be at least $50. Subject to the Contract Owner and Beneficiary provisions, any
option selection may be changed before the Net Death Benefit
C-1
<PAGE>
become payable. If you make no selection, the Beneficiary may select an option
when the Net Death Benefit becomes payable.
If the amount of the monthly benefit under Option B for the age of the payee is
the same for different periods certain, the payee will be entitled to the
longest period certain for the payee's age.
You may give the Beneficiary the right to change from Option C or D to any other
option at any time. If Option C or D is chosen by the payee when this Contract
becomes a claim, the payee may reserve the right to change to any other option.
The payee who elects to change options must be the payee under the option
selected.
ADDITIONAL DEPOSITS -- An additional deposit may be added to any proceeds when
they are applied under Option B and E. We reserve the right to limit the amount
of any additional deposit. We may levy a charge of no more than 3% on any
additional deposits.
RIGHTS AND LIMITATIONS -- A payee has no right to assign any amount payable
under any option, nor to demand a lump sum benefit in place of any amount
payable under Options B or E. A payee will have the right to receive a lump sum
in place of installments under Option A. The payee must provide us with a
Written Request to reserve this right. If the right to receive a lump sum is
exercised, we will determine the lump sum benefit at the same interest rates
used to calculate the installments. The amount left under Option C and any
unpaid balance under Option D, may be withdrawn only as noted in the Written
Request selecting the option.
A corporate or fiduciary payee may select only Option A, C or D, subject to our
approval.
PAYMENT DATES -- The first payment under any option, except Option C, will be
due on the date this Contract matures, by death or otherwise, unless another
date is designated. Benefits under Option C begin at the end of the first
benefit period.
The last payment under any option will be made as stated in the option's
description. However, if a payee under Options B or E dies before the due date
of the second monthly payment, the amount applied, minus the first monthly
payment, will be paid in a lump sum or under any option other than Option E.
This payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
BENEFIT RATES -- The Benefit Option Tables in your Contract show benefit amounts
for Option A, B and E. If you choose one of these options, either within five
years of the date of surrender or the date the proceeds are otherwise payable,
we will apply either the benefit rates listed in the Tables, or the rates we use
on the date the proceeds are paid, whichever is more favorable. Benefits that
begin more than five years after that date, or as a result of additional
deposits, will be based on the rates we use on the date the first benefit is
due.
C-2
<PAGE>
APPENDIX D -- ILLUSTRATIONS OF DEATH BENEFIT, CONTRACT VALUES
AND ACCUMULATED PAYMENTS
The following tables illustrate the way in which a Contract's Death Benefit and
Contract Value could vary over an extended period.
ASSUMPTIONS
The tables illustrate the following Contracts: a Contract issued to a male, age
55, under a standard underwriting class and qualifying for the non-tobacco user
discount; a Contract issued on a unisex basis to an Insured, age 55, under a
standard underwriting class and qualifying for the non-tobacco user discount; a
Second-to-Die Contract issued to a male, age 65, under a standard Underwriting
Class and qualifying for the non-tobacco user discount and a female, age 65,
under a standard Underwriting Class and qualifying for the non-tobacco user
discount; and a Second-to-Die Contract issued on a unisex basis to two Insureds
both age 65, under a standard Underwriting Class and qualifying for the
non-tobacco user discount. The tables illustrate the guaranteed insurance
protection rates and the current insurance protection rates as presently in
effect. On request, we will provide a comparable illustration based on the
proposed Insured's age, sex, and Underwriting Class, and a specified payment.
The tables illustrate Contract Values based on the assumptions that no Contract
loans have been made, that no partial withdrawals have been made, and that no
more than 12 transfers have been made in any Contract year (so that no
transaction or transfer charges have been incurred). The tables also assume that
the Guaranteed Death Benefit Rider is in effect. (The Contract will lapse when
the Surrender Value or Contract Value is zero, unless the Guaranteed Death
Benefit Rider is in effect.)
The tables assume that the initial payment is allocated to and remains in the
Variable Account for the entire period shown. They are based on hypothetical
gross investment rates of return for the Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equal to constant gross annual
rates of 0%, 6%, and 12%. The second column of the tables shows the amount that
would accumulate if the initial payment was invested to earn interest (after
taxes) at 5% compounded annually.
The Contract Values and Death Benefit would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below the averages for individual Contract
years. The values would also be different depending on the allocation of the
Contract's total Contract Value among the Sub-Accounts, if the rates of return
averaged 0%, 6% or 12%, but the rates of each Fund varied above and below the
averages.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Variable Account since no charges are currently made.
However, if in the future the charges are made, to produce illustrated Death
Benefits and Contract Value, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Contract Values take into account
the deduction from payments for the tax expense charge, the Monthly Deductions
from Contract Value (including the administrative charge (equivalent to 0.20% on
an annual basis), and the distribution charge (equivalent to 0.90% on an annual
basis, for the first ten Contract years only). and the daily charge against the
Variable Account for mortality and expense risks (0.90% on an annual basis). In
both the Current Cost of Insurance Charges illustrations and Guaranteed Cost of
Insurance Charges illustrations, the Variable Account charges currently are
equivalent to an effective annual rate of 0.90% of the average daily value of
the assets in the Variable Account.
D-1
<PAGE>
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses. These are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Funds, which is the
approximate average of the expenses of the Underlying Funds in 1998. The actual
fees and expenses of each Underlying Fund vary, and, in 1998, ranged from an
annual rate of 0.32% to an annual rate of 2.19% of average daily net assets. The
fees and expenses associated with the Contract may be more or less than 0.85% in
the aggregate, depending upon how you make allocations of the Contract Value
among the Sub-Accounts.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.35%
of average net assets for Select Aggressive Growth Fund and Select Capital
Appreciation Fund, 1.25% for Select Value Opportunity Fund, 1.50% for Select
International Equity Fund, 1.20% for Growth Fund and Select Growth Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Select Income Fund, Investment
Grade Income Fund and Government Bond Fund, and 0.60% for Money Market Fund, and
Equity Index Fund. The total operating expenses of these Funds of the Trust were
less than their respective expense limitations throughout 1998.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these Funds. These limitations may be terminated at any time.
Effective May 1, 1999, Delaware International Advisers Ltd., the investment
adviser for the DGPF International Equity Series, has agreed to limit total
annual expenses of the fund to 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 1999. The new limitation will be
in effect through October 31, 1999. For the fiscal year ended December 31, 1998,
the actual ratio of total annual expenses was 0.88%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
NET ANNUAL RATES OF INVESTMENT
Taking into account the Separate Account mortality and expense risk charge of
0.90%, and the assumed 0.85% charge for Underlying Fund advisory fees and
operating expenses, the gross annual rates of investment return of 0%, 6% and
12% correspond to net annual rates of -1.75%, 4.25% and 10.25%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and Contract Values, the gross annual investment rate of return
would have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax
charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED FACE
AMOUNT, SUM INSURED OPTION, AND RIDERS.
D-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
MALE NONSMOKER AGE 55
SPECIFIED FACE AMOUNT =
$74,596
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return
Interest ------------------------------- ------------------------------- -------------------------------
Contract At 5% Surrender Contract Death Surrender Contract Death Surrender Contract Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------- ---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,288 23,788 74,596 22,741 25,241 74,596 24,194 26,694 74,596
2 27,563 20,665 22,978 74,596 23,557 25,870 74,596 26,621 28,934 74,596
3 28,941 20,070 22,195 74,596 24,390 26,515 74,596 29,236 31,361 74,596
4 30,388 19,501 21,439 74,596 25,238 27,175 74,596 32,055 33,993 74,596
5 31,907 18,959 20,709 74,596 26,103 27,853 74,596 35,095 36,845 74,596
6 33,502 18,441 20,003 74,596 26,984 28,547 74,596 38,374 39,937 74,596
7 35,178 18,134 19,322 74,596 28,071 29,258 74,596 42,100 43,288 74,596
8 36,936 17,851 18,663 74,596 29,175 29,987 74,596 46,107 46,920 74,596
9 38,783 17,653 18,028 74,596 30,360 30,735 74,596 50,482 50,857 74,596
10 40,722 17,413 17,413 74,596 31,501 31,501 74,596 55,124 55,124 75,520
11 42,758 17,006 17,006 74,596 32,643 32,643 74,596 60,411 60,411 81,555
12 44,896 16,609 16,609 74,596 33,827 33,827 74,596 66,205 66,205 88,714
13 47,141 16,220 16,220 74,596 35,053 35,053 74,596 72,554 72,554 96,497
14 49,498 15,841 15,841 74,596 36,324 36,324 74,596 79,512 79,512 104,956
15 51,973 15,471 15,471 74,596 37,642 37,642 74,596 87,138 87,138 114,150
16 54,572 15,109 15,109 74,596 39,007 39,007 74,596 95,494 95,494 124,143
17 57,300 14,756 14,756 74,596 40,421 40,421 74,596 104,653 104,653 133,955
18 60,165 14,411 14,411 74,596 41,887 41,887 74,596 114,689 114,689 145,655
19 63,174 14,074 14,074 74,596 43,406 43,406 74,596 125,688 125,688 159,624
20 66,332 13,745 13,745 74,596 44,980 44,980 74,596 137,742 137,742 174,933
Age 60 31,907 18,959 20,709 74,596 26,103 27,853 74,596 35,095 36,845 74,596
Age 65 40,722 17,413 17,413 74,596 31,501 31,501 74,596 55,124 55,124 75,520
Age 70 51,973 15,471 15,471 74,596 37,642 37,642 74,596 87,138 87,138 114,150
Age 75 66,332 13,745 13,745 74,596 44,980 44,980 74,596 137,742 137,742 174,933
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
MALE NONSMOKER AGE 55
SPECIFIED FACE AMOUNT =
$74,596
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return
Interest ------------------------------- ------------------------------- -------------------------------
Contract At 5% Surrender Contract Death Surrender Contract Death Surrender Contract Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------- ---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,029 23,529 74,596 22,483 24,983 74,596 23,938 26,438 74,596
2 27,563 20,094 22,407 74,596 22,994 25,307 74,596 26,069 28,382 74,596
3 28,941 19,131 21,256 74,596 23,470 25,595 74,596 28,350 30,475 74,596
4 30,388 18,138 20,075 74,596 23,910 25,847 74,596 30,799 32,736 74,596
5 31,907 17,100 18,850 74,596 24,300 26,050 74,596 33,428 35,178 74,596
6 33,502 16,015 17,578 74,596 24,640 26,203 74,596 36,261 37,824 74,596
7 35,178 15,055 16,242 74,596 25,103 26,291 74,596 39,507 40,694 74,596
8 36,936 14,022 14,834 74,596 25,493 26,306 74,596 43,004 43,817 74,596
9 38,783 12,960 13,335 74,596 25,857 26,232 74,596 46,847 47,222 74,596
10 40,722 11,719 11,719 74,596 26,047 26,047 74,596 50,944 50,944 74,596
11 42,758 10,078 10,078 74,596 25,986 25,986 74,596 55,542 55,542 74,981
12 44,896 8,275 8,275 74,596 25,800 25,800 74,596 60,598 60,598 81,201
13 47,141 6,286 6,286 74,596 25,468 25,468 74,596 66,073 66,073 87,878
14 49,498 4,081 4,081 74,596 24,966 24,966 74,596 71,997 71,997 95,036
15 51,973 1,628 1,628 74,596 24,266 24,266 74,596 78,400 78,400 102,704
16 54,572 0 0 74,596 23,324 23,324 74,596 85,309 85,309 110,901
17 57,300 0 0 74,596 22,080 22,080 74,596 92,786 92,786 118,766
18 60,165 0 0 74,596 20,471 20,471 74,596 100,832 100,832 128,057
19 63,174 0 0 74,596 18,402 18,402 74,596 109,413 109,413 138,954
20 66,332 0 0 74,596 15,776 15,776 74,596 118,532 118,532 150,535
Age 60 31,907 17,100 18,850 74,596 24,300 26,050 74,596 33,428 35,178 74,596
Age 65 40,722 11,719 11,719 74,596 26,047 26,047 74,596 50,944 50,944 74,596
Age 70 51,973 1,628 1,628 74,596 24,266 24,266 74,596 78,400 78,400 102,704
Age 75 66,332 0 0 74,596 15,776 15,776 74,596 118,532 118,532 150,535
</TABLE>
* These illustrations assume that the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is not in effect, there will be no
Death Benefit when the Surrender Value or Contract Value are zero.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
UNISEX NONSMOKER AGE 55
SPECIFIED FACE AMOUNT =
$76,948
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return
Interest ------------------------------- ------------------------------- -------------------------------
Contract At 5% Surrender Contract Death Surrender Contract Death Surrender Contract Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------- ---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,288 23,788 76,948 22,741 25,241 76,948 24,194 26,694 76,948
2 27,563 20,665 22,978 76,948 23,557 25,870 76,948 26,621 28,934 76,948
3 28,941 20,070 22,195 76,948 24,390 26,515 76,948 29,236 31,361 76,948
4 30,388 19,501 21,439 76,948 25,238 27,175 76,948 32,055 33,993 76,948
5 31,907 18,959 20,709 76,948 26,103 27,853 76,948 35,095 36,845 76,948
6 33,502 18,441 20,003 76,948 26,984 28,547 76,948 38,374 39,937 76,948
7 35,178 18,134 19,322 76,948 28,071 29,258 76,948 42,100 43,288 76,948
8 36,936 17,851 18,663 76,948 29,175 29,987 76,948 46,107 46,920 76,948
9 38,783 17,653 18,028 76,948 30,360 30,735 76,948 50,482 50,857 76,948
10 40,722 17,413 17,413 76,948 31,501 31,501 76,948 55,124 55,124 76,948
11 42,758 17,006 17,006 76,948 32,643 32,643 76,948 60,411 60,411 81,555
12 44,896 16,609 16,609 76,948 33,827 33,827 76,948 66,205 66,205 88,714
13 47,141 16,220 16,220 76,948 35,053 35,053 76,948 72,554 72,554 96,497
14 49,498 15,841 15,841 76,948 36,324 36,324 76,948 79,512 79,512 104,956
15 51,973 15,471 15,471 76,948 37,642 37,642 76,948 87,138 87,138 114,150
16 54,572 15,109 15,109 76,948 39,007 39,007 76,948 95,494 95,494 124,143
17 57,300 14,756 14,756 76,948 40,421 40,421 76,948 104,653 104,653 133,955
18 60,165 14,411 14,411 76,948 41,887 41,887 76,948 114,689 114,689 145,655
19 63,174 14,074 14,074 76,948 43,406 43,406 76,948 125,688 125,688 159,624
20 66,332 13,745 13,745 76,948 44,980 44,980 76,948 137,742 137,742 174,933
Age 60 31,907 18,959 20,709 76,948 26,103 27,853 76,948 35,095 36,845 76,948
Age 65 40,722 17,413 17,413 76,948 31,501 31,501 76,948 55,124 55,124 76,948
Age 70 51,973 15,471 15,471 76,948 37,642 37,642 76,948 87,138 87,138 114,150
Age 75 66,332 13,745 13,745 76,948 44,980 44,980 76,948 137,742 137,742 174,933
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
UNISEX NONSMOKER AGE 55
SPECIFIED FACE AMOUNT =
$76,948
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return
Interest ------------------------------- ------------------------------- -------------------------------
Contract At 5% Surrender Contract Death Surrender Contract Death Surrender Contract Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------- ---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,029 23,529 76,948 22,483 24,983 76,948 23,937 26,437 76,948
2 27,563 20,092 22,405 76,948 22,991 25,304 76,948 26,065 28,377 76,948
3 28,941 19,139 21,264 76,948 23,475 25,600 76,948 28,350 30,475 76,948
4 30,388 18,153 20,091 76,948 23,920 25,857 76,948 30,801 32,739 76,948
5 31,907 17,135 18,885 76,948 24,325 26,075 76,948 33,439 35,189 76,948
6 33,502 16,074 17,637 76,948 24,684 26,247 76,948 36,282 37,844 76,948
7 35,178 15,143 16,331 76,948 25,170 26,357 76,948 39,535 40,723 76,948
8 36,936 14,144 14,956 76,948 25,586 26,398 76,948 43,040 43,852 76,948
9 38,783 13,121 13,496 76,948 25,979 26,354 76,948 46,885 47,260 76,948
10 40,722 11,930 11,930 76,948 26,208 26,208 76,948 50,983 50,983 76,948
11 42,758 10,347 10,347 76,948 26,190 26,190 76,948 55,572 55,572 76,948
12 44,896 8,617 8,617 76,948 26,058 26,058 76,948 60,657 60,657 81,280
13 47,141 6,716 6,716 76,948 25,792 25,792 76,948 66,185 66,185 88,026
14 49,498 4,624 4,624 76,948 25,373 25,373 76,948 72,177 72,177 95,273
15 51,973 2,302 2,302 76,948 24,771 24,771 76,948 78,663 78,663 103,048
16 54,572 0 0 76,948 23,935 23,935 76,948 85,669 85,669 111,369
17 57,300 0 0 76,948 22,829 22,829 76,948 93,265 93,265 119,379
18 60,165 0 0 76,948 21,401 21,401 76,948 101,461 101,461 128,856
19 63,174 0 0 76,948 19,563 19,563 76,948 110,232 110,232 139,994
20 66,332 0 0 76,948 17,222 17,222 76,948 119,581 119,581 151,868
Age 60 31,907 17,135 18,885 76,948 24,325 26,075 76,948 33,439 35,189 76,948
Age 65 40,722 11,930 11,930 76,948 26,208 26,208 76,948 50,983 50,983 76,948
Age 70 51,973 2,302 2,302 76,948 24,771 24,771 76,948 78,663 78,663 103,048
Age 75 66,332 0 0 76,948 17,222 17,222 76,948 119,581 119,581 151,868
</TABLE>
* These illustrations assume that the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is not in effect, there will be no
Death Benefit when the Surrender Value or Contract Value are zero.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
MALE NONSMOKER AGE 65
FEMALE NONSMOKER AGE 65
SPECIFIED FACE AMOUNT =
$73,207
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return
Interest ------------------------------- ------------------------------- -------------------------------
Contract At 5% Surrender Contract Death Surrender Contract Death Surrender Contract Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------- ---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,416 23,916 73,207 22,877 25,377 73,207 24,339 26,839 73,207
2 27,563 20,876 23,189 73,207 23,803 26,115 73,207 26,903 29,215 73,207
3 28,941 20,341 22,466 73,207 24,721 26,846 73,207 29,644 31,769 73,207
4 30,388 19,828 21,766 73,207 25,661 27,598 73,207 32,600 34,538 73,207
5 31,907 19,338 21,088 73,207 26,621 28,371 73,207 35,798 37,548 73,207
6 33,502 18,868 20,430 73,207 27,603 29,165 73,207 39,259 40,821 73,207
7 35,178 18,606 19,794 73,207 28,795 29,982 73,207 43,192 44,379 73,207
8 36,936 18,364 19,177 73,207 30,009 30,822 73,207 47,435 48,248 73,207
9 38,783 18,204 18,579 73,207 31,310 31,685 73,207 52,078 52,453 73,207
10 40,722 18,000 18,000 73,207 32,572 32,572 73,207 57,026 57,026 73,207
11 42,758 17,615 17,615 73,207 33,821 33,821 73,207 62,620 62,620 79,527
12 44,896 17,237 17,237 73,207 35,117 35,117 73,207 68,763 68,763 87,329
13 47,141 16,868 16,868 73,207 36,463 36,463 73,207 75,508 75,508 95,895
14 49,498 16,507 16,507 73,207 37,861 37,861 73,207 82,915 82,915 105,302
15 51,973 16,153 16,153 73,207 39,313 39,313 73,207 91,049 91,049 115,632
16 54,572 15,807 15,807 73,207 40,820 40,820 73,207 99,981 99,981 126,976
17 57,300 15,468 15,468 73,207 42,385 42,385 73,207 109,789 109,789 139,432
18 60,165 15,137 15,137 73,207 44,010 44,010 73,207 120,559 120,559 153,110
19 63,174 14,813 14,813 73,207 45,697 45,697 73,207 132,386 132,386 168,130
20 66,332 14,495 14,495 73,207 47,449 47,449 73,207 145,373 145,373 184,623
Age 70 31,907 19,338 21,088 73,207 26,621 28,371 73,207 35,798 37,548 73,207
Age 75 40,722 18,000 18,000 73,207 32,572 32,572 73,207 57,026 57,026 73,207
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
MALE NONSMOKER AGE 65
FEMALE NONSMOKER AGE 65
SPECIFIED FACE AMOUNT =
$73,207
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return
Interest ------------------------------- ------------------------------- -------------------------------
Contract At 5% Surrender Contract Death Surrender Contract Death Surrender Contract Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------- ---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,416 23,916 73,207 22,877 25,377 73,207 24,339 26,839 73,207
2 27,563 20,876 23,189 73,207 23,803 26,115 73,207 26,903 29,215 73,207
3 28,941 20,310 22,435 73,207 24,708 26,833 73,207 29,644 31,769 73,207
4 30,388 19,709 21,646 73,207 25,585 27,523 73,207 32,574 34,511 73,207
5 31,907 19,059 20,809 73,207 26,425 28,175 73,207 35,709 37,459 73,207
6 33,502 18,346 19,908 73,207 27,214 28,777 73,207 39,068 40,630 73,207
7 35,178 17,735 18,922 73,207 28,125 29,312 73,207 42,856 44,044 73,207
8 36,936 17,011 17,824 73,207 28,947 29,759 73,207 46,912 47,725 73,207
9 38,783 16,203 16,578 73,207 29,716 30,091 73,207 51,330 51,705 73,207
10 40,722 15,142 15,142 73,207 30,275 30,275 73,207 56,028 56,028 73,207
11 42,758 13,598 13,598 73,207 30,560 30,560 73,207 61,281 61,281 77,827
12 44,896 11,747 11,747 73,207 30,640 30,640 73,207 66,946 66,946 85,022
13 47,141 9,525 9,525 73,207 30,473 30,473 73,207 73,022 73,022 92,738
14 49,498 6,853 6,853 73,207 30,006 30,006 73,207 79,510 79,510 100,978
15 51,973 3,625 3,625 73,207 29,165 29,165 73,207 86,402 86,402 109,730
16 54,572 0 0 73,207 27,854 27,854 73,207 93,676 93,676 118,968
17 57,300 0 0 73,207 25,936 25,936 73,207 101,292 101,292 128,641
18 60,165 0 0 73,207 23,221 23,221 73,207 109,187 109,187 138,668
19 63,174 0 0 73,207 19,454 19,454 73,207 117,279 117,279 148,945
20 66,332 0 0 73,207 14,286 14,286 73,207 125,466 125,466 159,342
Age 70 31,907 19,059 20,809 73,207 26,425 28,175 73,207 35,709 37,459 73,207
Age 75 40,722 15,142 15,142 73,207 30,275 30,275 73,207 56,028 56,028 73,207
</TABLE>
* These illustrations assume that the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is not in effect, there will be no
Death Benefit when the Surrender Value or Contract Value are zero.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
UNISEX NONSMOKER AGE 65
UNISEX NONSMOKER AGE 65
SPECIFIED FACE AMOUNT =
$72,969
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return
Interest ------------------------------- ------------------------------- -------------------------------
Contract At 5% Surrender Contract Death Surrender Contract Death Surrender Contract Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------- ---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,416 23,916 72,969 22,877 25,377 72,969 24,338 26,838 72,969
2 27,563 20,874 23,186 72,969 23,800 26,113 72,969 26,901 29,213 72,969
3 28,941 20,339 22,464 72,969 24,719 26,844 72,969 29,639 31,764 72,969
4 30,388 19,826 21,764 72,969 25,658 27,596 72,969 32,595 34,532 72,969
5 31,907 19,336 21,086 72,969 26,619 28,369 72,969 35,792 37,542 72,969
6 33,502 18,866 20,428 72,969 27,600 29,163 72,969 39,252 40,815 72,969
7 35,178 18,604 19,792 72,969 28,792 29,979 72,969 43,185 44,372 72,969
8 36,936 18,362 19,175 72,969 30,006 30,819 72,969 47,428 48,240 72,969
9 38,783 18,202 18,577 72,969 31,307 31,682 72,969 52,070 52,445 72,969
10 40,722 17,998 17,998 72,969 32,569 32,569 72,969 57,017 57,017 72,969
11 42,758 17,613 17,613 72,969 33,818 33,818 72,969 62,610 62,610 79,515
12 44,896 17,236 17,236 72,969 35,114 35,114 72,969 68,752 68,752 87,315
13 47,141 16,866 16,866 72,969 36,460 36,460 72,969 75,496 75,496 95,880
14 49,498 16,505 16,505 72,969 37,858 37,858 72,969 82,902 82,902 105,286
15 51,973 16,151 16,151 72,969 39,310 39,310 72,969 91,035 91,035 115,614
16 54,572 15,805 15,805 72,969 40,817 40,817 72,969 99,965 99,965 126,956
17 57,300 15,467 15,467 72,969 42,381 42,381 72,969 109,772 109,772 139,410
18 60,165 15,136 15,136 72,969 44,006 44,006 72,969 120,540 120,540 153,086
19 63,174 14,811 14,811 72,969 45,693 45,693 72,969 132,365 132,365 168,103
20 66,332 14,494 14,494 72,969 47,445 47,445 72,969 145,350 145,350 184,594
Age 70 31,907 19,336 21,086 72,969 26,619 28,369 72,969 35,792 37,542 72,969
Age 75 40,722 17,998 17,998 72,969 32,569 32,569 72,969 57,017 57,017 72,969
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
UNISEX NONSMOKER AGE 65
UNISEX NONSMOKER AGE 65
SPECIFIED FACE AMOUNT =
$72,969
QUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return
Interest ------------------------------- ------------------------------- -------------------------------
Contract At 5% Surrender Contract Death Surrender Contract Death Surrender Contract Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------- ---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,416 23,916 72,969 22,877 25,377 72,969 24,338 26,838 72,969
2 27,563 20,874 23,186 72,969 23,800 26,113 72,969 26,901 29,213 72,969
3 28,941 20,305 22,430 72,969 24,703 26,828 72,969 29,638 31,763 72,969
4 30,388 19,698 21,636 72,969 25,575 27,512 72,969 32,564 34,501 72,969
5 31,907 19,041 20,791 72,969 26,407 28,157 72,969 35,693 37,443 72,969
6 33,502 18,316 19,878 72,969 27,185 28,748 72,969 39,041 40,604 72,969
7 35,178 17,689 18,876 72,969 28,081 29,268 72,969 42,818 44,005 72,969
8 36,936 16,948 17,761 72,969 28,887 29,699 72,969 46,862 47,674 72,969
9 38,783 16,119 16,494 72,969 29,637 30,012 72,969 51,267 51,642 72,969
10 40,722 15,035 15,035 72,969 30,175 30,175 72,969 55,952 55,952 72,969
11 42,758 13,465 13,465 72,969 30,435 30,435 72,969 61,190 61,190 77,711
12 44,896 11,586 11,586 72,969 30,489 30,489 72,969 66,836 66,836 84,882
13 47,141 9,336 9,336 72,969 30,295 30,295 72,969 72,892 72,892 92,572
14 49,498 6,636 6,636 72,969 29,800 29,800 72,969 79,357 79,357 100,784
15 51,973 3,384 3,384 72,969 28,933 28,933 72,969 86,226 86,226 109,507
16 54,572 0 0 72,969 27,597 27,597 72,969 93,477 93,477 118,715
17 57,300 0 0 72,969 25,657 25,657 72,969 101,071 101,071 128,360
18 60,165 0 0 72,969 22,927 22,927 72,969 108,949 108,949 138,365
19 63,174 0 0 72,969 19,152 19,152 72,969 117,029 117,029 148,626
20 66,332 0 0 72,969 13,989 13,989 72,969 125,212 125,212 159,019
Age 70 31,907 19,041 20,791 72,969 26,407 28,157 72,969 35,693 37,443 72,969
Age 75 40,722 15,035 15,035 72,969 30,175 30,175 72,969 55,952 55,952 72,969
</TABLE>
* These illustrations assume that the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is not in effect, there will be no
Death Benefit when the Surrender Value or Contract Value are zero.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-10
<PAGE>
APPENDIX E -- PERFORMANCE INFORMATION
The Contracts were first offered to the public in 1998. However, the Company may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Funds have been in existence. The
results for any period prior to the Contracts being offered will be calculated
as if the Contracts had been offered during that period of time, with all
charges assumed to be those applicable to the Sub-Accounts and the Funds.
Total return and average annual total return are based on the hypothetical
profile of a representative Contract Owner and historical earnings and are not
intended to indicate future performance. "Total return" is the total income
generated net of certain expenses and charges. "Average annual total return" is
net of the same expenses and charges, but reflects the hypothetical return
compounded annually. This hypothetical return is equal to cumulative return had
performance been constant over the entire period. Average annual total returns
are not the same as yearly results and tend to smooth out variations in the
Fund's return.
In Tables IA and IIA, performance information under the Contracts is net of Fund
expenses, Monthly Deductions and surrender charges. We take a representative
Contract Owner and assume that:
- The Insured is a male Age 36, standard (non-tobacco user) Underwriting
Class;
- The Contract Owner had allocations in each of the Sub-Accounts for the
Fund durations shown; and
- There was a full surrender at the end of the applicable period.
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during a period. It is not
representative of what may be achieved in the future. However, performance
information may be helpful in reviewing market conditions during a period and in
considering a Fund's success in meeting its investment objectives.
We may compare performance information for a Sub-Account in reports and
promotional literature to:
- Standard & Poor's 500 Stock Index ("S&P 500");
- Dow Jones Industrial Average ("DJIA");
- Shearson Lehman Aggregate Bond Index;
- Other unmanaged indices of unmanaged securities widely regarded by
investors as representative of the securities markets;
- Other groups of variable life separate accounts or other investment
products tracked by Lipper Inc.;
- Other services, companies, publications, or persons such as Morningstar,
Inc., who rank the investment products on performance or other criteria;
and
- The Consumer Price Index.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for insurance and administrative charges, separate account
charges and Fund management costs and expenses.
In advertising, sales literature, publications or other materials, we may give
information on various topics of interest to Contract Owners and prospective
Contract Owners. These topics may include:
- The relationship between sectors of the economy and the economy as a whole
and its effect on various securities markets, investment strategies and
techniques (such as value investing, market timing, dollar cost averaging,
asset allocation and automatic account rebalancing);
- The advantages and disadvantages of investing in tax-deferred and taxable
investments;
E-1
<PAGE>
- Customer profiles and hypothetical payment and investment scenarios;
- Financial management and tax and retirement planning; and
- Investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contracts and the
characteristics of and market for the financial instruments.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues but
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
E-2
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CONTRACT
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the Funds,
all Sub-Account charges, and all Contract charges (including surrender charges)
for a representative Contract. It is assumed that the Insured is Male, Age 36,
standard (non-tobacco user) Underwriting Class, that a single payment of $25,000
was made, that the entire payment was allocated to each Sub-Account
individually, and that there was a full surrender of the Contract at the end of
the applicable period.
<TABLE>
<CAPTION>
10 Years
One-Year or Life of
Total 5 Sub-Account
Underlying Fund Return Years (if less)
<S> <C> <C> <C>
Select Aggressive Growth Fund N/A N/A -95.74%
Select Capital Appreciation Fund N/A N/A -95.66%
Select Value Opportunity Fund N/A N/A -95.91%
Select Emerging Markets Fund N/A N/A N/A
T. Rowe Price International Stock Portfolio N/A N/A -95.96%
Fidelity VIP Overseas Portfolio N/A N/A -95.99%
Select International Equity Fund N/A N/A -95.96%
DGPF International Equity Series N/A N/A -95.99%
Fidelity VIP Growth Portfolio N/A N/A -95.89%
Select Growth Fund N/A N/A -95.81%
Select Strategic Growth Fund N/A N/A -96.01%
Growth Fund N/A N/A -95.88%
Equity Index Fund N/A N/A -95.94%
Fidelity VIP Equity-Income Portfolio N/A N/A -95.95%
Select Growth and Income Fund N/A N/A -95.89%
Fidelity VIP II Asset Manager Portfolio N/A N/A -96.01%
Fidelity VIP High Income Portfolio N/A N/A -96.15%
Investment Grade Income Fund N/A N/A -96.18%
Select Income Fund N/A N/A N/A
Government Bond Fund N/A N/A N/A
Money Market Fund N/A N/A N/A
</TABLE>
The inception date for the Sub-Accounts is: 12/15/98 for Select Aggressive
Growth; Select Capital Appreciation; Select Value Opportunity; T. Rowe Price
International Stock; Fidelity VIP Overseas; Select International Equity; DGPF
International Equity; Fidelity VIP Growth; Select Growth; Select Strategic
Growth; Growth; Equity Index; Fidelity VIP Equity-Income; Select Growth and
Income; Fidelity VIP II Asset Manager; Fidelity VIP High Income; and Investment
Grade Income.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-3
<PAGE>
TABLE I(B)
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIOD ENDING
DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
EXCLUDING MONTHLY CONTRACT CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Fund expenses and all Sub-Account charges. THE DATA DOES NOT REFLECT MONTHLY
CHARGES UNDER THE CONTRACTS OR SURRENDER CHARGES. It is assumed that a single
premium payment of $25,000 has been made and that the entire payment was
allocated to each Sub-Account individually.
<TABLE>
<CAPTION>
10 Years
One-Year or Life of
Total 5 Sub-Account
Underlying Fund Return Years (if less)
<S> <C> <C> <C>
Select Aggressive Growth Fund N/A N/A 10.67%
Select Capital Appreciation Fund N/A N/A 12.38%
Select Value Opportunity Fund N/A N/A 6.55%
Select Emerging Markets Fund N/A N/A N/A
T. Rowe Price International Stock Portfolio N/A N/A 5.39%
Fidelity VIP Overseas Portfolio N/A N/A 4.60%
Select International Equity Fund N/A N/A 5.33%
DGPF International Equity Series N/A N/A 4.59%
Fidelity VIP Growth Portfolio N/A N/A 7.12%
Select Growth Fund N/A N/A 8.99%
Select Strategic Growth Fund N/A N/A 4.27%
Growth Fund N/A N/A 7.17%
Equity Index Fund N/A N/A 5.82%
Fidelity VIP Equity-Income Portfolio N/A N/A 5.61%
Select Growth and Income Fund N/A N/A 6.98%
Fidelity VIP II Asset Manager Portfolio N/A N/A 4.09%
Fidelity VIP High Income Portfolio N/A N/A 0.92%
Investment Grade Income Fund N/A N/A 0.11%
Select Income Fund N/A N/A N/A
Government Bond Fund N/A N/A N/A
Money Market Fund N/A N/A N/A
</TABLE>
The inception date for the Sub-Accounts is: 12/15/98 for Select Aggressive
Growth; Select Capital Appreciation; Select Value Opportunity; T. Rowe Price
International Stock; Fidelity VIP Overseas; Select International Equity; DGPF
International Equity; Fidelity VIP Growth; Select Growth; Select Strategic
Growth; Growth; Equity Index; Fidelity VIP Equity-Income; Select Growth and
Income; Fidelity VIP II Asset Manager; Fidelity VIP High Income; and Investment
Grade Income.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN
TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE
ACHIEVED IN THE FUTURE.
E-4
<PAGE>
TABLE II(A)
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CONTRACT
The following performance information is based on the periods that the Funds
have been in existence. The data is net of expenses of the Funds, all
Sub-Account charges, and all Contract charges (including surrender charges) for
a representative Contract. It is assumed that the Insured is Male, Age 36,
standard (non-tobacco user) Underwriting Class, that a single payment of $25,000
was made, that the entire payment was allocated to each Sub-Account
individually, and that there was a full surrender of the Contract at the end of
the applicable period.
<TABLE>
<CAPTION>
10 Years
One-Year or Life of
Total 5 Fund
Underlying Fund Return Years (if less)
<S> <C> <C> <C>
Select Aggressive Growth Fund -3.79% 10.89% 14.47%
Select Capital Appreciation Fund -0.60% N/A 15.38%
Select Value Opportunity Fund -9.26% 8.98% 10.87%
Select Emerging Markets Fund N/A N/A -43.61%
T. Rowe Price International Stock Portfolio 1.30% N/A 5.37%
Fidelity VIP Overseas Portfolio -1.68% 5.56% 7.20%
Select International Equity Fund 1.90% N/A 7.95%
DGPF International Equity Series -4.01% 6.41% 7.46%
Fidelity VIP Growth Portfolio 24.01% 17.65% 16.31%
Select Growth Fund 20.12% 18.06% 15.53%
Select Strategic Growth Fund N/A N/A -27.90%
Growth Fund 4.63% 14.93% 13.93%
Equity Index Fund 13.28% 19.30% 17.41%
Fidelity VIP Equity-Income Portfolio -2.76% 14.69% 12.60%
Select Growth and Income Fund 1.85% 13.74% 11.91%
Fidelity VIP II Asset Manager Portfolio 0.53% 7.69% 9.95%
Fidelity VIP High Income Portfolio -18.09% 4.65% 8.17%
Investment Grade Income Fund -6.27% 2.77% 6.31%
Select Income Fund -7.36% 1.84% 2.91%
Government Bond Fund -6.56% 1.78% 3.67%
Money Market Fund -8.63% 1.00% 2.85%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government Bond;
8/21/92 for Select Aggressive Growth, Select Growth, Select Income, and Select
Growth and Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select
International Equity; 4/28/95 for Select Capital Appreciation; 10/09/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income; 1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II
Asset Manager; 10/29/92 for DGPF International Equity; 3/31/94 for T. Rowe Price
International Stock, and 2/20/98 for Select Emerging Markets and Select
Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-5
<PAGE>
TABLE II(B)
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1998
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY CONTRACT CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the Funds
have been in existence. The performance information is net of total Fund
expenses and all Sub-Account charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES
UNDER THE CONTRACTS OR SURRENDER CHARGES. It is assumed that a single premium
payment of $25,000 has been made and that the entire payment was allocated to
each Sub-Account individually.
<TABLE>
<CAPTION>
10 Years
One-Year or Life of
Total 5 Fund
Underlying Fund Return Years (if less)
<S> <C> <C> <C>
Select Aggressive Growth Fund 9.56% 13.95% 17.04%
Select Capital Appreciation Fund 12.85% N/A 19.28%
Select Value Opportunity Fund 3.92% 12.07% 13.68%
Select Emerging Markets Fund N/A N/A -22.07%
T. Rowe Price International Stock Portfolio 14.81% N/A 8.67%
Fidelity VIP Overseas Portfolio 11.73% 8.71% 9.09%
Select International Equity Fund 15.43% N/A 11.25%
DGPF International Equity Series 9.33% 9.54% 10.14%
Fidelity VIP Growth Portfolio 38.23% 20.64% 18.33%
Select Growth Fund 34.22% 21.05% 18.10%
Select Strategic Growth Fund N/A N/A% -3.23%
Growth Fund 18.24% 17.94% 15.92%
Equity Index Fund 27.17% 22.28% 19.60%
Fidelity VIP Equity-Income Portfolio 10.62% 17.70% 14.58%
Select Growth and Income Fund 15.38% 16.76% 14.49%
Fidelity VIP II Asset Manager Portfolio 14.01% 10.80% 11.96%
Fidelity VIP High Income Portfolio -5.19% 7.82% 10.08%
Investment Grade Income Fund 7.00% 5.99% 8.19%
Select Income Fund 5.87% 5.09% 5.60%
Government Bond Fund 6.70% 5.03% 6.03%
Money Market Fund 4.56% 4.27% 4.67%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government Bond;
8/21/92 for Select Aggressive Growth, Select Growth, Select Income, and Select
Growth and Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select
International Equity; 4/28/95 for Select Capital Appreciation; 10/09/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income; 1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II
Asset Manager; 10/29/92 for DGPF International Equity; 3/31/94 for T. Rowe Price
International Stock; and 2/20/98 for the Select Emerging Markets and Select
Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN
TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE
ACHIEVED IN THE FUTURE.
E-6
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 267.4 212.2 176.2
Net investment income...................... 151.3 164.2 171.7
Net realized investment gains (losses)..... 20.0 2.9 (3.6)
Other income............................... 0.6 1.4 0.9
------- ------- -------
Total revenues......................... 439.8 403.5 377.9
------- ------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 153.9 187.8 192.6
Policy acquisition expenses................ 64.6 2.8 49.9
Sales practice litigation.................. 21.0 -- --
Loss from cession of disability income
business................................. -- 53.9 --
Other operating expenses................... 104.1 101.3 86.6
------- ------- -------
Total benefits, losses and expenses.... 343.6 345.8 329.1
------- ------- -------
Income before federal income taxes............. 96.2 57.7 48.8
------- ------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 22.1 13.9 26.9
Deferred................................... 11.8 7.1 (9.8)
------- ------- -------
Total federal income tax expense....... 33.9 21.0 17.1
------- ------- -------
Net income..................................... $ 62.3 $ 36.7 $ 31.7
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)............................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)............................................ 31.8 54.0
Mortgage loans...................................... 230.0 228.2
Real estate......................................... 14.5 12.0
Policy loans........................................ 151.5 140.1
Other long-term investments......................... 9.1 20.3
---------- ----------
Total investments............................... 1,767.3 1,857.1
---------- ----------
Cash and cash equivalents............................. 217.9 31.1
Accrued investment income............................. 33.5 34.2
Deferred policy acquisition costs..................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses,
future policy benefits and unearned premiums........ 308.0 251.1
Other assets.......................................... 46.9 10.7
Separate account assets............................... 11,020.4 7,567.3
---------- ----------
Total assets.................................... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 17.9 18.5
Unearned premiums................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities....................................... 38.1 32.5
---------- ----------
Total policy liabilities and accruals........... 2,343.5 2,150.1
---------- ----------
Expenses and taxes payable............................ 146.2 77.6
Reinsurance premiums payable.......................... 45.7 4.9
Deferred federal income taxes......................... 78.8 75.9
Separate account liabilities.......................... 11,020.4 7,567.3
---------- ----------
Total liabilities............................... 13,634.6 9,875.8
---------- ----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,524 and 2,521 shares issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 407.9 386.9
Accumulated other comprehensive income................ 24.1 38.5
Retained earnings..................................... 275.4 213.1
---------- ----------
Total shareholder's equity...................... 709.9 641.0
---------- ----------
Total liabilities and shareholder's equity...... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 386.9 346.3 324.3
Issuance of common stock................... 21.0 40.6 22.0
-------- -------- --------
Balance at end of period................... 407.9 386.9 346.3
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period............. 38.5 20.5 23.8
Appreciation (depreciation) during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (23.4) 27.0 (5.1)
Benefit (provision) for deferred
federal income taxes................. 9.0 (9.0) 1.8
-------- -------- --------
(14.4) 18.0 (3.3)
-------- -------- --------
Balance at end of period................... 24.1 38.5 20.5
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4 144.7
Net income................................. 62.3 36.7 31.7
-------- -------- --------
Balance at end of period................... 275.4 213.1 176.4
-------- -------- --------
Total shareholder's equity............. $ 709.9 $ 641.0 $ 545.7
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Net income.................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities......... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal
income taxes.......................... 9.0 (9.0) 1.8
------- ------- -------
Other comprehensive income.......... (14.4) 18.0 (3.3)
------- ------- -------
Comprehensive income.................... 47.9 $ 54.7 $ 28.4
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (20.0) (2.9) 3.6
Net amortization and depreciation... (7.1) -- 3.5
Sales practice litigation expense... 21.0
Loss from cession of disability
income business................... -- 53.9 --
Deferred federal income taxes....... 11.8 7.1 (9.8)
Payment related to cession of
disability income business........ -- (207.0) --
Change in deferred acquisition
costs............................. (177.8) (181.3) (66.8)
Change in reinsurance premiums
payable........................... 40.8 3.9 (0.2)
Change in accrued investment
income............................ 0.7 3.5 1.2
Change in policy liabilities and
accruals, net..................... 193.1 (72.4) (39.9)
Change in reinsurance receivable.... (56.9) 22.1 (1.5)
Change in expenses and taxes
payable........................... 55.4 0.2 32.3
Separate account activity, net...... (0.5) 1.6 8.0
Other, net.......................... (28.0) (8.7) 2.3
-------- -------- --------
Net cash provided by (used in)
operating activities.......... 94.8 (343.3) (35.6)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 187.0 909.7 809.4
Proceeds from disposals of equity
securities............................ 53.3 2.4 1.5
Proceeds from disposals of other
investments........................... 22.7 23.7 17.4
Proceeds from mortgages matured or
collected............................. 60.1 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (136.0) (579.7) (795.8)
Purchase of equity securities........... (30.6) (3.2) (13.2)
Purchase of other investments........... (22.7) (9.0) (13.9)
Purchase of mortgages................... (58.9) (70.4) (22.3)
Other investing activities, net......... (3.9) -- (2.0)
-------- -------- --------
Net cash provided by investing
activities........................ 71.0 336.4 15.1
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 21.0 19.2 22.0
-------- -------- --------
Net cash provided by financing
activities........................ 21.0 19.2 22.0
-------- -------- --------
Net change in cash and cash equivalents..... 186.8 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 31.1 18.8 17.3
-------- -------- --------
Cash and cash equivalents, end of period.... $ 217.9 $ 31.1 $ 18.8
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 0.6 $ -- $ 3.4
Income taxes paid....................... $ 36.2 $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual life and annuity policies, and are based upon estimates as to future
investment yield, mortality and withdrawals that include provisions for adverse
deviation. Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. Benefits, losses and related expenses are matched
with premiums, resulting in their recognition over the lives of the contracts.
This matching is accomplished through the provision for future benefits,
estimated and unpaid losses and amortization of deferred policy acquisition
costs. Revenues for investment-related products consist of net investment income
and contract charges assessed against the fund values. Related benefit expenses
primarily consist of net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies. The Federal income tax for all subsidiaries in the consolidated
return of AFC is calculated on a separate return basis. Any current tax
liability is paid to AFC. Tax benefits resulting from taxable operating losses
or credits of AFC's subsidiaries are not reimbursed to the subsidiary until such
losses or credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), which established standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from non-owner
sources. This statement is effective for fiscal years beginning after December
15, 1997. The Company adopted Statement No. 130 for the first quarter of 1998,
which resulted primarily in reporting unrealized gains and losses on investments
in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,284.6 $66.4 $20.6 $1,330.4
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
1997
----------------------------------------------
<CAPTION>
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ 0.5 $-- $ 6.8
States and political subdivisions....... 2.8 0.2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,340.5 $66.6 $ 4.6 $1,402.5
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1998, the amortized
cost and market value of these assets on deposit in New York were $268.5 million
and $284.1 million, respectively. At December 31, 1997, the amortized cost and
market value of assets on deposit were $276.8 million and $291.7 million,
respectively. In addition, fixed maturities, excluding those securities on
deposit in New York, with an amortized cost of $4.2 million were on deposit with
various state and governmental authorities at December 31, 1998 and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
--------- --------
Total....................................................... $ 1,284.6 $1,330.4
--------- --------
--------- --------
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ --------------- ----- ------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
1997
Fixed maturities............................................ $702.9 $11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- -------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
---------- ------ -------
(5.9) (8.5) (14.4)
---------- ------ -------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
---------- ------ -------
---------- ------ -------
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ------ -------
9.4 8.6 18.0
---------- ------ -------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
---------- ------ -------
1996
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
---------- ------ -------
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ------ -------
(7.7) 4.4 (3.3)
---------- ------ -------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
---------- ------ -------
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Mortgage loans.............................................. $ 230.0 $ 228.2
Real estate held for sale................................... 14.5 12.0
------- -------
Total mortgage loans and real estate........................ $ 244.5 $ 240.2
------- -------
------- -------
</TABLE>
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, real estate assets with a carrying amount of
$15.7 million were written down to the estimated fair value less cost to sell of
$12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 1997. During 1996, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
Geographic region:
<S> <C> <C>
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 -- $11.5
million; 2003 -- $0.6 million; and $143.0 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances, which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $ 3.3
----- ----- --- -----
----- ----- --- -----
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ----- --- -----
Total................................................... $11.2 $ 4.8 $6.6 $ 9.4
----- ----- --- -----
----- ----- --- -----
1996
Mortgage loans.............................................. $12.5 $ 4.5 $7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- ----- --- -----
Total................................................... $14.6 $ 4.5 $7.9 $11.2
----- ----- --- -----
----- ----- --- -----
</TABLE>
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
------ ------ ------
------ ------ ------
</TABLE>
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 1997, and reduced net income by $0.1 million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.6 million, $21.1 million and $25.4 million at December 31,
1998, 1997 and 1996, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $1.4 million, $1.9 million and $3.6 million in 1998,
1997, and 1996, respectively. Actual interest income on these loans included in
net investment income aggregated $1.8 million, $2.1 million and $2.2 million in
1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
------ ------ ------
------ ------ ------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $ (5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------- ------- -------
Other comprehensive income.................................. $ (14.4) $ 18.0 $ (3.3)
------- ------- -------
------- ------- -------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), requires disclosure of fair value information about
certain financial instruments (insurance contracts, real estate, goodwill and
taxes are excluded) for which it is practicable to estimate such values, whether
or not these instruments are included in the balance sheet. The fair values
presented for certain financial instruments are estimates which, in many cases,
may differ significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments, which have comparable terms and credit
quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans is
limited to the lesser of the present value of the cash flows or book value.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities.......................................... 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities......................................... 31.8 31.8 54.0 54.0
Mortgage loans............................................ 230.0 241.9 228.2 239.8
Policy loans.............................................. 151.5 151.5 140.1 140.1
--------- --------- --------- ---------
$ 1,961.6 $ 1,973.5 $ 1,855.9 $ 1,867.5
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $ 1,069.4 $ 1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life Contingencies......... 16.6 16.6 15.3 15.3
--------- --------- --------- ---------
$ 1,086.0 $ 1,051.2 $ 891.3 $ 865.9
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $21.0 $17.1
----- ----- -----
----- ----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $ (205.1) $ (175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
-------- --------
Deferred tax liability, net................................. $ 78.8 $ 75.9
-------- --------
-------- --------
</TABLE>
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
------ ------ ------
------ ------ ------
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
------ ------ ------
------ ------ ------
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (10.2) 10.3
Adjustment for cession of disability income insurance..... -- (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- 50.3 --
------ ------ ------
Balance at end of year...................................... $950.5 $765.3 $632.7
------ ------ ------
------ ------ ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company believes
that no material adverse development of losses will occur. However, the amount
of the liabilities could be revised in the near term if the estimates are
revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Policyowners of the VEL Account III of Allmerica Financial Life
Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the VEL Account III of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1998, the results of each of their operations
and the changes in each of their net assets for the period indicated, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Allmerica Financial Life Insurance and
Annuity Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
VEL ACCOUNT III
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT MONEY GOVERNMENT AGGRESSIVE SELECT
GROWTH GRADE INCOME MARKET(a) EQUITY INDEX BOND(a) GROWTH GROWTH
---------- ------------ ---------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust... $ 76 $ 42 $ -- $ 60 $ -- $ 94 $ 154
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)......... -- -- -- -- -- -- --
Investment in shares of T.
Rowe Price International
Series, Inc.................. -- -- -- -- -- -- --
Investment in shares of
Delaware Group Premium Fund,
Inc.......................... -- -- -- -- -- -- --
---------- ------------ ---------- ------------- ------------- ---------- ----------
Total assets................ 76 42 -- 60 -- 94 154
LIABILITIES: -- -- -- -- -- -- --
---------- ------------ ---------- ------------- ------------- ---------- ----------
Net assets.................. $ 76 $ 42 $ -- $ 60 $ -- $ 94 $ 154
---------- ------------ ---------- ------------- ------------- ---------- ----------
---------- ------------ ---------- ------------- ------------- ---------- ----------
Net asset distribution by
category:
Variable life policies...... $ 76 $ 42 $ -- $ 60 $ -- $ 94 $ 154
---------- ------------ ---------- ------------- ------------- ---------- ----------
---------- ------------ ---------- ------------- ------------- ---------- ----------
Units outstanding, December
31, 1998..................... 71 42 -- 57 -- 85 141
Net asset value per unit,
December 31, 1998............ $ 1.071654 $ 1.000996 $1.000000 $1.058073 $1.000000 $1.106580 $ 1.089780
</TABLE>
(a) For the period ended 12/31/98, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
VEL ACCOUNT III
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT SELECT SELECT SELECT SELECT
GROWTH SELECT VALUE SELECT INTERNATIONAL CAPITAL EMERGING STRATEGIC
AND INCOME OPPORTUNITY INCOME(a) EQUITY APPRECIATION MARKETS(a) GROWTH
---------- ------------ ---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust... $ 45 $ 120 $ -- $ 119 $ 95 $ -- $ 74
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)......... -- -- -- -- -- -- --
Investment in shares of T.
Rowe Price International
Series, Inc.................. -- -- -- -- -- -- --
Investment in shares of
Delaware Group Premium Fund,
Inc.......................... -- -- -- -- -- -- --
---------- ------------ ---------- ------------ ------------ ---------- ----------
Total assets................ 45 120 -- 119 95 -- 74
LIABILITIES: -- -- -- -- -- -- --
---------- ------------ ---------- ------------ ------------ ---------- ----------
Net assets.................. $ 45 $ 120 $ -- $ 119 $ 95 $ -- $ 74
---------- ------------ ---------- ------------ ------------ ---------- ----------
---------- ------------ ---------- ------------ ------------ ---------- ----------
Net asset distribution by
category:
Variable life policies...... $ 45 $ 120 $ -- $ 119 $ 95 $ -- $ 74
---------- ------------ ---------- ------------ ------------ ---------- ----------
---------- ------------ ---------- ------------ ------------ ---------- ----------
Units outstanding, December
31, 1998..................... 42 113 -- 113 85 -- 71
Net asset value per unit,
December 31, 1998............ $1.069747 $ 1.065421 $1.000000 $1.053158 $1.123660 $1.000000 $ 1.042596
</TABLE>
(a) For the period ended 12/31/98, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
VEL ACCOUNT III
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
FIDELITY
VIP FIDELITY FIDELITY FIDELITY FIDELITY T. ROWE PRICE
HIGH VIP VIP VIP VIP II INTERNATIONAL
INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER STOCK
---------- ------------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust... $ -- $ -- $ -- $ -- $ -- $ --
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)......... 43 45 76 103 147 --
Investment in shares of T.
Rowe Price International
Series, Inc.................. -- -- -- -- -- 104
Investment in shares of
Delaware Group Premium Fund,
Inc.......................... -- -- -- -- -- --
---------- ------------- ---------- ------------ ------------- -------------
Total assets................ 43 45 76 103 147 104
LIABILITIES: -- -- -- -- -- --
---------- ------------- ---------- ------------ ------------- -------------
Net assets.................. $ 43 $ 45 $ 76 $ 103 $ 147 $ 104
---------- ------------- ---------- ------------ ------------- -------------
---------- ------------- ---------- ------------ ------------- -------------
Net asset distribution by
category:
Variable life policies...... $ 43 $ 45 $ 76 $ 103 $ 147 $ 104
---------- ------------- ---------- ------------ ------------- -------------
---------- ------------- ---------- ------------ ------------- -------------
Units outstanding, December
31, 1998..................... 43 43 71 98 141 99
Net asset value per unit,
December 31, 1998............ $1.009145 $1.056016 $ 1.071135 $ 1.045945 $1.040782 $ 1.053785
<CAPTION>
DGPF
INTERNATIONAL
EQUITY
------------
<S> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust... $ --
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)......... --
Investment in shares of T.
Rowe Price International
Series, Inc.................. --
Investment in shares of
Delaware Group Premium Fund,
Inc.......................... 103
------------
Total assets................ 103
LIABILITIES: --
------------
Net assets.................. $ 103
------------
------------
Net asset distribution by
category:
Variable life policies...... $ 103
------------
------------
Units outstanding, December
31, 1998..................... 99
Net asset value per unit,
December 31, 1998............ $1.045844
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
VEL ACCOUNT III
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME EQUITY INDEX
---------------------- ---------------------- ----------------------
PERIOD FROM PERIOD FROM PERIOD FROM
12/15/98** TO 12/31/98 12/15/98** TO 12/31/98 12/15/98** TO 12/31/98
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ 1 $ --
----- ----- -----
Net investment income
(loss).................. -- 1 --
----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... -- -- 1
----- ----- -----
Net realized gain (loss).... -- -- 1
Net unrealized gain
(loss).................... 5 (1) 2
----- ----- -----
Net realized and
unrealized gain
(loss).................. 5 (1) 3
----- ----- -----
Net increase (decrease) in
net assets from
operations................ 5 -- 3
----- ----- -----
POLICY TRANSACTIONS:
Transfers between
sub-accounts (including
fixed account), net....... 71 42 57
----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. 71 42 57
----- ----- -----
Net increase (decrease) in
net assets................ 76 42 60
NET ASSETS:
Beginning of period......... -- -- --
----- ----- -----
End of period............... $ 76 $ 42 $ 60
----- ----- -----
----- ----- -----
<CAPTION>
SELECT SELECT
AGGRESSIVE GROWTH SELECT GROWTH GROWTH AND INCOME
---------------------- ---------------------- ----------------------
PERIOD FROM PERIOD FROM PERIOD FROM
12/15/98** TO 12/31/98 12/15/98** TO 12/31/98 12/15/98** TO 12/31/98
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ -- $ --
----- ----- -----
Net investment income
(loss).................. -- -- --
----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... -- -- --
----- ----- -----
Net realized gain (loss).... -- -- --
Net unrealized gain
(loss).................... 9 13 3
----- ----- -----
Net realized and
unrealized gain
(loss).................. 9 13 3
----- ----- -----
Net increase (decrease) in
net assets from
operations................ 9 13 3
----- ----- -----
POLICY TRANSACTIONS:
Transfers between
sub-accounts (including
fixed account), net....... 85 141 42
----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. 85 141 42
----- ----- -----
Net increase (decrease) in
net assets................ 94 154 45
NET ASSETS:
Beginning of period......... -- -- --
----- ----- -----
End of period............... $ 94 $154 $ 45
----- ----- -----
----- ----- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
VEL ACCOUNT III
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT SELECT SELECT
VALUE OPPORTUNITY INTERNATIONAL EQUITY CAPITAL APPRECIATION
---------------------- ---------------------- ----------------------
PERIOD FROM PERIOD FROM PERIOD FROM
12/15/98** TO 12/31/98 12/15/98** TO 12/31/98 12/15/98** TO 12/31/98
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ 1 $ 1 $ --
----- ----- -----
Net investment income
(loss).................... 1 1 --
----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... -- -- 14
----- ----- -----
Net realized gain (loss).... -- -- 14
Net unrealized gain
(loss).................... 6 5 (4)
----- ----- -----
Net realized and
unrealized gain
(loss).................. 6 5 10
----- ----- -----
Net increase (decrease) in
net assets from
operations................ 7 6 10
----- ----- -----
POLICY TRANSACTIONS:
Transfers between
sub-accounts (including
fixed account), net....... 113 113 85
----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. 113 113 85
----- ----- -----
Net increase (decrease) in
net assets................ 120 119 95
NET ASSETS:
Beginning of period......... -- -- --
----- ----- -----
End of period............... $120 $119 $ 95
----- ----- -----
----- ----- -----
<CAPTION>
SELECT FIDELITY VIP FIDELITY VIP
STRATEGIC GROWTH HIGH INCOME EQUITY-INCOME
---------------------- ---------------------- ----------------------
PERIOD FROM PERIOD FROM PERIOD FROM
12/15/98** TO 12/31/98 12/15/98** TO 12/31/98 12/15/98** TO 12/31/98
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ -- $ --
----- ----- -----
Net investment income
(loss).................... -- -- --
----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... -- -- --
----- ----- -----
Net realized gain (loss).... -- -- --
Net unrealized gain
(loss).................... 3 -- 2
----- ----- -----
Net realized and
unrealized gain
(loss).................. 3 -- 2
----- ----- -----
Net increase (decrease) in
net assets from
operations................ 3 -- 2
----- ----- -----
POLICY TRANSACTIONS:
Transfers between
sub-accounts (including
fixed account), net....... 71 43 43
----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. 71 43 43
----- ----- -----
Net increase (decrease) in
net assets................ 74 43 45
NET ASSETS:
Beginning of period......... -- -- --
----- ----- -----
End of period............... $ 74 $ 43 $ 45
----- ----- -----
----- ----- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
VEL ACCOUNT III
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP II T. ROWE PRICE
GROWTH OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
---------------------- ---------------------- ---------------------- ----------------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
12/15/98** TO 12/31/98 12/15/98** TO 12/31/98 12/15/98** TO 12/31/98 12/15/98** TO 12/31/98
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ -- $ -- $ 1
----- ----- ----- -----
Net investment income
(loss).................. -- -- -- 1
----- ----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON
INVESTMENTS:
Realized gain distributions
from portfolio sponsors... -- -- -- --
----- ----- ----- -----
Net realized gain (loss).... -- -- -- --
Net unrealized gain
(loss).................... 5 5 6 4
----- ----- ----- -----
Net realized and
unrealized gain
(loss).................. 5 5 6 4
----- ----- ----- -----
Net increase (decrease) in
net assets from
operations................ 5 5 6 5
----- ----- ----- -----
POLICY TRANSACTIONS:
Transfers between
sub-accounts (including
fixed account), net....... 71 98 141 99
----- ----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. 71 98 141 99
----- ----- ----- -----
Net increase (decrease) in
net assets................ 76 103 147 104
NET ASSETS:
Beginning of period......... -- -- -- --
----- ----- ----- -----
End of period............... $ 76 $ 103 $ 147 $ 104
----- ----- ----- -----
----- ----- ----- -----
<CAPTION>
DGPF
INTERNATIONAL EQUITY
----------------------
PERIOD FROM
12/15/98** TO 12/31/98
----------------------
<S> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ --
-----
Net investment income
(loss).................. --
-----
REALIZED AND UNREALIZED GAIN
(LOSS) ON
INVESTMENTS:
Realized gain distributions
from portfolio sponsors... --
-----
Net realized gain (loss).... --
Net unrealized gain
(loss).................... 5
-----
Net realized and
unrealized gain
(loss).................. 5
-----
Net increase (decrease) in
net assets from
operations................ 5
-----
POLICY TRANSACTIONS:
Transfers between
sub-accounts (including
fixed account), net....... 98
-----
Net increase (decrease) in
net assets from policy
transactions.............. 98
-----
Net increase (decrease) in
net assets................ 103
NET ASSETS:
Beginning of period......... --
-----
End of period............... $ 103
-----
-----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
VEL ACCOUNT III
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The VEL Account III (VEL III) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company), established on
October 30, 1998 for the purpose of separating from the general assets of the
Company those assets used to fund the variable portion of certain modified
single premium variable life insurance policies issued by the Company. The
Company is a wholly-owned subsidiary of First Allmerica Financial Life Insurance
Company (First Allmerica). First Allmerica is a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC). Under applicable insurance law, the
assets and liabilities of VEL III are clearly identified and distinguished from
the other assets and liabilities of the Company. VEL III cannot be charged with
liabilities arising out of any other business of the Company.
VEL III is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). VEL III currently offers
twenty-one Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio of: Allmerica Investment Trust (the Trust), managed by
Allmerica Financial Investment Management Services, Inc. (AFIMS) (successor to
Allmerica Investment Management Company, Inc.), a wholly-owned subsidiary of
First Allmerica; or of the Variable Insurance Products Fund (Fidelity VIP) or
the Variable Insurance Products Fund II (Fidelity VIP II), managed by Fidelity
Management & Research Company (FMR); or of the T. Rowe Price International
Series, Inc. (T. Rowe Price), managed by Rowe Price-Fleming International, Inc.;
or of the Delaware Group Premium Fund, Inc. (DGPF), managed by Delaware
International Advisers, Ltd. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe
Price, and DGPF (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of VEL III.
Therefore, no provision for income taxes has been charged against VEL III.
SA-7
<PAGE>
VEL ACCOUNT III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
--------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Growth.................................. 27 $ 71 $ 2.825
Investment Grade Income................. 37 43 1.132
Money Market............................ -- -- 1.000
Equity Index............................ 18 58 3.408
Government Bond......................... -- -- 1.068
Select Aggressive Growth................ 38 85 2.460
Select Growth........................... 63 141 2.428
Select Growth and Income................ 25 42 1.779
Select Value Opportunity................ 71 114 1.685
Select Income........................... -- -- 1.032
Select International Equity............. 77 114 1.542
Select Capital Appreciation............. 58 99 1.640
Select Emerging Markets................. -- -- 0.784
Select Strategic Growth................. 76 71 0.973
Fidelity VIP High Income................ 4 43 11.530
Fidelity VIP Equity-Income.............. 2 43 25.420
Fidelity VIP Growth..................... 2 71 44.870
Fidelity VIP Overseas................... 5 98 20.050
Fidelity VIP II Asset Manager........... 8 141 18.160
T. Rowe Price International Stock....... 7 100 14.520
DGPF International Equity............... 6 98 16.480
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, the cost of any additional benefits
provided by rider and monthly administration and distribution charges. The
policyowner may instruct the Company to deduct this monthly charge from a
specific Sub-Account, but if not so specified, it will be deducted on a pro-rata
basis of allocation which is the same proportion that the policy value in the
General Account of the Company and in each Sub-Account bear to the total policy
value.
The Company makes a charge of 0.90% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The mortality and expense risk charge may be increased or decreased,
subject to compliance with applicable state and federal requirements, but the
total charge may not exceed 0.90% per annum. This charge is deducted in the
daily computation of unit values and is paid to the Company daily or monthly
based on the Sub-Account.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of VEL III, and does not receive any compensation for sales of
SA-8
<PAGE>
VEL ACCOUNT III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
VEL III policies. Commissions are paid to registered representatives of
Allmerica Investments and certain independent broker-dealers by the Company. The
current series of policies have a surrender charge and no deduction is made for
sales charges at the time of the sale. For the period ended December 31, 1998,
there were no surrender charges applicable to VEL III.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life
insurance policy, other than a policy issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance policy
for federal income tax purposes for any period for which the investments of the
segregated asset account on which the policy is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VEL III satisfies the current requirements
of the regulations, and it intends that VEL III will continue to meet such
requirements.
SA-9
<PAGE>
VEL ACCOUNT III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by VEL III
during the period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- --------- -----
<S> <C> <C>
Growth................................................. $ 71 $ --
Investment Grade Income................................ 43 --
Money Market........................................... -- --
Equity Index........................................... 58 --
Government Bond........................................ -- --
Select Aggressive Growth............................... 85 --
Select Growth.......................................... 141 --
Select Growth and Income............................... 42 --
Select Value Opportunity............................... 114 --
Select Income.......................................... -- --
Select International Equity............................ 114 --
Select Capital Appreciation............................ 99 --
Select Emerging Markets................................ -- --
Select Strategic Growth................................ 71 --
Fidelity VIP High Income............................... 43 --
Fidelity VIP Equity-Income............................. 43 --
Fidelity VIP Growth.................................... 71 --
Fidelity VIP Overseas.................................. 98 --
Fidelity VIP II Asset Manager.......................... 141 --
T. Rowe Price International Stock...................... 100 --
DGPF International Equity.............................. 98 --
--------- -----
Totals................................................. $1,432 $ --
--------- -----
--------- -----
</TABLE>
SA-10
