INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
KMA VARIABLE ACCOUNT
AND
KEYPORT LIFE INSURANCE COMPANY
The variable annuity contract (form number FLEX(4), referred to as the Contract)
described in this prospectus provides for accumulation of Contract Values and
payment of periodic annuity payments on a variable basis and, except for
Contracts issued to New Jersey and Washington residents, also on a fixed basis.
The Contract is designed for use by individuals for retirement planning
purposes.
This prospectus generally describes only the variable features of the Contract
(for a summary of the fixed features, see Appendix A on Page 25). If the
Contract Owner elects to have Contract Values accumulated on a variable basis,
purchase payments will be allocated to a segregated investment account of
Keyport Life Insurance Company ("Keyport"), designated the KMA Variable Account
("Variable Account"). The Variable Account invests in shares of the following
Eligible Funds of SteinRoe Variable Investment Trust ("SteinRoe Trust") at their
net asset value: Cash Income Fund ("CIF"); Mortgage Securities Income Fund
("MSIF"); Managed Assets Fund ("MAF"); Managed Growth Stock Fund ("MGSF"); and
Capital Appreciation Fund ("CAF"). The Variable Account also invests in shares
of the following Eligible Funds of Keyport Variable Investment Trust ("Keyport
Trust") at their net asset value: Colonial-Keyport Growth and Income Fund
("CKGIF"); Colonial-Keyport Strategic Income Fund ("CKSIF"); Colonial-Keyport
Utilities Fund ("CKUF"); Colonial-Keyport U.S. Fund for Growth ("CKUSFG");
Colonial-Keyport International Fund for Growth ("CKIFG") and Newport-Keyport
Tiger Fund ("NKTF").
Persons who have purchased Variable Account variable annuity contracts before
May 1, 1992 may continue to make purchase payments under those contracts
subject to the terms and conditions of those contracts and Appendix B on Page
28.
Keyport may also offer group variable annuity contracts issued by the Variable
Account. Any such group contract would be offered by a separate prospectus.
A Statement of Additional Information dated the same as this prospectus has been
filed with the Securities and Exchange Commission and is herein incorporated by
reference. It is available, at no charge, by writing Keyport at 125 High Street,
Boston, MA 02110, by calling (800) 437-4466, or by returning the postcard on the
back cover of this prospectus. A table of contents for the Statement of
Additional Information is on Page 24.
The Contract may be sold by or through banks or other depository institutions.
The Contract: is not insured by the FDIC; is not a deposit or other obligation
of, or guaranteed by, the depository institution; and is subject to investment
risks, including the possible loss of principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH THE INFORMATION A PROSPECTIVE INVESTOR SHOULD KNOW
BEFORE INVESTING. THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE OR JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED BY KEYPORT
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING, AND IF GIVEN OR
MADE, SUCH UNAUTHORIZED INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED
UPON.
The date of this prospectus is May 1, 1996
TABLE OF CONTENTS
Page
Glossary of Special Terms 3
Summary of Expenses 4
Synopsis 6
Condensed Financial Information 7
Keyport and the Variable Account 9
Purchase Payments and Applications 9
Investments of the Variable Account 10
Allocations of Purchase Payments 10
Eligible Funds 10
Dollar Cost Averaging 12
Transfer of Variable Account Value 12
Substitution of Eligible Funds and
Other Variable Account Changes 13
Deductions 13
Deductions for Contract Maintenance Charge 13
Deductions for Mortality and Expense Risk Charge 14
Deductions for Daily Sales Charge 14
Deductions for Contingent Deferred Sales Charge 14
Deductions for Transfers of Variable Account Value 15
Deductions for Premium Taxes 15
Deductions for Income Taxes 15
Total Expenses 15
The Contracts 15
Variable Account Value 15
Valuation Periods 16
Net Investment Factor 16
Modification of the Contract 16
Right to Revoke 16
Death Provisions for Non-Qualified Contracts 17
Death Provisions for Qualified Contracts 18
Ownership 18
Assignment 18
Surrenders 18
Annuity Provisions 19
Annuity Benefits 19
Income Date and Settlement Option 19
Change in Income Date and Settlement Option 19
Settlement Options 19
Variable Annuity Payment Values 20
Proof of Age, Sex, and Survival of Annuitant 20
Suspension of Payments 21
Tax Status 21
Introduction 21
Taxation of Annuities in General 21
Qualified Plans 22
Tax-Sheltered Annuities 22
Individual Retirement Annuities 23
Corporate Pension and Profit-Sharing Plans 23
Deferred Compensation Plans with Respect to
Service for State and Local Governments 23
Texas Optional Retirement Program 23
Variable Account Voting Rights 23
Distribution of the Contract 24
Legal Proceedings 24
Inquiries by Contract Owners 24
Table of Contents Statement of Additional Information 24
Appendix A The Fixed Account (also known as the
Guaranteed Rate Account) 25
Appendix B Prior Contracts of the Variable Account 28
Appendix C Telephone Instructions 35
Appendix D Dollar Cost Averaging 36
GLOSSARY OF SPECIAL TERMS
Accumulation Unit: An accounting unit of measure used to calculate Variable
Account Value.
Annuitant: The Annuitant is the natural person to whom any annuity payments will
be made starting on the Income Date. The Annuitant may not be over age 80 on the
Issue Date (age 75 for Qualified Contracts).
Contract Anniversary: The same month and day as the Issue Date in each
subsequent year of the Contract.
Contract Owner: The person (or persons in the case of joint ownership) who
possesses all the ownership rights under the Contract. The primary Owner may not
be over age 80 on the Issue Date (age 75 for Qualified Contracts and age 85 for
a joint Owner).
Contract Value: The sum of the Variable Account Value and the Fixed Account
Value.
Contract Year: Any period of 12 months commencing with the Issue Date and each
Contract Anniversary thereafter shall be a Contract Year.
Designated Beneficiary: The person who may be entitled to receive benefits
following the death of the Annuitant or Contract Owner. The Designated
Beneficiary will be the first person among the following who is alive on the
date of death: primary Owner; joint Owner; primary beneficiary; contingent
beneficiary; and if no one is alive, the primary Owner's estate. If the
primary Owner and joint Owner are both alive, they will be the Designated
Beneficiary together.
Eligible Funds: The mutual funds that are eligible investments for the Variable
Account.
Fixed Account: Part of Keyport's general account into which purchase payments
may be allocated.
Fixed Account Value: The value of all Fixed Account amounts accumulated under
the Contract prior to the Income Date.
In Force: The status of the Contract before the Income Date so long as it is not
totally surrendered and there has not been a death of the Annuitant or any
Contract Owner that will cause the Contract to end within at most five years of
the date of death.
Income Date: The date on which annuity payments are to begin.
Issue Date: The effective date of the Contract; it is shown on Page 3 of the
Contract.
Non-Qualified Contract: Any Contract that is not issued under a Qualified Plan.
Office: Keyport's executive office, which is 125 High Street, Boston,
Massachusetts 02110.
Qualified Contract: Contracts issued under Qualified Plans.
Qualified Plan: A retirement plan established pursuant to the provisions of
Sections 401, 403 or 408 of the Internal Revenue Code. Keyport treats Section
457 plans as Qualified Plans.
Surrender Value: The Contract Value less the deductions made upon a total
surrender of the Contract. See "Surrenders" on Page 19.
Variable Account: A separate investment account of Keyport, designated on Page
1, into which purchase payments may be allocated.
Variable Account Value: The value of all Variable Account amounts accumulated
under the Contract prior to the Income Date.
Written Request: A request written on a form satisfactory to Keyport, signed by
the Contract Owner and a disinterested witness, and filed at Keyport's Office.
SUMMARY OF EXPENSES
The expense summary format below, including the examples, was adopted by the
Securities and Exchange Commission to assist the owner of a variable annuity
contract in understanding the transaction and operating expenses the owner will
directly or indirectly bear under a contract. The values reflect expenses of the
Variable Account as well as the Eligible Funds. The expenses shown for the
Eligible Funds are from 1995 and the examples should not be considered a
representation of future expenses.
Contract Owner Transaction Expenses
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of purchase payments): 7%1
Years from Date of Payment Sales Charge
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 or later 0%
Maximum Total Contract Owner Transaction Expenses2
(as a percentage of purchase payments): 7%
Annual Contract Fee $36
Variable Account Annual Expenses
(as a percentage of average net assets)
Mortality and Expense Risk Charge: 1.25%
Asset-based Sales Charge: .15%
Total Variable Account Annual Expenses: 1.40%
SteinRoe Trust and Keyport Trust Annual Expenses3,4
(as a percentage of average net assets)
Management Other Total Fund
Fund Fees Expenses Operating Expenses
CIF .50% .13% .63%
MSIF .55 .14 .69
CKGIF .65 .16 .81
CKSIF .65 .15 .80 (.94%)4
MAF .60 .06 .66
CKUF .65 .18 .83
MGSF .65 .09 .74
CKUSFG .80 .20 1.00 (1.07%)4
CAF .65 .11 .76
CKIFG .90 .50 1.40
NKTF .90 .82 1.72
Example #1 Assuming surrender of the Contract at the end of the periods
shown.5,6
A $1,000 investment in each Sub-Account listed would be subject to the expenses
shown, assuming 5% annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
CIF $ 91 $ 118 $ 154 $ 301
MSIF 92 120 157 309
CKGIF 93 123 164 324
CKSIF 93 123 164 323
MAF 92 119 156 305
CKUF 93 124 165 327
MGSF 92 121 160 315
CKUSFG 95 129 175 348
CAF 93 122 161 318
CKIFG 99 141 197 397
NKTF 102 151 213 435
Example #2 Assuming annuitization of the Contract at the end of the periods
shown.5
A $1,000 investment in each Sub-Account listed would be subject to the expenses
shown, assuming 5% annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
CIF $ 21 $ 69 $ 124 $ 301
MSIF 22 71 127 309
CKGIF 23 75 134 324
CKSIF 23 74 134 323
MAF 22 70 126 305
CKUF 23 75 135 327
MGSF 22 72 130 315
CKUSF 25 81 145 348
CAF 23 73 131 318
CKIFG 29 93 167 397
NKTF 32 103 184 435
Example #3 Assuming the Contract stays in force through the periods shown.
A $1,000 investment in each Sub-Account listed would be subject to the same
expenses shown in Example #2, assuming 5% annual return on assets.
1Contingent Deferred Sales Charges are deducted only if the Contract is fully or
partially surrendered. A surrender will not incur the Charge percentage shown to
the extent the amount of that surrender does not exceed the Contract's increase
in value at the time of surrender or, after the first Contract Year, 10% of the
Contract Value on the prior Contract Anniversary if this 10% amount is greater.
2Keyport reserves the right to impose a transfer fee after prior notice to
Contract Owners, but currently does not impose any charge. Premium taxes are not
shown. Keyport deducts the amount of premium taxes, if any, when paid unless
Keyport elects to defer such deduction.
3Keyport Trust's manager has agreed until 4/30/97 to reimburse all expenses,
including management fees, in excess of the following percentage of the average
annual net assets of each Fund, so long as such reimbursement would not result
in the Fund's inability to qualify as a regulated investment company under the
Internal Revenue Code: .80% for CKSIF; 1.75% for CKIFG and NKTF, and 1.00% for
CKGIF, CKUF and CKUSFG. The total percentages shown in the table for CKSIF and
CKUSFG are after expense reimbursement. Each percentage shown in the
parentheses is what the total for 1995 would have been in the absence of expense
reimbursement: for CKSIF, .94% and for CKUSFG, 1.07%.
4SteinRoe Trust's adviser has voluntarily agreed until 4/30/97 to reimburse all
expenses, including management fees, in excess of the following percentage of
the average annual net assets of each Fund, so long as such reimbursement would
not result in the Fund's inability to qualify as a regulated investment company
under the Internal Revenue Code: .65% for CIF; .70% for MSIF; .75% for MAF; and
.80% for MGSF and CAF.
5The annuity is designed for retirement planning purposes. Surrenders prior to
the Income Date are not consistent with the long-term purposes of the Contract
and the applicable tax laws.
6The CIF-DCA Sub-Account is not shown because it is available under previously
issued Contracts only for automatic monthly transfers that will deplete a
Contract Owner's Sub-Account values by the end of either the first or second
Contract Year. This Sub-Account was not generally available for Contract Owners
who began automatic monthly transfers after July 31, 1993. See Appendix D on
Page 36.
The examples should not be considered a representation of past or future
expenses and charges of the Sub-Accounts. Actual expenses may be greater or less
than those shown. Similarly, the assumed 5% annual rate of return is not an
estimate or a guarantee of future investment performance. See Deductions in this
prospectus, How the Funds are Managed in the prospectus for SteinRoe Variable
Investment Trust, and Trust Management Organizations and Expenses of the Funds
in the prospectus for Keyport Variable Investment Trust.
SYNOPSIS
The Contract allows Contract Owners to allocate purchase payments to the
Variable Account and, except for Contracts issued to New Jersey and Washington
residents, also to the Fixed Account. The Variable Account is a separate
investment account maintained by Keyport. The Fixed Account is part of Keyport's
general account, which consists of all Keyport's assets except the Variable
Account and the assets of other separate accounts maintained by Keyport.
Contract Owners may allocate payments to, and receive annuity payments from, the
Variable Account and/or Fixed Account. If the Contract Owner allocates payments
to the Variable Account, the accumulation values and annuity payments will
fluctuate according to the investment performance of the Eligible Funds chosen.
If the Contract Owner allocates payments to the Fixed Account, the accumulation
values will increase at guaranteed interest rates and annuity payments will be
of a fixed amount. (See Appendix A on Page 25 for more information on the Fixed
Account.) If the Contract Owner allocates payments to both Accounts, then the
accumulation values and annuity payments will be variable in part and fixed in
part.
The Contract permits purchase payments to be made on a flexible purchase payment
basis. The minimum initial payment is $5,000. The minimum amount for each
subsequent payment is $1,000 or such lesser amount as Keyport may permit from
time to time (currently $250). (See Purchase Payments on Page 9.)
There are no deductions made from purchase payments for sales charges at the
time of purchase. A Contingent Deferred Sales Charge may be deducted in the
event of a total or partial surrender (see Surrenders on Page 19). The
Contingent Deferred Sales Charge is based on a graded table of charges. The
charge will not exceed 7% of that portion of the amount surrendered that
represents purchase payments made during the seven years immediately preceding
the request for surrender. (See Deductions for Contingent Deferred Sales Charge
on Page 14.)
Keyport deducts a Mortality and Expense Risk Charge, which is equal on an annual
basis to 1.25% of the average daily net asset values in the Variable Account
attributable to the Contracts. (See Deductions for Mortality and Expense Risk
Charge on Page 13.) Keyport also deducts a sales charge which is equal on an
annual basis to .15% of the same values. (See Deductions for Daily Sales Charge
on Page 14.)
Keyport deducts an annual Contract Maintenance Charge (currently $36.00) from
the Variable Account Value for administrative expenses. Prior to the Income
Date, Keyport reserves the right to change this charge for future years. (See
Deductions for Contract Maintenance Charge on Page 13.)
Premium taxes will be charged against Contract Value. Currently such premium
taxes range from 0% to 5.0%. (See Deductions for Premium Taxes on Page 15.)
There are no federal income taxes on increases in the value of a Contract until
a distribution occurs, in the form of a lump sum payment, annuity payments, or
the making of a gift or assignment of the Contract. A federal penalty tax
(currently 10%) may also apply. (See Tax Status on Page 21.)
The Contract allows the Contract Owner to revoke the Contract within 10 days of
delivery (see Right to Revoke on Page 16). For most states, Keyport will
refund the lesser of the initial purchase payment or Contract Value. The
Contract Owner will thus bear the investment risk during the revocation period.
CONDENSED FINANCIAL INFORMATION
Accumulation Unit Values*
Accumulation Unit Accumulation Unit Number of
Value Value Accumulation Units
Sub-Account Beginning of Year** End of Year End of Year Year
Cash Income Fund $12.322 $12.833 1,870,176 1995
("CIF") 12.036 12.322 2,006,163 1994
11.884 12.036 1,406,317 1993
11.646 11.884 945,998 1992
11.163 11.646 1,090,836 1991
10.492 11.163 821,676 1990
10.000 10.492 148,835 1989
Cash Income Fund-DCA 11.423 12.063 16,825 1995
("CIF-DCA") 11.004 11.423 46,801 1994
10.715 11.004 384,348 1993
10.335 10.715 1,228,989 1992
10.000 10.355 513,367 1991
Mortgage Securities 14.104 16.099 3,176,177 1995
Income Fund ("MSIF") 14.529 14.104 3,002,643 1994
13.865 14.529 3,692,561 1993
13.269 13.865 3,006,271 1992
11.752 13.269 1,756,957 1991
10.923 11.752 601,483 1990
10.000 10.923 57,088 1989
Colonial-Keyport Growth 10.207 13.099 3,443,237 1995
and Income Fund 10.428 10.207 2,866,727 1994
("CKGIF") 10.000 10.428 1,221,301 1993
Colonial-Keyport
Strategic Income 10.014 11.684 2,910,213 1995
Fund ("CKSIF") 10.000 10.014 314,502 1994
Managed Assets Fund 15.071 18.650 10,314,629 1995
("MAF") 15.785 15.071 8,164,856 1994
14.646 15.785 7,302,625 1993
13.811 14.646 4,438,508 1992
10.947 13.811 2,031,594 1991
11.183 10.947 1,027,228 1990
10.000 11.183 283,776 1989
Colonial-Keyport 8.638 11.514 4,018,271 1995
Utilities Fund ("CKUF") 9.762 8.638 4,028,555 1994
10.000 9.762 4,153,150 1993
Managed Growth Stock 16.770 22.780 3,638,901 1995
Fund ("MGSF") 18.158 16.770 3,415,076 1994
17.541 18.158 3,278,749 1993
16.681 17.541 2,574,438 1992
11.426 16.681 1,294,859 1991
11.784 11.426 468,587 1990
10.000 11.784 135,505 1989
Colonial-Keyport U.S. 10.369 13.263 1,947,382 1995
Fund for Growth 10.000 10.369 442,457 1994
("CKUSFG")
Capital Appreciation 21.192 23.357 4,164,352 1995
Fund ("CAF") 21.236 21.192 4,371,837 1994
15.872 21.236 2,769,483 1993
14.058 15.872 1,128,248 1992
10.386 14.058 683,185 1991
11.578 10.386 216,272 1990
10.000 11.578 34,624 1989
Colonial-Keyport 9.314 9.723 1,052,842 1995
International Fund for 10.000 9.314 872,971 1994
Growth ("CKIFG")
Newport-Keyport
Tiger Fund ("NKTF") 10.000 11.445 599,500 1995
*Accumulation Unit values are rounded to the nearest tenth of a cent and numbers
of accumulation units are rounded to the nearest whole number. See Appendix B
(Page 28) for historical values for the contracts described in that appendix.
**Except for CIF-DCA and the six Keyport Trust Funds, each $10.00 value is as of
May 1, 1989, which is the date the Fund Sub-Account first became available for
Accumulation Units based on a 1.40% asset-based charge. The $10.00 value for
CIF-DCA, CKGIF and CKUF is as of the date the Fund Sub-Account first became
available: May 1, 1991; July 1, 1993; and July 1, 1993, respectively. The unit
values for the CKIFG, CKSIF, CKUSFG and NKTF Sub-Accounts were valued at $10.00
on May 2, 1994; July 5, 1994, July 5, 1994, and May 1, 1995, respectively.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
The Variable Account may from time to time advertise certain performance
information concerning its various Sub-Accounts.
Keyport and the Variable Account have been offering contracts for periods prior
to the commencement of the offering of the Contracts described in this
prospectus. The performance information will be based on historical results of
Eligible Funds that apply to the Contract for the specified time periods.
This performance information is not intended to indicate either past performance
under an actual Contract or future performance. Moreover, the performance
information for each SteinRoe Trust Sub-Account may reflect the investment
experience of the current Eligible Funds and Eligible Funds previously available
under the Variable Account. The Funds of the SteinRoe Variable Investment Trust
replaced these other mutual funds beginning January 1, 1989. These other funds
had a different investment adviser (Keystone Investments, Inc.) than the
SteinRoe Trust (Stein Roe & Farnham, Incorporated). See Appendix B on Page 28.
Performance information for periods prior to May 1, 1989 will reflect historical
asset-based charges that are at a lower level than the current asset-based
charges.
The Sub-Accounts, other than CIF Sub-Account, may advertise total return
information for various periods of time. Total return performance information is
based on the overall percentage change in value of a hypothetical investment in
the specific Sub-Account over a given period of time.
Average annual total return information shows the average percentage change in
the value of an investment in the Sub-Account from the beginning date of the
measuring period to the end of that period. This standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Sub-Account and a Contract (including any
Contingent Deferred Sales Charge that would apply if a Contract Owner
surrendered the Contract at the end of each period indicated). Average total
return does not take into account any premium taxes and would be lower if
these taxes were included.
In order to calculate average annual total return, Keyport divides the change in
value of a Sub-Account under a Contract surrendered on a particular date by a
hypothetical $1,000 investment in the Sub-Account made by the Contract Owner at
the beginning of the period illustrated. The resulting total rate for the period
is then annualized to obtain the average annual percentage change during the
period. Annualization assumes that the application of a single rate of return
each year during the period will produce the ending value, taking into account
the effect of compounding.
The Sub-Accounts may present additional total return information computed on a
different basis.
First, the Sub-Accounts may present total return information computed on the
same basis as described above, except deductions will not include the Contingent
Deferred Sales Charge. This presentation assumes that the investment in the
Contract continues beyond the period when the Contingent Deferred Sales Charge
applies, consistent with the long-term investment and retirement objectives of
the Contract. The total return percentage will thus be higher under this method
than the standard method described above.
Second, the Sub-Accounts may present total return information calculated by
dividing the change in a Sub-Account's Accumulation Unit value over a specified
time period by the Accumulation Unit value of that Sub-Account at the beginning
of the period. This computation results in a 12-month change rate or, for longer
periods, a total rate for the period which Keyport annualizes in order to obtain
the average annual percentage change in the Accumulation Unit value for that
period. The change percentages do not take into account the Contingent Deferred
Sales Charge, the Contract Maintenance Charge and premium taxes. The percentages
would be lower if these charges were included.
The CIF and CIF-DCA Sub-Accounts are money market Sub-Accounts that may
advertise yield and effective yield information. The yield of the Sub-Account
refers to the income generated by an investment in the Sub-Account over a
specifically identified 7-day period. This income is annualized by assuming that
the amount of income generated by the investment during that week is generated
each week over a 52-week period and is shown as a percentage. The yield reflects
the deduction of all charges assessed against the Sub-Account and a Contract but
does not take into account Contingent Deferred Sales Charges and premium taxes.
The yield would be lower if these charges were included.
The effective yield of the Sub-Account is calculated in a similar manner but,
when annualizing such yield, income earned by the Sub-Account is assumed to be
reinvested. This compounding effect causes effective yield to be higher than
yield.
KEYPORT AND THE VARIABLE ACCOUNT
Keyport Life Insurance Company was incorporated in Rhode Island in 1957 as a
stock life insurance company. Its executive and administrative offices are at
125 High Street, Boston, Massachusetts 02110 and its home office is at 235
Promenade Street, Providence, Rhode Island 02903.
Keyport writes individual life insurance and individual and group annuity
contracts on a non-participating basis. Keyport is licensed to do business in
all states except New York and is also licensed in the District of Columbia
and the Virgin Islands. Keyport has been rated A+ (Superior) by A.M. Best
and Company, independent analysts of the insurance industry. Keyport has been
rated A+ each year since 1976, the first year Keyport was subject to Best's
alphabetic rating system. Standard & Poor's ( S & P ) has rated Keyport AA- for
excellent financial security, Moody's has rated Keyport A1 for good financial
strength and Duff & Phelps has rated Keyport AA- for very high claims paying
ability. The Best's A+ rating is in the highest rating category, which also
includes A++. S & P and Duff & Phelps have one rating category above AA and
Moody's has two rating categories above A. The Moody's 1 modifier signifies that
Keyport is in the higher end of the A category while the S&P and Duff & Phelps
modifier signifies that Keyport is at the lower end of the AA category. These
ratings merely reflect the opinion of the rating company as to the relative
financial strength of Keyport and Keyport's ability to meet its
contractual obligations to its policyholders. Even though assets in the Variable
Account are held separately from Keyport's other assets, ratings of Keyport may
still be relevant to Contract Owners since not all of Keyport's contractual
obligations relate to payments based on those segregated assets (e.g., see Death
Provisions on Pages 17-18 for Keyport's obligation after certain deaths to
increase the Contract Value if it is less than the guaranteed minimum death
value amount).
Keyport is one of the Liberty Financial Companies. Keyport is ultimately
controlled by Liberty Mutual Insurance Company of Boston, Massachusetts, a
multi-line insurance and financial services institution.
The Variable Account was established by Keyport pursuant to the provisions of
Rhode Island Law on January 9, 1980. The Variable Account meets the definition
of separate account under the federal securities laws. The Variable Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. Such registration does not
involve supervision of the management of the Variable Account or Keyport by the
Securities and Exchange Commission.
Obligations under the Contracts are the obligations of Keyport. Although the
assets of the Variable Account are the property of Keyport, these assets are
held separately from the other assets of Keyport and are not chargeable with
liabilities arising out of any other business Keyport may conduct. Income,
capital gains and/or capital losses, whether or not realized, from assets
allocated to the Variable Account are credited to or charged against the
Variable Account without regard to the income, capital gains, and/or capital
losses arising out of any other business Keyport may conduct. Thus, Keyport
does not guarantee the investment performance of the Variable Account. The
Variable Account Value and the amount of variable annuity payments will vary
with the investment performance of the investments in the Variable Account.
PURCHASE PAYMENTS AND APPLICATIONS
The initial purchase payment is due on the Issue Date. The minimum initial
purchase payment is $5,000. Additional purchase payments can be made at the
Contract Owner's option. Each subsequent purchase payment must be at least
$1,000 or such lesser amount as Keyport may permit from time to time (currently
$250). Keyport may reject any purchase payment.
If the application for a Contract is in good order and it calls for amounts to
be allocated to the Variable Account, Keyport will apply the initial purchase
payment to the Variable Account and credit the Contract with Accumulation Units
within two business days of receipt. If the application for a Contract is not in
good order, Keyport will attempt to get it in good order within five business
days. If it is not complete at the end of this period, Keyport will inform the
applicant of the reason for the delay and that the purchase payment will be
returned immediately unless the applicant specifically consents to Keyport
keeping the purchase payment until the application is complete. Once it is
complete, the purchase payment will be applied within two business days of its
completion. Keyport has reserved the right to reject any application.
Keyport confirms, in writing, to the Contract Owner the allocation of all
purchase payments and the re-allocation of values after any requested transfer.
Keyport must be notified immediately by the Contract Owner of any processing
error.
Keyport will permit others to act on behalf of an applicant in two instances.
First, Keyport will accept an application for a Contract that contains a
signature signed under a power of attorney if a copy of that power of attorney
is submitted with the application. Second, Keyport will issue a Contract that
is not replacing an existing life insurance or annuity policy without having
previously received a signed application from the applicant. Certain dealers
will inform Keyport of an applicant's answers to the questions in the
application by telephone or by order ticket and cause the initial purchase
payment to be paid to Keyport. If the information is in good order, Keyport will
issue the Contract with a copy of an application completed with that
information. The Contract will be delivered to the Contract Owner with a letter
from Keyport that will give the Contract Owner an opportunity to respond to
Keyport if any of the application information is incorrect. Alternatively,
Keyport's letter may request the Contract Owner to confirm the correctness of
the information by signing either a copy of the application or a Contract
delivery receipt that ratifies the application in all
respects (in either case, a copy of the signed document would be returned to
Keyport for its permanent records). All purchases are confirmed, in writing,
to the applicant by Keyport. Keyport's liability under a Contract extends only
to amounts so confirmed.
INVESTMENTS OF THE VARIABLE ACCOUNT
Allocations of Purchase Payments
Purchase payments applied to the Variable Account will be invested in one or
more of the Eligible Fund Sub-Accounts designated as permissible investments in
accordance with the selection made by the Contract Owner in the application. Any
selection must specify the percentage of the purchase payment that is allocated
to each Sub-Account. The percentage for each Sub-Account, if not zero, must be
at least 10% and must be a whole number. A Contract Owner may change the
allocation percentages without fee, penalty or other charge. Allocation changes
must be made by Written Request unless the Contract Owner has by Written Request
authorized Keyport to accept telephone allocation instructions from the Contract
Owner or from a person acting for the Contract Owner as an attorney-in-fact
under a power of attorney. By authorizing Keyport to accept telephone changes, a
Contract Owner agrees to accept and be bound by the conditions and procedures
established by Keyport from time to time. The current conditions and procedures
are in Appendix C and Contract Owners authorizing telephone allocation
instructions will be notified, in advance, of any changes.
The Variable Account is segmented into Sub-Accounts. Each Sub-Account contains
the shares of one of the Eligible Funds and such shares are purchased at net
asset value. Eligible Funds and Sub-account may be added or withdrawn as
permitted by applicable law. The Sub-Accounts in the Variable Account and the
corresponding Eligible Funds currently are as follows:
Eligible Funds of SteinRoe Variable Investment Trust Sub-Accounts
Cash Income Fund ("CIF") CIF and CIF-DCA Sub-
Accounts*
Mortgage Securities Income Fund ("MSIF") MSIF Sub-Account
Managed Assets Fund ("MAF") MAF Sub-Account
Managed Growth Stock Fund ("MGSF") MGSF Sub-Account
Capital Appreciation Fund ("CAF") CAF Sub-Account
Eligible Funds of Keyport Variable Investment Trust Sub-Accounts
Colonial-Keyport Growth and Income Fund ("CKGIF") CKGIF Sub-Account
Colonial-Keyport Strategic Income Fund ("CKSIF") CKSIF Sub-Account
Colonial-Keyport Utilities Fund ("CKUF") CKUF Sub-Account
Colonial-Keyport U.S. Fund for Growth ("CKUSFG") CKUSFG Sub-Account
Colonial-Keyport International Fund for Growth ("CKIFG") CKIFG Sub-Account
Newport-Keyport Tiger Fund ("NKTF") NKTF Sub-Account
* The CIF-DCA Sub-Account is available only under previously issued Contracts
that allocated the initial purchase payment under Keyport's Value-Added Dollar
Cost Averaging program. This Sub-Account was not generally available after
July 31, 1993 for the allocation of any payment. See Appendix D on Page 36.
Eligible Funds
The Eligible Funds which are the permissible investments of the Variable Account
are the separate funds of SteinRoe Variable Investment Trust, the separate funds
of Keyport Variable Investment Trust, and any other mutual funds with which
Keyport and the Variable Account may enter into a participation agreement for
the purpose of making such mutual funds available as Eligible Funds under
certain Contracts.
Stein Roe & Farnham Incorporated ("Stein Roe") is the investment adviser for
each Eligible Fund of SteinRoe Trust. In 1986, Stein Roe was organized and
succeeded to the business of Stein Roe & Farnham, a partnership. Stein Roe is an
affiliate of Keyport. Stein Roe and its predecessor have provided investment
advisory and administrative services since 1932.
Keyport Advisory Services Corp. ("KASC"), a subsidiary of Keyport, is the
manager for Keyport Trust and its Eligible Funds. Colonial Management
Associates, Inc. ("Colonial"), an affiliate of Keyport, serves as sub-adviser
for the Eligible Funds (except for Newport-Keyport Tiger Fund). Colonial has
provided investment advisory services since 1931. The portfolio of the
Colonial-Keyport U.S. Fund for Growth is managed by State Street Global Advisors
a division of State Street Bank and Trust Company. Newport Fund Management,
Inc., an affiliate of Keyport, serves as sub-adviser for the Newport-Keyport
Tiger Fund.
The investment objectives of the Eligible Funds are briefly described below.
More detailed information, including investor considerations related to the
risks of investing in a particular Eligible Fund, may be found in the current
prospectus for that Fund. An investor should read that prospectus carefully
before selecting a fund for investing. The prospectus is available, at no
charge, from a salesperson or by writing Keyport at the address shown on Page 1
or by calling (800) 437-4466.
Eligible Funds of SteinRoe
Variable Investment Trust and
Variable Account Sub-Accounts Investment Objective
Cash Income Fund
(CIF and CIF-DCA Sub-Accounts)* High current income from short-term money market
instruments while emphasizing preservation of
capital and maintaining excellent liquidity.
Mortgage Securities Income Fund
(MSIF Sub-Account) Highest possible level of current income
consistent with safety of principal and
maintenance of liquidity through investment
primarily in mortgage-backed securities.
Managed Assets Fund
(MAF Sub-Account) High total investment return through investment
in a changing mix of securities.
Managed Growth Stock Fund
(MGSF Sub-Account) Long-term growth of capital through investment
primarily in common stocks.
Capital Appreciation Fund
(CAF Sub-Account) Capital growth by investing primarily in common
stocks, convertible securities, and other
securities selected for prospective capital
growth.
*The CIF-DCA Sub-Account was not generally available after July 31, 1993 for the
allocation of an initial purchase payment. See Appendix D on Page 36.
Eligible Funds of Keyport
Variable Investment Trust and
Variable Account Sub-Accounts Investment Objective
Colonial-Keyport Growth and Income Fund
(CKGIF Sub-Account) Primarily income and long-term capital
growth and, secondarily, preservation of
capital.
Colonial-Keyport Strategic Income
Fund (CKSIF Sub-Account) A high level of current income, as is
consistent with prudent risk, and
maximizing total return, by diversifying
investments primarily in U.S. and foreign
government and high yield, high risk
corporate debt securities. The Fund may
invest a substantial portion of its assets
in high yield, high risk bonds (commonly
referred to as "junk bonds").
Colonial-Keyport Utilities Fund
(CKUF Sub-Account) Primarily current income and, secondarily,
long-term capital growth.
Colonial-Keyport U.S. Fund for
Growth (CKUSFG Sub-Account) Growth exceeding over time the S&P 500
Index (Standard & Poor's Corporation
Composite Stock Price Index) performance.
Colonial-Keyport International Fund
for Growth (CKIFG Sub-Account) Long-term capital growth, by investing
primarily in non-U.S. equity securities.
The Fund is non-diversified and may invest
more than 5% of its total assets in the
securities of a single issuer, thereby
increasing the risk of loss compared to a
diversified fund.
Newport-Keyport Tiger Fund
(NKTF Sub-Account) Long-term capital growth by investing
primarily in equity securities of companies
located in the four Tigers of Asia (Hong
Kong, Singapore, South Korea and Taiwan)
and other mini-Tigers of Asia (Malaysia,
Thailand, Indonesia, China and the
Philippines).
There is no assurance that the Eligible Funds will achieve their stated
objectives.
SteinRoe Variable Investment Trust is a funding vehicle for variable annuity
contracts and variable life insurance policies offered by separate accounts of
Keyport and of insurance companies affiliated and unaffiliated with Keyport.
Keyport Variable Investment Trust is a funding vehicle for variable annuity
contracts and variable life insurance policies offered by separate accounts of
Keyport and of insurance companies affiliated with Keyport. The risks involved
in this mixed and shared funding are disclosed in the Trusts' prospectuses under
the caption "The Trust".
Dollar Cost Averaging
Keyport offers a dollar cost averaging program that Contract Owners may
participate in by Written Request. The program periodically transfers
Accumulation Units from the CIF Sub-Account or the One-Year Guarantee Period of
the Fixed Account to other Sub-Accounts selected by the Contract Owner. The
program allows a Contract Owner to invest in non-"money market" Sub-Accounts
over time rather than having to invest in those Sub-Accounts all at once. The
program is available for initial and subsequent purchase payments and for
Contract Value transferred into the CIF Sub-Account or One-Year Guarantee Period
Under the program, Keyport makes automatic transfers on a periodic basis out of
the CIF Sub-Account or the One-Year Guarantee Period into one or more of the
other available Sub-Accounts (Keyport reserves the right to limit the number of
Sub-Accounts the Contract Owner may choose but there are currently no limits).
The One-Year Guarantee Period option of the program is not available under
Contracts issued to New Jersey and Washington residents.
A transfer under the program will not be counted as a transfer for purposes of
the limitations in "Transfer of Variable Account Value" below. The automatic
transfer program does not guarantee a profit nor does it protect against loss
in declining markets. The program is described in detail in Appendix D on Page
36. Appendix D also describes the Value-Added Dollar Cost Averaging Program
(with its CIF-DCA Sub-Account), which was not generally available after July 31,
1993 for the allocation of an initial purchase payment.
Transfer of Variable Account Value
Contract Owners may transfer Variable Account Value from one Sub-Account to
another Sub-Account and/or to the Fixed Account.
The Contract allows Keyport to charge a transfer fee and to limit the number of
transfers that can be made in a specified time period. Contract Owners should be
aware that transfer limitations may prevent an Owner from making a transfer on
the date he or she wants to, with the result that the Owner's future Contract
Value may be lower than it would have been had the transfer been made on the
desired date.
Currently, Keyport is not charging a transfer fee but it is limiting transfers
to 12 per calendar year except as follows. For transfers under different
Contracts that are being requested under powers of attorney with a common
attorney-in-fact or that are, in Keyport's determination, based on the
recommendation of a common investment adviser or broker/dealer, the transfer
limitation is instead one transfer every 30 days.
Regardless of which transfer limitation is applicable, Keyport is also limiting
each transfer to a maximum of $500,000. All transfers requested for a Contract
on the same day will be treated as a single transfer and the total combined
transfer amount will be subject to the $500,000 limitation. If the $500,000
limitation is exceeded, no amount of the transfer will be executed by Keyport.
In applying the limitation of 12 transfers in a year of up to $500,000 apiece,
Keyport may treat as one transfer all transfers requested by a Contract Owner
for multiple Contracts he or she owns. If the $500,000 limitation is exceeded
for multiple transfers requested on the same day that are treated as a single
transfer, no amount of the transfer will be executed by Keyport.
In applying the limitation of one $500,000 transfer every 30 days, Keyport will
treat as one transfer all transfers requested under different Contracts that are
being requested under powers of attorney with a common attorney-in-fact or that
are, in Keyport's determination, based on the recommendation of a common
investment adviser or broker/dealer. If the $500,000 limitation is exceeded for
multiple transfers requested on the same day that are treated as a single
transfer, no amount of the transfer will be executed by Keyport. If a transfer
is executed under one Contract and, within the next 30 days, a transfer request
for another Contract is determined by Keyport to be related to the executed
transfer under this paragraph's rules, the transfer request will not be executed
by Keyport (in order for it to be executed, it would need to be requested again
after the 30 day period and it, along with any other transfer requests that are
collectively treated as a single transfer, would need to total less than
$500,000).
Keyport's interest in applying these limitations is to protect the interests of
both Contract Owners who are not engaging in significant transfer activity and
Contract Owners who are engaging in such activity. Keyport has determined that
the actions of Contract Owners engaging in significant transfer activity among
Sub-Accounts may cause an adverse affect on the performance of the underlying
Fund for the Sub-Account involved. The movement of Sub-Account values from one
Sub-Account to another may prevent the appropriate underlying Fund from taking
advantage of investment opportunities because it must maintain a liquid position
in order to handle redemptions. Such movement may also cause a substantial
increase in Fund transaction costs which must be indirectly borne by Contract
Owners.
Contract Owners will be notified, in advance, of the imposition of any transfer
fee or of a change in the limitation on the number of transfers. Keyport does
not guarantee any maximum transfer fee that it may charge, but the fee will not
exceed the cost of effecting a transfer. Contracts delivered in Pennsylvania,
South Carolina and Texas contain a stated maximum of $15 per transfer.
Transfers must be made by Written Request unless the Contract Owner has by
Written Request authorized Keyport to accept telephone transfer requests from
the Contract Owner or from a person acting for the Contract Owner as an
attorney-in-fact under a power of attorney. By authorizing Keyport to accept
telephone transfer instructions, a Contract Owner agrees to accept and be bound
by the conditions and procedures established by Keyport from time to time. The
current conditions and procedures are in Appendix C and Contract Owners
authorizing telephone transfers will be notified, in advance, of any
changes. Written transfer requests may be made by a person acting for the
Contract Owner as an attorney-in-fact under a power of attorney.
Transfer requests received by Keyport before the close of trading on the New
York Stock Exchange (currently 4:00 PM Eastern Time) will be initiated at the
close of business that day. Any requests received later will be initiated at the
close of the next business day. Each request from a Contract Owner to transfer
value will be executed by both redeeming and acquiring Accumulation Units on the
day Keyport initiates the transfer.
If 100% of any Sub-Account's value is transferred and the allocation formula for
purchase payments includes that Sub-Account, then the allocation formula for
future purchase payments will automatically change unless the Contract Owner
instructs otherwise. For example, if the allocation formula is 50% to Sub-
Account A and 50% to Sub-Account B and all of Sub-Account A's value is
transferred to Sub-Account B, the allocation formula will change to 100% to
Sub-Account B unless the Contract Owner instructs otherwise.
Substitution of Eligible Funds and Other Variable Account Changes
If the shares of any of the Eligible Funds should no longer be available for
investment by the Variable Account or if in the judgment of Keyport's management
further investment in such fund shares should become inappropriate in view of
the purpose of the Contract, Keyport may add or substitute shares of another
Eligible Fund or of another mutual fund for Eligible Fund shares already
purchased under the Contract. No substitution of Fund shares in any Sub-Account
may take place without prior approval of the Securities and Exchange Commission
and notice to Contract Owners, to the extent required by the Investment Company
Act of 1940.
Keyport has also reserved the right, subject to compliance with the law as
currently applicable or subsequently changed: (a) to operate the Variable
Account in any form permitted under the Investment Company Act of 1940 or in
any other form permitted by law; (b) to take any action necessary to comply with
or obtain and continue any exemptions from the Investment Company Act of 1940 or
to comply with any other applicable law; (c) to transfer any assets in any Sub-
Account to another Sub-Account, or to one or more separate investment accounts,
or to Keyport's general account; or to add, combine or remove Sub-Accounts in
the Variable Account; and (d) to change the way Keyport assesses charges, so
long as the aggregate amount is not increased beyond that currently charged to
the Variable Account and the Eligible Funds in connection with the Contracts.
DEDUCTIONS
Deductions for Contract Maintenance Charge
Keyport has responsibility for all administration of the Contracts and the
Variable Account. This administration includes, but is not limited to,
preparation of the Contracts, maintenance of Contract Owners' records, and all
accounting, valuation, regulatory and reporting requirements. Keyport makes a
Contract Maintenance Charge for such services. At the present time the Contract
Maintenance Charge is $36.00 per Contract Year. PRIOR TO THE INCOME DATE THE
CONTRACT MAINTENANCE CHARGE IS NOT GUARANTEED AND MAY BE CHANGED BY KEYPORT. The
Contract Maintenance Charge of any Contract delivered in Pennsylvania, South
Carolina, or Texas may not be changed by Keyport to exceed $100 per year. There
is no such limit under Contracts delivered in other jurisdictions, but the
charge will not exceed the yearly costs of administering the Contract.
Prior to the Income Date, the full amount of the charge will be deducted from
the Variable Account Value on each Contract Anniversary and on the date of any
total surrender not falling on the Contract Anniversary. On the Income Date,
a pro-rata portion of the charge due on the next Contract Anniversary will be
deducted from the Variable Account Value. This pro-rata charge covers the period
from the prior Contract Anniversary to the Income Date. For example, if the
Income Date occurs 73 days after that prior anniversary, then one-fifth (i.e.,
73 days/365 days) of the annual charge would be deducted on the Income Date. The
charge will be deducted from each Sub-Account in the proportion that the
value of each bears to the Variable Account Value.
Once annuity payments begin on the Income Date or once they begin after
surrender benefits are applied under a settlement option, the yearly cost of
the Contract Maintenance Charge for a payee's annuity will be the same as the
yearly amount in effect immediately before the annuity payments begin. Keyport
may not later change the amount of the Contract Maintenance Charge deducted
from the annuity payments. The charge will be deducted on a pro-rata basis from
each annuity payment. For example, if annuity payments are monthly, then one-
twelfth of the annual charge will be deducted from each payment.
Deductions for Mortality and Expense Risk Charge
Although variable annuity payments made to Annuitants will vary in accordance
with the investment performance of the investments of the Variable Account, they
will not be affected by the mortality experience (death rate) of persons
receiving such payments or of the general population. Keyport guarantees certain
total surrenders after the death of the Annuitant or Contract Owner will not
result in payments that are reduced by a Contingent Deferred Sales Charge or in
payments that are lower than the amount of purchase payments less any prior
partial surrenders. Keyport assumes an expense risk since the Con-tract
Maintenance Charge after the Income Date will stay the same and not be affected
by variations in expenses.
To compensate it for assuming these mortality and expense risks, for each
Valuation Period Keyport deducts from each Sub-Account (other than the CIF-DCA
Sub-Account from which no deduction is made) a Mortality and Expense Risk Charge
equal on an annual basis to 1.25% of the average daily net asset value of the
Sub-Account. The charge is deducted during both the accumulation and annuity
periods (i.e., both before and after the Income Date). Less than the full charge
will be deducted from Sub-Account values attributable to Contracts issued to
employees of Keyport and other persons specified in Distribution of the
Contract on Page 24.
Deductions for Daily Sales Charge
Keyport also deducts from each Sub-Account (other than the CIF-DCA Sub-Account
from which no deduction is made) each Valuation Period a sales charge equal on
an annual basis to 0.15% of the average daily net asset value of the Sub-
Account. This charge compensates Keyport for certain sales distribution expenses
relating to the Contract.
This charge will not be deducted from Sub-Account values attributable to
Contracts that have reached the maximum cumulative sales charge limit defined in
the next section and to Contracts issued to employees of Keyport and other
persons specified in Distribution of the Contract on Page 24. The charge is
also not deducted from Sub-Account values attributable to Annuity Units. Keyport
may decide not to deduct the charge from Sub-Account values attributable to a
Contract issued in an internal exchange or transfer of an annuity contract of
Keyport's general account.
Deductions for Contingent Deferred Sales Charge
A sales charge is not deducted from the Contract's purchase payments when
initially received. However, a Contingent Deferred Sales Charge may be deducted
upon a surrender.
In order to determine whether a Contingent Deferred Sales Charge will be due
upon a partial or total surrender, Keyport maintains a separate set of records.
These records identify the date and amount of each purchase payment made to the
Contract and the Contract Value over time.
A surrender in any Contract Year will be free of Contingent Deferred Sales
Charge to the extent the surrender amount does not exceed the Contract's
increase in value at that time. The increase in value is equal to: the Contract
Value at the time of surrender; less that portion of purchase payments that are
still remaining at the time of surrender.
After the first Contract Year, Keyport guarantees that a minimum amount of
Contract Value will be free of Contingent Deferred Sales Charge each year. This
amount is equal to 10% of the Contract Value at the beginning of each
Contract Year (i.e., on the Contract Anniversary). This 10% amount will be
reduced by the amount of each surrender in a year that represents the Contract's
increase in value. The portion of any surrender in excess of this increase
in value but not in excess of the remaining 10% amount will be free of
Contingent Deferred Sales Charge. This portion will be deducted from the
purchase payments in chronological order from the oldest to the most recent
until the amount is fully deducted. Any amount so deducted will not be subject
to a charge.
The following additional amounts will be deducted from the purchase payments in
the same chronological order: the amount of any surrender in the first Contract
Year in excess of the Contract's increase in value at the time of surrender; and
the amount of any surrender in any later Contract Year in excess of the
Contract's increase in value at the time of surrender (or in excess of the 10%
limit if it applies). The Contingent Deferred Sales Charge for each purchase
payment from which a deduction is made will be equal to (a) multiplied by (b),
where:
(a) is the amount so deducted; and
(b) is the applicable percentage for the number of years that have elapsed
from the date of that payment to the date of surrender. Years are measured
from the month and day of payment to the same month and day in each
subsequent calendar year. The percentages applicable to each purchase
payment during the seven years after the date of its payment are: 7%
during year 1; 6% during year 2; 5% during year 3; 4% during year 4; 3%
during year 5; 2% during year 6; 1% during year 7; and 0% thereafter.
The applicable Contingent Deferred Sales Charges for each purchase payment are
then totalled. The lesser of this total amount and the Contract's maximum
cumulative sales charge will be deducted from the Contract Value in the same
manner as the surrender amount. The maximum cumulative sales charge is equal to
(a) less (b), where (a) is 8.5% of the total purchase payments made to the
Contract and (b) is the sum of all prior Contingent Deferred Sale Charge
deductions from the Contract Value and all prior Variable Account sales charges
applicable to the Contract from the 0.15% sales charge factor. After each
surrender, Keyport's records will be adjusted to reflect any deductions made
from the applicable purchase payments.
Example: Two purchase payments were made one year apart for $5,000 and $7,000.
The Contract Value has grown to an assumed $13,200 when the Owner decides to
withdraw $8,000. The Contract Value at the beginning of the Contract Year of
surrender was $13,000. The Contingent Deferred Sales Charge percentages at the
time of surrender are an assumed 5% for the $5,000 payment and 6% for the $7,000
payment. The portion of the surrender representing the Contract's increase in
value ($13,200 less $12,000, or $1,200) would not be subject to charges. Since
$1,200 is less than the amount guaranteed not to have charges (10% of $13,000,
or $1,300), an additional $100 would not be subject to charges. This $100 would
be deducted from the oldest purchase payment, reducing it from $5,000 to $4,900.
The $1,200 increase in value plus the additional $100 leaves $6,700 ($8,000
$1,200 $100) to be deducted. This $6,700 would be deducted from the $4,900 of
the first payment still left and $1,800 of the second payment. The total
Contingent Deferred Sales Charge would be $4,900 multiplied by the applicable
5% and $1,800 times the applicable 6%, or a total of $353. The sales charge
records would now reflect $0 for the 1st payment and $5,200 for the 2nd payment.
The $8,000 requested plus the $353 charge would be deducted from Contract Values
under the rules specified in the Surrenders section on Page 19.
The Contingent Deferred Sales Charge, when it is applicable, will be used to
cover the expenses of selling the Contract, including compensation paid to
selling dealers and the cost of sales literature. Any expenses not covered by
the Charge will be paid from Keyport's general account, which may include monies
deducted from the Variable Account for the Mortality and Expense Risk Charge. A
dealer selling the Contract can receive up to 6% of purchase payments with
additional compensation later based on the Contract Value of those payments.
During certain time periods selected by Keyport and the Principal Underwriter,
the percentage may increase to 6.25%.
The Contingent Deferred Sales Charge will be eliminated under Contracts issued
to employees of Keyport and other persons specified in Distribution of the
Contract on Page 24.
Keyport may reduce or change to 0% any Contingent Deferred Sales Charge
percentage under a Contract issued in an internal exchange or transfer of an
annuity contract of Keyport's general account.
Keyport may establish a program to allow a Contract Owner to request systematic
partial surrenders in the first Contract Year up to a total of 10% of the
initial purchase payment to the Contract. Under such a program, Keyport may
waive the Contingent Deferred Sales Charge on the amount of any partial
surrender that is in excess of the Contract's increase in value (defined in
the third paragraph of this section) at the time the surrender occurs. Any such
excess surrender amount will not be deducted from the initial purchase payment
under the procedure described in the fourth paragraph of this section.
This means that the waiver of Contingent Deferred Sales Charge is not a
permanent waiver and the Charge can potentially be collected by Keyport in the
event the Contract Owner later makes a non-systematic partial or total
surrender.
Deductions for Transfers of Variable Account Value
The Contract allows Keyport to charge a transfer fee. Currently no fee is being
charged. Contract Owners will be notified, in advance, of the imposition of any
fee. Keyport does not guarantee any maximum transfer fee that it may charge, but
the fee will not exceed the cost of effecting a transfer. Contracts delivered in
Pennsylvania, South Carolina and Texas contain a stated maximum of $15 per
transfer.
Deductions for Premium Taxes
Keyport deducts the amount of any premium taxes levied by any state or
governmental entity when paid unless Keyport elects to defer such deduction. It
is not possible to describe precisely the amount of premium tax payable on any
transaction involving the Contract offered hereby. Such premium taxes depend,
among other things, on the type of Contract (Qualified or Non-Qualified), on the
state of residence of the Contract Owner, the state of residence of the
Annuitant, the status of Keyport within such states, and the insurance tax laws
of such states. Currently such premium taxes range from 0% to 5.0% of either
total purchase payments or Contract Value.
Deductions for Income Taxes
Keyport will deduct from any amount payable under the Contract any income taxes
that a governmental authority requires Keyport to withhold with respect to that
amount. See Income Tax Withholding and Tax-Sheltered Annuities on Page 22.
Total Expenses
The Variable Account's total expenses in relation to the Contract will be the
Contract Maintenance Charge, the Mortality and Expense Risk Charge, and the
Daily Sales Charge.
The value of the assets in the Variable Account will reflect the value of
Eligible Fund shares and therefore the deductions from and expenses paid
out of the assets of the Eligible Funds. These deductions and expenses are
described in the Eligible Fund prospectus.
THE CONTRACTS
Variable Account Value
The Variable Account Value for a Contract is the sum of the value of each Sub-
Account to which values are allocated under a Contract. The value of each Sub-
Account is determined at any time by multiplying the number of Accumulation
Units attributable to that Sub-Account by the Accumulation Unit value for that
Sub-Account at the time of determination. The Accumulation Unit value is an
accounting unit of measure used to determine the change in an Accumulation
Unit's value from Valuation Period to Valuation Period.
Each purchase payment that is made results in additional Accumulation Units
being credited to the Contract and the appropriate Sub-Account thereunder. The
number of additional units for any Sub-Account will equal the amount allocated
to that Sub-Account divided by the Accumulation Unit value for that Sub-Account
at the time of investment.
Valuation Periods
The Variable Account is valued each Valuation Period using the net asset value
of the Eligible Fund shares. A Valuation Period is the period commencing at the
close of trading on the New York Stock Exchange on each Valuation Date and
ending at the close of trading for the next succeeding Valuation Date. A
Valuation Date is each day that the New York Stock Exchange is open for
business. The New York Stock Exchange is currently closed on weekends, New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Net Investment Factor
Variable Account Value will fluctuate in accordance with the investment results
of the underlying Eligible Funds. In order to determine how these fluctuations
affect value, Keyport utilizes an Accumulation Unit value. Each Sub-account has
its own Accumulation Units and value per Unit. The Unit value applicable during
any Valuation Period is determined at the end of that period.
When Keyport first purchased Eligible Fund shares on behalf of the Variable
Account, Keyport valued each Accumulation Unit at $10. The Unit value for each
Sub-Account in any Valuation Period thereafter is determined by multiplying the
value for the prior period by a net investment factor. This factor may be
greater or less than 1.0; therefore, the Accumulation Unit may increase or
decrease from Valuation Period to Valuation Period. Keyport calculates a net
investment factor for each Sub-Account by dividing (a) by (b) and then sub-
tracting (c) (i.e., (a / b) c),where:
(a) is equal to:
(i) the net asset value per share of the Eligible Fund at the end of the
Valuation Period; plus
(ii) the per share amount of any distribution made by the Eligible Fund if
the ex-dividend date occurs during that same Valuation Period.
(b) is the net asset value per share of the Eligible Fund at the end of the
prior Valuation Period.
(c) is equal to:
(i) the Valuation Period equivalent of the 1.25% per year Mortality and
Expense Risk Charge; plus
(ii) the Valuation Period equivalent of the .15% per year sales charge;
plus
(iii) a charge factor, if any, for any tax provision established by Keyport
as a result of the operations of that Sub-Account.
For the CIF-DCA Sub-Account only, (c)(i) and (c)(ii) above are not applicable.
If a Contract ever reaches the maximum cumulative sales charge limit defined in
Deductions for Contingent Deferred Sales Charge, Unit values without (c)(ii)
above will be used thereafter. For Contracts issued to employees of Keyport and
other persons specified in Distribution of the Contract on Page 24, Unit values
with .35% in (c)(i) above and without (c)(ii) above will be used. Unit values
without (c)(ii) above may be used for certain Contracts issued in an internal
exchange or transfer (see Deductions for Daily Sales Charges on Page 14).
Modification of the Contract
Only Keyport's President or Secretary may agree to alter the Contract or waive
any of its terms. Any changes must be made in writing and with the Contract
Owner's consent, except as may be required by applicable law.
Right to Revoke
The Contract Owner may return the Contract within 10 days after he or she
receives it by delivering or mailing it to Keyport's Office. The return of the
Contract by mail will be effective when the postmark is affixed to a properly
addressed and postage-prepaid envelope. The returned Contract will be treated
as if Keyport never issued it and Keyport will refund: (a) the initial purchase
payment for Contracts delivered in Connecticut, Georgia, Idaho, North Carolina,
South Carolina, Utah, Washington and West Virginia; (b) the Contract Value for
Contracts delivered in Arizona, California if the Contract Owner is age 60 or
older (see below), Kansas, Minnesota, North Dakota and Pennsylvania; and (c) the
lesser of the initial purchase payment or the Contract Value for Contracts
delivered elsewhere, including in California if the Contract Owner is under age
60.
For Contracts delivered in California to a Contract Owner age 60 or older, the
Contract Owner may return the Contract to Keyport's Office or to the agent from
whom the Contract was purchased. If the Contract is received at Keyport's Office
or by the agent within 30 days after the Owner receives the Contract, Keyport
will refund the Contract Value.
DEATH PROVISIONS FOR NON-QUALIFIED CONTRACTS
Death of Primary Owner, Joint Owner or Certain Non-Owner Annuitant
These provisions apply if, before the Income Date while the Contract is In
Force, the primary Owner or any joint Owner dies (whether or not the decedent
is also the Annuitant) or the Annuitant dies under a Contract with a non-natural
Owner such as a trust. The Designated Beneficiary will control the Contract
after such a death.
The covered person under this paragraph shall be the primary Owner or, if there
is a non-natural Owner such as a trust, the Annuitant shall be the covered
person. If the covered person dies, the Contract Value will be increased, as
provided below, if it is less than the guaranteed minimum death value amount
("GMDV"). Except for certain previously issued Contracts, the GMDV is the
greater of:
(a) the sum of all purchase payments made through the date of death, less
all partial surrenders made through the date of death; and
(b) Keyport will compute an "Anniversary Value" for each Contract Anniversary
(if any) before the 81st birthday of the covered person and Keyport will
use the greatest of such "Anniversary Values". The "Anniversary Value"
for each applicable Contract Anniversary initially equals the Contract
Value on that Anniversary. It is then increased by any purchase payments
made from that Anniversary until the date of death, and decreased by the
following amount at the time of each partial surrender made from that
Anniversary until the date of death: the partial surrender amount divided
by the Contract Value right before the surrender, multiplied by the
"Anniversary Value" right before the surrender.
The GMDV will be different for any Contract issued on or after July 1, 1993
using application form number FLEX-APP(REV)3, FLEX-APP-OH(REV)3 or
FLEX-APP-PA(REV)3, but before the later of July 5, 1994 and the date Keyport
changed the death provisions in the state of issue of a Contract (you or your
agent may call 800-437-4466 to see when the change was made in your state). The
GMDV for such a Contract is the greatest of (a) above, (b) above, and (c)
the Contract Value on the seventh Contract Anniversary, plus any purchase
payments made from that Anniversary until the date of death, less any partial
surrenders made from that Anniversary until the date of death. The GMDV for any
other Contract issued before May 1, 1996 is the greater of (a) and (c) above.
When Keyport receives due proof of the covered person's death, Keyport will
compare, as of the date of death, the Contract Value to the GMDV. If the
Contract Value was less than the GMDV, Keyport will increase the current
Contract Value by the amount of the difference. Note that while the amount of
the difference is determined as of the date of death, that amount is not added
to the Contract Value until Keyport receives due proof of death. The amount to
be credited will be allocated to the Variable Account and/or the Fixed Account
based on the purchase payment allocation selection that is in effect when
Keyport receives due proof of death. Whether or not the Contract Value is
increased because of this minimum death provision, the Designated Beneficiary
may surrender the Contract within 90 days of the date of the covered person's
death for the Contract Value (i.e., any applicable Contingent Deferred Sales
Charge will be waived). For a surrender after 90 days and for a surrender at
any time after the death of a non-covered person, the Surrender Value is
payable instead. If the Contract is not surrendered, it will stay in force
for the time period specified below.
If the decedent's surviving spouse (if any) is the sole Designated Beneficiary,
the surviving spouse will automatically become the new sole primary Owner as of
the decedent's date of the death. And, if the Annuitant is the decedent, the new
Annuitant will be any living contingent annuitant, otherwise the surviving
spouse. The Contract can stay in force until another death occurs (i.e., until
the death of the Annuitant, primary Owner or joint Owner). Except for this
paragraph, all of Death Provisions will apply to that subsequent death.
In all other cases, the Contract can stay in force up to five years from the
date of death. During this period, the Designated Beneficiary may exercise all
ownership rights, including the right to make transfers or partial surrenders or
the right to totally surrender the Contract for its Surrender Value. If the
Contract is still in force at the end of the five-year period, Keyport will
automatically end it then by paying the Contract Value to the Designated
Beneficiary. If the Designated Beneficiary is not alive then, Keyport will pay
any person(s) named by the Designated Beneficiary in a Written Request;
otherwise the Designated Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Owner or any
Designated Beneficiary may direct by Written Request that Keyport pay any
benefit of $5,000 or more under an annuity payment option that meets the
following: (a) the first payment to the Designated Beneficiary must be made no
later than one year after the date of death; (b) payments must be made over the
life of the Designated Beneficiary or over a period not extending beyond that
person's life expectancy; and (c) any payment option that provides for payments
to continue after the death of the Designated Beneficiary will not allow the
successor payee to extend the period of time over which the remaining payments
are to be made.
Death of Certain Non-Owner Annuitant. These provisions apply if, before the
Income Date while the Contract is In Force, (a) the Annuitant dies, (b) the
Annuitant is not an Owner, and (c) the Owner is a natural person. The Contract
will continue in force after the Annuitant's death. The new Annuitant will be
any living contingent annuitant, otherwise the primary Owner.
DEATH PROVISIONS FOR QUALIFIED CONTRACTS
Death of Annuitant. If the Annuitant dies before the Income Date while the
Contract is In Force, the Designated Beneficiary will control the Contract after
such a death. The Contract Value will be increased, as provided below, if it is
less than the guaranteed minimum death value amount ( GMDV ). The GMDV is the
amount defined on page __. When Keyport receives due proof of the Annuitant's
death, Keyport will compare, as of the date of death, the Contract Value to the
GMDV. If the Contract Value was less than the GMDV, Keyport will increase the
current Contract Value by the amount of the difference. Note that while the
amount of the difference is determined as of the date of death, that amount is
not added to the Contract Value until Keyport receives due proof of death. The
amount to be credited will be allocated to the Variable Account and/or the
Fixed Account based on the purchase payment allocation selection that is in
effect when Keyport receives due proof of death. Whether or not the Contract
Value is increased because of this minimum death provision, the Designated
Beneficiary may surrender the Contract within 90 days of the date of the
Annuitant's death for the Contract Value (i.e., any applicable Contingent
Deferred Sales Charge will be waived). For a surrender after 90 days, the
Surrender Value is payable instead.
If the Contract is not surrendered, it can stay in force for the time period
permitted by the Internal Revenue Code provisions applicable to the particular
Qualified Plan. During this period, the Designated Beneficiary may exercise all
ownership rights, including the right to make transfers or partial surrenders or
the right to totally surrender the contract for its Surrender Value. If the
Contract is still in force at the end of the period, Keyport will automatically
end it then by paying the Contract Value to the Designated Beneficiary. If the
Designated Beneficiary is not alive then, Keyport will pay any person(s) named
by the Designated Beneficiary in a Written Request; otherwise the Designated
Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Owner or any
Designated Beneficiary may direct by Written Request that Keyport pay any
benefit of $5,000 or more under an annuity payment option that meets the
following: (a) the first payment to the Designated Beneficiary must be made no
later than one year after the date of death; (b) payments must be made over the
life of the Designated Beneficiary or over a period not extending beyond that
person's life expectancy; and (c) any payment option that provides for payments
to continue after the death of the Designated Beneficiary will not allow the
successor payee to extend the period of time over which the remaining payments
are to be made.
OWNERSHIP
The Contract Owner shall be the person designated in the application. The
Contract Owner may exercise all the rights of the Contract. Joint Owners are
permitted but not contingent Owners.
The Contract Owner may by Written Request change the Owner, primary beneficiary,
contingent beneficiary or contingent annuitant. An irrevocably-named person may
be changed only with the written consent of such person.
Because a change of Owner by means of a gift (i.e., a transfer without full and
adequate consideration) may be a taxable event, a Contract Owner should consult
a competent tax adviser as to the tax consequences resulting from such a
transfer.
Any Qualified Contract may have limitations on transfer of ownership. A Contract
Owner should consult a competent tax adviser as to the tax consequences
resulting from such a transfer.
ASSIGNMENT
The Contract Owner may assign the Contract at any time. A copy of any assignment
must be filed with Keyport. The Contract Owner's rights and those of any
revocably-named person will be subject to the assignment. Any Qualified Contract
may have limitations on assignability.
Because an assignment may be a taxable event, a Contract Owner should consult a
competent tax adviser as to the tax consequences resulting from any such
assignment.
SURRENDERS
The Contract Owner may partially surrender the Contract. Keyport must receive a
Written Request and the minimum amount to be surrendered must be at least $300
or such lesser amount as Keyport may permit in conjunction with a program of
systematic partial surrenders. If the Contract Value after a partial surrender
would be below $2,500, Keyport will treat the request as a surrender of only the
excess amount over $2,500. The amount surrendered will include any applicable
Contingent Deferred Sales Charge and therefore the amount actually surrendered
may be greater than the amount of the surrender check requested. Unless the
request specifies otherwise, the total amount surrendered will be deducted from
all Sub-Accounts of the Variable Account in the proportion that the value in
each Sub-Account bears to the total Variable Account Value. If there is no
value, or insufficient value, in the Variable Account, then the amount
surrendered, or the insufficient portion, will be deducted from the Fixed
Account.
The Contract Owner may totally surrender the Contract by making a Written
Request. Surrendering the Contract will end it. The Surrender Value is equal to
the Contract Value for the Valuation Period during which Keyport has received
the request less: the Contract Maintenance Charge if there is any Variable
Account Value; any applicable Contingent Deferred Sales Charge; and any
applicable premium taxes not previously deducted.
Keyport will pay the amount of any surrender within seven days of receipt of
such request. Alternatively, the Contract Owner may purchase for himself or
herself an annuity payment option with any surrender benefit of at least $5,000.
Keyport's consent is needed to choose an option if the Contract Owner is not a
natural person.
Settlement Options based on life contingencies cannot be surrendered after
annuity payments have begun. Settlement Option 1, which is not based on life
contingencies, may be surrendered as described on Page 20.
Because of the potential tax consequences of a full or partial surrender, a
Contract Owner should consult a competent tax adviser regarding a surrender.
ANNUITY PROVISIONS
Annuity Benefits
If the Annuitant is alive on the Income Date and the Contract is In Force,
payments will begin under the payment option or options the Contract Owner has
chosen. The amount of the payments will be determined by applying the Contract
Value (less any premium taxes not previously deducted and less any applicable
Contract Maintenance Charge) on the Income Date in accordance with the option
selected.
Income Date and Settlement Option
The Contract Owner may select an Income Date and Settlement Option at the time
of application. If the Contract Owner does not select a Settlement Option,
Option 2 will automatically be designated. If the Contract Owner does not
select an Income Date for the Annuitant, the Income Date will automatically be
the first day of the calendar month following the later of the Annuitant's 75th
birthday or the 10th Contract Anniversary.
Change in Income Date and Settlement Option
The Contract Owner may choose or change a Settlement Option or the Income Date
by making a Written Request to Keyport at least 30 days prior to the Income
Date. However, any Income Date must be: (a) for variable annuity payment
options, not earlier than the second calendar month after the Issue Date (e.g.,
if the Issue Date is in January, the earliest Income Date is March 1); (b) for
fixed annuity options, not earlier than the first calendar month after the end
of the first Contract Year; (c) not later than the calendar month after the
Annuitant's 90th birthday; and (d) the first day of a calendar month.
Settlement Options
The payment options are:
Option 1: Income for a Fixed Number of Years;
Option 2: Life Income with 10 Years of Payments Guaranteed; and
Option 3: Joint and Last Survivor Income.
Other options may be arranged by mutual consent. Each option is available in two
forms as a variable annuity for use with the Variable Account and as a fixed
annuity for use with the Fixed Account. Variable annuity payments will fluctuate
while fixed annuity payments will not. (See Appendix A on Page 25 for a
discussion of fixed annuity payments.) Unless the Owner chooses otherwise,
Variable Account Value will be applied to a variable annuity option and Fixed
Account Value will be applied to a fixed annuity option. Whether variable or
fixed, the same Contract Value applied to each option will produce a different
initial annuity payment as well as different subsequent payments.
The payee is the person who will receive the sum payable under a payment option.
Any payment option that provides for payments to continue after the death of the
payee will not allow the successor payee to extend the period of time over which
the remaining payments are to be made.
If the amount available to apply under any variable or fixed option is less than
$5,000, Keyport has reserved the right to pay such amount in one sum to the
payee in lieu of the payment otherwise provided for.
Annuity payments will be made monthly unless quarterly, semi-annual or annual
payments are chosen by Written Request. However, if any payment provided for
would be or becomes less than $100, Keyport has the right to reduce the
frequency of payments to such an interval as will result in each payment being
at least $100.
Option 1: Income For a Fixed Number of Years. Keyport will pay an annuity for a
chosen number of years, not less than 5 nor over 50 (a period of years over 30
may be chosen only if it does not exceed the difference between age 100 and the
Annuitant's age on the date of the first payment). At any time while variable
annuity payments are being made, the payee may elect to receive the following
amount: (a) the present value of the remaining payments, commuted at the
interest rate used to create the annuity factor for this option (this interest
rate is 6% per year (5% per year for Oregon Contracts), unless 3% per year is
chosen by Written Request); less (b) any Contingent Deferred Sales Charge due by
treating the value defined in (a) as a total surrender. (See Deductions for
Contingent Deferred Sales Charge on Page 14). Instead of receiving a lump sum,
the payee can elect another payment option and the amount applied to the option
will not be reduced by the charge defined in (b) above. If, at the death of the
payee, Option 1 payments have been made for less than the chosen number of
years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present value
of the remaining payments, commuted at the interest rate used to create
the annuity factor for this option. For the variable annuity, this
interest rate is 6% per year (5% per year for Oregon Contracts), unless
3% per year is chosen by Written Request.
The Mortality and Expense Risk Charge is deducted during the Option 1 payment
period but Keyport has no mortality risk during this period.
Keyport has available a "level monthly" payment option that can be chosen for
variable payments under Option 1. Under this option, the monthly payment amount
changes every 12 months instead of every month as would be the case under the
standard monthly payment frequency. The "level monthly" option converts an
annual payment amount into 12 equal monthly payments as follows. Each annual
payment will be determined as described in "Variable Annuity Payment Values" on
page 29. Each annual payment will then be placed in Keyport's general account,
from which it will be paid out in twelve equal monthly payments. The sum of the
twelve monthly payments will exceed the annual payment amount because of an
interest rate factor used by Keyport that will vary from year to year. If the
payments are commuted, (1) the commutation method described above for
calculating the present value of remaining payments applies to any remaining
annual payments and (2) any unpaid monthly payments out of the current twelve
will be commuted at the interest rate that was used to determine those twelve
current monthly payments.
See "Annuity Payments" on page __ for the manner in which Option 1 may be taxed.
Option 2: Life Income with 10 Years of Payments Guaranteed. Keyport will pay an
annuity during the lifetime of the payee. If, at the death of the payee,
payments have been made for less than 10 years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present value
of the remaining payments, commuted at the interest rate used to create
the annuity factor for this option. For the variable annuity, this
interest rate is 6% per year (5% per year for Oregon Contracts), unless
3% per year is chosen by Written Request.
The amount of the annuity payments will depend on the age of the payee at the
time annuity payments are to begin and it may also depend on the payee's sex.
Option 3: Joint and Last Survivor Income. Keyport will pay an annuity for as
long as either the payee or a designated second natural person is alive. The
amount of the annuity payments will depend on the age of both persons at the
time annuity payments are to begin and it may also depend on each person's sex.
IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF BOTH
PAYEES DIE AFTER THE RECEIPT OF THE FIRST PAYMENT OR TO RECEIVE ONLY TWO ANNUITY
PAYMENTS IF THE PAYEES BOTH DIE AFTER RECEIPT OF THE SECOND PAYMENT AND SO ON.
Variable Annuity Payment Values
The amount of the first variable annuity payment is determined by Keyport using
an annuity purchase rate that is based on an assumed annual investment return of
6% (5% for Oregon Contracts), unless 3% is chosen by Written Request. Subsequent
variable annuity payments will fluctuate in amount and reflect whether the
actual investment return of the selected Sub-Account(s) (after deducting the
Mortality and Expense Risk Charge) is better or worse than the assumed
investment return. The total dollar amount of each variable annuity payment will
be equal to: (a) the sum of all Sub-Account payments; less (b) the pro-rata
amount of the annual Contract Maintenance Charge. A payee can instruct Keyport
to change the Sub-Account(s) used to determine the amount of the variable
annuity payments. Any change requested must be at least six months after a prior
selection.
Proof of Age, Sex, and Survival of Annuitant
Keyport may require proof of age, sex or survival of any payee upon whose age,
sex or survival payments depend. If the age or sex has been misstated, Keyport
will compute the amount payable based on the correct age and sex. If income
payments have begun, any underpayments Keyport may have made will be paid in
full with the next annuity payment. Any overpayments, unless repaid in one sum,
will be deducted from future annuity payments until Keyport is repaid in full.
SUSPENSION OF PAYMENTS
Keyport reserves the right to postpone surrender payments from the Fixed Account
for up to six months. Keyport reserves the right to suspend or postpone any type
of payment from the Variable Account for any period when: (a) the New York Stock
Exchange is closed other than customary weekend or holiday closings; (b) trading
on the Exchange is restricted; (c) an emergency exists as a result of which it
is not reasonably practicable to dispose of securities held in the Variable
Account or determine their value; or (d) the Securities and Exchange Commission
permits delay for the protection of security holders. The applicable rules and
regulations of the Securities and Exchange Commission shall govern as to whether
the conditions described in (b) and (c) exist.
TAX STATUS
Introduction
The Contract is designed for use by individuals in retirement plans which may or
may not be Qualified Plans under the provisions of the Internal Revenue Code
(the Code ). The ultimate effect of federal income taxes on the Contract Value,
on annuity payments, and on the economic benefit to the Contract Owner,
Annuitant or Designated Beneficiary depends on the type of retirement plan for
which the Contract is purchased and upon the tax and employment status of the
individual concerned. The discussion contained herein is general in nature and
is not intended as tax advice. Each person concerned should consult a
competent tax adviser. No attempt is made to consider any applicable
state or other tax laws. Moreover, the discussion herein is based upon Keyport's
understanding of current federal income tax laws as they are currently
interpreted. No representation is made regarding the likelihood of continuation
of those current federal income tax laws or of the current interpretations by
the Internal Revenue Service.
Taxation of Annuities in General
Section 72 of the Code governs taxation of annuities in general. There are no
income taxes on increases in the value of a Contract until a distribution
occurs, in the form of a full surrender, a partial surrender, an assignment or
gift of the Contract, or annuity payments.
Surrenders, Assignments and Gifts. A Contract Owner who fully surrenders his or
her Contract is taxed on the portion of the payment that exceeds his or her cost
basis in the Contract. For Non-Qualified Contracts, the cost basis is generally
the amount of the purchase payments made for the Contract and the taxable
portion of the surrender payment is taxed as ordinary income. For Qualified
Contracts, the cost basis is generally zero and the taxable portion of the
surrender payment is generally taxed as ordinary income subject to special 5-
year income averaging. A Designated Beneficiary receiving a lump sum surrender
benefit after the death of the Annuitant or Owner is taxed on the portion of the
amount that exceeds the Contract Owner's cost basis in the Contract. If the
Designated Beneficiary elects to receive annuity payments within 60 days of the
decedent's death, different tax rules apply. See Annuity Payments below. For
Non-Qualified Contracts, the tax treatment applicable to Designated
Beneficiaries may be contrasted with the income-tax-free treatment applicable to
persons inheriting and then selling mutual fund shares with a date-of-death
value in excess of their basis.
Partial surrenders received under Non-Qualified Contracts prior to annuitization
are first included in gross income to the extent Contract Value exceeds purchase
payments. Then, to the extent the Contract Value does not exceed purchase pay-
ments, such surrenders are treated as a non-taxable return of principal to the
Contract Owner. For partial surrenders under a Qualified Contract, payments are
treated first as a non-taxable return of principal up to the cost basis and then
a taxable return of income. Since the cost basis of Qualified Contracts is
generally zero, partial surrender amounts will generally be fully taxed as
ordinary income.
A Contract Owner who assigns or pledges a Non-Qualified Contract is treated as
if he or she had received the amount assigned or pledged and thus is subject to
taxation under the rules applicable to surrenders. A Contract Owner who gives
away the Contract (i.e., transfers it without full and adequate consideration)
to anyone other than his or her spouse is treated for income tax purposes as if
he or she had fully surrendered the Contract.
A special computational rule applies if Keyport issues to the Contract Owner,
during any calendar year, (a) two or more Contracts or (b) one or more Contracts
and one or more of Keyport's other annuity contracts. Under this rule, the
amount of any distribution includable in the Contract Owner's gross income is to
be determined under Section 72(e) of the Code by treating all the Keyport
contracts as one contract. Keyport believes that this means the amount of any
distribution under one contract will be includable in gross income to the extent
that at the time of distribution the sum of the values for all the contracts
exceeds the sum of the cost bases for all the contracts.
Annuity Payments. The non-taxable portion of each variable annuity payment is
determined by dividing the cost basis of the Contract by the total number of
expected payments while the non-taxable portion of each fixed annuity payment is
determined by an exclusion ratio formula which establishes the ratio that the
cost basis of the Contract bears to the total expected value of annuity payments
for the term of the annuity. The remaining portion of each payment is taxable.
Such taxable portion is taxed at ordinary income rates. For Qualified Contracts,
the cost basis is generally zero. With annuity payments based on life
contingencies, the payments will become fully taxable once the payee lives
longer than the life expectancy used to calculate the non-taxable portion of the
prior payments. Because variable annuity payments can increase over time and
because certain payment options provide for a lump sum right of commutation, it
is possible that the IRS could determine that variable annuity payments under
commutable options should not be taxed as described above but instead should be
taxed as if they were received under an agreement to pay interest. This
determination would result in a higher amount (up to 100%) of certain payments
being taxable.
With respect to the "level monthly" payment option available under Option 1,
pursuant to which each annual payment is placed in Keyport's general account and
paid out with interest in twelve equal monthly payments, it is possible the IRS
could determine that receipt of the first monthly payout of each annual payment
is constructive receipt of the entire annual payment. Thus, the total taxable
amount for each annual payment would be accelerated to the time of the first
monthly payout and reported in the tax year in which the first monthly payout is
received.
Penalty Tax. Payments received by Owners, Annuitants, and Designated
Beneficiaries under Contracts may be subject to both ordinary income taxes and a
penalty tax equal to 10% of the amount received that is includable in income.
The penalty tax is not imposed on amounts received: (a) after the taxpayer
attains age 59 1/2; (b) in a series of substantially equal payments made for
life or life expectancy; (c) after the death of the Contract Owner (or, where
the Owner is not a human being, after the death of the Annuitant); (d) if the
taxpayer becomes totally and permanently disabled; or (e) under a Non-Qualified
Contract's annuity payment option that provides for a series of substantially
equal payments, provided only one purchase payment is made to the Contract, the
Contract is not issued as a result of a Section 1035 exchange, and the first
annuity payment begins in the first Contract Year.
Income Tax Withholding. Keyport is required to withhold federal income taxes on
taxable amounts paid under Contracts unless the recipient elects not to have
withholding apply. Keyport will notify recipients of their right to elect not to
have withholding apply. See Tax-Sheltered Annuities (TSAs) on page 22 for an
alternative type of withholding that may apply to distributions from TSAs that
are eligible for rollover to another TSA or an individual retirement annuity or
account (IRA).
Section 1035 Exchanges. A Non-Qualified Contract may be purchased with proceeds
from the surrender of an existing annuity contract. Such a transaction may
qualify as a tax-free exchange pursuant to Section 1035 of the Code. It is
Keyport's understanding that in such an event: (a) the new Contract will be
subject to the distribution-at-death rules described in Death Provisions for
Non-Qualified Contracts on Page 17; (b) purchase payments made between 8/14/82
and 1/18/85 and the income allocable to them will, following an exchange, no
longer be covered by a grandfathered exception to the penalty tax for a
distribution of income that is allocable to an investment made over ten
years prior to the distribution; and (c) purchase payments made before 8/14/82
and the income allocable to them will, following an exchange, continue to
receive the following grandfathered tax treatment under prior law: (i) the
penalty tax does not apply to any distribution; (ii) partial surrenders are
treated first as a non-taxable return of principal and then a taxable return
of income; and (iii) assignments are not treated as surrenders subject to
taxation. Keyport's understanding of the above is principally based on
legislative reports prepared by the Staff of the Congressional Joint
Committee on Taxation.
Diversification Standards. The U.S. Secretary of the Treasury has issued
regulations that set standards for diversification of the investments underlying
variable annuity contracts (other than pension plan contracts). The Eligible
Funds are designed to be managed to meet the diversification requirements for
the Contract as those requirements may change from time to time. If the
diversification requirements are not satisfied, the Contract would not be
treated as an annuity contract. As a consequence to the Contract Owner,
income earned on a Contract would be taxable to the Contract Owner in the
year in which diversification requirements were not satisfied, including
previously non-taxable income earned in prior years. As a further consequence,
Keyport would be subjected to federal income taxes on assets in the Variable
Account.
The Secretary of the Treasury announced in September 1986 that he expects to
issue regulations which will prescribe the circumstances in which a Contract
Owner's control of the investments of a segregated asset account may cause the
Contract Owner, rather than the insurance company, to be treated as the owner
of the assets of the account. The regulations could impose requirements that
are not reflected in the Contract. Keyport, however, has reserved certain rights
to alter the Contract and investment alternatives so as to comply with such
regulations. Since the regulations have not been issued, there can be no
assurance as to the content of such regulations or even whether application of
the regulations will be prospective. For these reasons, Contract Owners are
urged to consult with their own tax advisers.
Qualified Plans
The Contract is designed for use with several types of Qualified Plans. The tax
rules applicable to participants in such Qualified Plans vary according to the
type of plan and the terms and conditions of the plan itself. Therefore, no
attempt is made herein to provide more than general information about the use of
the Contract with the various types of Qualified Plans. Participants under such
Qualified Plans as well as Contract Owners, Annuitants, and Designated
Beneficiaries are cautioned that the rights of any person to any benefits under
such Qualified Plans may be subject to the terms and conditions of the plans
themselves regardless of the terms and conditions of the Contract issued in
connection therewith. Following are brief descriptions of the various types of
Qualified Plans and of the use of the Contract in connection therewith.
Purchasers of the Contract should seek competent advice concerning the terms
and conditions of the particular Qualified Plan and use of the Contract with
that Plan.
Tax-Sheltered Annuities
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to
certain contribution limitations, exclude the amount of purchase payments from
gross income for tax purposes. However, such purchase payments may be subject to
Social Security (FICA) taxes. This type of annuity contract is commonly referred
to as a Tax-Sheltered Annuity (TSA).
Section 403(b)(11) of the Code contains distribution restrictions. Specifically,
benefits may be paid, through surrender of the Contract or otherwise, only (a)
when the employee attains age 59-1/2, separates from service, dies or becomes
totally and permanently disabled (within the meaning of Section 72(m)(7) of the
Code) or (b) in the case of hardship. A hardship distribution must be of
employee contributions only and not of any income attributable to such
contributions. Section 403(b)(11) does not apply to distributions attributable
to assets held as of December 31, 1988. Thus, it appears that the law's
restrictions would apply only to distributions attributable to contributions
made after 1988, to earnings on those contributions, and to earnings on
amounts held as of 12/31/88. The Internal Revenue Service has indicated
that the distribution restrictions of Section 403(b)(11) are not applicable
when TSA funds are being transferred tax-free directly to another TSA issuer,
provided the transferred funds continue to be subject to the Section 403(b)(11)
distribution restrictions.
Keyport will notify a Contract Owner who has requested a distribution from a
Contract if all or part of such distribution is eligible for rollover to another
TSA or to an individual retirement annuity or account (IRA). Any amount eligible
for rollover treatment will be subject to mandatory federal income tax
withholding at a 20% rate if the Contract Owner receives the amount rather than
directing Keyport by Written Request to transfer the amount as a direct rollover
to another TSA or IRA.
Individual Retirement Annuities
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity. These
Individual Retirement Annuities are subject to limitations on the amount which
may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, distributions from certain types of
Qualified Plans may be placed on a tax-deferred basis into an Individual
Retirement Annuity.
Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of retirement plans for employees. Such retirement plans may
permit the purchase of the Contract to provide benefits under the plans.
Deferred Compensation Plans With Respect to Service for State and Local
Governments
Section 457 of the Code, while not actually providing for a Qualified Plan as
that term is normally used, provides for certain deferred compensation plans
that enjoy special income tax treatment with respect to service for tax-exempt
organizations, state governments, local governments, and agencies and
instrumentalities of such governments. The Contract can be used with such plans.
Under such plans, a participant may specify the form of investment in
which his or her participation will be made. However, all such investments
are owned by and subject to the claims of general creditors of the sponsoring
employer.
Texas Optional Retirement Program
If Keyport is an approved carrier under the Texas Optional Retirement Program
( ORP ), any Contract issued to an ORP participant will contain an ORP
endorsement that will amend the Contracts in two ways. First, if for any reason
a second year of ORP participation is not begun, the total amount of the
State of Texas' first-year contribution will be returned to the appropriate
institution of higher education upon its request. Second, no benefits will be
payable, through surrender of the Contract or otherwise, unless the participant
dies, accepts retirement, or terminates employment in all Texas institutions of
higher education. The value of the Contract may, however, be transferred to
other contracts or carriers during the period of ORP participation.
VARIABLE ACCOUNT VOTING RIGHTS
In accordance with its view of present applicable law, Keyport will vote the
shares of the Eligible Funds held in the Variable Account at regular and special
meetings of the shareholders of the Eligible Funds in accordance with
instructions received from persons having the voting interest in the Variable
Account. Keyport will vote shares for which it has not received instructions
in the same proportion as it votes shares for which it has received
instructions.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation thereof should change, and
as a result Keyport determines that it is permitted to vote the shares of the
Eligible Funds in its own right, it may elect to do so.
The person having the voting interest under a Contract shall be the Contract
Owner. The number of shares held in each Sub-Account which are attributable to
each Contract Owner is determined by dividing the Contract Owner's interest in
each Sub-Account by the net asset value of the applicable share of the Eligible
Fund. The person having the voting interest under an annuity payment option
shall be the payee. The number of shares held in the Variable Account which are
attributable to each payee is determined by dividing the reserve for the annuity
payments by the net asset value of one share. During the annuity payment period,
the votes attributable to a payee decrease as the reserves underlying the
payments decrease.
The number of shares which a person has a right to vote will be determined as of
the date coincident with the date established by the respective Eligible Fund
for determining shareholders eligible to vote at the meeting of the Fund and
voting instructions will be solicited by written communication prior to such
meeting in accordance with the procedures established by the Eligible Fund.
Each person having the voting interest in the Variable Account will receive
periodic reports relating to the Eligible Fund(s) in which he or she has an
interest, proxy material and a form with which to give such voting instructions
with respect to the proportion of the Eligible Fund shares held in the Variable
Account corresponding to his or her interest in the Variable Account.
DISTRIBUTION OF THE CONTRACT
Keyport Financial Services Corp. ( KFSC ) serves as the Principal Underwriter
for the Contract described in this prospectus. The Contract will be sold by
salespersons who represent Keyport Life Insurance Company (KFSC's corporate
parent) as variable annuity agents and who are registered representatives of
broker/dealers who have entered into distribution agreements with KFSC. KFSC is
registered under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc. It is located at 125 High
Street, Boston, Massachusetts 02110.
Different Contracts are sold (1) to a person who is an officer, director, or
employee of Keyport, a trustee or officer of SteinRoe Variable Investment Trust
or Keyport Variable Investment Trust, an employee of the investment adviser or
sub-investment adviser of either Trust, or an employee of a company that is
under contract with either Trust to provide management or administrative
services or (2) to any Qualified Plan established for such a person. Such
Contracts are different from the Contracts sold to others in that (1) they are
not subject to the deduction for the Contract Maintenance Charge, the asset-
based sales charge or the Contingent Deferred Sales Charge and (2) they have a
Mortality and Expense Risk Charge of 0.35% per year.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account or the Principal
Underwriter are a party. Keyport is engaged in various kinds of routine
litigation which in its judgment is not of material importance in relation to
the total capital and surplus of Keyport.
INQUIRIES BY CONTRACT OWNERS
Contract Owners with questions about their Contracts can write Keyport Life
Insurance Company, Client Service Department, 125 High Street, Boston, MA 02110,
or call (800) 367-3653.
TABLE OF CONTENTS STATEMENT OF ADDITIONAL INFORMATION
Page
Keyport Life Insurance Company 2
Variable Annuity Benefits 2
Variable Annuity Payment Values 2
Re-Allocating Sub-Account Payments 3
Principal Underwriter 4
Custodian 4
Experts 4
Investment Performance 4
Average Annual Total Return for a Contract
that is Surrendered and for a Contract that Continues 5
Change in Accumulation Unit Value 7
Yields for CIF and CIF-DCA Sub-Accounts 8
Financial Statements 9
Keyport Life Insurance Company 9
KMA Variable Account 31
APPENDIX A
THE FIXED ACCOUNT (ALSO KNOWN AS THE GUARANTEED RATE ACCOUNT)
Introduction
This Appendix describes the Fixed Account option available under the
Contract. The Fixed Account is not available under either the Contract (form
number FLEX(4)V) that is issued to New Jersey residents or the Contract (form
number FLEX(4)/WA) that is issued to Washington residents.
Purchase payments allocated to the Fixed Account option become part of Keyport's
general account. Because of applicable exemptive and exclusionary provisions,
interests in the Fixed Account options have not been registered under the
Securities Act of 1933 ( 1933 Act ), nor is the general account an investment
company under the Investment Company Act. Accordingly, neither the general
account, the Fixed Account option, nor any interest therein, are subject to
regulation under the 1933 Act or the Investment Company Act. Keyport understands
that the Securities and Exchange Commission has not reviewed the disclosure in
the prospectus relating to the general account and the Fixed Account option.
Investments in the Fixed Account and Capital Protection Plus
Purchase payments will be allocated to the Fixed Account in accordance with the
selection made by the Contract Owner in the application. Any selection must
specify that percentage of the purchase payment that is to be allocated to each
Guarantee Period of the Fixed Account. The percentage, if not zero, must be
at least 10%. The Contract Owner may change the allocation percentages without
fee, penalty or other charge. Allocation changes must be made by Written Request
unless the Contract Owner has by Written Request authorized Keyport to accept
telephone allocation instructions from the Contract Owner. By authorizing
Keyport to accept telephone changes, a Contract Owner agrees to accept and
be bound by the conditions and procedures established by Keyport from time
to time. The current conditions and procedures are in Appendix C and Contract
Owners authorizing telephone allocation instructions will be notified, in
advance, of any changes.
Keyport currently offers Guarantee Periods of 1, 3, 5, and 7 years. Keyport may
change at any time the number of Guarantee Periods it offers under newly-issued
and in-force Contracts, as well as the length of those Guarantee Periods. If
Keyport stops offering a particular Guarantee Period, existing Fixed Account
Value in such Guarantee Period would not be affected until the end of the
Period (at that time, a Period of the same length would not be a transfer
option). Each Guarantee Period currently offered is available for initial
and subsequent purchase payments and for transfers of Contract Value.
Keyport offers a Capital Protection Plus program that a Contract Owner may
request. Under this program, Keyport will allocate part of the purchase payment
to the Guarantee Period selected by the Contract Owner so that such part, based
on that Guarantee Period's Maturity Rate in effect on the date of allocation,
will equal at the end of the Guarantee Period the total payment amount. The rest
of the purchase payment will be allocated to the Sub-Account(s) of the Variable
Account based on the Contract Owner's allocation. If any part of the Fixed
Account Value is surrendered or transferred before the end of the Guarantee
Period, the Value at the end of that Period will not equal the original purchase
payment amount.
For an example of Capital Protection Plus, assume Keyport receives a payment of
$10,000 when the Maturity Rate for the 7-year Guarantee Period is 6.75% per
year. Keyport will allocate $6,331 to that Guarantee Period because $6,331 will
increase at that interest rate to $10,000 after 7 years. The remaining $3,669 of
the payment will be allocated to the Sub-Account(s) selected by the Contract
Owner.
Fixed Account Value
The Fixed Account Value at any time is equal to:
(a) all purchase payments allocated to the Fixed Account plus the interest
subsequently earned on those payments; plus
(b) any Variable Account Value transferred to the Fixed Account plus the
interest subsequently earned on the transferred value; less
(c) any prior partial surrenders from the Fixed Account; less
(d) any Fixed Account Value transferred to the Variable Account.
Interest Credits
Keyport will credit interest daily (based on an annual compound interest rate)
to purchase payments allocated to the Fixed Account at rates declared by Keyport
for Guarantee Periods of one or more years from the month and day of allocation.
Each Guarantee Period will have a Basic Interest Rate and a Maturity Interest
Rate. During the Guarantee Period, Keyport will credit interest at the Basic
Rate. At the end of the Guarantee Period, Keyport will credit an additional
interest amount so that the original allocation amount remaining at that time
will have earned interest at the Maturity Rate for the entire Guarantee Period.
For certain post-death surrenders occurring before the end of the Guarantee
Period (see the last paragraph of this section), Keyport will credit an
additional interest amount so that the original allocation amount remaining at
the time of surrender will have earned interest at the Maturity Rate through the
time of surrender.
Under this method of crediting interest (unless the post-death surrender
exception applies): (a) the Maturity Rate will be credited only on amounts held
for the entire Guarantee Period; and (b) if the Contract Owner or a Designated
Beneficiary surrenders or transfers any part of an allocated amount before the
end of a Guarantee Period, only the Basic Rate will be credited on that part.
Any Basic and Maturity Interest Rates set by Keyport will be at least 3.5% per
year.
Keyport's method of crediting interest means that Fixed Account Value might be
subject to different rates for each Guarantee Period the Contract Owner has
selected in the Fixed Account. For purposes of this section, Variable Account
Value transferred to the Fixed Account and Fixed Account Value renewed for
another Guarantee Period shall be treated as a purchase payment allocation.
With certain deaths, "Death Provisions for Non-Qualified Contracts" and "Death
Provisions for Qualified Contracts" provide that the Designated Beneficiary may
surrender the Contract within 90 days of the date of death for the Contract
Value. In the event such a surrender occurs before the end of the Guarantee
Period, Keyport will credit immediately before the surrender an additional
interest amount so that the original allocation amount remaining at that time
will have earned interest at the Maturity Rate throughout the Guarantee Period.
For a surrender after 90 days, no additional interest amount will be credited.
Transfers when Guarantee Periods End
The total accumulated amount at the end of a Guarantee Period will be
transferred to the new Guarantee Period(s) and/or Sub-Account(s) of the Variable
Account that the Contract Owner has selected by Written Request. If the Contract
Owner has not made a selection, Keyport will automatically transfer the total
accumulated amount at the end of the Guarantee Period to the CIF Sub-Account. If
the Guarantee Period selected exceeds the time remaining to the Income Date but
does not exceed the time remaining to the latest Income Date allowable under the
Contract, the Income Date will automatically change to the latest allowable
date, thereby allowing the selected Guarantee Period to go into effect. The
Contract Owner may not otherwise select a Guarantee Period that would end after
the Income Date.
Transfers of Fixed Account Value
The Contract Owner may transfer Fixed Account Value from one Guarantee Period to
another or to one or more Sub-Accounts of the Variable Account. If the Fixed
Account Value represents multiple Guarantee Periods, the transfer request must
specify from which values the transfer is to be made.
The Contract allows Keyport to limit the number of transfers that can be made in
a specified time period. Currently, Keyport is limiting Variable Account and
Fixed Account transfers to generally 12 transfers per calendar year with a
$500,000 per transfer dollar limit. See Transfer of Variable Account Value
on Page 12. These limitations will not apply to any transfer made at the end
of a Guarantee Period. Contract Owners will be notified, in advance, of a change
in the limitation on the number of transfers.
Transfer requests must be by Written Request unless the Contract Owner has
authorized Keyport by Written Request to accept telephone transfer instructions
from the Contract Owner or from a person acting for the Contract Owner as an
attorney-in-fact under a power of attorney. By authorizing Keyport to accept
telephone transfer instructions, a Contract Owner agrees to accept and be bound
by the conditions and procedures established by Keyport from time to time. The
current conditions and procedures are in Appendix C and Contract Owners
authorizing telephone transfers will be notified, in advance, of any changes.
Written transfer requests may be made by a person acting for the Contract Owner
as an attorney-in-fact under a power of attorney.
Transfer requests received by Keyport before the close of trading on the New
York Stock Exchange (currently 4:00 PM Eastern Time) will be executed at the
close of business that day. Any requests received later will be executed at the
close of the next business day.
The amount of the transfer will be deducted from the specified values in the
manner stated in the next section below.
If 100% of a Guarantee Period's value is transferred and the current allocation
for purchase payments includes that Guarantee Period, then the allocation
formula for future purchase payments will automatically change unless the
Contract Owner instructs otherwise. For example, if the allocation formula is
50% to the one-year Guarantee Period and 50% to Sub-Account A and all Fixed
Account Value is transferred to Sub-Account A, the allocation formula will
change to 100% to Sub-Account A.
Reductions of Guarantee Period Values After a Transfer or Surrender
As stated elsewhere in the prospectus, a transfer request must specify from
which Guarantee Period's values the transfer is to be made and a partial
surrender request may, at the Contract Owner's option, similarly specify the
Guarantee Period. The specified amount will be deducted from both the
allocated purchase amount and its associated interest in the proportion that
each bear to their total sum. For example, if $600 is to be deducted from a $800
payment that was allocated for a three-year Guarantee Period and the interest
earned up to the date of transfer is $200 (for a total value of $1,000), $480
will be deducted from the payment allocation [($800/$1,000) x $600] and $120
will be deducted from the interest [($200/$1,000) x $600]. The $400 remaining
after the transfer or surrender would thus represent $320 of payment allocation
and $80 of interest. This $320, if it remains until the end of the
Guarantee Period, would receive the Maturity Interest Rate credit described in
Interest Credits on Page 26.
If a partial surrender request does not specify any Guarantee Period, the
ordering rule in Surrenders on Page 19 may result in a certain amount of Fixed
Account Value being automatically deducted. Any amount determined under that
rule will be deducted from each Guarantee Period's values in the proportion that
each bears to the total Fixed Account Value. For example, if $500 is to be
deducted from two Guarantee Periods' values of $4,000 and $1,000, $400 will be
deducted from the first Guarantee Period's values [($4,000/$5,000) x $500] and
$100 will be deducted from the second [($1,000/$5,000) x $500]. Each of these
amounts (the $400 and the $100 in the example) will then be deducted from the
allocated purchase amount and its associated interest in the manner stated in
the preceding paragraph.
The above rules automatically determine the amount of the allocated purchase
payment and its associated interest that still remains after any transfer or
surrender. The rules do not, however, determine in any way the amount of
Contingent Deferred Sales Charge that may be due since that Charge is based on
different rules and different records.
Fixed Annuity Payment Values
The dollar amount of each fixed annuity payment will be determined by deducting
any premium taxes not previously deducted and then dividing the remaining Fixed
Account Value by $1,000 and multiplying the result by the greater of: (a) the
applicable factor shown in the appropriate table in the Contract; or (b) the
factor currently offered by Keyport at the time annuity payments begin. This
current factor may be based on the sex of the payee unless to do so would be
prohibited by law.
APPENDIX B
PRIOR CONTRACTS OF THE VARIABLE ACCOUNT
Persons who purchased the variable annuity contracts identified below before May
1, 1992 may continue to make purchase payments under those contracts subject to
the terms and conditions of those contracts and this Appendix. All contracts are
subject to the transfer limitations and procedures described in Transfer of
Variable Account Value on Page 12. Persons who purchased non-qualified
contracts between April 9, 1981 and September 25, 1981 are not permitted to make
any additional purchase payments under those contracts. Such non-qualified
contracts are not included in number 4 below.
1. KEYFLEX Contracts (Form #FLEX(4)). The current Eligible Funds are those
listed on Page 11. CKGIF, CKUF, CKIFG, CKUSFG, CKSIF and NKTF were added
effective 7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively.
Accumulation unit values are shown on Page 7. The Dollar Cost Averaging program
for use with the CIF Sub-Account or the One-Year Guarantee Period of the Fixed
Account is available (see Dollar Cost Averaging on Page 11).
2. KEYFLEX Contracts (Form #FLEX-I). The current Eligible Funds are those listed
on Page 11. CKGIF, CKUF, CKIFG, CKUSFG, CKSIF and NKTF were added effective
7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. CIF, MSIF, MAF,
MGSF and CAF were substituted on 1/1/89 for, respectively, the former eligible
mutual funds: Cash Income Trust; Mortgage Securities Income Trust; Managed
Assets Trust; Managed Growth Stock Trust; and Aggressive Stock Trust.
Accumulation unit values are shown on Page 29.
3. FLEX 2 Contracts (Form #FLEX-II). The current Eligible Funds are those listed
on Page 11. CKGIF, CKUF, CKIFG, CKUSFG, CKSIF and NKTF were added effective
7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. CIF, MSIF, MAF,
MGSF and CAF were substituted on 1/1/89 for, respectively, the former eligible
mutual funds: Cash Income Trust; Mortgage Securities Income Trust; Managed
Assets Trust; Managed Growth Stock Trust; and Aggressive Stock Trust.
Accumulation unit values are shown on Page 30.
4. All K-100 and KeySource Contracts (Form #VA-1-81) Other than those Identified
in Numbers 5 and 6 below. The current Eligible Funds are those listed on Page
11. CKGIF, CKUF, CKIFG, CKUSFG, CKSIF and NKTF were added effective 7/1/93,
7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. CIF, CIF, MAF, and CAF
were substituted on 1/1/89 for, respectively, the former eligible mutual funds:
Cash Income Trust; Money Market/Options Investments, Inc.; Managed Assets Trust;
and Aggressive Stock Trust. Accumulation unit values are shown on Pages 31-32.
5. K-100 Qualified Contracts (Form #VA-1-81) Issued Before May 1, 1986 Pursuant
to Section 457 of the Internal Revenue Code. The Eligible Mutual Funds are:
Keystone Liquid Trust; and Quality Bond Fund, Diversified Bond Fund, High Income
Bond Fund, Growth and Income Fund, Mid-Cap Growth Fund, and Small Company Growth
Fund (formerly named Keystone Custodian Fund, Series B-1, B-2, B-4, S-1, S-3,
and S-4, respectively). Accumulation unit values are shown on Pages 33-34.
6. All Other K-100 Qualified Contracts (Form #VA-1-81) Issued Before September
25, 1981. The current Eligible Funds are those listed on Page 11. CKGIF, CKUF,
CKIFG, CKUSFG, CKSIF and NKTF were added effective 7/1/93, 7/1/93, 5/2/94,
7/5/94, 7/5/94 and 5/1/95, respectively. CIF, CIF, MGSF, ASF and CAF were
substituted on 1/1/89 for, respectively, the former eligible mutual funds:
Keystone Liquid Trust; Money Market/Options Investments, Inc.; and Growth and
Income Fund, Mid-Cap Growth Fund, and Small Company Growth Fund (formerly
named Keystone Custodian Fund, Series S-1, S-3, and S-4, respectively).
Accumulation unit values for 1989 1995 are shown on Page 32 and values
for 1986 1988 are shown on Pages 33-34.
ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER TWO
Accumulation Unit Accumulation Unit Number of
Value Value Accumulation Units
Sub-Account Beginning of Year* End of Year End of Year Year
Cash Income Fund $15.443 $16.108 204,597 1995
15.062 15.443 475,023 1994
14.849 15.062 514,598 1993
14.530 14.849 582,150 1992
13.906 14.530 907,810 1991
13.052 13.906 1,756,598 1990
12.118 13.052 1,993,108 1989
Cash Income Trust 11.459 12.118 2,740,761 1988
10.917 11.459 2,543,770 1987
10.396 10.917 467,956 1986
Colonial-Keyport U.S. 10.048 12.871 73,706 1995
U.S. Fund for Growth 10.000 (8/11/94) 10.048 5,259 1994
Mortgage Securities 15.617 17.853 189,804 1995
Income Fund 16.065 15.617 233,588 1994
15.307 16.065 299,033 1993
14.627 15.307 381,266 1992
12.936 14.627 443,240 1991
12.005 12.936 503,751 1990
10.773 12.005 601,466 1989
Mortgage Securities 10.183 10.773 541,052 1988
Income Trust 10.184 10.183 634,675 1987
10.000 (10/27/86) 10.184 114,841 1986
Colonial-Keyport Growth 10.258 13.184 57,955 1995
and Income Fund 10.464 10.258 66,152 1994
10.000 (7/22/93) 10.464 20,759 1993
Managed Assets Fund 24.566 30.445 714,638 1995
25.692 24.566 861,315 1994
23.802 25.692 1,055,478 1993
22.412 23.802 1,241,344 1992
17.737 22.412 1,462,279 1991
18.092 17.737 1,633,069 1990
14.959 18.092 1,882,766 1989
Managed Assets Trust 13.867 14.959 1,902,679 1988
13.747 13.867 2,544,739 1987
11.694 13.747 1,214,374 1986
Colonial-Keyport 8.621 11.508 27,533 1995
Utilities Fund 9.727 8.621 31,506 1994
10.000 (7/21/93) 9.727 52,776 1993
Colonial-Keyport 10.000 (1/19/95) 11.633 486,417 1995
Strategic Income Available in 1994 but no accumulation units were purchased.
Fund
Colonial-Keyport 9.323 9.747 34,733 1995
International Fund 10.000 (5/3/94) 9.323 24,303 1994
for Growth
Managed Growth Stock 17.919 24.378 239,514 1995
Fund 19.374 17.919 294,345 1994
18.687 19.374 327,760 1993
17.744 18.687 377,851 1992
12.137 17.744 346,524 1991
12.498 12.137 409,288 1990
9.635 12.498 525,196 1989
Managed Growth Stock 9.202 9.635 511,030 1988
Trust 10.000 (5/26/87) 9.202 539,305 1987
Capital Appreciation 28.043 30.953 285,923 1995
Fund (formerly named 28.698 28.043 301,017 1994
Aggressive Stock Fund)20.939 28.698 316,873 1993
18.519 20.939 404,666 1992
13.662 18.519 424,426 1991
15.206 13.662 730,255 1990
11.751 15.206 667,685 1989
Aggressive Stock Trust10.810 11.751 675,561 1988
11.887 10.810 884,826 1987
10.946 11.887 680,204 1986
Newport-Keyport Tiger 10.000 (6/8/95) 10.242 4,861 1995
Fund
*The date after each $10.00 value is when Keyport first purchased mutual fund
shares for that Sub-Account of the Variable Account.
Accumulation unit values are rounded to the nearest tenth of a cent and numbers
of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER THREE
Accumulation Unit Accumulation Unit Number of
Value Value Accumulation Units
Sub-Account Beginning of Year* End of Year End of Year Year
Cash Income Fund $15.173 $15.810 16,359 1995
14.813 15.173 25,550 1994
14.617 14.813 16,027 1993
14.317 14.617 28,411 1992
13.717 14.317 43,912 1991
12.886 13.717 63,361 1990
11.976 12.886 50,088 1989
Cash Income Trust 11.336 11.976 73,710 1988
10.811 11.336 65,700 1987
10.304 10.811 54,645 1986
Colonial-Keyport U.S. 10.000 (3/7/95) 12.065 1,642 1995
Fund for Growth Available in 1994 but no accumulation units were purchased.
Mortgage Securities 15.571 17.783 16,594 1995
Income Fund 16.033 15.571 21,047 1994
15.292 16.033 23,129 1993
14.627 15.292 18,834 1992
12.949 14.627 19,947 1991
12.029 12.949 20,699 1990
10.804 12.029 831 1989
Mortgage Securities 10.223 10.804 1,315 1988
Income Trust 10.000 (5/8/87) 10.223 1,180 1987
Colonial-Keyport Available in 1993, 1994 & 1995 but no accumulation units
Growth and Income Fund were purchased.
Managed Assets Fund 23.646 29.276 36,360 1995
24.754 23.646 44,913 1994
22.956 24.754 54,901 1993
21.636 22.956 59,345 1992
17.140 21.636 72,706 1991
17.501 17.140 77,976 1990
14.484 17.501 86,066 1989
Managed Assets Trust 13.440 14.484 78,797 1988
13.336 13.440 93,727 1987
11.355 13.336 58,003 1986
Colonial-Keyport Available in 1993, 1994 & 1995 but no accumulation units
Utilities Fund were purchased.
Colonial-Keyport 10.000 (3/14/95) 11.234 29,901 1995
Strategic Income Fund Available in 1994 but no accumulation units were
purchased.
Colonial-Keyport 9.371 9.788 538 1995
International Fund 10.000 (5/24/94) 9.371 599 1994
for Growth
Managed Growth Stock 16.435 22.337 4,230 1995
Fund 17.787 16.435 6,259 1994
17.173 17.787 6,593 1993
16.323 17.173 8,430 1992
11.176 16.323 3,630 1991
11.520 11.176 3,545 1990
8.889 11.520 5,212 1989
Managed Growth Stock 8.497 8.889 2,999 1988
Trust 10.000 (6/18/87) 8.497 2,355 1987
Capital Appreciation 28.653 31.595 24,833 1995
Fund (formerly named 28.698 28.653 29,605 1994
Aggressive Stock Fund)21.437 28.698 39,376 1993
18.978 21.437 47,198 1992
14.014 18.978 40,776 1991
15.614 14.014 40,304 1990
12.078 15.614 50,936 1989
Aggressive Stock Trust11.121 12.078 44,345 1988
12.241 11.121 53,129 1987
11.283 12.241 45,205 1986
Newport-Keyport Tiger Available in 1995 but no accumulation units were purchased
Fund
*The date after each $10.00 value is when Keyport first purchased mutual fund
shares for that Sub-Account of the Variable Account.
Accumulation unit values are rounded to the nearest tenth of a cent and numbers
of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
1989 1995 ACCUMULATION UNIT VALUES FOR CONTRACTS
DESCRIBED IN NUMBERS FOUR AND SIX
Accumulation Unit Accumulation Unit Number of
Value Value Accumulation Units
Sub-Account Beginning of Year* End of Year End of Year Year
Cash Income Fund $21.580 $22.563 930,979 1995
20.996 21.580 1,184,102 1994
20.648 20.996 1,384,339 1993
20.155 20.648 1,697,243 1992
19.243 20.155 2,138,976 1991
18.016 19.243 2,936,979 1990
16.686 18.016 3,493,117 1989
Colonial-Keyport 10.000 (1/13/95) 12.722 22,589 1995
U.S.Fund for Growth Available in 1994 but no accumulation units were purchased.
Mortgage Securities 14.608 16.740 68,359 1995
Income Fund 14.990 14.608 72,190 1994
14.248 14.990 114,507 1993
13.582 14.248 85,079 1992
11.983 13.582 78,913 1991
11.093 11.983 60,390 1990
10.000 (1/13/89) 11.093 12,608 1989
Colonial-Keyport 10.165 13.097 13,781 1995
Growth and Income Fund 10.344 10.165 10,136 1994
10.000 (8/3/93) 10.344 8,415 1993
Managed Assets Fund 24.465 30.394 296,617 1995
25.524 24.465 299,672 1994
23.589 25.524 348,975 1993
22.156 23.589 339,963 1992
17.492 22.156 372,220 1991
17.799 17.492 356,575 1990
14.681 17.799 459,250 1989
Colonial-Keyport 8.651 11.577 24,359 1995
Utilities Fund 9.737 8.651 18,049 1994
10.000 (7/21/93) 9.737 23,195 1993
Colonial-Keyport 10.000 (2/28/95) 11.305 465,616 1995
Strategic Income Available in 1994 but no accumulation units were purchased.
Fund
Colonial-Keyport 9.390 9.842 27,992 1995
International Fund 10.000 (5/25/94) 9.390 44,610 1994
for Growth
Managed Growth Stock 41.147 56.113 60,347 1995
Fund 44.377 41.147 56,165 1994
42.701 44.377 66,644 1993
40.447 42.701 67,611 1992
27.598 40.447 54,873 1991
28.349 27.598 43,639 1990
21.801 28.349 38,197 1989
Capital Appreciation 56.716 62.755 329,680 1995
Fund (formerly named 56.611 56.716 346,355 1994
Aggressive Stock Fund) 42.142 56.611 398,198 1993
37.181 42.142 446,136 1992
27.361 37.181 466,795 1991
30.380 27.361 581,842 1990
23.420 30.380 611,392 1989
Newport-Keyport Tiger 10.000 (5/24/95) 10.438 15,701 1995
Fund
*The date after each $10.00 value is when Keyport first purchased mutual fund
shares for that Sub-Account of the Variable Account.
Accumulation unit values are rounded to the nearest tenth of a cent and numbers
of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
1986-1988 ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER FOUR
(QUALIFIED CONTRACTS ONLY)
Accumulation Unit Accumulation Unit Number of
Value Value Accumulation Units
Sub-Account Beginning of Year End of Year End of Year Year
Cash Income $15.741 $16.686 1,632,674 1988
Trust 14.960 15.741 1,885,426 1987
14.211 14.960 1,954,861 1986
Managed Assets 13.576 14.681 219,163 1988
Trust 13.425 13.576 293,796 1987
11.392 13.425 217,076 1986
Aggressive Stock 21.491 23.420 409,556 1988
Trust 23.575 21.491 571,229 1987
21.655 23.575 791,432 1986
1986-1988 ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER FOUR
(NON-QUALIFIED CONTRACTS ONLY)
Accumulation Unit Accumulation Unit Number of
Value Value Accumulation Units
Sub-Account Beginning of Year End of Year End of Year Year
Cash Income $15.747 $16.692 2,498,152 1988
Trust 14.966 15.747 3,219,029 1987
14.216 14.966 2,949,285 1986
Managed Assets 13.636 14.746 312,640 1988
Trust 13.484 13.636 382,205 1987
11.442 13.484 357,954 1986
Aggressive Stock 18.951 20.651 414,759 1988
Trust 20.788 18.951 711,443 1987
19.095 20.788 1,233,989 1986
*This date is when Keyport first purchased mutual fund shares for that
Sub-Account of the Variable Account.
Accumulation unit values are rounded to the nearest tenth of a cent and numbers
of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
ACCUMULATION UNIT VALUES FOR QUALIFIED CONTRACTS DESCRIBED
IN NUMBER FIVE (1986-1995) AND NUMBER SIX (1986-1988)
Accumulation Unit Accumulation Unit Number of
Value Value Accumulation Units
Sub-Account Beginning of Year End of Year End of Year Year
Keystone Liquid $22.238 $23.122 21,828 1995
Trust 21.718 22.238 21,067 1994
21.483 21.718 24,968 1993
21.102 21.483 27,163 1992
20.269 21.102 58,684 1991
19.042 20.269 76,538 1990
17.724 19.042 83,706 1989
16.780 17.724 444,750 1988
16.002 16.780 560,681 1987
15.254 16.002 592,852 1986
Quality Bond Fund 31.679 36.552 959 1995
(formerly Keystone 33.702 31.679 2,523 1994
Custodian Fund, 31.286 33.702 2,731 1993
Series B-1) 30.422 31.286 2,563 1992
26.897 30.422 2,880 1991
25.457 26.897 2,688 1990
22.978 25.457 2,541 1989
21.834 22.978 27,480 1988
22.649 21.834 29,482 1987
20.083 22.649 41,291 1986
Diversified Bond
Fund (formerly 31.149 35.378 558 1995
Keystone Custodian 33.798 31.149 414 1994
Fund, Series B-2) 29.983 33.798 254 1993
27.600 29.983 149 1992
23.489 27.600 714 1991
24.242 23.489 851 1990
23.330 24.242 1,392 1989
21.238 23.330 26,902 1988
21.429 21.238 38,962 1987
19.232 21.429 49,621 1986
High Income Bond
Fund (formerly 28.120 30.569 527 1995
Keystone Custodian 32.345 28.120 514 1994
Fund, Series B-4) 25.880 32.345 579 1993
22.132 25.880 571 1992
15.763 22.132 3,596 1991
20.364 15.763 4,427 1990
21.699 20.364 5,688 1989
19.605 21.699 36,779 1988
20.605 19.605 53,498 1987
18.971 20.605 104,299 1986
(Accumulation unit values continue on the next page)
ACCUMULATION UNIT VALUES FOR QUALIFIED CONTRACTS DESCRIBED
IN NUMBER FIVE (1986-1995) AND NUMBER SIX (1986-1988)
(CONTINUED)
Accumulation Unit Accumulation Unit Number of
Value Value Accumulation Units
Sub-Account Beginning of Year End of Year End of Year Year
Growth and Income
Fund (formerly 33.202 43.376 4,179 1995
Keystone Custodian 35.621 33.202 5,248 1994
Fund, Series S-1) 32.763 35.621 6,382 1993
33.076 32.763 7,180 1992
25.924 33.076 14,956 1991
27.459 25.924 18,927 1990
21.801 27.459 21,757 1989
20.301 21.801 49,631 1988
19.774 20.301 63,034 1987
17.026 19.774 52,544 1986
Mid-Cap Growth Fund 33.423 44.970 3,693 1995
(formerly Keystone 35.401 33.423 6,753 1994
Custodian Fund, 32.874 35.401 7,178 1993
Series S-3) 31.567 32.874 7,388 1992
22.434 31.567 20,839 1991
24.838 22.434 18,451 1990
20.108 24.838 20,928 1989
17.800 20.108 47,781 1988
17.903 17.800 70,665 1987
15.566 17.903 102,227 1986
Small Company Growth
Fund (formerly 32.263 42.685 9,696 1995
Keystone Custodian 32.527 32.263 12,813 1994
Fund, Series S-4) 26.208 32.527 13,929 1993
24.094 26.208 16,338 1992
14.071 24.094 53,908 1991
15.122 14.071 61,931 1990
12.355 15.122 70,739 1989
11.166 12.355 133,891 1988
11.969 11.166 177,623 1987
11.405 11.969 291,787 1986
Accumulation unit values are rounded to the nearest tenth of a cent and numbers
of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
APPENDIX C
TELEPHONE INSTRUCTIONS
Telephone Transfers of Contract Values
1. If there are joint Contract Owners, both must authorize Keyport to accept
telephone instructions but either Owner can give Keyport telephone instructions.
2. All callers will be required to identify themselves. Keyport reserves the
right to refuse to act upon any telephone instructions in cases where the
caller has not sufficiently identified himself/herself to Keyport's
satisfaction.
3. Neither Keyport nor any person acting on its behalf shall be subject to any
claim, loss, liability, cost or expense if it or such person acted in good faith
upon a telephone instruction, including one that is unauthorized or fraudulent;
however, Keyport will employ reasonable procedures to confirm that a telephone
instruction is genuine and, if Keyport does not, Keyport may be liable for
losses due to an unauthorized or fraudulent instruction. The Contract Owner thus
bears the risk that an unauthorized or fraudulent instruction that is executed
may cause the Contract Value to be lower than it would be had no instruction
been executed.
4. All conversations will be recorded with disclosure at the time of the call.
5. The application for the Contract may allow a Contract Owner to create a power
of attorney by authorizing another person to give telephone instructions. Unless
prohibited by state law, such power will be treated as durable in nature and
shall not be affected by the subsequent incapacity, disability or incompetency
of the Contract Owner. Either Keyport or the authorized person may cease to
honor the power by sending written notice to the Contract Owner at the Contract
Owner's last known address. Neither Keyport nor any person acting on its behalf
shall be subject to liability for any act executed in good faith reliance upon a
power of attorney.
6. Telephone authorization shall continue in force until (a) Keyport receives
the Contract Owner's written revocation, (b) Keyport discontinues the privilege,
or (c) Keyport receives written evidence that the Contract Owner has entered
into a market timing or asset allocation agreement with an investment adviser or
with a broker/dealer.
7. Telephone transfer instructions received by Keyport at 800-367-3653 before
the close of trading on the New York Stock Exchange (currently 4:00 P.M. Eastern
Time) will be initiated that day based on the unit value prices calculated at
the close of that day. Instructions received after the close of trading on the
NYSE will be initiated the following business day.
8. Once instructions are accepted by Keyport, they may not be canceled.
9. All transfers must be made in accordance with the terms of the Contract and
current prospectus. If the transfer instructions are not in good order, Keyport
will not execute the transfer and will notify the caller within 48 hours.
10. If 100% of any Sub-Account's value is transferred and the allocation
formula for purchase payments includes that Sub-Account, then the allocation
formula for future purchase payments will change accordingly unless Keyport
receives telephone instructions to the contrary. For example, if the allocation
formula is 50% to Sub-Account A and 50% to Sub-Account B and all of Sub-Account
A's value is transferred to Sub-Account B, the allocation formula will change to
100% to Sub-Account B unless Keyport is instructed otherwise.
Telephone Changes to Purchase Payment Allocation Percentages Numbers 1-6 above
are applicable.
APPENDIX D
DOLLAR COST AVERAGING
Keyport offers a dollar cost averaging program that Contract Owners may
participate in by Written Request. The program periodically transfers
Accumulation Units from the CIF Sub-Account or the One-Year Guarantee Period of
the Fixed Account to other Sub-Accounts selected by the Contract Owner. The
program allows a Contract Owner to invest in non-money market Sub-Accounts
over time rather than having to invest in those Sub-Accounts all at once.
The program is available for initial and subsequent purchase payments and for
Contract Value transferred into the CIF Sub-Account or One-Year Guarantee
Period. Under the program, Keyport makes automatic transfers on a periodic basis
out of the CIF Sub-Account or the One-Year Guarantee Period into one or more of
the other available Sub-Accounts (Keyport reserves the right to limit the number
of Sub-Accounts the Contract Owner may choose but there are currently no
limits). The automatic transfer program does not guarantee a profit nor does it
protect against loss in declining markets. The One-Year Guarantee Period option
of the program is not available under Contracts issued to New Jersey and
Washington residents.
The Contract Owner by Written Request must specify the CIF Sub-Account or
One-Year Guarantee Period from which the transfers are to be made, the monthly
amount to be transferred (minimum $150) and the Sub-Account(s) to which the
transfers are to be made. The first transfer will occur at the close of the
Valuation Period that includes the 30th day after the receipt of the Contract
Owner's Written Request. Each succeeding transfer will occur one month later
(e.g., if the 30th day after the receipt date is April 8, the second
transfer will occur at the close of the Valuation Period that includes May 8).
When the remaining value is less than the monthly transfer amount, that
remaining value will be transferred and the program will end. Before this final
transfer, the Contract Owner may extend the program by allocating additional
purchase payments to the CIF Sub-Account or One-Year Guarantee Period or by
transferring Contract Value to the CIF Sub-Account or One-Year Guarantee Period.
The Contract Owner may, by Written Request or by telephone, change the monthly
amount to be transferred, change the Sub-Account(s) to which the
transfers are to be made, or end the program. The program will automatically end
if the Income Date occurs. Keyport reserves the right to end the program at any
time by sending the Contract Owner a notice one month in advance.
Written or telephone instructions must be received by Keyport by the end
(currently 5:00 PM Eastern Time) of the business day preceding the next
scheduled transfer in order to be in effect for that transfer. Telephone
instructions are subject to the conditions and procedures established by
Keyport from time to time. The current conditions and procedures appear below
and Contract Owners in a dollar cost averaging program will be notified,
in advance, of any changes.
1. If there are joint Contract Owners, either Owner can give Keyport telephone
transfer instructions.
2. All callers will be required to identify themselves. Keyport reserves the
right to refuse to act upon any telephone instructions in cases where the caller
has not sufficiently identified himself/herself to Keyport's satisfaction.
3. Neither Keyport nor any person acting on its behalf shall be subject to any
claim, loss, liability, cost or expense if it or such person acted in good faith
upon a telephone instruction, including one that is unauthorized or fraudulent;
however, Keyport will employ reasonable procedures to confirm that a telephone
instruction is genuine and, if Keyport does not, Keyport may be liable for
losses due to an unauthorized or fraudulent instruction. The Contract Owner
thus bears the risk that an unauthorized or fraudulent instruction that is
executed may cause the Contract Value to be lower than it would be had no
instruction been executed.
4. All conversations will be recorded with disclosure at the time of the call.
5. Telephone authorization shall continue in force until (a) Keyport receives
the Contract Owner's written revocation, (b) Keyport discontinues the privilege,
or (c) Keyport receives written evidence that the Contract Owner has entered
into a market timing or asset allocation agreement with an investment adviser or
with a broker/dealer.
6. Telephone instructions must be received by Keyport at 800-367-3653 before the
end (currently 5:00 P.M. Eastern Time) of the business day preceding the next
scheduled transfer in order to be in effect for that transfer.
7. Once instructions are accepted by Keyport, they may not be canceled. New
telephone instructions may be given on the following business day.
8. All instructions must be made in accordance with the terms of the Contract
and current prospectus. If the instructions are not in good order, Keyport will
not execute them and will notify the caller within 48 hours.
Keyport previously offered a Value-Added Dollar Cost Averaging Program for
initial purchase payments made under Contracts issued generally before August 1,
1993. The remainder of this Appendix describes that program for the benefit of
Contract Owners who are still participating in it.
The Value-Added Dollar Cost Averaging program uses the CIF-DCA Sub-Account and
was available only for the initial purchase payment (and for subsequent payments
under Qualified Contracts meeting the conditions described below). The CIF-DCA
Sub-Account is the only Sub-Account with no deduction for the Contract's 1.40%
asset-based charge.
A Contract Owner was able to allocate all or part of the initial purchase
payment to the CIF-DCA Sub-Account for automatic transfers over either 12
months or 24 months. The Contract Owner allocated at least $1,800 if 12 months
was selected and at least $3,600 if 24 months was selected. Based on the period
the Owner selected, Keyport transfers each month either 1/12 or 1/24 of the
original allocated amount from the CIF-DCA Sub-Account to the Sub-Account(s)
chosen by the Owner. The first transfer occurred at the close of the Valuation
Period that included the 30th day after the Issue Date of the Contract.
Each succeeding transfer occurs one month later (e.g., if the 30th day
after the Issue Date is April 8, the second transfer occurred at the close of
the Valuation Period that included May 8). The last transfer (the 12th or 24th
transfer, as applicable) will be of all the remaining value in the CIF-DCA
Sub-Account. Before this final transfer, the Contract Owner may, by Written
Request or by telephone, change the Sub-Account(s) to which the
transfers are to be made or end the program (see the fourth paragraph of this
Appendix). If the Contract Owner transfers any CIF-DCA Sub-Account value outside
the program, the program will automatically end. The program will also
automatically end if the Income Date occurs. If the program ends for any reason,
Keyport, in the absence of instructions to the contrary, will transfer any
remaining CIF-DCA Sub-Account value to the CIF Sub-Account. Once the program
ends, a Contract Owner may not restart it.
If a Qualified Contract application stated the Value-Added Dollar Cost Averaging
program was to apply to multiple transfer or rollover payments that would all be
made to Keyport within a reasonable time, the program began as stated above with
the first transfer or rollover payment received by Keyport. Then, as each
subsequent transfer or rollover payment was received, that payment was added to
the then-current CIF-DCA Sub-Account value and divided by the applicable 1/12 or
1/24 to determine a new monthly transfer amount. The total CIF-DCA Sub-Account
value will then be transferred out monthly for the applicable 12 or 24
transfers. Each monthly transfer continues to occur on the monthly transfer date
established for the first payment allocated to the program.
KEYPORT PREFERRED ADVISOR
PROSPECTUS
MAY 1, 1996
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
Keyport Life Insurance Company's ultimate parent is
Liberty Mutual Insurance Company
Service Hotline 800-367-3653 Keyline 800-367-3654
Keyport Logo is a registered service mark of Keyport Life Insurance Company.
KVAP 5/96
Yes. I would like to receive the Keyport Variable Annuity Statement of
Additional Information.
Yes. I would like to receive the SteinRoe Variable Investment Trust Statement
of Additional Information.
Yes. I would like to receive the Keyport Variable Investment Trust Statement
of Additional Information.
Name
Address
City, State Zip
BUSINESS REPLY MAIL
FIRST CLASS MAIL PERMIT NO. 6719 BOSTON, MA
POSTAGE WILL BE PAID BY ADDRESSEE
KEYPORT LIFE INSURANCE COMPANY
125 HIGH STREET
BOSTON, MA 02110-9773
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
KMA VARIABLE ACCOUNT
AND
KEYPORT LIFE INSURANCE COMPANY ("Keyport")
This Statement of Additional Information is not a prospectus but it relates to,
and should be read in conjunction with, the variable annuity prospectus dated
May 1, 1996. The prospectus is available, at no charge, by writing Keyport at
125 High Street, Boston, MA 02110 or by calling (800) 437-4466.
TABLE OF CONTENTS
Page
Keyport Life Insurance Company ............................ 2
Variable Annuity Benefits.................................. 2
Variable Annuity Payment Values ......................... 2
Re-Allocating Sub-Account Payments....................... 3
Principal Underwriter ..................................... 4
Custodian.................................................. 4
Experts.................................................... 4
Investment Performance..................................... 4
Average Annual Total Return for a Contract that is
Surrendered and for a Contract that Continues.......... 5
Change in Accumulation Unit Value........................ 7
Yields for CIF and CIF-DCA Sub-Accounts.................. 8
Financial Statements ...................................... 11
Keyport Life Insurance Company........................... 11
KMA Variable Account .................................... 39
The date of this statement of additional information is May 1, 1996.
KMA1.SAI
KEYPORT LIFE INSURANCE COMPANY
Liberty Mutual Insurance Company ("Liberty Mutual"), a multi-line insurance and
financial services institution, is the ultimate corporate parent of Keyport.
Liberty Mutual ultimately controls Keyport through the following intervening
holding company subsidiaries: Liberty Mutual Equity Corporation, Liberty
Financial Companies, Inc. and SteinRoe Services, Inc. Liberty Mutual, as of
March 31, 1995, owned, indirectly, approximately 81.9% of the combined voting
power of the outstanding voting stock of LFC (with the balance being publicly
held). As of 12/31/95, Keyport owned in its own name (not for the benefit
of Contract Owners) 8.73% of the total assets of the Variable Account.
Prior to January 1, 1991, Keyport's name was Keystone Provident
Life Insurance Company. For additional information about Keyport, see page 8 of
the prospectus.
VARIABLE ANNUITY BENEFITS
Variable Annuity Payment Values
For each variable payment option, the total dollar amount of each periodic
payment will be equal to: (a) the sum of all Sub-account payments; less (b) the
pro-rata amount of the annual Contract Maintenance Charge.
The first payment for each Sub-Account will be determined by deducting any ap-
plicable Contract Maintenance Charge and any applicable state premium taxes and
then dividing the remaining value of that Sub-Account by $1,000 and multiplying
the result by the greater of: (a) the applicable factor from the Contract's
annuity table for the particular payment option; or (b) the factor currently
offered by Keyport at the time annuity payments begin. This current factor may
be based on the sex of the payee unless to do so would be prohibited by law.
The number of Annuity Units for each Sub-Account will be determined by dividing
such first payment by the Sub-Account Annuity Unit value for the Valuation
Period that includes the date of the first payment. The number of Annuity Units
remains fixed for the annuity payment period. Each Sub-Account payment after the
first one will be determined by multiplying (a) by (b), where: (a) is the number
of Sub-Account Annuity Units; and (b) is the Sub-Account Annuity Unit value for
the Valuation Period that includes the date of the particular payment.
Variable annuity payments will fluctuate in accordance with the investment
results of the underlying Eligible Funds. In order to determine how these
fluctuations affect annuity payments, Keyport uses an Annuity Unit value. Each
Sub-Account has its own Annuity Units and value per Unit. The Unit value
applicable during any Valuation Period is determined at the end of such period.
When Keyport first purchased the Eligible Fund shares of SteinRoe Variable
Investment Trust and Keyport Variable Investment Trust on behalf of the Variable
Account, Keyport valued each Annuity Unit for each Sub-Account at $10. The Unit
value for each Sub-Account in any Valuation Period thereafter is determined by
multiplying the value for the prior period by a net investment factor. This
factor may be greater or less than 1.0; therefore, the Annuity Unit may increase
or decrease from Valuation Period to Valuation Period. For each assumed annual
investment rate (AIR), Keyport calculates a net investment factor for each Sub-
Account by dividing (a) by (b), where:
(a) is equal to the net investment factor defined on page 16 of the prospectus
without any deduction for the sales charge defined in (c)(ii) on that
page; and
(b) is the assumed investment factor for the current Valuation Period. The
assumed investment factor adjusts for the interest assumed in determining
the first variable annuity payment. Such factor for any Valuation Period
shall be the accumulated value, at the end of such period, of $1.00
deposited at the beginning of such period at the assumed annual investment
rate (AIR). The AIR for Annuity Units based on the Contract's annuity
tables is 6% per year (5% per year for Oregon contracts.) An AIR of 3%
per year is also currently available upon Written Request.
With a particular AIR, payments after the first one will increase or decrease
from month to month based on whether the actual annualized investment return of
the selected Sub-Account(s) (after deducting the Mortality and Expense Risk
Charge) is better or worse than the assumed AIR percentage. If a given amount
of Sub-Account value is applied to a particular payment option, the initial pay-
ment will be smaller if a 3% AIR is selected instead of a 6% AIR but, all other
things being equal, the subsequent 3% AIR payments have the potential for
increasing in amount by a larger percentage and for decreasing in amount by a
smaller percentage. For example, consider what would happen if the actual
annualized investment return (see the first sentence of this paragraph) is 9%,
6%, 3%, or 0% between the time of the first and second payments. With an actual
9% return, the 3% AIR and 6% AIR payments would both increase in amount but the
3% AIR payment would increase by a larger percentage. With an actual 6% return,
the 3% AIR payment would increase in amount while the 6% AIR payment would stay
the same. With an actual return of 3%, the 3% AIR payment would stay the same
while the 6% AIR payment would decrease in amount. Finally, with an actual
return of 0%, the 3% AIR and 6% AIR payments would both decrease in amount
but the 3% AIR payment would decrease by a smaller
percentage. Note that the changes in payment amounts described above are on a
percentage basis and thus do not illustrate when, if ever, the 3% AIR payment
amount might become larger than the 6% AIR payment amount. Note though that if
Option 1 (Income for a Fixed Number of Years) is selected and payments continue
for the entire period, the 3% AIR payment amount will start out being smaller
than the 6% AIR payment amount but eventually the 3% AIR payment amount will
become larger than the 6% AIR payment amount.
Re-Allocating Sub-Account Payments
The number of Annuity Units for each Sub-Account under any variable annuity
option will remain fixed during the entire annuity payment period unless the
payee makes a written request for a change. Any change requested must be at
least six months after a prior selection. The payee's request must specify the
percentage of the annuity payment that is to be based on the investment
performance of each Sub-Account. The percentage for each Sub-Account, if not
zero, must be at least 10% and must be a whole number. At the end of the
Valuation Period during which Keyport receives the request, Keyport will: (a)
value the Annuity Units for each Sub-Account to create a total annuity value;
(b) apply the new percentages the payee has selected to this total value; and
(c) recompute the number of Annuity Units for each Sub-Account. This new number
of units will remain fixed for the remainder of the payment period unless the
payee requests another change.
PRINCIPAL UNDERWRITER
The Contract, which is offered continuously, is distributed by Keyport Financial
Services Corp. ("KFSC"), a wholly-owned subsidiary of Keyport. During the
fiscal years ended December 31, 1995, 1994 and 1993, Keyport paid KFSC under-
writing commissions for the Contract of $0.00, $0.00, and $0.00, respectively.
CUSTODIAN
The custodian of the assets of the KMA Variable Account is State Street Bank and
Trust Company, a state chartered trust company. Its principal office is at 225
Franklin Street, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Keyport as of December 31, 1995 and
1994 and for each of the years in the three-year period ended December 31, 1995
included herein, and the financial statements of KMA Variable Account as of
December 31, 1995 and for each of the years, or other periods as applicable, in
the two-year period ended December 31, 1995, included herein, have been included
herein in reliance on the reports of KPMG Peat Marwick LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
INVESTMENT PERFORMANCE
The Variable Account may from time to time quote performance information
concerning its various Sub-Accounts. A Sub-Account's performance may also be
compared to the performance of sub-accounts used with variable annuities offered
by other insurance companies. This comparative information may be expressed as a
ranking prepared by Financial Planning Resources, Inc. of Miami, FL (The VARDS
Report) or by Morningstar, Inc. of Chicago, IL (Morningstar's Variable Annuity
Performance Report), which are independent services that compare the performance
of variable annuity sub-accounts. The rankings are done on the basis of changes
in accumulation unit values over time and do not take into account any charges
(such as sales charges or administrative charges) that are deducted directly
from contract values.
Ibbotson Associates of Chicago, IL provides historical returns from 1926 on
capital markets in the United States. The Variable Account may quote the
performance of its Sub-Accounts in conjunction with the long-term performance of
capital markets in order to illustrate general long-term risk versus reward
investment scenarios. Capital markets tracked by Ibbotson Associates include
common stocks, small company stocks, long-term corporate bonds, long-term
government bonds, U.S. Treasury Bills, and the U.S. inflation rate. Historical
total returns are determined by Ibbotson Associates for: Common Stocks,
represented by the Standard and Poor's Composite Index (an unmanaged weighted
index of 90 stocks prior to March 1957 and 500 stocks thereafter of industrial,
transportation, utility and financial companies widely regarded by investors as
representative of the stock market); Small Company Stocks, represented by the
fifth capitalization quintile (i.e., the ninth and tenth deciles) of stocks on
the New York Stock Exchange for 1926-1981 and by the performance of the Dimen-
sional Fund Advisors Small Company 9/10 (for ninth and tenth deciles) Fund
thereafter; Long Term Corporate Bonds, represented beginning in 1969 by the
Salomon Brothers Long-Term High-Grade Corporate Bond Index, which is an un-
managed index of nearly all Aaa and Aa rated bonds, represented for 1946-1968 by
backdating the Salomon Brothers Index using Salomon Brothers' monthly yield data
with a methodology similar to that used by Salomon Brothers in computing
its Index, and represented for 1925-1945 through the use of the Standard and
Poor's monthly High-Grade Corporate Composite yield data, assuming a 4% coupon
and a 20-year maturity. Long-Term Government Bonds, measured each year using
a portfolio containing one U.S. government bond with a term of approximately
twenty years and a reasonably current coupon; U.S. Treasury Bills, measured
by rolling over each month a one-bill portfolio containing, at the beginning
of each month, the shortest-term bill having not less than one month to maturity
Inflation, measured by the Consumer Price Index for all Urban Consumers, not
seasonably adjusted, since January, 1978 and by the Consumer Price Index
before then. The stock capital markets may be contrasted with the corporate
bond and U.S. government securities capital markets. Unlike an investment
in stock, an investment in a bond that is held to maturity provides a
fixed rate of return. Bonds have a senior priority to common stocks in the event
the issuer is liquidated and interest on bonds is generally paid by the issuer
before it makes any distributions to common stock owners. Bonds rated in the two
highest rating categories are considered high quality and present minimal risk
of default. An additional advantage of investing in U.S. government bonds and
Treasury bills is that they are backed by the full faith and credit of the U.S.
government and thus have virtually no risk of default. Although government
securities fluctuate in price, they are highly liquid.
The tables below provide performance results for each Sub-Account through
December 31, 1995. The results shown in this section are not an estimate or
guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Contract Owner. Moreover, the
performance information for four of the Sub-Accounts (MSIF, MAF, MGSF and CAF)
reflects the investment experience of the Eligible Funds previously available
under the Variable Account. The Funds of the SteinRoe Trust replaced these other
mutual funds as the Eligible Funds beginning January 1, 1989. These other funds
had a different investment adviser (Keystone Custodian Funds, Inc.) than the
SteinRoe Trust (Stein Roe & Farnham, Incorporated). See Appendix B of the
prospectus. The performance information for the same four Sub-Accounts also
reflects historical asset-based charges for the period before May 1, 1989 that
are at a lower level than the current asset-based charges.
Average Annual Total Return for a Contract that is Surrendered and for a
Contract that Continues
The first section of the following table was calculated using the method
prescribed by the Securities and Exchange Commission. It illustrates each Sub-
Account's average annual total return over the periods shown assuming a single
$1,000 initial purchase payment and the surrender of the contract at the end of
each period. The Sub-Account's average annual total return is the annual rate
that would be necessary to achieve the ending value of an investment kept in the
Sub-Account for the period specified.
Each calculation assumes that the $1,000 initial purchase payment was allocated
to only one Sub-Account and no transfers or additional purchase payments were
made. The rate of return reflects all charges assessed against a Contract and
the Sub-Account except for any premium taxes that may be payable. The charges
reflected are: a Contingent Deferred Sales Charge that applies when the
hypothetical Contract is surrendered; the annual 1.25% Mortality and Expense
Risk Charge; for any period on or after May 1, 1989, the annual 0.15% sales
charge; and, on an allocated basis, the Contract's Contract Maintenance
Charge that is deducted at the end of each year and upon surrender. The
Contingent Deferred Sales Charge used in the calculations for a particular
Sub-Account is equal to the percentage charge in effect at the end
of the period multiplied by: the assumed $1,000 payment less any amount of that
payment that is free of Contingent Deferred Sales Charge under the Contract's
surrender provisions. The percentage charge declines from 7% to 1% over 7 years
by 1% per year. The Contract Maintenance Charge used in the calculations for a
particular Sub-Account is equal to a dollar and time-weighted average for that
Sub-Account based on a yearly charge of $30 for the portion of the period shown
that is before 7/1/94 and $36 for any later portion of that period. A particular
Sub-Account's prorated portion is then equated to a $1,000 basis by multiplying
it by a fraction equal to $1,000 divided by the average Contract Value in that
Sub-Account during the period shown.
The second section of the table was calculated in the same manner as the first
except no Contingent Deferred Sales Charge was deducted since it is assumed the
Contract continues through the end of each period.
If the current charges under the Contracts had been in effect during the period
before May 1, 1989, any total return percentage that includes a period before
May 1, 1989 would be lower than the percentage shown since current Accumulation
Unit values reflect additional asset-based charges of .15% (i.e., total asset-
based charges of 1.40% rather than 1.25%).
<TABLE>
<CAPTION>
Average Annual Total Return for a Average Annual Total Return for a
Contract Surrendered on 12/31/95 Contract Still in force on 12/31/95
Hypothetical $1,000 Purchase Payment* Hypothetical $1,000 Purchase Payment*
Length of Investment Period Length of Investment Period
Sub- One Five Ten Since Contract One Five Ten Since
Contract
Account Year Years Years Inception Shown Year Years Years Inception
Shown
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MSIF 8.12% 6.16% N/A 6.40%(10/27/86) 14.12% 6.48% N/A
6.40%(10/27/86)
MAF 17.68 10.93 9.9 10.93(5/14/85) 23.68 11.20 9.92 10.93
(5/14/85)
MGSF 29.79 14.53 N/A 10.77(5/26/87) 35.79 14.76 N/A 10.77
(5/26/87)
CAF 4.15 17.35 10.83 11.10 (5/16/85) 10.15 17.56 10.82 11.10
(5/16/85)
CKUF 27.27 N/A N/A 3.92 (7/1/93) 33.27 N/A N/A 5.78
(7/1/93)
CKGIF 22.32 N/A N/A 9.66 (7/1/93) 28.32 N/A N/A 11.38
(7/1/93)
CKIFG -1.25 N/A N/A -4.93 (5/3/94) 4.38 N/A N/A -1.68
(5/3/94)
CKUSFG 21.90 N/A N/A 17.17 (7/6/94) 27.90 N/A N/A 20.86
(7/6/94)
CKSIF 10.66 N/A N/A 7.26 (7/14/94) 16.66 N/A N/A 11.18
(7/14/94)
NKTF N/A N/A N/A 7.45**(5/1/95) N/A N/A N/A
14.45**(5/1/95)
</TABLE>
* Expense reimbursement was applicable to MSIF beginning January 1, 1989 to the
extent expenses, including management fees, exceeded 1.00% of average annual
assets. See footnote 4 on page 6 of the prospectus for the expense reimbursement
percentages applicable to MSIF and the other Funds of the SteinRoe Trust
beginning May 1, 1993. See footnote 3 on page 5 of the prospectus for the
expense reimbursement applicable to the Keyport Trust Funds beginning July 1,
1993; CKSIF was at 1.00% before May 1, 1995 when it decreased to .80%. The
return percentages shown would be lower without this expense reimbursement.
** These are non-annualized returns since these Sub-Accounts have been in
existence for less than one year.
Change in Accumulation Unit Value
The following performance information illustrates the average annual change and
the actual annual change in Accumulation Unit values for each Sub-Account and is
computed differently than the standardized average annual total return
information.
A Sub-Account's average annual change in Accumulation Unit values is the
annualized rate at which the value of a Unit changes over the time period
illustrated. A Sub-Account's actual annual change in Accumulation Unit values is
the rate at which the value of a Unit changes over each 12-month period
illustrated. These rates of change in Accumulation Unit values reflect the
Contract's annual 1.25% Mortality and Expense Risk Charge and for any period on
or after May 1, 1989, the annual .15% sales charge. They do not reflect
deductions for any Contingent Deferred Sales Charge, Contract Maintenance
Charge, and premium taxes. The rates of change would be lower if these charges
were included.
If the current charges under the Contract had been in effect during the period
before May 1, 1989, any change percentage that includes a period before May 1,
1989 would be lower than the percentage shown since current Accumulation Unit
values reflect additional asset-based charges of .15% (i.e., total asset-based
charges of 1.40% rather than 1.25%).
<TABLE>
<CAPTION> Average Annual Change
In Accumulation Unit 12-Month Period Change
Value From Contract in Accumulation Unit Value**
Sub- Inception Shown
Account through 12/31/95** 1986 1987 1988 1989 1990 1991 1992 1993
1994 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
MSIF 6.41%(10/27/86) 1.84%* -0.01%* 5.79% 11.46% 7.59% 12.90% 4.49%
4.79% -2.93% 14.15
MAF 10.96 (5/14/85) 17.56 0.88 7.87 21.16 -2.11 26.17 6.04 7.78
-4.52 23.75
MGSF 10.79 (5/26/87) N/A -7.98* 4.71 29.71 -3.04 45.98 5.16 3.52
-7.64 35.84
CAF 11.12 (5/16/85) 8.60 -9.06 8.71 29.45 -10.29 35.36 12.90 33.80
-0.21 10.21
CKUF 5.00 (7/1/93) N/A N/A N/A N/A N/A N/A N/A
- -2.38* -11.51 33.29
CKGIF 11.40 (7/1/93) N/A N/A N/A N/A N/A N/A N/A
4.28* -2.12 28.34
CKIFG -1.67 (5/3/94) N/A N/A N/A N/A N/A N/A N/A N/A
-6.86* 4.39
CKUSFG 20.86 (7/6/94) N/A N/A N/A N/A N/A N/A N/A N/A
3.69* 27.91
CKSIF 11.18 (7/14/94) N/A N/A N/A N/A N/A N/A N/A N/A
0.14* 16.67
NKTF 14.45* (5/1/95) N/A N/A N/A N/A N/A N/A N/A N/A
N/A 14.45*
</TABLE>
* Percentage of change is for less than 12 months; it is for the period from the
inception date shown in the second column to the end of the year.
** Expense reimbursement was applicable to MSIF beginning January 1, 1989 to the
extent expenses, including management fees, exceeded 1.00% of average annual
assets. See footnote 4 on page 6 of the prospectus for the expense reimbursement
percentages applicable to MSIF and the other Funds of the SteinRoe Trust
beginning May 1, 1993. See footnote 3 on page 5 of the prospectus for the
expense reimbursement applicable to the Keyport Trust Funds beginning July 1,
1993; CKSIF was at 1.00% before May 1, 1995 when it decreased to .80%. The
return percentages shown would be lower without this expense reimbursement.
Yields for CIF and CIF-DCA Sub-Accounts
Yield and effective yield percentages for the CIF and CIF-DCA Sub-Accounts are
calculated using the method prescribed by the Securities and Exchange
Commission. Both yields reflect the deduction of the annual 1.40% asset-based
Contract charges (this deduction is not applicable to the CIF-DCA Sub-Account
and accounts for the CIF-DCA Sub-Account yields being higher than the CIF
yields). Both yields also reflect, on an allocated basis, the Contract's annual
$36 Contract Maintenance Charge. Both yields do not reflect Contingent Deferred
Sales Charges and premium taxes. The yields would be lower if these charges were
included. The following are the standardized formulas:
Yield equals: (A - B - 1) X 365
C 7
Effective Yield Equals: (A - B)365/7 - 1
C
Where:
A = the Accumulation Unit value at the end of the 7-day period.
B = hypothetical Contract Maintenance Charge for the 7-day period. The assumed
annual CIF charge is equal to the $36 Contract charge multiplied by a
fraction equal to the average number of Contracts with CIF Sub-Account
value during the 7-day period divided by the average total number of
Contracts during the 7-day period. This annual amount is converted to a
7-day charge by multiplying it by 7/365. It is then equated to an
Accumulation Unit size basis by multiplying it by a fraction equal to the
average value of one CIF Accumulation Unit during the 7-day period divided
by the average Contract Value in CIF Sub-Account during the 7-day period.
The assumed annual CIF-DCA charge is similarly calculated using CIF-DCA
data.
C = the Accumulation Unit value at the beginning of the 7-day period.
The yield formula assumes that the weekly net income generated by an investment
in the CIF or CIF-DCA Sub-Account will continue over an entire year. The
effective yield formula also annualizes seven days of net income but it assumes
that the net income is reinvested over the year. This compounding effect causes
effective yield to be higher than the yield.
For the 7-day period ended 12/31/95, the yield for the CIF Sub-Account was 3.91%
and the effective yield was 3.99%. For the CIF-DCA Sub-Account the yield was
5.31% and the effective yield was 5.45%.
Independent Auditors' Report
The Board of Directors
Keyport Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Keyport Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Keyport Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 2(b) to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, effective January 1, 1994.
February 16, 1996 /s/KPMG Peat Marwick LLP
KEYPORT LIFE INSURANCE COMPANY
Consolidated Balance Sheets
(in thousands)
Assets December 31,
1995 1994
Cash and investments:
Fixed maturities available for sale (amortized cost:
1995 - $9,227,834; 1994 - $6,795,065) $ 9,535,948 $ 6,509,815
Fixed maturities held to maturity (fair value:
1995 - $0; 1994 - $1,442,665) - 1,448,680
Equity securities (cost: 1995 - $17,521;
1994 - $13,627) 25,214 12,941
Mortgage loans 74,505 129,452
Policy loans 498,326 477,293
Other invested assets 10,748 11,994
Cash and cash equivalents 777,384 684,618
Total cash and investments 10,922,125 9,274,793
Accrued investment income 132,856 111,936
Deferred policy acquisition costs 179,672 439,232
Value of insurance in force 43,939 139,221
Deferred federal income taxes - 42,361
Intangible assets 20,314 21,444
Federal income taxes recoverable 9,205 4,911
Other assets 11,859 10,772
Separate account assets 959,224 828,934
Total assets $12,279,194 $10,873,604
Liabilities and Stockholder's Equity
Policy liabilities:
Policyholder account balances $10,073,806 $ 9,333,755
Other policyholders' funds 10,586 10,289
Total policy liabilities 10,084,392 9,344,044
Current federal income taxes 7,666 -
Deferred federal income taxes 32,823 -
Payable for investments purchased and loaned 317,715 -
Guaranty association fees 21,940 24,688
Other liabilities 23,221 57,978
Separate account liabilities 889,106 764,409
Total liabilities 11,376,863 10,191,119
Stockholder's equity:
Common stock, $1.25 par value; authorized 8,000
shares; issued and outstanding 2,412 shares 3,015 3,015
Additional paid-in capital 505,933 505,933
Net unrealized investment gains (losses) 85,772 (64,464)
Retained earnings 307,611 238,001
Total stockholder's equity 902,331 682,485
Total liabilities and stockholder's equity $12,279,194 $10,873,604
See accompanying notes to consolidated financial statements.
KEYPORT LIFE INSURANCE COMPANY
Consolidated Income Statements
Year Ended December 31
1995 1994 1993
Revenues:
Net investment income $757,361 $689,575 $669,667
Insurance revenues 29,767 25,273 18,158
Net realized investment gains (losses) (3,958) (8,220) 11,403
Total revenues 783,170 706,628 699,228
Benefits and expenses:
Interest credited to policyholders 557,156 481,926 504,205
Policy benefits 4,448 4,838 3,113
Operating expenses 42,475 47,095 36,983
Guaranty association expenses 2,000 7,200 3,714
Amortization of deferred policy acquisition costs 58,541 52,174 41,003
Amortization of value of insurance in force 9,479 16,989 22,375
Amortization of intangible assets 1,130 1,130 1,130
Total benefits and expenses 675,229 611,352 612,523
Income before federal income taxes 107,941 95,276 86,705
Federal income tax expense 38,331 32,051 28,710
Net income $ 69,610 $ 63,225 $ 57,995
See accompanying notes to consolidated financial statements.
<TABLE>
KEYPORT LIFE INSURANCE COMPANY
Consolidated Statements of Stockholder's Equity
(in thousands)
<CAPTION Net
Unrealized
Additional Investment
Common Paid-In Gains Retained
Stock Capital (Losses) Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $1,508 $430,933 $ 5,687 $118,288
$556,416
Net income 57,995
57,995
Capital contribution by parent 75,000
75,000
Change in net unrealized
investment gains (losses) (5,141)
(5,141)
Balance, December 31, 1993 1,508 505,933 546 176,283
684,270
Net income 63,225
63,225
Common stock dividend 1,507 (1,507) -
(1,206 shares)
Change in net unrealized
investment gains (losses) (65,010)
(65,010)
Balance, December 31, 1994 3,015 505,933 (64,464) 238,001
682,485
Net income 69,610
69,610
Change in net unrealized
investment gains (losses) 150,236
150,236
Balance, December 31, 1995 $3,015 $ 505,933 $ 85,772 $307,611
$902,331
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
KEYPORT LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION> Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 69,610 $ 63,225 $
57,995
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to policyholders 557,156 478,797
501,073
Net realized investment losses (gains) 3,958 8,220
(11,403)
Amortization of value of insurance in force
and intangible assets 10,609 18,120
23,505
Net amortization (accretion) on investments 9,688 12,215
(3,132)
Change in deferred policy acquisition costs (24,630) (38,852)
(50,531)
Change in current and deferred federal
income taxes 1,953 7,731
10,988
Change in guaranty association fees (2,748) 140
(3,669)
Net change in other assets and liabilities (61,058) (13,729)
(102)
Total adjustments 494,928 472,642
466,729
Net cash provided by operating
activities 564,538 535,867
524,724
Cash flows from investing activities:
Investments purchased - held to maturity -
(277,626)(2,674,315)
Investments purchased - available for sale (2,851,013) (2,624,493) -
Investments sold - held to maturity 14,930 10,637
97,816
Investments sold - available for sale 605,197 950,885
387,305
Investments matured - held to maturity 317,773 576,021
1,195,083
Investments matured - available for sale 906,522 854,441
758,279
Increase in policy loans (21,033) (35,143)
(38,661)
Decrease in mortgage loans 54,947 26,520
3,416
Acquisition of subsidiary, net of cash acquired - (961)
(24,831)
Net cash used in investing activities (972,677) (519,719)
(295,908)
Cash flows from financing activities:
Withdrawals from policyholder accounts (933,785)
(1,034,464)(1,295,617)
Deposits to policyholder accounts 1,116,975 1,202,076
856,339
Capital contribution by parent - -
75,000
Securities lending 317,715 - -
Net cash provided by (used in)
financing activities 500,905 167,612
(364,278)
Change in cash and cash equivalents 92,766 183,760
(135,462)
Cash and cash equivalents at beginning of year 684,618 500,858
636,320
Cash and cash equivalents at end of year $ 777,384 $ 684,618 $
500,858
</TABLE>
See accompanying notes to consolidated financial statements.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(in thousands)
(1) Organization
Keyport Life Insurance Company offers a diversified line of fixed and
variable annuity products designed to serve the growing retirement savings
market. These annuity products primarily consist of single premium deferred
and variable annuities that are sold through a wide ranging network of banks,
agents, and securities dealers.
The consolidated financial statements include Keyport Life Insurance Company
and its wholly owned subsidiaries, Independence Life and Annuity Company
("Independence Life"), Keyport Advisory Services Corporation, and Keyport
Financial Services Corporation (collectively, the "Company"). The Company is
a wholly owned subsidiary of Stein Roe Services Incorporated ("Stein Roe").
Stein Roe is a wholly owned subsidiary of Liberty Financial Companies,
Incorporated ("Liberty Financial") which is a majority-owned Insurance
Company ("Liberty Mutual").
(2) Summary of Significant Accounting Policies
(a) Basis of Reporting and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could subsequently differ from such
estimates. All significant intercompany transactions and balances have been
eliminated.
(b) Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 , "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). SFAS 115 segregates fixed maturity
investments into three classifications: "held to maturity", "trading" and
"available for sale." Securities may be designated as held to maturity only
if there is the positive intent and ability to hold these securities to
maturity. Held to maturity securities are carried at amortized cost. Securities
purchased for short-term resale are classified as trading and are carried at
fair value. Unrealized gains and losses on trading account securities are
recognized in income. Fixed maturity investments are classified as available
for sale if they might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, general liquidity needs, or other
factors. Available for sale securities ar carried at fair value and unrealized
gains and losses (net of related adjustments to deferred policy acquisition
costs, value of insurance in force and deferred income taxes) are recorded
directly to stockholder's equity. Equity securities ar classified as available
for sale and are carried at fair value. Unrealized gains and losses on equity
securities ar credited or charged directly to stockholder's equity net of
applicable deferred income taxes.
Accordingly, as of January 1, 1994, the Company reclassified certain fixed
maturity investments from the held to maturity to the available for sale
category to conform to the classification criteria prescribed in SFAS 115.
This had the effect of recording a net unrealized gain of $41,614 directly
to stockholder's equity.
As of December 31, 1995, pursuant to a Guide to Implementation of SFAS 115
issued by the Financial Accounting Standards Board in November 1995, the
Company made a one-time reclassification from fixed maturities held to
maturity to fixed maturities available for sale. This had the effect of
recording a net unrealized gain of $13,867 directly to stockholder's equity.
The Company enters into dollar roll transactions to enhance the yield of its
mortgage backed portfolio. Dollar roll transactions represent a one month
reverse repurchase agreement involving mortgage backed securities, frequently
those issued by a U.S. Government Agency. Dollar roll transactions under
which substantially the same securities are received at the end of the
repurchase period are accounted for as financing arrangements. Accordingly,
both the collateral and repurchase liability are reflected on the balance sheet
and the transaction fee is recorded over the period of the agreement. As of
December 31, 1995, the Company was engaged in one dollar roll agreement
classified as a financing arrangement involving a FNMA mortgage backed security
with market value of $87,198. The Company did not enter into dollar roll
agreements during 1994.
The Company from time to time engages in securities lending under which it
lends certain U.S. Government and corporate bonds to approved counterparties
to enhance the yield of its bond portfolio. The carrying values of the loaned
securities are unaffected by the transaction, and the lending fee is recorded
during the period the securities are loaned. The Company records the
collateral received for the security lending transaction as an asset and its
obligation to return the collateral at the end of the transaction as a
liability. As of December 31, 1995, the Company had recorded an asset, and a
corresponding liability of $230,517 for cash pledged as collateral. The
Company did not enter into any securities lending transactions in 1994.
Fixed maturities and mortgage loans with premiums and discounts are amortized
using the interest method. Unamortized premiums and discounts on mortgage
backed securities are amortized using the interest method over the estimated
remaining term of the securities, adjusted for anticipated prepayments.
Policy loans are carried at the unpaid principal balance plus accrued
interest. Cash and cash equivalents are carried at cost, which approximates
market.
Realized investment gains and losses are calculated on a first-in, first-out
basis. For each investment security where a decline in value is determined to
be other than temporary, the Company's policy is to write down the investment
security to fair value with the charge to realized investment losses. Sales
of securities supporting the Company's single premium deferred annuities and
single premium whole life products result in adjustments to the amortization
of the deferred policy acquisition costs and the value of insurance in force.
The increase or decrease in amortization relating to such adjustments is
included in realized investment gains and losses to reflect the acceleration or
delay in the incidence of the estimated gross profits.
(c) Derivative Financial Instruments
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" ("SFAS 119"). SFAS 119
requires specific disclosures about derivative financial instruments such as
forward, swap and option contracts and requires distinguishing between
financial instruments held or issued for trading purposes and financial
instruments held or issued for purposes other than trading.
As part of the Company's overall risk management policy, the Company uses
interest rate swaps and interest rate caps. Interest rate swaps are used to
reduce the risk in a rising interest rate environment by providing additional
investment income to cover higher competitive credited rates to policy-
holders to reduce the invested asset duration, and to better match the
interest rates earned on invested assets with those interest rates credited
to policyholders. Interest rate swaps are considered synthetic alterations
since the objective of the swaps is to change the characteristics of the
underlying invested assets to reduce the impact of rising interest rates. Since
interest rate swaps are designated as synthetic alterations of securities
available for sale, interest rate swaps are carried at fair value for those
securities, and the unrealized gain or loss is included in stockholder's
equity.
The net differential to be paid or received on interest rate swaps is
recorded monthly in investment income as interest rates change. From time to
time, swap positions may be terminated. If the terminated swap was accounted
for as a hedge, realized gains or losses are amortized over the remaining
life of the swap. Conversely, if the terminated swap was not accounted for as
a hedge, or the assets and liabilities that were altered no longer exist, the
swap position is marked to market, and realized gains or losses are immediately
recognized in income. The Company is exposed to potential credit loss in the
event of nonperformance by the counterparty to the interest rate swap
agreements with respect to only the net differential payments.
Interest rate caps are used to minimize exposure to rising interest rates.
The Company receives payments when the indexed rate exceeds the stated strike
rate. The cost of interest rate caps is amortized on a straight-line basis
over the period to maturity. Since interest rate caps are designed as
synthetic alterations of securities available for sale, interest rate caps
are carried at fair value and the unrealized gain or loss is included in
stockholder's equity.
The Company also utilizes derivative financial instruments to replicate
positions in a trading portfolio of pass-through mortgage backed securities.
As a result, these derivative financial instruments are classified as trading
instruments and are recorded at fair value. Realized and unrealized changes
in fair value are recognized in realized investment gains and losses.
Interest income arising from these trading instruments is included in net
investment income.
(d) Recognition of Insurance Revenues and Policy Benefits
Revenues from single premium whole life policies and single premium deferred
annuities include mortality charges, surrender charges, policy fees and
contract fees and are recognized when assessed. Policyholder account balances
consist of deposits received plus credited interest, less accumulated policy-
holder charges, assessments, and withdrawals. Policy benefits that are
charged to expenses include benefit claims incurred in the period in excess
of related policy account balances. Interest crediting rates ranged from 3.60%
to 8.35%, 3.75% to 8.50%, and 3.75% to 8.90% at December 31, 1995, 1994, and
1993, respectively.
(e) Deferred Policy Acquisition Costs and Value of Insurance in Force
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. These
costs are deferred to the extent they are deemed recoverable from future
gross profits. Such costs include commissions, costs of policy issuance and
underwriting, and variable agency expenses. Costs deferred are amortized in
relation to the present value of estimated gross profits from mortality,
investment and expense margins. Amortization of such cost is adjusted to
reflect the effect of differences between original assumptions and actual
experience.
Value of insurance in force represents the actuarially-determined present
value of projected future profits from policies in force at the date of their
acquisition. This amount is amortized in proportion to the projected
emergence of profits over periods not exceeding fifteen years for annuities
and twenty-five years for life insurance.
Deferred policy acquisition costs and value of insurance in force are
adjusted to reflect the amounts associated with realized and unrealized
investment gains and losses pertaining to single premium deferred annuities
and single premium whole life products.
(f) Intangible Assets
Intangible assets consist primarily of goodwill. Goodwill is the excess of
the purchase price over the fair value of the net assets acquired by Liberty
Mutual and is amortized on a straight-line basis over twenty-five years.
(g) Separate Account
Separate account assets, which are carried at fair value, consist principally
of investments in mutual funds and are included as a separate caption in the
consolidated balance sheets. Investment income and changes in asset values
are fully allocated to variable annuity and variable life policyholders and,
therefore, do not affect the operating results of the Company. The Company
provides administrative services and bears the mortality risk related to
these contracts. Fees earned by the Company related to these contracts were
$14,646, $13,694 and $8,489, for the years ended December 31, 1995, 1994 and
1993, respectively. As of December 31, 1995 and 1994, the Company also
classified $72,533 and $64,962, respectively, of its investments in certain
mutual funds sponsored by the Company and its affiliates as separate account
assets.
(h) Federal Income Taxes
Beginning in 1994, the Company is included in Liberty Mutual's consolidated
tax return. The Company calculates its consolidated income tax liability as
if it filed its own consolidated federal income tax return.
(i) Cash and Cash Equivalents
Cash and cash equivalents include short-term investments which have an
original maturity of three months or less from the time of purchase.
(j) Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statement amounts to conform to the current year presentation.
(3) Acquisition
On October 1, 1993, the Company acquired the common stock of Crown America
Life Insurance Company (Crown America), a Michigan insurance company, for
$27,877. The acquisition was accounted for as a purchase and, accordingly,
operating results are included in the accompanying consolidated financial
statements from date of acquisition. In connection with the acquisition, the
Company acquired assets with a fair value of $185,735 and assumed liabilities
of $157,858.
On February 22, 1994, the acquisition was completed with the contingent
purchase price payment of $1,479, which increased the value of insurance in
force.
On December 29, 1993, Crown America was redomesticated to the state of Rhode
Island and, on January 10, 1994, the name was changed to Keyport America Life
Insurance Company. On July 19, 1995, the name was changed to Independence
Life and Annuity Company.
(4) Investments
(a) Fixed Maturities
Fair values of publicly-traded securities are determined using values
reported by an independent pricing service. Fair values of conventional
mortgage backed securities not actively traded in a liquid market are
obtained through broker-dealer quotations. Fair values of private placement
bonds are determined by obtaining market indications from various
broker-dealers. The amortized cost and fair values of investments in fixed
maturities at December 31, 1995 and 1994 were as follows:
December 31,1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U.S. Treasury securities $ 360,157 $ 9,020 $ (209) $ 368,968
Mortgage backed securities of
U.S. government
corporations and agencies 1,585,538 58,795 (5,250) 1,639,083
Obligations of states and
political subdivisions 26,688 1,324 - 28,012
Debt securities issued by
foreign governments 57,446 4,258 - 61,704
Corporate securities 3,479,584 224,332 (7,309) 3,696,607
Other mortgage backed securities 1,951,480 66,530 (71,754) 1,946,256
Asset backed securities 1,543,891 29,823 (1,446) 1,572,268
Senior secured loans 223,050 - - 223,050
Total fixed maturities
available for sale $9,227,834 $394,082 $(85,968) $9,535,948
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Mortgaged backed securities of
U.S. Government
corporations and agencies $ 206,569 $ 8,683 $ (18) $ 215,234
Obligations of states and
political subdivisions 21,452 277 (28) 21,701
Corporate Securities 843,669 14,564 (17,005) 841,228
Other mortgage backed securities 79,164 44 (3,385) 75,823
Asset backed securities 297,826 88 (9,235) 288,679
Total fixed maturities
held to maturity $1,448,680 $23,656 $ (29,671) $1,442,665
Available for sale:
U.S. Treasury securities $ 271,700 $ 2 $ (8,390) $ 263,312
Mortgaged backed securities of
U.S. Government
corporations and agencies 1,238,925 1,244 (76,651) 1,163,518
Obligations of states and
political subdivisions 37,718 433 - 38,151
Debt securities issued by
foreign governments 82,608 1,049 (4,079) 79,578
Corporate securities 2,607,712 17,951 (116,077) 2,509,586
Other mortgage backed securities 1,186,515 14,577 (70,250) 1,130,842
Asset backed securities 1,123,803 654 (45,713) 1,078,744
Senior secured loans 246,084 - - 246,084
Total fixed maturities
available for sale $6,795,065 $35,910 $(321,160) $6,509,815
At December 31, 1995 and 1994, bonds with an amortized cost of $7,710 and
$7,657, respectively, were on deposit with regulatory authorities.
(b) Contractual Maturities
The amortized cost and fair value of fixed maturities for the various
categories at December 31, 1995, by contractual maturity, are set forth
below. Expected maturities may differ from contractual maturities as
borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties.
December 31, 1995
Amortized Fair
Cost Value
Available for sale:
Due in one year or less $ 254,299 $ 256,055
Due after one year through five years 1,503,507 1,564,132
Due after five years through ten years 1,838,679 1,953,542
Due after ten years 550,440 604,612
4,146,925 4,378,431
Mortgage and asset
backed securities 5,080,909 5,157,607
Total fixed maturities
available for sale $9,227,834 $9,535,948
(c) Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) as of December 31, 1995 and 1994
were as follows:
December 31
1995 1994
Fixed maturities available for sale:
Gross unrealized gains $ 394,082 $ 35,910
Gross unrealized losses (85,968) (321,160)
308,114 (285,250)
Adjustments for:
Deferred acquisition costs (151,351) 135,059
Value of insurance in force (32,459) 53,344
Total fixed maturities 124,304 (96,847)
Equity securities and investments in separate account:
Gross unrealized gains 16,927 1,932
Gross unrealized losses (1,980) (4,261)
Total equity securities 14,947 (2,329)
Interest rate caps (7,294) -
131,957 (99,176)
Deferred federal income taxes (46,185) 34,712
Net unrealized investment gains (losses) $ 85,772 $ (64,464)
(d) Net Investment Income
Net investment income is summarized as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities $683,429 $635,947 $619,847
Equity securities 4,807 2,132 2,368
Mortgage loans 12,444 15,416 17,252
Policy loans 28,485 26,295 22,766
Cash and cash equivalents 41,643 20,727 18,551
Gross investment income 770,808 700,517 680,784
Investment expenses (13,447) (10,942) (11,117)
Net investment income $757,361 $689,575 $669,667
As of December 31, 1994, the carrying value of fixed maturity investments
that were non-income producing for the preceding twelve months was $4,967.
There were no non-income producing fixed maturity investments as of December
31, 1995.
(e) Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities - held to maturity
Gross gains $ 1,306 $ 3,493 $ 31,594
Gross losses (64) (755) (3,070)
Other than temporary declines - (7,904) -
Provisions for possible investment losses - - (16,609)
Fixed maturities - available for sale
Gross gains 8,156 26,043 7,097
Gross losses (15,982) (26,831) (6,311)
Other than temporary declines - (3,610) -
Provisions for possible investment losses - - 7,487
Equity securities 1,279 (845) 11,228
Interest rate swaps (860) (28) (16,193)
Interest rate caps - - (6,082)
Other (13) (809) 1,412
Gross realized investment gains (losses) (6,178) (11,246) 10,553
Amortization adjustments:
Deferred policy acquisition costs 2,220 2,675 785
Value of insurance in force - 351 65
Net realized gains (losses) $ (3,958) $ (8,220) $ 11,403
Proceeds from sales of fixed maturities were as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities - available for sale $565,366 $927,779 $313,568
Fixed maturities - held to maturity 14,930 10,637 97,816
Total proceeds $580,296 $938,416 $411,384
The sale of fixed maturities held to maturity during 1995 and 1994 relate to
certain securities, with an amortized cost of $14,994 and $10,630, respectively,
which were sold specifically due to a significant deterioration
in the issuer's creditworthiness.
(f) Concentration of Investments
Investments in a single entity (all of which are fully collateralized and
guaranteed by an agency or agencies of the U.S. Government) in excess of ten
percent of total stockholder's equity as of December 31, 1995 and 1994 were
as follows:
Carrying Value at
December 31,
1995 1994
Mortgage backed securities
FNMA Pool #303075 $134,884 $125,212
Morgan Stanley CMO (33-5) 108,051 101,832
FNMA Pool #303074 105,832 98,470
Investments in fixed maturities are diversified among more than one hundred
industries. Significant concentrations of credit risk are classified as
follows:
Carrying Value at
December 31,
1995 1994
Financial services $547,872 $539,537
Telecommunications 324,029 276,559
Banks 323,579 247,514
Electrical services 271,822 437,339
Oil and gas 261,161 274,026
Paper products 205,889 146,472
Retail 197,064 247,874
Transportation equipment 168,588 146,593
Credit institutions - 173,565
Food and beverage - 151,758
(g) Quality Ratings
The carrying values of publicly traded and privately placed fixed maturities
at December 31, 1995 represented by each quality ratings category were as
follows:
Carrying Value at December 31, 1995
Publicly Privately
Traded Placed Total
Investment grade:
U.S. government $ 368,969 - $ 368,969
Class 1 4,996,275 $1,480,089 6,476,364
Class 2 982,096 896,673 1,878,769
Total Investment grade 6,347,340 2,376,762 8,724,102
Below investment grade:
Class 3 317,131 147,517 464,648
Class 4 201,718 123,032 324,750
Class 5 - 22,448 22,448
Total below investment grade 518,849 292,997 811,846
Total fixed maturities $6,866,189 $2,669,759 $9,535,948
The Company held no securities rated Class 6 at December 31, 1995.
Securities that are rated class 1 or 2 by the Securities Valuation Office of
the National Association of Insurance Commissioners (NAIC), or, if not so rated,
securities that are rated "BBB-" or above by S&P, or "Baa3" or above by Moody's
(using the lower of the S&P or Moody's rating) are considered "investment grade"
securities. Securities included in the U.S. government category in the preceding
table are those as defined by the NAIC.
The distribution of fixed maturities quality ratings were as follows:
December 31,
1995 1994
Class 1 (including U.S. government) 71.8% 72.3%
Class 2 19.7% 19.9%
Class 3 4.9% 5.6%
Class 4 3.4% 2.0%
Class 5 0.2% 0.2%
(h) Derivative Financial Instruments
The Company's primary objective in acquiring certain derivative financial
instruments is the management of interest rate risk. Interest rate risk results
from a mismatch in the timing and amount of invested asset and policyholder
liability cash flows. The Company seeks to manage this risk through various
asset/liability management strategies such as the setting of renewal rates and
by investment portfolio actions designed to address the interest rate
sensitivity of asset cash flows in relation to liability cash flows. Portfolio
actions used to manage interest rate risk include managing the effective
duration of portfolio securities and utilizing interest rate swaps and caps.
Interest rate swaps
The Company uses a combination of three distinct classes of interest rate swaps
to reduce interest rate risk. The following table summarizes the categories of
swaps used, their notional amounts, their weighted average interest rates as of
the reporting period date, and their effects on the consolidated balance sheets
and statements of income. The majority of swaps mature beginning in 1999
through 2001. The fair values of the interest rate swaps are primarily obtained
from dealer quotes. These values represent the estimated amounts the Company
would receive or pay to terminate the contracts, taking into account current
interest rates and, when appropriate, the current creditworthiness of the
counterparties.
December 31,
1995 1994
Interest rate swaps:
(1) Pay fixed, receive variable rate - notional amount $1,975,000 $775,000
Average pay rate 6.79% 7.19%
Average receive rate 5.88% 7.61%
Amount included in net investment income $ (2,751) $ (1,213)
Fair value $ (64,124) $ 27,587
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale $ (64,124) $ 27,587
Deferred loss - included in fixed maturities
available for sale $ (3,662) -
(2) Pay variable, receive variable rate - notional amount - $300,000
Average pay rate - 5.85%
Average receive rate - 6.42%
Amount included in net investment income $ (1,251) $ 6,781
Fair value - $(14,550)
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale - $(14,550)
Deferred loss - included in fixed maturities
available for sale $ (6,952) -
(3) Srpead lock swap - notional amount - $150,000
Seven year spread - 0.34%
Amount included in net investment income $ 746 -
Fair value - $ 731
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale - $ 731
1) The Company had thirty-six interest rate swap contracts with a notional
amount $1,975,000 and twenty contracts with a notional amount of $775,000 as of
December 31, 1995 and 1994, respectively, on which it pays a fixed rate of
interest and receives variable rates based on the two, five, and ten year
"constant maturity" treasury or swap rate. The variable rates are reset to
current market levels at six month intervals. The objective of holding this
class of derivatives is to reduce invested asset duration and better match the
interest rates earned on medium to long-term (grater thatn two year maturity)
fixed rate assets with the interest rates credited to policyholders. The
Company has medium to long-term invested assets of approximately $8,624,000 and
$5,600,000 in 1995 and 1994, respectively. For the majority of new and existing
single premium deferred annuities, credited rates are reset annually. In
addition, rates credited on annuity policies are closely correlated with longer
term interest rates, e.g., five or ten year market interest rates. This
derivative class allows the Company to swap the fixed interest rates received
on the medium to long-term fixed rate invested assets for a variable rate
which is better correlated with rates credited to policyholders. This reduces
the Company's risk in rising interest rate environments by providing investment
income to cover higher competitive credited rates.
2) In 1994, the Company had six interest rate swaps contracts with a notional
amount of $300,000 on which it paid a variable rate of interest based on the
six month LIBOR and received a variable rate based on the ten year swap rate
minus 1.50%. The objective of holding this class of derivatives is to better
match the interest rates earned on short term and floating rate assets with the
interest credited to policyholders. The Company had approximately $850,000 of
invested assets where the Company received interest income based on interest
rates closely correlated with short-term LIBOR. This derivative class allowed
the Company to swap variable interest income received on short term and floating
rate assets for a variable rate which was better correlated with rates credited
to policyholders.
During 1995, certain swaps were sold as part of the Company's overall tax
planning strategy. The Company unwound one pay fixed and six pay variable
interest rate swap contracts with a notional amount of $350,000. In 1992 the
Company unwound 3 contracts with a notional amount of $300,000. The resulting
loss of $10,691 in 1995 and the gain of $16,230 in 1992 were deferred and
amortized over the original remaining terms of the contracts, in accordance with
hedge accounting. The following table summarizes the deferred gain (loss)
amounts included in the consolidated balance sheet and the expected recognition
of income by year:
December 31,
1995 1994
Amounts expected to be includes in net
invested income:
Within one year $ (1,861) $ 4,720
Within one to five years (7,862) 891
Total $ (9,723) $ 5,611
During 1993, the Company unwound interest rate swap contracts with a notional
amount of $200,000. The swaps were unwound when the associated liabilities no
longer existed, resulting in a loss of $16,193, which was recognized
immediately.
3) In 1993, the Company entered into a $150,000 notional "spread lock" that
terminated in 1995. The Company received/(paid) the present value of the
seven year swap if corporate spreads widened/(compressed) above/(below) the
seven year swap spread of 26 basis points based on the 7.5% U.S. Treasury note
maturing November 15, 2001. As the result of the termination, the Company
recognized income of $746 during 1995. The objective of this derivative was to
reduce the exposure of the Company's fixed maturity investments to widening
corporate spreads. The value of the company's corporate bond portfolio decreased
as corporate spreads widened. The Company's spread lock swap increased in value
as spreads widened and thus reduced the Company's risk.
Interest rate caps
The Company had seven interest rate caps with a $450,000 notional amount and
six interest rate caps with a $400,000 notional amount as of December 31, 1995
and 1994, respectively. These contracts are indexed to either the three month
LIBOR, or to the two or five year constant maturity swap (CMS) rates. Under
these contracts, the Company has paid a premium for the right to receive
payments when the index rises above a predetermined level, i.e., the strike
rate. The objective of holding these derivatives is to reduce the Company's
risk in rising interest rate environments by providing additional investment
income to cover higher competitive interest credited rates on policy
liabilities.
The following table summarizes the interest rate caps, their notional amounts,
their weighted average strike and index rates as of the reporting period date,
and their effects on the consolidated balance sheets and income statements. The
majority of caps mature in 1997 and 1999. The fair values of the interest rate
caps are obtained from dealer quotes. These values represent the estimated
amounts the Company would receive or pay to terminate the contracts, taking into
account current interest rates and, when appropriate, the current credit-
worthiness of the counterparties.
December 31,
1995 1994
Interest rate caps:
Index: three month LIBOR - notional amount $ 200,000 $200,000
Weighted average strike rate 8.50% 8.50%
Weighted average current index 5.63% 6.44%
Amortization expense included in net investment income $ (648) $ (649)
Fair value $ 46 $ 2,698
Carrying value $ 1,254 $ 1,903
Unrealized gain (loss) included in fixed maturities AFS $ (1,208) $ 795
Index: two year CMS - notional amount $ 150,000 $100,000
Weighted average strike rate 7.60% 7.25%
Weighted average current index 5.28% 7.91%
Amortization expense included in net investment income $ (1,305) $ (144)
Fair Value $ 1,001 $ 4,930
Carrying value $ 5,269 $ 5,001
Unrealized gain (loss) included in fixed maturities AFS $ (4,268) $ (71)
Index: five year CMS - notional amount $ 100,000 $100,000
Weighted average strike rate 8.26% 7.93%
Weighted average current index 5.66% 7.83%
Amortization expense included in net investment income $ (564) $ (38)
Fair value $ 414 $ 2,806
Carrying value $ 2,232 $ 2,800
Unrealized gain (loss) included in fixed maturities AFS $ (1,818) $ 6
During 1993, the Company sold interest rate caps with notional amounts of
$300,000, resulting in realized losses of $4,082. In 1993, due to an other than
temporary decline in value, the Company reduced the carrying value of the
remaining interest rate caps by $2,000 resulting in a realized loss.
Trading Instruments
During 1995, a $50,000 notional current coupon mortgage swap matured. The
Company paid a total return of a seven year swap to receive the total return of
a current coupon, thirty year FNMA pass-through mortgage backed security plus
.40%. The swap reset to market levels at two month intervals. The objective
of the strategy was to replicate a position in FNMA pass-throughs with an
enhanced return.
The following table summarizes the current coupon mortgage swap and the effects
on the consolidated balance sheets and income statements. The swap matured in
1995. The fair value represents the estimated amount the Company had paid to
terminate the contracts in 1994, taking into account current interest rates and,
when appropriate, the current creditworthiness of the counterparties.
December 31,
1995 1994
Current coupon mortgage swap:
Notional amount - $ 50,000
Pay rate at reporting date - 8.05%
Receive rate at reporting date - 8.90%
Amount included in net investment income - $ 455
Amount included in net realized investment gains (losses) $ (860) $ (28)
Fair value - $ 153
(5) Fair Value of Financial Instruments
Estimated fair values of the Company's investments in fixed maturities, equity
securities and derivative financial instruments are set forth in Note 4.
Estimated fair values, methods and assumptions of the Company's other financial
instruments are set forth below.
(a) Mortgage loans
For purposes of estimating fair value, mortgage loans are segregated into
commercial real estate loans and residential mortgages. The fair value of
commercial real estate loans is calculated by discounting scheduled cash flows
through the stated maturity using estimated market rates. The estimated market
rate is based on the five year prime mortgage rate. The fair value of
residential mortgages is estimated by discounting contractual cash flows
adjusted for expected prepayments using an estimated discount rate. The discount
rate is an estimated market rate adjucted to reflect differences in servicing
costs, and the expected prepayments are estimated based upon Company experience.
Morgage loans are summarized as follows:
December 31, 1995
Average Estimated Estimated
Carrying Historical Discount Fair
Value Yield Rate Value
Commercial real estate loans $ 39,500 9,4% 7.5% $ 40,351
Residential mortgages 35,005 13.6% 7.5% 39,346
December 31, 1994
Average Estimated Estimated
Carrying Historical Discount Fair
Value Yield Rate Value
Commercial real estate loans $ 87,000 9.4% 8.3% $ 89,795
Residential mortgages 42,452 13.7% 8.3% 49,003
The weighted average maturities (which may be different from the stated
maturities) for the cash flows used in deriving the estimated fair values for
commercial real estate loans and residential mortgages are 0.3 years and 2.3
years, respectively, at December 31, 1995, and 1.3 years and 2.7 years,
respectively, at December 31, 1994.
(b) Policy Loans
The carrying value of policy loans approximates fair value at December 31, 1995
and 1994.
(c) Policy Liabilities
The fair value of deposit liabilities with no stated maturity is equal to the
amount payable on demand. The Company considers its policy liabilities to be
similar to deposit liabilities.
The carrying value and estimated fair value of the policy liabilities at
December 31, 1995 were $10,084,392 and $9,650,113, respectively. The carrying
value and estimated fair value of the policy liabilities at December 31, 1994
were $9,344,044 and $8,961,971, respectively.
(6) Employee Benefit Plans
Keyport employees and certain employees of Liberty Financial are eligible to
participate in the Liberty Financial Companies, Inc. Pension Plan (the "Plan").
Under the Plan, all employees are vested after five years of service. Benefits
are based on years of service, the employee's average pay for the highest five
consecutive years during the last ten years of employment, and the employee's
estimated social security retirement benefit. The Company's funding policy is to
contribute the minimum required employer contribution under the Employee
Retirement Income Security Act of 1974. The Company may, from time to time,
increase its employer contributions beyond the minimum amount but within IRS
guidelines.
Changes in prior service costs are amortized over the expected future service
periods of active participants expected to receive benefits under the Plan as of
the date such costs are first recognized. Cumulative net actuarial gains and
losses in excess of a corridor amount are amortized over the expected future
service periods of active participants expected to receive benefits under the
Plan.
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated balance sheets. Substantially all of the Plans'
assets are invested in mutual funds sponsored by an affiliated company.
December 31,
1995 1994
Actuarial present value of benefit obligations
Accumulated benefit obligation, including
vested benefits of $6,082 and $4,197 $ 6,915 $ 5,025
Projected benefit obligation for service to date $ 9,185 $ 6,523
Plan assets at fair value (5,703) (4,459)
Projected benefit obligation in excess of Plan assets 3,482 2,064
Unrecognized net actuarial loss (1,740) (227)
Prior service cost not yet recognized in net periodic
pension cost (206) (660)
Accrued pension cost $ 1,536 $ 1,177
Year Ended December 31,
1995 1994 1993
Pension cost includes the following components:
Service cost benefits earned during the period $ 541 $ 532 $ 392
Interest cost on projected benefit obligation 603 534 423
Actual return on Plan assets (999) 63 (185)
Net amortization and deferred amounts 600 (338) (88)
Net periodic pension cost $ 745 $ 791 $ 542
The assumptions used to develop the actuarial present value of the projected
benefit obligation, and the expected long-term rate of return on Plan assets are
as follows:
Years Ended December 31,
1995 1994 1993
Discount rate 7.25% 8.25% 7.25%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
Rate of increase in compensation levels 5.25% 5.25% 5.25%
The Company also provides a savings and investment plan with a matching savings
program containing several investment options for which substantially all
employees are eligible. In addition, the Company has a non-qualified deferred
compensation plan for certain employees.
(7) Deferred Policy Acquisition Costs and Value of Insurance In Force
The amounts of policy acquisition costs deferred and amortized are summarized
below:
Year Ended December 31,
1995 1994 1993
Balance, beginning of year $ 439,232 $ 262,646 $ 211,330
Additions:
Policy acquisition costs deferred during period:
Commissions 70,484 82,626 81,515
Other expenses 12,687 8,400 10,019
Total deferrals 83,171 91,026 91,534
Adjustments for unrealized investment losses - 135,059 -
Adjustments for realized investment losses 2,220 2,675 785
Total additions 85,391 228,760 92,319
Deductions:
Amortization expense (58,541) (52,174) (41,003)
Adjustments for unrealized investment gains (286,410) - -
Total deductions (344,951) (52,174) (41,003)
Balance, end of year $ 179,672 $ 439,232 $ 262,646
The value of insurance in force is summarized below:
Year Ended December 31,
1995 1994 1993
Balance, beginning of year $ 139,221 $ 101,036 $ 115,824
Additions:
Value of insurance purchased - 1,479 7,522
Interest accrued on unamortized balance 4,578 4,994 6,124
Adjustments for unrealized investment losses - 53,344 -
Adjustments for realized investment losses - 351 65
Total additions 4,578 60,168 13,711
Deductions:
Amortization expense (14,057) (21,983) (28,499)
Adjustments for unrealized investment gains (85,803) - -
Total deductions (99,860) (21,983) (28,499)
Balance, end of year $ 43,939 $ 139,221 $ 101,036
Interest is accrued on the unamortized value of insurance in force balance at
the contract rate of 5.58%, 5.49% and 6.01% for the years ended December 31,
1995, 1994 and 1993, respectively.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1995, is as follows: 1996 - $7,747; 1997 - $8,169; 1998 - $7,218;
1999 - $6,648; 2000 - $6,199; and thereafter - $40,417.
(8) Federal Income Taxes
The provision for federal income taxes, computed under the asset and liability
method, is summarized as follows:
Year Ended December 31,
1995 1994 1993
Current $37,746 $18,118 $24,878
Deferred 585 13,933 3,832
Federal income tax expense $38,331 $32,051 $28,710
A reconciliation of federal income tax expense as recorded in the accompanying
consolidated statements of operations with expected federal income tax expense
computed at the applicable federal tax rate of 35% is as follows:
Year Ended December 31,
1995 1994 1993
Expected income tax expense $37,779 $33,347 $30,347
Increase (decrease) in income taxes resulting from:
Nontaxable investment income (1,737) (2,099) (2,189)
Amortization of goodwill 396 396 396
Other, net 1,893 407 156
Actual federal income tax expense $38,331 $32,051 $28,710
In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted. This
law increased the Company's top marginal tax rate to 35% from 34% retroactive to
January 1, 1993. The effect of this change in tax rates on the Company's
consolidated financial statements was not material.
The components of deferred federal income taxes are as follows:
December 31,
1995 1994
Deferred tax assets:
Policy liabilities $ (140,971) $ (127,558)
Excess of tax over book bases - investments - (69,039)
Guaranty association fees (7,679) (8,642)
Net operating loss carryforward (3,041) (3,573)
Deferred gain on interest rate swap agreements (312) (1,964)
Other (1,039) (3,914)
Total deferred tax assets (153,042) (214,690)
Deferred tax liabilities:
Excess book over tax basis - investments 130,530 -
Deferred policy acquisition costs 44,468 137,909
Value of insurance inforce and intangibles 7,152 34,420
Deferred loss on interest rate swap agreements 3,715 -
Total deferred tax liabilities 185,865 172,329
Net deferred federal income tax liability (asset) $ 32,823 $ (42,361)
The Company believes that is more likely than not that the Company will realize
the benefits of the total deferred tax assets and, accordingly, believes that a
valuation allowance with respect to the realization of the total deferred tax
assets is not necessary. While there are no assurances that this benefit will be
realized, the Company expects that the net deductible amounts will be
recoverable through the reversal of taxable temporary differences, taxes paid in
the carryback period, tax planning strategies, and future expectations of
taxable income.
As of December 31, 1995 and 1994, the Company had approximately $8,688 and
$10,208 respectively, of net operating loss carryforwards relating to
Independence Life's operations prior to the acquisition by the Company. These
operating loss carryforwards are limited to use against future taxable profits
of Independence Life and expire through 2006.
Income taxes paid were $44,694, $28,811, and $17,722 for the years ended
December 31, 1995, 1994 and 1993, respectively.
(9) Statutory Information and Dividend Restrictions
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. In
converting to GAAP, adjustments to the Company's statutory amounts include: the
deferral and amortization of the costs of acquiring new policies, such as
commissions and other issue costs; the deferral of federal income taxes; the
recognition as revenues of premiums for investment-type products for statutory
purposes but as deposits to policyholders' accounts under GAAP. In addition,
different assumptions are used in calculating policyholder liabilities,
different methods are used for calculating valuation allowances for statutory
and GAAP purposes, and the Company's realized gains and losses on fixed income
investments due to interest rate changes are not deferred for GAAP. Statutory
surplus and statutory net income are presented below:
Year Ended December 31,
1995 1994 1993
Statutory surplus $ 535,179 $ 546,440 $ 517,181
Statutory net income 25,689 24,871 65,315
The maximum amount of dividends which can be paid by the Company without prior
approval of the Insurance Commissioner of the State of Rhode Island is subject
to restrictions related to statutory surplus and statutory net gains from
operations. As of December 31, 1995, such restriction would limit dividends to
approximately $34,604. The Company has not paid dividends since the acquisition
by Liberty Mutual.
(10) Transactions with Affiliated Companies
As of December 31, 1995 and 1994, the Company had $39,500 and $87,000,
respectively, of commercial real estate loans of affiliated investment
partnerships. These mortgages are unconditionally guaranteed by Liberty Mutual.
The Company reimbursed Liberty Financial and certain affiliates for expenses
incurred on its behalf for the years ended December 31, 1995, 1994 and 1993.
These reimbursements included corporate general and administrative expenses,
corporate overhead, such as executive and legal support, and investment
management services. The total amounts reimbursed were $7,626, $7,345 and
$7,444 for the years ended December 31, 1995, 1994 and 1993, respectively.
During 1993 the Company received a $75,000 capital contribution from Liberty
Financial.
(11) Commitments and Contingencies
The Company leases data processing equipment, furniture and certain office
facilities from others under operating leases expiring in various years through
2001. Rental expense amounted to $3,221, $3,011 and $3,042 for the years ended
December 31, 1995, 1994 and 1993, respectively. For each of the next five years,
and in the aggregate, as of December 31, 1995, the following are the minimum
future rental payments under noncancelable operating leases having remaining
terms in excess of one year:
1996 $ 3,211
1997 2,641
1998 2,491
1999 2,347
2000 2,310
Thereafter 2,308
Total minimum future rental payments $15,308
Under existing guaranty fund laws in all states, insurers licensed to do
business in those states can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. The actual amount of such
assessments will depend upon the final outcome of rehabilitation proceedings and
will be paid over several years. In 1995, 1994 and 1993, the Company was
assessed $8,143, $7,674 and $7,314, respectively. During 1995, 1994 and 1993,
the Company recorded $2,000, $7,200, and $3,714, respectively, of provisions for
state guaranty fund association expenses.
Based on information recently provided by the industry association with respect
to aggregate assessments related to known insolvencies, the range of future
assessments with respect to known insolvencies is estimated by the Company to
be between $16,500 and $25,500, taking into account the industry association
information as well as the Company's own estimate of its potential share of such
aggregate assessments. At December 31, 1995 and 1994, the reserve for such
assessments was $21,940 and $24,688, respectively.
The Company is contingently liable for certain structured settlements written by
a subsidiary of Liberty Mutual and assigned to Keyport Life. The Company
guarantees to the policyholder payment in the event of nonperformance. The loss
contingency related to the structured settlements is approximately $160,000. In
the opinion of management, the likelihood of loss is remote.
The company is involved, from time to time, in litigation incidental to its
business. In the opinion of management, the resolution of such litigation is not
expected to have a material adverse effect on the Company's financial condition.
Independent Auditors' Report
The Contract Owners of
Keyport Life Insurance Company's
KMA Variable Account:
We have audited the accompanying statement of assets and liabilities of the sub-
accounts comprising KMA Variable Account as of December 31, 1995, and the
related statements of operations and changes in net assets for each of the
years, or other periods as applicable, in the two-year period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the sub-accounts comprising KMA
Variable Account at December 31, 1995, and the results of their operations and
changes in their net assets for each of the years, or other periods as
applicable, in the two-year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Boston, Massachusetts /s/ KPMG Peat Marwick LLP
April 5, 1996
KMA VARIABLE ACCOUNT
Statement of Assets and Liabilities
December 31, 1995
Assets
Investments at market value:
Keystone Custodian Funds
Keystone Liquid Trust - 607,517 shares (cost $607,517) $ 607,517
Quality Bond Fund (B-1) - 2,904 shares (cost $41,690) 45,644
Diversified Bond Fund (B-2) - 1,286 shares (cost $20,570) 19,734
High Income Bond Fund (B-4) - 11,428 shares (cost $74,310) 47,770
Growth and Income Fund (S-1) - 8,547 shares (cost $145,421) 201,450
Mid-Cap Growth Fund (S-3) - 18,606 shares (cost $129,707) 166,523
Small Company Growth Fund (S-4) - 60,038 shares (cost $423,848) 561,958
SteinRoe Variable Investment Trust
Cash Income Fund - 49,483,519 shares (cost $49,483,519) 49,483,519
Capital Appreciation Fund - 8,012,396 shares (cost $125,748,804) 130,842,427
Managed Assets Fund - 16,523,648 shares (cost $212,065,223) 232,652,959
Mortgage Securities Income Fund - 7,301,076 shares
(cost $75,331,987) 74,178,934
Managed Growth Stock Fund - 3,998,768 shares (cost $71,903,849) 94,330,927
Keyport Variable Investment Trust
Colonial-Keyport Growth and Income Fund - 5,442,480 shares
(cost $57,294,341) 68,629,676
Colonial-Keyport Utilities Fund - 4,680,398 shares
(cost $46,877,524) 49,144,176
Colonial-Keyport International Fund for Growth - 11,249,643
shares (cost $22,198,330) 22,161,797
Colonial-Keyport Strategic Income Fund - 4,231,510 shares
(cost $46,573,368) 46,504,295
Colonial-Keyport U.S. Fund for Growth - 3,451,833 shares
(cost $38,612,407) 42,664,655
Newport-Keyport Tiger Fund - 8,285,382 shares (cost $17,226,888) 18,973,523
Total assets $831,217,484
Net Assets
Variable annuity contracts (Note 5) $734,499,348
Annuity reserves (Note 2) 23,733,326
Retained by Keyport Life Insurance Company (Note 2) 72,984,810
831,217,484
Total net assets $831,217,484
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets
For the periods ended December 31, 1995 and 1994
Keystone Quality Diversified
Liquid Trust Bond Fund (B-1) Bond Fund (B-2)
1995 1994 1995 1994 1995 1994
Income
Dividends $ 28,479 $ 19,458 $ 5,091 $ 5,399 $ 1,265 $ 821
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 7,042 6,907 883 945 173 114
Net investment income 21,437 12,551 4,208 4,454 1,092 707
Realized gain (loss) - - 2,607 (443) - -
Unrealized appreciation
(depreciation) during
the period - - 5,123 (9,629) 915 (1,559)
Net increase (decrease) in
net assets from
operations 21,437 12,551 11,938 (5,618) 2,007 (852)
Purchase payments from
contract owners 2,794 3,111 4,446 17,240 4,807 5,192
Transfers between
accounts 51,705 4,267 123 224 11 -
Contract terminations
and annuity payouts (65,458) (102,875) (61,318) (13,429) - -
Other transfers (to) from
Keyport Life Insurance
Company 12,257 (1,125) - - - -
Net increase (decrease) in
net assets from contract
transactions 1,298 (96,622) (56,749) 4,035 4,818 5,192
Net assets at beginning of
period 584,782 668,853 90,455 92,038 12,909 8,569
Net assets at end of
period $ 607,517 $ 584,782 $ 45,644 $ 90,455 $19,734 $ 12,909
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
High Income Growth and Income Mid-Cap Growth
Bond Fund (B-4) Fund (S-1) Fund (S-3)
1995 1994 1995 1994 1995 1994
Income
Dividends $ 4,788 $ 4,258 $ 26,879 $ 13,263 $ 46,976 $ 20,886
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 555 573 2,277 2,335 2,562 2,581
Net investment
income 4,233 3,685 24,602 10,928 44,414 18,305
Realized gain
(loss) 3 (263) 8,363 8,202 11,363 604
Unrealized appreciation
(depreciation) during
the period (513) (10,312) 19,439 (33,437) 8,332 (32,194)
Net increase (decrease) in
net assets from
operations 3,723 (6,890) 52,404 (14,307) 64,109 (13,285)
Purchase payments from
contract owners 444 325 4,661 27,962 8,982 12,657
Transfers between
accounts (1) (2,132) 7,664 (215) (44,697) 415
Contract terminations
and annuity payouts - - (55,086) (48,742) (89,787) (30,232)
Other transfers (to) from
Keyport Life Insurance
Company - - - - - -
Net increase (decrease) in
net assets from contract
transactions 443 (1,807) (42,761) (20,995) (125,502) (17,160)
Net assets at beginning of
period 43,604 52,301 191,807 227,109 227,916 258,361
Net assets at end
of period $ 47,770 $ 43,604 $ 201,450 $ 191,807 $166,523 $ 227,916
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
Small Company
Growth Fund (S-4) Cash Income Fund
1995 1994 1995 1994
Income
Dividends $ 62,494 $ 40,652 $ 2,835,190 $ 2,362,104
Expenses (note 3)
Mortality and Expense
risk and
administrative
charges 6,673 6,003 667,110 778,093
Net investment income 55,821 34,649 2,168,080 1,584,011
Realized gain (loss) 20,262 4,098 - -
Unrealized appreciation
(depreciation) during
the period 98,073 (42,975) - -
Net increase (decrease) in
net assets from
operations 174,156 (4,228) 2,168,080 1,584,011
Purchase payments from
contract owners 8,396 11,585 2,622,342 17,156,646
Transfers between
accounts (46,276) (11,763) (1,168,571) (6,967,116)
Contract terminations and
annuity payouts (99,703) (36,113) (13,524,359) (10,898,708)
Other transfers (to) from
Keyport Life Insurance
Company - - (11,671) (1,682)
Net increase (decrease) in
net assets from contract
transactions (137,583) (36,291) (12,082,259) (710,860)
Net assets at beginning of
period 525,385 565,904 59,397,698 58,524,547
Net assets at end
of period $ 561,958 $ 525,385 $ 49,483,519 $ 59,397,698
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
Capital Appreciation Fund Managed Assets Fund
1995 1994 1995 1994
Income
Dividends $ 1,119,833 $ 14,220,469 $ 18,232,566 $ 6,368,392
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 1,811,814 1,514,415 2,707,560 2,330,029
Net investment income (691,981) 12,706,054 15,525,006 4,038,363
Realized gain (loss) 444,883 (46,678) 1,699,944 745,660
Unrealized appreciation
(depreciation) during
the period 12,421,795 (12,492,300) 21,102,576 (12,556,006)
Net increase (decrease) in
net assets from
operations 12,174,697 167,076 38,327,526 (7,771,983)
Purchase payments from
contract owners 12,359,075 26,395,515 9,601,078 31,898,250
Transfers between
accounts (3,848,840) 12,162,117 45,077,131 (1,255,658)
Contract terminations and
annuity payouts (13,006,701) (7,265,786) (18,567,356) (17,752,058)
Other transfers (to) from
Keyport Life Insurance
Company - - - -
Net increase (decrease) in
net assets from contract
transactions (4,496,466) 31,291,846 36,110,853 12,890,534
Net assets at beginning of
period 123,164,196 91,705,274 158,214,580 153,096,029
Net assets at end
of period $130,842,427 $123,164,196 $232,652,959 $158,214,580
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
Mortgage Managed
Securities Income Fund Growth Stock Fund
1995 1994 1995 1994
Income
Dividends $ 3,084,525 $ 3,465,587 $ 5,090,894 $ 4,183,973
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 748,107 790,009 1,183,227 996,449
Net investment income 2,336,418 2,675,578 3,907,667 3,187,524
Realized gain (loss) 208,764 (455,390) 754,285 145,214
Unrealized appreciation
(depreciation) during
the period 3,958,635 (3,951,314) 19,501,353 (8,941,674)
Net increase (decrease) in
net assets from
operations 6,503,817 (1,731,126) 24,163,305 (5,608,936)
Purchase payments from
contract owners 2,132,895 2,373,519 6,486,389 8,392,811
Transfers between
accounts 5,988,023 (9,228,189) 5,423,688 510,795
Contract terminations and
annuity payouts (5,095,184) (4,478,412) (7,536,917) (6,637,061)
Other transfers (to) from
Keyport Life Insurance
Company 17,149,572 - - -
Net increase (decrease) in
net assets from contract
transactions 20,175,306 (11,333,082) 4,373,160 2,266,545
Net assets at beginning of
period 47,499,811 60,564,019 65,794,462 69,136,853
Net assets at end
of period $ 74,178,934 $ 47,499,811 $ 94,330,927 $ 65,794,462
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
Strategic
Managed Assets Fund Managed Income Fund
1995 1994 1995 1994
Income
Dividends $ 6,888,371 $ 3,011,254 $ 1,913,930 $ 2,854,226
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 596,912 853,128 359,114 572,056
Net investment incom 6,291,459 2,158,126 1,554,816 2,282,170
Realized gain (loss) (1,881,972) (65,326) (1,684,383) (409,530)
Unrealized appreciation
(depreciation) during
the period 3,760,239 (3,018,501) 4,815,684 (4,396,101)
Net increase (decrease) in
net assets from
operations 8,169,726 (925,701) 4,686,117 (2,523,461)
Purchase payments from
contract owners 623,379 8,521,790 117,683 4,327,540
Transfers between
accounts (60,806,436) (2,343,245) (37,247,795) (7,064,413)
Contract terminations and
annuity payouts (4,025,653) (4,616,631) (3,674,434) (5,455,003)
Other transfers (to) from
Keyport Life Insurance
Company - - (4,355,032) (200,372)
Net increase (decrease) in
net assets from contract
transactions (64,208,710) 1,561,914 (45,159,578) (8,392,248)
Net assets at beginning of
period 56,038,984 55,402,771 40,473,461 51,389,170
Net assets at end
of period $ - $ 56,038,984 $ - $ 40,473,461
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
Colonial-Keyport Colonial-Keyport
Growth and Income Fund Utilities Fund
1995 1994 1995 1994
Income
Dividends $ 1,623,990 $ 752,954 $ 2,061,056 $ 2,300,324
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 581,425 366,231 627,774 560,400
Net investment
income 1,042,565 386,723 1,433,282 1,739,924
Realized gain
(loss) 53,942 (11,550) 179,659 (395,224)
Unrealized appreciation
(depreciation) during
the period 8,431,489 (1,086,131) 10,472,204 (6,351,672)
Net increase (decrease) in
net assets from
operations 9,527,996 (710,958) 12,085,145 (5,006,972)
Purchase payments from
contract owners 7,708,398 14,558,000 3,561,384 11,652,903
Transfers between
accounts 3,549,431 6,387,864 1,260,097 (8,854,833)
Contract terminations and
annuity payouts(3,526,945) (2,398,598) (3,994,781) (3,116,309)
Other transfers (to) from
Keyport Life Insurance
Company 4,710,224 (118,963) - (10,733,914)
Net increase (decrease) in
net assets from contract
transactions 12,441,108 18,428,303 826,700 (11,052,153)
Net assets at beginning of
period 46,660,572 28,943,227 36,232,331 52,291,456
Net assets at end
of period $ 68,629,676 $ 46,660,572 $ 49,144,176 $36,232,331
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
Colonial-Keyport Colonial-Keyport
U.S. Government Fund International Fund for Growth*
1995 1994 1995 1994
Income
Dividends $ 406,224 $ 745,545 $ 122,192 $ -
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 112,397 212,540 151,837 41,573
Net investment
income 293,827 533,005 (29,645) (41,573)
Realized gain
(loss) (487,572) (106,615) (23,625) 328
Unrealized appreciation
(depreciation) during
the period 1,180,567 (902,960) (632,521) (519,052)
Net increase (decrease) in
net assets from
operations 986,822 (476,570) 579,251 (560,297)
Purchase payments from
contract owners 328,844 8,155,365 4,477,512 5,212,629
Transfers between
accounts (12,956,156) (8,215,557) (364,008) 4,792,529
Contract terminations and
annuity payouts (1,050,768) (1,205,381) (1,567,181) (358,638)
Other transfers (to) from
Keyport Life Insurance
Company (15,024,888) (215,963) 550,000 9,400,000
Net increase (decrease) in
net assets from contract
transactions (28,702,968) (1,481,536) 3,096,323 19,046,520
Net assets at beginning of
period 27,716,146 29,674,252 18,486,223 -
Net assets at
end of period $ - $27,716,146 $ 22,161,797 $18,486,223
* Commencement of operations - May 2, 1994
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
Colonial-Keyport Colonial-Keyport Newport-Keyport
Strategic Income Fund** U.S. Fund for Growth** Tiger Fund***
1995 1994 1995 1994 1995
Income
Dividends $ 2,361,382 $ 104,296 $ 2,095,010 $ 76,800 $ 63,385
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 236,072 8,819 252,806 13,278 30,834
Net investment
income 2,125,310 95,477 1,842,204 63,522 32,551
Realized gain
(loss) 25,084 (71) 26,657 1,712 (10,024)
Unrealized appreciation
(depreciation) during
the period 21,898 (90,969) 1,706,939 (48,691) 295,754
Net increase (decrease) in
net assets from
operations 2,172,292 4,437 3,575,800 16,543 318,281
Purchase payments from
contract
owners 6,346,799 1,362,608 11,127,729 2,316,254 3,514,580
Transfers
between
accounts 36,913,338 2,001,637 12,112,957 2,841,200 3,875,764
Contract terminations
and annuity
payouts (2,157,749) (139,067) (2,592,867) (272,806) (285,983)
Other transfers (to) from
Keyport Life Insurance
Company (10,109,673) 10,109,673 3,100,340 10,439,505 11,550,881
Net increase (decrease) in
net assets from contract
transactions 30,992,715 13,334,851 23,748,159 15,324,153 18,655,242
Net assets at beginning of
period 13,339,288 - 15,340,696 - -
Net assets at end
of period $46,504,295 $13,339,288 $42,664,655 $15,340,696 $18,973,523
** Commencement of operations - July 4, 1994
*** Commencement of operations - May 1, 1995
See accompanying notes to financial statements
KEYPORT LIFE INSURANCE COMPANY
KMA VARIABLE ACCOUNT
Statements of Operations and Changes in Net Assets, continued
For the periods ended December 31, 1995 and 1994
Total Total
1995 1994
Income
Dividends $ 48,074,520 $ 40,550,661
Expenses (note 3)
Mortality and Expense
risk and administrative
charges 10,087,154 9,056,478
Net investment income 37,987,366 31,494,183
Realized gain (loss) (651,760) (585,272)
Unrealized appreciation
(depreciation) during
the period 88,433,023 (54,485,477)
Net increase (decrease) in
net assets from operations 125,768,629 (23,576,566)
Purchase payments from
contract owners 71,042,617 142,401,902
Transfers between accounts (2,222,848) (15,242,073)
Contract terminations and
annuity payouts (80,978,230) (64,825,849)
Other transfers (to) from
Keyport Life Insurance
Company 7,572,010 18,677,159
Net increase (decrease) in
net assets from contract
transactions (4,586,451) 81,011,139
Net assets at beginning of
period 710,035,306 652,600,733
Net assets at end of period $ 831,217,484 $ 710,035,306
See accompanying notes to financial statements
KMA VARIABLE ACCOUNT
Notes to Financial Statements
December 31, 1995
1. Organization
KMA Variable Account (the "Variable Account") is a separate investment account
established by Keyport Life Insurance Company (the "Company") to receive and
invest premium payments under flexible purchase payment deferred and immediate
variable annuity contracts issued by the Company. The Variable Account operates
as a Unit Investment Trust under the Investment Company Act of 1940 and invests
in eligible mutual funds.
There are currently two funding vehicles available to the Variable Account, the
SteinRoe Variable Investment Trust ("SRVIT") and the Keyport Variable Investment
Trust ("KVIT"). There are currently eleven available sub-accounts within the
Variable Account to which contract funds may be allocated. The Colonial-Keyport
International Fund for Growth was made available to contractholders on May 2,
1994. The Colonial-Keyport Strategic Income Fund and the Colonial-Keyport U.S.
Fund for Growth were made available to contractholders on July 4, 1994. The
Newport-Keyport Tiger Fund was made available to contractholders on May 1, 1995.
On October 13, 1995, the Securities and Exchange Commission approved the
substitution of shares from the Strategic Managed Assets Fund, the Managed
Income Fund, and the Colonial-Keyport U.S. Government Fund to shares in the
Managed Assets Fund, the Colonial-Keyport Strategic Income Fund, and the
Mortgage Securities Income Fund, respectively.
On May 1, 1995, the following fund names were changed:
From To
Keystone Custodian Fund, Series B-1 Quality Bond Fund (B-1)
Keystone Custodian Fund, Series B-2 Diversified Bond Fund (B-2)
Keystone Custodian Fund, Series B-4 High Income Bond Fund (B-4)
Keystone Custodian Fund, Series S-1 Growth and Income Fund (S-1)
Keystone Custodian Fund, Series S-3 Mid-Cap Growth Fund (S-3)
Keystone Custodian Fund, Series S-4 Small Company Growth Fund (S-4)
2. Significant Accounting Policies
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results could
differ from these estimates, any such differences are expected to be immaterial
to the Variable Account.
Shares of the SRVIT and KVIT are sold to the Variable Account at the reported
net asset values. Transactions are recorded on the trade date. Income from
dividends is recorded on the ex-dividend date. Realized gains and losses on
sales of investments are computed on the basis of identified cost of the
investments sold.
Annuity reserves are computed for contracts in the income stage according to the
1983a Individual Annuity Mortality Table. The assumed investment rate is either
4.0% or 6.0% unless the annuitant elects otherwise, in which case the rate may
vary from 3.0% to 6.0%, as regulated by the laws of the respective states. The
mortality risk is fully borne by the Company and may result in additional
amounts being transferred into the Variable Account by the Company.
The net assets retained by the Company represent seed money shares invested in
certain sub-accounts required to commence operations. The seed money is stated
at market value (shares multiplied by net asset value per share). The
operations of the Variable Account are included in the federal income tax return
of the Company, which is taxed as a Life Insurance Company under the provisions
of the Internal Revenue Code.
3. Expenses
There are no deductions made from purchase payments for sales charges at the
time of purchase. In the event of a contract termination, a contingent deferred
sales charge, based on a graded table of charges, is deducted. An annual
contract maintenance charge to cover the cost of contract administration is
deducted from each contractholder's account on the contract anniversary date.
Daily deductions are made from each sub-account for assumption of mortality and
expense risk. The effective annual rates are:
Prior contract series Flex I: effective annual rate of 1.25% of contract value.
Prior contract series Flex II: effective annual rate of 1.35% of contract value.
Prior contract series K100: effective annual rate of 1.00% of contract value.
Contract series Preferred Advisor: effective annual rate of 1.25% of contract
value. A daily sales charge is also deducted at an effective annual rate of
0.15% of contract value.
Contract series Preferred Advisor Employee: effective annual rate of 0.35% of
contract value.
4. Affiliated Company Transactions
Administrative services necessary for the operation of the Variable Account are
provided by the Company. The Company has absorbed all organizational expenses
including the fees of registering the Variable Account and its contracts for
distribution under federal and state securities laws. SteinRoe & Farnham, Inc.,
an affiliate of the Company, is the investment advisor to the SRVIT. Keyport
Advisory Services Corporation, a wholly-owned subsidiary of the Company, is the
investment advisor to the KVIT. Colonial Management Associates, Inc., an
affiliate of the Company, is the investment sub-advisor to the KVIT. Keyport
Financial Services Corporation, a wholly-owned subsidiary of the Company, is the
principal underwriter for SRVIT and KVIT. The investment advisors' compensation
is derived from the mutual funds.
5. Unit Values
A summary of the accumulation unit values at December 31, 1995 and 1994 and the
accumulation units and dollar value outstanding at December 31, 1995 are as
follows:
1994 1995
UNIT UNIT
VALUE VALUE UNITS DOLLARS
Keystone Liquid Trust
K100 Qualified $22.238468 $23.121660 21,827.9047 $ 504,697
K100 Non-Qualified 21.962820 22.835022 3,484.3890 79,566
Quality Bond Fund (B-1)
K100 Qualified 31.679474 36.552435 959.2854 35,064
K100 Non-Qualified 35.263373 43.620132 - -
Diversified Bond Fund (B-2)
K100 Qualified 31.149039 35.378201 557.8333 19,734
K100 Non-Qualified 29.979362 35.407962 - -
High Income Bond Fund (B-4)
K100 Qualified 28.119956 30.568654 527.2125 16,115
K100 Non-Qualified 28.812449 31.321421 1,010.6477 31,655
Growth and Income Fund (S-1)
K100 Qualified 33.201859 43.375544 4,178.5767 181,248
K100 Non-Qualified 30.065945 39.946358 - -
Mid-Cap Growth Fund (S-3)
K100 Qualified 33.423377 44.970109 3,693.0922 166,079
K100 Non-Qualified 37.399454 50.799485 - -
Small Company Growth Fund (S-4)
K100 Qualified 32.263055 42.685132 9,695.6445 413,860
K100 Non-Qualified 36.671026 48.516956 3,052.5001 148,098
Cash Income Fund
K100 21.579790 22.563269 930,979.2856 21,005,936
Flex I 15.443213 16.107692 204,597.4778 3,295,598
Flex II 15.172548 15.809845 16,358.7941 258,626
Preferred Advisor 12.322294 12.833328 1,870,176.0930 24,000,583
Dollar Cost Averaging 11.422977 12.062820 16,825.0645 202,957
Employee 10.429830 10.975629 - -
Capital Appreciation Fund
K100 56.716187 62.754578 329,679.6825 20,688,909
Flex I 28.043235 30.953346 285,922.9911 8,850,274
Flex II 28.653118 31.595455 24,833.1832 784,616
Preferred Advisor 21.192232 23.356516 4,164,351.9870 97,264,754
Employee 12.480066 13.898002 18,641.1063 259,074
Unit Values, continued
1994 1995
UNIT UNIT
VALUE VALUE UNITS DOLLARS
Managed Assets Fund
K100 $24.464870 $30.393516 296,617.1820 $ 9,015,238
Flex I 24.566111 30.445015 714,637.8024 21,757,157
Flex II 23.646061 29.276014 36,360.2257 1,064,482
Preferred Advisor 15.070997 18.649799 10,314,628.7999 192,365,754
Employee 9.825037 12.284776 8,738.7366 107,354
Mortgage Securities Income Fund
K100 14.608208 16.740391 68,358.7502 1,144,353
Flex I 15.617442 17.853370 189,804.1585 3,388,644
Flex II 15.571013 17.782813 16,593.5945 295,081
Preferred Advisor 14.103610 16.098763 3,176,177.1740 51,132,524
Employee 9.852558 11.363559 - -
Managed Growth Stock Fund
K100 41.146819 56.112683 60,347.4633 3,386,258
Flex I 17.919417 24.377573 239,513.6317 5,838,761
Flex II 16.435494 22.336918 4,229.7660 94,480
Preferred Advisor 16.769681 22.779503 3,638,900.6501 82,892,348
Employee 10.201673 14.002023 12,981.4734 181,767
Strategic Managed Assets Fund
K100 15.481439 - - -
Flex I 15.948206 - - -
Flex II 13.810999 - - -
Preferred Advisor 16.345229 - - -
Employee 10.252800 - - -
Managed Income Fund
K100 10.131402 - - -
Flex I 10.115327 - - -
Flex II 10.028959 - - -
Preferred Advisor 10.083378 - - -
Employee 9.586992 - - -
Colonial-Keyport Growth and Income Fund
K100 10.164748 13.096753 13,780.9570 180,487
Flex I 10.257581 13.184205 57,955.2321 764,094
Flex II 10.000000 10.000000 - -
Preferred Advisor 10.206855 13.099465 3,443,236.7179 45,104,559
Employee 10.298005 13.354147 11,058.1214 147,672
Colonial-Keyport Utilities Fund
K100 8.651023 11.576591 24,359.2923 281,998
Flex I 8.620522 11.507703 27,532.7689 316,839
Flex II 8.919253 11.894779 - -
Preferred Advisor 8.638326 11.514290 4,018,271.0053 46,267,538
Employee 8.672733 11.680586 1,281.5367 14,969
Unit Values, continued
1994 1995
UNIT UNIT
VALUE VALUE UNITS DOLLARS
Colonial-Keyport U.S. Government Fund
K100 $ 9.851921 $ - - $ -
Flex I 9.848906 - - -
Flex II 10.000000 - - -
Preferred Advisor 9.811867 - - -
Employee 9.957231 - - -
Colonial-Keyport Strategic Income Fund
K100 10.000000 11.304782 465,615.5808 5,263,683
Flex I 10.000000 11.632780 486,416.7659 5,658,379
Flex II 10.000000 11.233998 29,901.1764 335,910
Preferred Advisor 10.014367 11.684000 2,910,213.0914 34,002,932
Employee 9.995270 11.783226 885.1064 10,429
Colonial-Keyport International Fund for Growth
K100 9.390387 9.841542 27,991.6656 275,481
Flex I 9.322942 9.747047 34,733.4599 338,549
Flex II 9.370894 9.787562 537.9761 5,265
Preferred Advisor 9.314037 9.723230 1,052,842.1081 10,237,026
Employee 9.619577 10.146906 4,159.8541 42,210
Colonial-Keyport U.S. Fund for Growth
K100 10.000000 12.722369 22,588.5144 287,379
Flex I 10.047611 12.871427 73,706.1727 948,704
Flex II 10.000000 12.065252 1,642.4704 19,817
Preferred Advisor 10.368975 13.263322 1,947,382.4404 25,828,760
Employee 10.463646 13.523864 8,108.3083 109,656
Newport-Keyport Tiger Fund
K100 - 10.437921 15,700.8436 163,884
Flex I - 10.241649 4,861.0535 49,785
Flex II - 10.000000 - -
Preferred Advisor - 11.445356 599,500.1211 6,861,492
Employee - 11.524093 9,563.1632 110,207
41,983,067.6634 $734,499,348
