<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
ZENITH ACCUMULATOR
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
(PART B)
MAY 1, 1998
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated May 1, 1998 and
should be read in conjunction therewith. A copy of the Prospectus may be
obtained by writing to New England Securities Corporation ("New England
Securities") 399 Boylston Street, Boston, Massachusetts 02116.
VA-140SAI-98
II-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
History................................................................... II-3
Services Relating to the Variable Account and the Contracts............... II-3
Performance Comparisons................................................... II-3
Calculation of Performance Data........................................... II-4
Net Investment Factor..................................................... II-23
Annuity Payments.......................................................... II-23
Hypothetical Illustrations of Annuity Income Payouts...................... II-25
Historical Illustrations of Annuity Income Payouts........................ II-28
Experts................................................................... II-31
Legal Matters............................................................. II-31
Appendix A................................................................ II-32
Financial Statements...................................................... F-1
</TABLE>
II-2
<PAGE>
HISTORY
The New England Variable Account (the "Variable Account") is a separate
account of Metropolitan Life Insurance Company (the "Company"). The Variable
Account was originally a separate account of New England Mutual Life Insurance
Company, and became a separate account of the Company when New England Mutual
Life Insurance Company merged with and into the Company on August 30, 1996.
SERVICES RELATING TO THE VARIABLE ACCOUNT AND THE CONTRACTS
Auditors. Deloitte & Touche LLP, located at 125 Summer Street, Boston,
Massachusetts 02110, conducts an annual audit of the Variable Account's
financial statements.
Administrative Services Agreement. Pursuant to an administrative services
agreement between New England Life Insurance Company ("NELICO") and the
Company, NELICO serves as the Designated Office for servicing the Contracts
and performs certain other administrative services for the Company relating to
the Variable Account and the Contracts. NELICO is compensated for these
services based on the expenses it incurs in providing them. NELICO was a
wholly-owned subsidiary of New England Mutual Life Insurance Company before it
merged into the Company, and became a subsidiary of the Company as a result of
the merger. For services rendered, the Company paid NELICO $4,461,228.08, for
the period August 30, 1996 to December 31, 1996, and $13,017,919.74 for the
one-year period ended December 31, 1997.
Principal Underwriter. New England Securities Corporation ("New England
Securities"), an indirect subsidiary of the Company, serves as principal
underwriter for the Variable Account pursuant to a distribution agreement with
the Company. The Contracts are offered continuously and are sold by NELICO's
life insurance agents and insurance brokers who are registered representatives
of New England Securities. Contracts also may be sold by registered
representatives of broker-dealers that have selling agreements with New
England Securities. The Company pays commissions, none of which are retained
by New England Securities, to the registered representatives involved in
selling Contracts. For the years ended December 31, 1995, 1996 and 1997 the
Company paid commissions in the amount of $5,203,001.05, $5,927,575.34 and
$5,719,756.22, respectively.
PERFORMANCE COMPARISONS
Articles and releases, developed by the Company, the Eligible Funds (as
defined in the Prospectus) and other parties, about the Account or the
Eligible Funds regarding performance, rankings, statistics and analyses of the
Account's, the individual Eligible Funds' and fund groups' asset levels and
sales volumes, statistics and analyses of industry sales volumes and asset
levels, and other characteristics may appear in publications, including, but
not limited to, those publications listed in Appendix A to this Statement of
Additional Information. In particular, some or all of these publications may
publish their own rankings or performance reviews including the Account or the
Eligible Funds. References to or reprints of such articles may be used in the
Company's promotional literature. Such literature may refer to personnel of
the advisers, who have portfolio management responsibility, and their
investment style. The references may allude to or include excerpts from
articles appearing in the media.
The advertising and sales literature of the Contract and the Account may
refer to historical, current and prospective economic trends and may include
historical and current performance and total returns of investment
alternatives.
In addition, sales literature may be published concerning topics of general
investor interest for the benefit of registered representatives and
prospective Contractholders. These materials may include, but are not limited
to, discussions of college planning, retirement planning, reasons for
investing and historical examples of the investment performance of various
classes of securities, securities markets and indices.
II-3
<PAGE>
CALCULATION OF PERFORMANCE DATA
The tables below illustrate hypothetical average annual total returns for
each sub-account for the periods shown, based on the actual investment
experience of the sub-accounts, and the Eligible Funds during those periods.
The tables do not represent what may happen in the future.
The Variable Account was not established until July, 1987. The Contracts
were not available until September, 1988. The Capital Growth, Back Bay
Advisors Bond Income and Back Bay Advisors Money Market Series commenced
operations on August 26, 1983. The Westpeak Growth and Income and Goldman
Sachs Midcap Value (formerly the Loomis Sayles Avanti Growth Series) commenced
operations on April 30, 1993. The Equity-Income Portfolio commenced operations
on October 9, 1986, and the Overseas Portfolio commenced operations on January
28, 1987. The Loomis Sayles Small Cap Series commenced operations on May 2,
1994. The other Zenith Fund Series (Loomis Sayles Balanced, Morgan Stanley
International Magnum Equity, Alger Equity Growth, Davis Venture Value, Salomon
Brothers Strategic Bond Opportunities and Salomon Brothers U.S. Government)
commenced operations on October 31, 1994.
Calculations of average annual total return are based on the assumption that
a single investment of $1,000 was made at the beginning of each period shown.
The figures do not reflect the effect of any premium tax charges, which apply
in certain states, and which would reduce the results shown.
The average annual total return is related to surrender value and is
calculated as follows. The amount of the assumed $1,000 purchase payment for a
Contract issued at the beginning of the period is divided by the Accumulation
Unit Value of each sub-account at the beginning of the period shown to arrive
at the number of Accumulation Units purchased. The number of Accumulation
Units is reduced on each Contract anniversary to reflect deduction of the
annual $30 Administration Contract Charge from the Contract Value. Each such
$30 deduction reduces the number of units held under the Contract by an amount
equal to $30 divided by the Accumulation Unit Value on the date of the
deduction. The total number of units held under the Contract at the beginning
of the last Contract Year covered by the period shown is multiplied by the
Accumulation Unit Value on December 31, 1997 to arrive at the Contract Value
on that date. This Contract Value is then reduced by the applicable Contingent
Deferred Sales Charge and by the portion of the $30 Administration Contract
Charge which would be deducted upon surrender on December 31, 1997 to arrive
at the surrender value. The average annual total return is the annual
compounded rate of return which would produce the surrender value on December
31, 1997. In other words, the average annual total return is the rate which,
when added to 1, raised to a power reflecting the number of years in the
period shown, and multiplied by the initial $1,000 investment, yields the
surrender value at the end of the period. The average annual total returns
assume that no premium tax charge has been deducted.
Sub-account average total return, which is calculated in accordance with the
SEC standardized formula, uses the inception date of the sub-account through
which the Eligible Fund shown is available. Fund total return adjusted for
Contract charges uses the inception date of the Eligible Fund shown, and
therefore may reflect periods prior to the availablity of the corresponding
sub-account under the Contract. THIS INFORMATION DOES NOT INDICATE OR
REPRESENT FUTURE PERFORMANCE.
SUB-ACCOUNT AVERAGE ANNUAL TOTAL RETURN
For purchase payment allocated to the Loomis Sayles Small Cap Series:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 13.7%
Since Inception of the Sub-Account.................................. 15.6%
For purchase payment allocated to the Morgan Stanley International Magnum
Equity Series:*
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. -10.7%
Since Inception of the Sub-Account.................................. -1.4%
</TABLE>
- --------
* The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
II-4
<PAGE>
For purchase payment allocated to the Overseas Portfolio:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 1.3%
Since Inception of the Sub-Account................................... 4.6%
For purchase payment allocated to the Alger Equity Growth Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 14.4%
Since Inception of the Sub-Account................................... 19.2%
For purchase payment allocated to the Capital Growth Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 12.4%
5 Years.............................................................. 12.1%
Since Inception of the Sub-Account................................... 12.5%
For purchase payment allocated to the Goldman Sachs Midcap Value Series**:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 6.7%
Since Inception of the Sub-Account................................... 9.8%
For purchase payment allocated to the Davis Venture Value Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 21.8%
Since Inception of the Sub-Account................................... 23.6%
For purchase payment allocated to the Westpeak Growth and Income Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 21.7%
Since Inception of the Sub-Account................................... 14.8%
For purchase payment allocated to the Equity-Income Portfolio:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 16.7%
Since Inception of the Sub-Account................................... 14.3%
For purchase payment allocated to the Loomis Sayles Balanced Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 5.6%
Since Inception of the Sub-Account................................... 12.2%
For purchase payment allocated to the Salomon Brothers Strategic Bond
Opportunities Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... .8%
Since Inception of the Sub-Account................................... 7.7%
</TABLE>
- --------
** The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998, when Goldman Sachs Asset Management became
the subadviser.
II-5
<PAGE>
For purchase payment allocated to the Back Bay Advisors Bond Income Series:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... .7%
5 Years.............................................................. 3.9%
Since Inception of the Sub-Account................................... 5.9%
For purchase payment allocated to the Salomon Brothers U.S. Government
Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... -1.6%
Since Inception of the Sub-Account................................... 2.8%
For purchase payment allocated to the Back Bay Advisors Money Market Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... -4.5%
5 Years.............................................................. -.5%
Since Inception of the Sub-Account................................... 1.4%
</TABLE>
FUND TOTAL RETURN ADJUSTED FOR CONTRACT CHARGES
For purchase payment allocated to the Loomis Sayles Small Cap Series:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 13.7%
Since Inception of the Fund......................................... 15.6%
For purchase payment allocated to the Morgan Stanley International Magnum
Equity Series:*
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. -10.7%
Since Inception of the Fund......................................... -1.4%
For purchase payment allocated to the Overseas Portfolio:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 1.3%
5 Years............................................................. 9.5%
10 Years............................................................ 5.7%
Since Inception of the Fund......................................... 4.0%
For purchase payment allocated to the Alger Equity Growth Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 14.4%
Since Inception of the Fund......................................... 19.2%
</TABLE>
- --------
* The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
II-6
<PAGE>
For purchase payment allocated to the Capital Growth Series:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 12.4%
5 Years.............................................................. 12.1%
10 Years............................................................. 10.0%
Since Inception of the Fund.......................................... 20.7%
For purchase payment allocated to the Goldman Sachs Midcap Value Series:**
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 6.7%
Since Inception of the Fund.......................................... 11.6%
For purchase payment allocated to the Davis Venture Value Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 21.8%
Since Inception of the Fund.......................................... 23.6%
For purchase payment allocated to the Westpeak Growth and Income Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 21.7%
Since Inception of the Fund.......................................... 15.8%
For purchase payment allocated to the Equity-Income Portfolio:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 16.7%
5 Years.............................................................. 15.3%
10 Years............................................................. 13.1%
Since Inception of the Fund.......................................... 10.9%
For purchase payment allocated to the Loomis Sayles Balanced Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... 5.6%
Since Inception of the Fund.......................................... 12.2%
For purchase payment allocated to the Salomon Brothers Strategic Bond
Opportunities Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... .8%
Since Inception of the Fund.......................................... 7.7%
For purchase payment allocated to the Back Bay Advisors Bond Income Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... .7%
5 Years.............................................................. 3.9%
10 Years............................................................. 6.1%
Since Inception of the Fund.......................................... 7.0%
</TABLE>
- --------
** The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998, when Goldman Sachs Asset Management became
the subadviser.
II-7
<PAGE>
For purchase payment allocated to the Salomon Brothers U.S. Government
Series:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... -1.6%
Since Inception of the Fund.......................................... 2.8%
For purchase payment allocated to the Back Bay Advisors Money Market Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year............................................................... -4.5%
5 Years.............................................................. -.5%
10 Years............................................................. 1.7%
Since Inception of the Fund.......................................... 2.7%
</TABLE>
Information is available illustrating the impact of fund performance on
annuity payouts. For examples, see "Historical Illustrations of Annuity Income
Payments" and "Hypothetical Illustrations of Annuity Income Payments" in this
Statement of Additional Information.
The following chart illustrates how the average annual total return was
determined for the five year period ending December 31, 1997 for the sub-
account investing in the Capital Growth Series based on the assumptions used
in the above table. The units column below shows the number of accumulation
units hypothetically purchased by the investment in the Capital Growth Series
in the first year (assuming that no premium tax is deducted). The units are
reduced on each Contract anniversary to reflect the deduction of the $30
Administration Contract Charge. The illustration assumes no premium tax charge
is deducted.
The unit values of the sub-accounts reflect the change in the net asset
value of the underlying Eligible Funds plus the reinvestment of dividends from
net investment income and of distributions from net realized gains, if any.
The unit values also reflect the deduction of the Mortality and Expense Risk
Charge as well as the Administration Asset Charge.
<TABLE>
<CAPTION>
AVERAGE
UNIT CONTRACT SURRENDER ANNUAL TOTAL
DATE UNITS VALUE VALUE VALUE RETURN
- ---- -------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1992........... 125.3436 7.978068 $1,000.00
December 31, 1993........... 122.0281 9.049554 1,104.30 $1,044.67 4.47%
December 31, 1994........... 118.4129 8.297578 982.54 933.90 -3.36%
December 31, 1995........... 115.7582 11.300017 1,308.07 1,249.21 7.70%
December 31, 1996........... 113.5352 13.496435 1,532.32 1,470.26 10.12%
December 31, 1997........... 111.7107 16.441932 1,836.74 1,770.62 12.10%
</TABLE>
The following charts illustrate what would have been the growth and value of
a $10,000 purchase payment for a Contract if it had been invested in each of
the Eligible Funds on the first day of the first month after those Eligible
Funds became available: September 1, 1983 in the case of the Back Bay Advisors
Money Market, Back Bay Advisors Bond Income and Capital Growth Series;
November 1, 1986 in the case of the Equity-Income Portfolio; February 1, 1987
in the case of the Overseas Portfolio; May 1, 1993 in the case of the Westpeak
Growth and Income and Goldman Sachs Midcap Value Series; May 2, 1994 in the
case of the Loomis Sayles Small Cap Series; and November 1, 1994 for the other
Zenith Fund Series. The figures shown do not reflect the deduction of any
premium tax charge. During the period when the Contingent Deferred Sales
Charge applies, the percentage return on surrender value from year to year
(after the 1st year) will be greater than the percentage return on Contract
Value for the same years. This is because the percentage return on surrender
value reflects not only investment experience but also the annual reduction in
the applicable Contingent Deferred Sales Charge. In the first chart, the
Contract Value and surrender value on each date shown are calculated in the
manner described in the preceding illustrations of average annual total
return, assuming that no premium tax charge is deducted.
II-8
<PAGE>
In the second and third charts, the difference between the Contract Value or
surrender value at the beginning and at the end of each year is divided by the
beginning Contract Value or surrender value to arrive at the annual percentage
change. The cumulative return information set forth in these charts is
determined by taking the difference between the $10,000 investment and the
ending Contract Value or surrender value and dividing it by $10,000. The
annual effective rate of return in this illustration is calculated in the same
manner as the average annual total return described in the preceding
illustration, assuming that no premium tax charge is deducted.
II-9
<PAGE>
$10,000 SINGLE PURCHASE PAYMENT CONTRACT
ISSUED SEPTEMBER 1, 1983 (FOR SUB-ACCOUNTS INVESTING IN CAPITAL GROWTH,
BACK BAY ADVISORS BOND INCOME AND BACK BAY ADVISORS MONEY MARKET)
(EQUITY-INCOME: NOVEMBER 1, 1986 AND OVERSEAS: FEBRUARY 1, 1987)
(WESTPEAK GROWTH AND INCOME AND GOLDMAN SACHS MIDCAP VALUE(3): MAY 1, 1993)
(LOOMIS SAYLES SMALL CAP: MAY 2, 1994)
(OTHER ZENITH FUND SERIES: NOVEMBER 1, 1994)
INVESTMENT RESULTS
<TABLE>
<CAPTION>
CONTRACT VALUE(1)
------------------------------------------------------------------------------------------------------
MORGAN
LOOMIS STANLEY GOLDMAN WESTPEAK
SAYLES INTERNATIONAL ALGER SACHS DAVIS GROWTH
SMALL MAGNUM EQUITY CAPITAL MIDCAP VENTURE AND EQUITY-
CAP EQUITY(2) OVERSEAS GROWTH GROWTH VALUE(3) VALUE INCOME INCOME
---------- ------------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December
31:
1983............ $ 10,470.12
1984............ 10,237.14
1985............ 16,941.91
1986............ 32,599.29 $ 9,888.64
1987............ $ 9,345.49 49,087.62 9,615.25
1988............ 9,936.28 44,141.97 11,611.24
1989............ 12,343.46 56,919.65 13,412.67
1990............ 11,945.10 54,170.04 11,176.22
1991............ 12,695.83 82,262.43 14,462.11
1992............ 11,156.05 76,212.70 16,645.30
1993............ 15,078.13 86,417.09 $11,370.39 $11,321.11 19,396.57
1994............ $ 9,590.97 $10,237.83 15,104.86 $ 9,695.00 79,208.42 11,157.06 $ 9,628.96 11,004.57 20,460.15
1995............ 12,156.37 10,698.65 16,311.44 14,193.96 107,838.80 14,313.48 13,201.25 14,780.39 27,238.96
1996............ 15,637.59 11,227.90 18,185.02 15,815.91 128,763.66 16,574.48 16,356.09 17,185.98 30,677.47
1997............ 19,225.09 10,904.04 19,981.29 19,572.63 156,835.46 19,149.94 21,511.40 22,593.88 38,742.01
<CAPTION>
SURRENDER VALUE(1)
------------------------------------------------------------------------------------------------------
MORGAN
LOOMIS STANLEY GOLDMAN WESTPEAK
SAYLES INTERNATIONAL ALGER SACHS DAVIS GROWTH
SMALL MAGNUM EQUITY CAPITAL MIDCAP VENTURE AND EQUITY-
CAP EQUITY(2) OVERSEAS GROWTH GROWTH VALUE(3) VALUE INCOME INCOME
---------- ------------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December
31:
1983............ $ 9,847.62
1984............ 9,674.33
1985............ 16,131.91
1986............ 31,789.29 $ 9,305.15
1987............ $ 8,771.28 48,277.62 9,091.03
1988............ 9,372.22 43,331.97 11,031.48
1989............ 11,704.96 56,109.65 12,804.10
1990............ 11,380.07 53,360.04 10,718.58
1991............ 12,154.15 81,452.43 13,936.47
1992............ 10,726.94 75,516.79 16,115.97
1993............ 14,575.67 86,407.09 $10,685.22 $10,638.82 18,867.86
1994............ $ 9,012.40 $ 9,633.91 14,669.53 $ 9,122.84 79,198.42 10,534.58 $ 9,060.66 10,390.32 20,086.86
1995............ 11,482.43 10,115.92 15,990.34 13,422.49 107,828.80 13,584.96 12,483.38 14,028.76 26,988.81
1996............ 14,846.03 10,667.11 17,993.85 15,028.03 128,753.66 15,808.63 15,551.09 16,392.61 30,672.47
1997............ 18,407.59 10,408.36 19,953.79 18,767.63 156,825.48 18,354.37 20,706.40 21,773.88 38,737.01
<CAPTION>
SALOMON
BROTHERS BACK BAY SALOMON BACK BAY
LOOMIS STRATEGIC ADVISORS BROTHERS ADVISORS
SAYLES BOND BOND U.S. MONEY
BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
As of December
31:
1983............ $10,339.37 $10,258.59
1984............ 11,453.64 11,175.34
1985............ 13,388.01 11,905.86
1986............ 15,137.25 12,514.94
1987............ 15,242.29 13,122.50
1988............ 16,265.40 13,889.20
1989............ 17,990.50 14,941.00
1990............ 19,151.95 15,916.76
1991............ 22,256.25 16,648.66
1992............ 23,722.98 17,018.47
1993............ 26,326.49 17,259.12
1994............ $ 9,968.28 $ 9,838.87 25,071.19 $10,038.07 17,674.12
1995............ 12,242.06 11,557.83 29,948.07 11,360.92 18,401.19
1996............ 14,087.95 13,008.06 30,873.63 11,548.68 19,053.28
1997............ 16,117.12 14,224.45 33,745.25 12,328.54 19,770.95
<CAPTION>
SALOMON
BROTHERS BACK BAY SALOMON BACK BAY
LOOMIS STRATEGIC ADVISORS BROTHERS ADVISORS
SAYLES BOND BOND U.S. MONEY
BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
As of December
31:
1983............ $ 9,724.51 $ 9,648.46
1984............ 10,825.14 10,561.87
1985............ 12,715.30 11,306.52
1986............ 14,446.07 11,941.77
1987............ 14,614.97 12,581.04
1988............ 15,669.85 13,379.19
1989............ 17,413.80 14,460.36
1990............ 18,624.85 15,477.01
1991............ 21,845.84 16,338.98
1992............ 23,499.47 16,855.30
1993............ 26,316.49 17,249.12
1994............ $ 9,380.13 $ 9,258.29 25,061.19 $ 9,445.85 17,664.12
1995............ 11,575.99 10,928.71 29,938.07 10,742.43 18,391.19
1996............ 13,385.59 12,359.16 30,863.63 10,972.02 19,043.28
1997............ 15,386.85 13,579.35 33,735.25 11,768.76 19,760.95
</TABLE>
II-10
<PAGE>
ANNUAL PERCENTAGE CHANGE IN CONTRACT VALUE(1)
<TABLE>
<CAPTION>
MORGAN
LOOMIS STANLEY GOLDMAN
SAYLES INTERNATIONAL ALGER SACHS DAVIS
SMALL MAGNUM EQUITY CAPITAL MIDCAP VENTURE
CAP EQUITY(2) OVERSEAS GROWTH GROWTH VALUE(3) VALUE
---------- ------------- -------- ------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... 4.70%
1984................... -2.23
1985................... 65.49
1986................... 92.42
1987................... -6.55% 50.58
1988................... 6.32 -10.08
1989................... 24.23 28.95
1990................... -3.23 -4.83
1991................... 6.28 51.86
1992................... -12.13 -7.35
1993................... 35.16 13.39 13.70%
1994................... -4.09% 2.38% 0.18 -3.05% -8.34 -1.88 -3.71%
1995................... 26.75 4.50 7.99 46.40 36.15 28.29 37.10
1996................... 28.64 4.95 11.49 11.43 19.40 15.80 23.90
1997................... 22.94 -2.88 9.88 23.75 21.80 15.54 31.52
Cumulative Return....... 92.25 9.04 99.81 95.73 1,468.35 91.50 115.11
Annual Effective Rate of
Return................. 19.52 2.77 6.55 23.64 21.18 14.93 27.39
<CAPTION>
SALOMON
BROTHERS BACK BAY SALOMON BACK BAY
WESTPEAK LOOMIS STRATEGIC ADVISORS BROTHERS ADVISORS
GROWTH EQUITY- SAYLES BOND BOND U.S. MONEY
AND INCOME INCOME BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
---------- ------------- -------- ------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... 3.39% 2.59%
1984................... 10.78 8.94
1985................... 16.89 6.54
1986................... -1.11% 13.07 5.12
1987................... -2.76 0.69 4.85
1988................... 20.76 6.71 5.84
1989................... 15.51 10.61 7.57
1990................... -16.67 6.46 6.53
1991................... 29.40 16.21 4.60
1992................... 15.10 6.59 2.22
1993................... 13.21% 16.53 10.97 1.41
1994................... -2.80 5.48 -0.32% -1.61% -4.77 0.38% 2.40
1995................... 34.31 33.13 22.81 17.47 19.45 13.18 4.11
1996................... 16.28 12.62 15.08 12.55 3.09 1.65 3.54
1997................... 31.47 26.29 14.40 9.35 9.30 6.75 3.77
Cumulative Return....... 125.94 287.42 61.17 42.24 237.45 23.29 97.71
Annual Effective Rate of
Return................. 19.08 12.90 16.28 11.78 8.86 6.84 4.87
</TABLE>
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
GOVERNMENT/
DOW JONES S&P 500 CORPORATE CONSUMER
INDUSTRIAL STOCK BOND PRICE
AVERAGE(4) INDEX(5) INDEX(6) INDEX(7)
---------- -------- ------------ --------
<S> <C> <C> <C> <C>
As of December 31:
1983............................... 5.11% 1.79% 4.51% 1.07%
1984............................... 1.35 6.27 14.37 3.95
1985............................... 33.62 31.73 18.06 3.77
1986............................... 27.25 18.66 13.13 1.13
1987............................... 5.55 5.25 3.66 4.41
1988............................... 16.21 16.61 6.67 4.42
1989............................... 32.24 31.69 12.77 4.65
1990............................... -.54 -3.10 9.16 6.11
1991............................... 24.25 30.47 14.62 3.06
1992............................... 7.40 7.62 7.17 2.90
1993............................... 16.97 10.08 8.79 2.75
1994............................... 5.02 1.32 -1.93 2.67
1995............................... 36.94 37.58 15.33 2.54
1996............................... 28.91 22.96 4.05 3.32
1997............................... 24.91 33.36 7.87 1.83
Cumulative Return................... 1,166.71 1,026.38 283.07 65.47
Annual Effective Rate of Return..... 18.44 17.52 9.37 3.41
</TABLE>
II-11
<PAGE>
ANNUAL PERCENTAGE CHANGE IN SURRENDER VALUE(1)
<TABLE>
<CAPTION>
MORGAN
LOOMIS STANLEY GOLDMAN
SAYLES INTERNATIONAL ALGER SACHS DAVIS
SMALL MAGNUM EQUITY CAPITAL MIDCAP VENTURE
CAP EQUITY(2) OVERSEAS GROWTH GROWTH VALUE(3) VALUE
---------- ------------- -------- ------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... -1.52%
1984................... -1.76
1985................... 66.75
1986................... 97.06
1987................... -12.29% 51.87
1988................... 6.85 -10.24
1989................... 24.89 29.49
1990................... -2.78 -4.90
1991................... 6.80 52.65
1992................... -11.74 -7.29
1993................... 35.88 14.42 6.85%
1994................... -9.88% -3.66% 0.64 -8.77% -8.34 -1.41 -9.39%
1995................... 27.41 5.00 9.00 47.13 36.15 28.96 37.78
1996................... 29.29 5.45 12.53 11.96 19.41 16.37 24.57
1997................... 23.99 -2.43 10.89 24.88 21.80 16.10 33.15
Cumulative Return....... 84.08 4.08 99.54 87.68 1,468.25 83.54 107.06
Annual Effective Rate of
Return................. 18.11 1.27 6.54 22.01 21.17 13.89 25.86
<CAPTION>
SALOMON
BROTHERS BACK BAY SALOMON BACK BAY
WESTPEAK LOOMIS STRATEGIC ADVISORS BROTHERS ADVISORS
GROWTH EQUITY- SAYLES BOND BOND U.S. MONEY
AND INCOME INCOME BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
---------- ------------- -------- ------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... -2.75% -3.52%
1984................... 11.32 9.47
1985................... 17.46 7.05
1986................... -6.95% 13.61 5.62
1987................... -2.30 1.17 5.35
1988................... 21.34 7.22 6.34
1989................... 16.07 11.13 8.08
1990................... -16.29 6.95 7.03
1991................... 30.02 17.29 5.57
1992................... 15.64 7.57 3.16
1993................... 6.39% 17.08 11.99 2.34
1994................... -2.34 6.46 -6.20% -7.42% -4.77 -5.54% 2.41
1995................... 35.02 34.36 23.41 18.04 19.46 13.73 4.12
1996................... 16.85 13.65 15.63 13.09 3.09 2.14 3.55
1997................... 32.83 26.29 14.95 9.87 9.30 7.26 3.77
Cumulative Return....... 117.74 287.37 53.87 35.79 237.35 17.69 97.61
Annual Effective Rate of
Return................. 18.14 12.90 14.59 10.15 8.85 5.28 4.87
</TABLE>
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
GOVERNMENT/
DOW JONES S&P 500 CORPORATE CONSUMER
INDUSTRIAL STOCK BOND PRICE
AVERAGE(4) INDEX(5) INDEX(6) INDEX(7)
---------- -------- ------------ --------
<S> <C> <C> <C> <C>
As of December 31:
1983............................... 5.11% 1.79% 4.51% 1.07%
1984............................... 1.35 6.27 14.37 3.95
1985............................... 33.62 31.73 18.06 3.77
1986............................... 27.25 18.66 13.13 1.13
1987............................... 5.55 5.25 3.66 4.41
1988............................... 16.21 16.61 6.67 4.42
1989............................... 32.24 31.69 12.77 4.65
1990............................... -.54 -3.10 9.16 6.11
1991............................... 24.25 30.47 14.62 3.06
1992............................... 7.40 7.62 7.17 2.90
1993............................... 16.97 10.08 8.79 2.75
1994............................... 5.02 1.32 -1.93 2.67
1995............................... 36.94 37.58 15.35 2.54
1996............................... 28.91 22.96 4.05 3.32
1997............................... 24.91 33.36 7.87 1.83
Cumulative Return................... 1,166.71 1,026.38 283.07 65.47
Annual Effective Rate of Return..... 18.44 17.52 9.37 3.41
</TABLE>
II-12
<PAGE>
- --------
NOTES:
(1) The Contract Value, surrender value and annual percentage change figures
assume reinvestment of dividends and capital gain distributions. The
Contract Value figures are net of all deductions and expenses except
premium tax. Each surrender value shown equals the Contract Value less
any applicable Contingent Deferred Sales Charge and a pro rata portion of
the annual $30 Administration Contract Charge. (See "Administration
Charges, Contingent Deferred Sales and Other Deductions.") 1983 figures
for the Capital Growth, Back Bay Advisors Bond Income and Back Bay
Advisors Money Market Series are from September 1 through December 31,
1983. The 1986 figure for the Equity-Income Portfolio is from November 1,
1986 through December 31, 1986; the 1987 figure for the Overseas
Portfolio is from February 1, 1987 through December 31, 1987. The 1993
figures for the Goldman Sachs Midcap Value and Westpeak Growth and Income
Series are from May 1, 1993 through December 31, 1993. The 1994 figure
for the Loomis Sayles Small Cap Series is from May 2, 1994 through
December 31, 1994. The 1994 figures for the other Zenith Fund Series are
from November 1, 1994 through December 31, 1994.
(2) The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
(3) The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998, when Goldman Sachs Asset Management
became the subadviser.
(4) The Dow Jones Industrial Average is an unmanaged index of 30 large
industrial stocks traded on the New York Stock Exchange. The annual
percentage change figures have been adjusted to reflect reinvestment of
dividends. 1983 figures are from September 1 through December 31, 1983.
(5) The S&P 500 Stock Index is an unmanaged weighted index of the stock
performance of 500 industrial, transportation, utility and financial
companies. The annual percentage change figures have been adjusted to
reflect reinvestment of dividends. 1983 figures are from September 1
through December 31, 1983.
(6) The Lehman Intermediate Government/Corporate Bond Index is a subset of
the Lehman Government/ Corporate Bond Index covering all issues with
maturities between 1 and 10 years which is comprised of taxable, publicly
issued, non-convertible debt obligations issued or guaranteed by the U.S.
Government or its agencies and another Lehman Index that is comprised of
taxable, fixed rate publicly issued, investment grade non-convertible
corporate debt obligations. 1983 figures are from September 1 through
December 31, 1983.
(7) The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the prices
of goods and services. 1983 figures are from September 1 through December
31, 1983.
II-13
<PAGE>
The chart below illustrates what would have been the change in value of a
$100 monthly investment in each of the Eligible Funds if monthly purchase
payments for a Contract had been made on the first day of each month starting
with September 1, 1983 for the Capital Growth, Back Bay Advisors Bond Income
and Back Bay Advisors Money Market Series; November 1, 1986 for the Equity-
Income Portfolio; February 1, 1987 for the Overseas Portfolio; May 1, 1993 for
the Goldman Sachs Midcap Value and Westpeak Growth and Income Series; May 2,
1994 for the Loomis Sayles Small Cap Series; and November 1, 1994 for the
other six Zenith Fund Series. The figures shown do not reflect the deduction
of any premium tax charge, and only surrender values, not Contract Values,
reflect the deduction of any applicable Contingent Deferred Sales Charge. Each
purchase payment is divided by the Accumulation Unit Value of each sub-account
on the date of the investment to calculate the number of Accumulation Units
purchased. The total number of units under the Contract is reduced on each
Contract anniversary as a result of the $30 Administration Contract Charge, as
described in the illustrations of average annual total return. The Contract
Value and the surrender value are calculated according to the methods
described in the preceding examples. The annual effective rate of return in
this illustration represents the compounded annual rate that the hypothetical
purchase payments shown would have had to earn in order to produce the
Contract Value and surrender value illustrated on December 31, 1997. In other
words, the annual effective rate of return is the rate which, when added to 1
and raised to a power equal to the number of months for which the payment is
invested divided by twelve, and multiplied by the payment amount, for all
monthly payments, would yield the contract value or surrender value on the
ending date of the illustration.
INVESTMENT RESULTS
SEPTEMBER 1, 1983--DECEMBER 31, 1997 (CAPITAL GROWTH, BOND INCOME AND MONEY
MARKET SERIES)
(NOVEMBER 1, 1986--DECEMBER 31, 1997 FOR EQUITY-INCOME PORTFOLIO AND FEBRUARY
1, 1987--DECEMBER 31, 1997 FOR OVERSEAS PORTFOLIO)
(MAY 2, 1994--DECEMBER 31, 1997 FOR LOOMIS SAYLES SMALL CAP SERIES)
(NOVEMBER 1, 1994--DECEMBER 31, 1997 FOR ALL OTHER ZENITH FUND SERIES)
<TABLE>
<CAPTION>
CUMULATIVE
PAYMENTS(1)
-----------
<S> <C>
As of December
31:
1983............ $ 400
1984............ 1,600
1985............ 2,800
1986............ 4,000
1987............ 5,200
1988............ 6,400
1989............ 7,600
1990............ 8,800
1991............ 10,000
1992............ 11,200
1993............ 12,400
1994............ 13,600
1995............ 14,800
1996............ 16,000
1997............ 17,200
Annual Effective
Rate of Return...
<CAPTION>
CONTRACT VALUE
---------------------------------------------------------------------------------------------------------
MORGAN
LOOMIS STANLEY GOLDMAN WESTPEAK
SAYLES INTERNATIONAL ALGER SACHS DAVIS GROWTH
SMALL MAGNUM EQUITY CAPITAL MIDCAP VENTURE AND EQUITY-
CAP EQUITY(2) OVERSEAS GROWTH GROWTH VALUE(3) VALUE INCOME INCOME
---------- ------------- ----------- ---------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December
31:
1983............ $ 409.40
1984............ 1,648.95
1985............ 4,277.11
1986............ 9,765.58 $ 195.78
1987............ $ 1,007.13 15,890.14 1,215.08
1988............ 2,306.86 15,451.37 2,714.98
1989............ 4,229.80 21,215.12 4,346.48
1990............ 5,222.71 21,316.48 4,721.63
1991............ 6,778.08 33,833.21 7,427.49
1992............ 7,031.68 32,549.81 9,840.29
1993............ 10,872.84 38,177.72 $ 848.90 $ 848.38 12,731.03
1994............ $ 782.65 $ 204.56 12,048.05 $ 199.08 36,110.66 2,021.49 $ 197.97 2,002.46 14,650.43
1995............ 2,337.57 1,436.32 14,272.33 1,671.74 50,536.57 3,907.29 1,632.30 4,059.83 20,892.48
1996............ 4,363.73 2,706.36 17,185.14 3,119.42 61,680.44 5,786.10 3,373.37 6,026.98 24,811.34
1997............ 6,686.43 3,767.74 20,101.70 5,139.40 76,386.05 7,957.27 5,782.92 9,279.81 32,682.67
Annual Effective
Rate of Return... 23.38% -.52% 7.58% 19.45% 18.88% 15.07% 27.53% 21.87% 15.10%
<CAPTION>
-------------------------------------------------------------
SALOMON BACK BAY SALOMON BACK BAY
LOOMIS BROTHERS ADVISORS BROTHERS ADVISORS
SAYLES STRATEGIC BOND BOND U.S. MONEY
BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
---------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
As of December
31:
1983............ $ 405.13 $ 406.44
1984............ 1,720.27 1,673.57
1985............ 3,304.19 2,999.59
1986............ 4,982.85 4,362.45
1987............ 6,208.12 5,788.99
1988............ 7,835.43 7,350.98
1989............ 9,915.71 9,142.45
1990............ 11,807.13 10,970.63
1991............ 15,037.48 12,694.15
1992............ 17,272.18 14,182.75
1993............ 20,405.31 15,588.48
1994............ $ 200.89 $ 196.89 20,609.31 $ 200.97 17,179.87
1995............ 1,543.68 1,507.66 25,924.91 1,476.06 19,112.88
1996............ 3,072.43 2,953.92 27,970.49 2,704.81 21,015.28
1997............ 4,784.73 4,468.88 31,839.31 4,116.70 23,035.65
Annual Effective
Rate of Return... 14.68% 10.22% 8.14% 4.99% 3.95%
</TABLE>
- ----
(1) Cumulative payments as of December 31, 1997 would be $13,400 for Equity-
Income, $13,100 for Overseas, $5,600 for Goldman Sachs Midcap Value and
Westpeak Growth and Income, $4,400 for Loomis Sayles Small Cap, and
$3,800 for each of the other Zenith Fund series.
(2) The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
(3) The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998 when Goldman Sachs Asset Management
became the subadviser.
II-14
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE
PAYMENTS(1)
-----------
<S> <C>
As of December
31:
1983............ $ 400
1984............ 1,600
1985............ 2,800
1986............ 4,000
1987............ 5,200
1988............ 6,400
1989............ 7,600
1990............ 8,800
1991............ 10,000
1992............ 11,200
1993............ 12,400
1994............ 13,600
1995............ 14,800
1996............ 16,000
1997............ 17,200
Annual Effective
Rate of Return...
<CAPTION>
SURRENDER VALUE
--------------------------------------------------------------------------------------------------------
MORGAN
LOOMIS STANLEY GOLDMAN WESTPEAK
SAYLES INTERNATIONAL ALGER SACHS DAVIS GROWTH
SMALL MAGNUM EQUITY CAPITAL MIDCAP VENTURE AND EQUITY-
CAP EQUITY(2) OVERSEAS GROWTH GROWTH VALUE(3) VALUE INCOME INCOME
---------- ------------- ----------- ---------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December
31:
1983............ $ 375.45
1984............ 1,549.91
1985............ 4,055.39
1986............ 9,435.58 $ 179.32
1987............ $ 920.71 15,464.14 1,144.47
1988............ 2,154.79 14,929.37 2,575.59
1989............ 3,992.93 20,597.12 4,145.89
1990............ 4,960.18 20,730.94 4,525.41
1991............ 6,476.07 33,214.21 7,155.10
1992............ 6,751.04 32,246.86 9,525.32
1993............ 10,502.85 38,167.72 $ 779.24 $ 778.75 12,382.29
1994............ $ 719.36 $ 187.60 11,695.26 $ 182.44 36,100.66 1,892.33 $ 181.39 1,874.32 14,381.73
1995............ 2,193.84 1,353.76 13,987.92 1,576.47 50,526.57 3,693.88 1,539.15 3,838.86 20,699.45
1996............ 4,130.23 2,567.39 17,002.98 2,950.51 61,670.44 5,505.72 3,201.39 5,735.76 24,806.34
1997............ 6,363.04 3,593.19 20,074.20 4,903.13 76,376.05 7,615.01 5,517.69 8,883.98 32,677.67
Annual Effective
Rate of Return... 20.49% -3.41% 7.55% 16.30% 18.88% 13.15% 24.29% 19.93% 15.09%
<CAPTION>
--------------------------------------------------------------
SALOMON BACK BAY SALOMON BACK BAY
LOOMIS BROTHERS ADVISORS BROTHERS ADVISORS
SAYLES STRATEGIC BOND BOND U.S. MONEY
BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
---------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
As of December
31:
1983............ $ 371.43 $ 372.66
1984............ 1,617.37 1,573.20
1985............ 3,130.63 2,841.11
1986............ 4,748.62 4,156.14
1987............ 5,946.69 5,544.54
1988............ 7,543.35 7,076.34
1989............ 9,593.36 8,844.46
1990............ 11,478.34 10,664.43
1991............ 14,756.80 12,455.65
1992............ 17,106.73 14,045.10
1993............ 20,395.31 15,578.48
1994............ $ 184.14 $ 180.37 20,599.31 $ 184.22 17,169.67
1995............ 1,455.32 1,421.25 25,914.91 1,391.35 19,102.88
1996............ 2,915.35 2,802.70 27,960.49 2,565.93 21,005.28
1997............ 4,564.41 4,262.78 31,829.31 3,926.45 23,025.65
Annual Effective
Rate of Return... 11.60% 7.19% 8.13% 2.03% 3.95%
</TABLE>
- ----
(1) Cumulative payments as of December 31, 1997 would be $13,400 for Equity-
Income, $13,100 for Overseas, $5,600 for Goldman Sachs Midcap Value and
Westpeak Growth and Income, $4,400 for Loomis Sayles Small Cap, and $3,800
for each of the other Zenith Fund series.
(2) The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
(3) The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998, when Goldman Sachs Asset Management
became the subadviser.
II-15
<PAGE>
As discussed in the prospectus in the third to the last paragraph of the
section entitled "Investment Experience Information," the Variable Account may
illustrate historical investment performance by showing the percentage change
in unit value and the annual effective rate of return of each sub-account of
the Variable Account for every calendar year since inception of the
corresponding Eligible Funds to the date of the illustration and for the 10, 5
and 1 year periods and the year-to-date period ending with the date of the
illustration. Examples of such illustrations follow. Such illustrations do not
reflect the impact of any Contingent Deferred Sales Charge or the annual $30
Administration Contract Charge. The method of calculating the percentage
change in unit value is described in the prospectus under "Investment
Experience Information." The annual effective rate of return in these
illustrations is calculated by dividing the unit value at the end of the
period by the unit value at the beginning of the period, raising this quantity
to the power of 1/n (where n is the number of years in the period), and then
subtracting 1.
Set forth on the following pages are illustrations of the percentage change
in unit value information and annual effective rate of return information
discussed above that may appear in the Variable Account's Annual and Semi-
Annual Reports and in other illustrations of historical investment
performance. Such illustrations do not reflect the impact of any Contingent
Deferred Sales Charge or the annual $30 Administration Contract Charge.
LOOMIS SAYLES SMALL CAP SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
May 1, 1994................................................ 1.000000
December 31, 1994.......................................... 0.959097 -4.1%
December 31, 1995.......................................... 1.219226 27.1%
December 31, 1996.......................................... 1.571807 28.9%
December 31, 1997.......................................... 1.936137 23.2%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 8 months ended December 31, 1997.................... 93.6% 19.7%
1 year ended December 31, 1997............................... 23.2% 23.2%
</TABLE>
MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SUB-ACCOUNT**
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994........................................... 1.000000
December 31, 1994.......................................... 1.023745 2.4%
December 31, 1995.......................................... 1.073005 4.8%
December 31, 1996.......................................... 1.129151 5.2%
December 31, 1997.......................................... 1.099535 -2.6%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997.................... 10.0% 3.0%
1 year ended December 31, 1997............................... -2.6% -2.6%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
** The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
II-16
<PAGE>
OVERSEAS SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
January 28, 1987........................................... 1.000000
December 31, 1987.......................................... 0.934480 -6.6%
December 31, 1988.......................................... 0.996890 6.7%
December 31, 1989.......................................... 1.242056 24.6%
December 31, 1990.......................................... 1.204901 -3.0%
December 31, 1991.......................................... 1.283814 6.5%
December 31, 1992.......................................... 1.130753 -11.9%
December 31, 1993.......................................... 1.532303 35.5%
December 31, 1994.......................................... 1.537887 0.4%
December 31, 1995.......................................... 1.664159 8.2%
December 31, 1996.......................................... 1.858653 11.7%
December 31, 1997.......................................... 2.045625 10.1%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
10 years, 11 months ended December 31, 1997.................. 104.6% 6.8%
10 years ended December 31, 1997............................. 118.9% 8.1%
5 years ended December 31, 1997.............................. 80.9% 12.6%
1 year ended December 31, 1997............................... 10.1% 10.1%
</TABLE>
ALGER EQUITY GROWTH SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994........................................... 1.000000
December 31, 1994.......................................... 0.955891 -4.4%
December 31, 1995.......................................... 1.402375 46.7%
December 31, 1996.......................................... 1.565675 11.6%
December 31, 1997.......................................... 1.940577 23.9%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997.................... 94.1% 23.3%
1 year ended December 31, 1997............................... 23.9% 23.9%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales Charge
or the annual $30 Administration Contract Charge.
II-17
<PAGE>
CAPITAL GROWTH SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
August 26, 1983............................................ 1.000000
December 31, 1983.......................................... 1.086144 8.6%
December 31, 1984.......................................... 1.065136 -1.9%
December 31, 1985.......................................... 1.766488 65.8%
December 31, 1986.......................................... 3.402150 92.6%
December 31, 1987.......................................... 5.125504 50.7%
December 31, 1988.......................................... 4.612285 -10.0%
December 31, 1989.......................................... 5.950283 29.0%
December 31, 1990.......................................... 5.665855 -4.8%
December 31, 1991.......................................... 8.607664 51.9%
December 31, 1992.......................................... 7.978068 -7.3%
December 31, 1993.......................................... 9.049554 13.4%
December 31, 1994.......................................... 8.297578 -8.3%
December 31, 1995.......................................... 11.300017 36.2%
December 31, 1996.......................................... 13.496435 19.4%
December 31, 1997.......................................... 16.441932 21.8%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
14 years, 4 months ended December 31, 1997................... 1,544.2% 21.5%
10 years ended December 31, 1997............................. 220.8% 12.4%
5 years ended December 31, 1997.............................. 106.1% 15.6%
1 year ended December 31, 1997............................... 21.8% 21.8%
</TABLE>
GOLDMAN SACHS MIDCAP VALUE** SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
April 30, 1993............................................. 1.000000
December 31, 1993.......................................... 1.137039 13.7%
December 31, 1994.......................................... 1.118794 -1.6%
December 31, 1995.......................................... 1.438865 28.6%
December 31, 1996.......................................... 1.669358 16.0%
December 31, 1997.......................................... 1.932280 15.7%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
4 years, 8 months ended December 31, 1997.................... 93.2% 15.1%
1 year ended December 31, 1997............................... 15.7% 15.7%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
** The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998, when Goldman Sachs Asset Management became
the subadviser.
II-18
<PAGE>
DAVIS VENTURE VALUE SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994........................................... 1.000000
December 31, 1994.......................................... 0.962860 -3.7%
December 31, 1995.......................................... 1.323183 37.4%
December 31, 1996.......................................... 1.642613 24.1%
December 31, 1997.......................................... 2.163463 31.7%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997.................... 116.3% 27.6%
1 year ended December 31, 1997............................... 31.7% 31.7%
</TABLE>
WESTPEAK GROWTH AND INCOME SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
April 30, 1993............................................. 1.000000
December 31, 1993.......................................... 1.132111 13.2%
December 31, 1994.......................................... 1.103489 -2.5%
December 31, 1995.......................................... 1.485762 34.6%
December 31, 1996.......................................... 1.730922 16.5%
December 31, 1997.......................................... 2.279329 31.7%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
4 years, 8 months ended December 31, 1997.................... 127.9% 19.3%
1 year ended December 31, 1997............................... 31.7% 31.7%
</TABLE>
EQUITY-INCOME SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 9, 1986............................................ 1.000000
December 31, 1986.......................................... 0.998929 -0.1%
December 31, 1987.......................................... 0.974348 -2.5%
December 31, 1988.......................................... 1.179618 21.1%
December 31, 1989.......................................... 1.365709 15.8%
December 31, 1990.......................................... 1.141297 -16.4%
December 31, 1991.......................................... 1.480005 29.7%
December 31, 1992.......................................... 1.706687 15.3%
December 31, 1993.......................................... 1.991856 16.7%
December 31, 1994.......................................... 2.104085 5.6%
December 31, 1995.......................................... 2.804492 33.3%
December 31, 1996.......................................... 3.161755 12.7%
December 31, 1997.......................................... 3.996188 26.4%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales Charge
or the annual $30 Administration Contract Charge.
II-19
<PAGE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
11 years, 2 months ended December 31, 1997................... 299.6% 13.1%
10 years ended December 31, 1997............................. 310.1% 15.2%
5 years ended December 31, 1997.............................. 134.1% 18.5%
1 year ended December 31, 1997............................... 26.4% 26.4%
</TABLE>
LOOMIS SAYLES BALANCED SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994.......................................... 1.000000
December 31, 1994......................................... 0.996791 -0.3%
December 31, 1995......................................... 1.227281 23.1%
December 31, 1996......................................... 1.415482 15.3%
December 31, 1997......................................... 1.622453 14.6%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997.................... 62.2% 16.5%
1 year ended December 31, 1997............................... 14.6% 14.6%
</TABLE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994........................................... 1.000000
December 31, 1994.......................................... 0.983850 -1.6%
December 31, 1995.......................................... 1.158823 17.8%
December 31, 1996.......................................... 1.307292 12.8%
December 31, 1997.......................................... 1.432601 9.6%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997.................... 43.3% 12.0%
1 year ended December 31, 1997............................... 9.6% 9.6%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales Charge
or the annual $30 Administration Contract Charge.
II-20
<PAGE>
BACK BAY ADVISORS BOND INCOME SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
- ---- ------------ ------
<S> <C> <C>
August 26, 1983............................................. 1.000000
December 31, 1983........................................... 1.027196 2.7%
December 31, 1984........................................... 1.141109 11.1%
December 31, 1985........................................... 1.337005 17.2%
December 31, 1986........................................... 1.514752 13.3%
December 31, 1987........................................... 1.528314 0.9%
December 31, 1988........................................... 1.633970 6.9%
December 31, 1989........................................... 1.810362 10.8%
December 31, 1990........................................... 1.930406 6.6%
December 31, 1991........................................... 2.246568 16.4%
December 31, 1992........................................... 2.397657 6.7%
December 31, 1993........................................... 2.663825 11.1%
December 31, 1994........................................... 2.539801 -4.7%
December 31, 1995........................................... 3.037039 19.6%
December 31, 1996........................................... 3.134109 3.2%
December 31, 1997........................................... 3.428788 9.4%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
14 years, 4 months ended December 31, 1997................... 242.9% 9.0%
10 years ended December 31, 1997............................. 124.4% 8.4%
5 years ended December 31, 1997.............................. 43.0% 7.4%
1 year ended December 31, 1997............................... 9.4% 9.4%
</TABLE>
SALOMON BROTHERS U.S. GOVERNMENT SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
- ---- ------------ ------
<S> <C> <C>
October 31, 1994............................................ 1.000000
December 31, 1994........................................... 1.003770 0.4%
December 31, 1995........................................... 1.139109 13.5%
December 31, 1996........................................... 1.160957 1.9%
December 31, 1997........................................... 1.242399 7.0%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997.................... 24.2% 7.1%
1 year ended December 31, 1997............................... 7.0% 7.0%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales Charge
or the annual $30 Administration Contract Charge.
II-21
<PAGE>
BACK BAY ADVISORS MONEY MARKEY SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
- ---- ------------ ------
<S> <C> <C>
August 26, 1983............................................. 1.000000
December 31, 1983........................................... 1.027165 2.7%
December 31, 1984........................................... 1.122053 9.2%
December 31, 1985........................................... 1.198477 6.8%
December 31, 1986........................................... 1.262853 5.4%
December 31, 1987........................................... 1.327245 5.1%
December 31, 1988........................................... 1.407892 6.1%
December 31, 1989........................................... 1.517621 7.8%
December 31, 1990........................................... 1.619846 6.7%
December 31, 1991........................................... 1.697425 4.8%
December 31, 1992........................................... 1.738206 2.4%
December 31, 1993........................................... 1.765866 1.6%
December 31, 1994........................................... 1.811432 2.6%
December 31, 1995........................................... 1.889065 4.3%
December 31, 1996........................................... 1.959126 3.7%
December 31, 1997........................................... 2.036045 3.9%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
14 years, 4 months ended December 31, 1997................... 103.6% 5.1%
10 years ended December 31, 1997............................. 53.4% 4.4%
5 years ended December 31, 1997.............................. 17.1% 3.2%
1 year ended December 31, 1997............................... 3.9% 3.9%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales Charge
or the annual $30 Administration Contract Charge.
II-22
<PAGE>
NET INVESTMENT FACTOR
The net investment factor ("Net Investment Factor") for each sub-account is
determined on each day on which the New York Stock Exchange is open for
trading as follows:
(1) The net asset value per share of the Eligible Fund held in the sub-
account determined as of the close of regular trading on the New York Stock
Exchange on a particular day;
(2) Plus the per share amount of any dividend or capital gains
distribution made by the Eligible Fund since the close of regular trading
on the New York Stock Exchange on the preceding trading day;
(3) Is divided by the net asset value per share of the Eligible Fund as
of the close of regular trading on the New York Stock Exchange on the
preceding trading day; and
(4) Finally, the daily charges for the Administration Asset Charge and
Mortality and Expense Risk Charge that have accumulated since the close of
regular trading on the New York Stock Exchange on the preceding trading day
are subtracted. (See "Administration Charges, Contingent Deferred Sales
Charge and Other Deductions" in the prospectus.) On an annual basis, the
total deduction for such charges equals 1.35% of the daily net asset value
of the Variable Account.
ANNUITY PAYMENTS
At annuitization, the Contract Value is applied toward the purchase of
monthly variable annuity payments. The amount of these payments will be
determined on the basis of (i) annuity purchase rates not lower than the rates
set forth in the Life Income Tables contained in the Contract that reflect the
age of the Payee at annuitization, (ii) the assumed interest rate selected,
(iii) the type of payment option selected, and (iv) the investment performance
of the Eligible Fund selected.
When a variable payment option is selected, the Contract proceeds will be
applied at annuity purchase rates, which vary depending on the particular
option selected and the age of the Payee, to calculate the basic payment level
purchased by the Contract Value. With respect to Contracts issued in New York
or Oregon for use in situations not involving an employer-sponsored plan,
annuity purchase rates used to calculate the basic payment level will also
reflect the sex of the Payee when the payment option involves a life
contingency. The impact of the choice of option and the sex and age of the
Payee on the level of annuity payments is described in the prospectus under
"Amount of Variable Annuity Payments."
The amount of the basic payment level is determined by applying the
applicable annuity purchase rate to the amount applied from each sub-account
to provide the annuity. This basic payment level is converted into annuity
units, the number of which remains constant. Each monthly annuity payment is
in an amount equal to that number of annuity units multiplied by the
applicable annuity unit value for that payment (described below). The
applicable annuity unit value for each sub-account will change from day to day
depending upon the investment performance of the sub-account, which in turn
depends upon the investment performance of the Eligible Fund in which the sub-
account invests.
The selection of an assumed interest rate ("Assumed Interest Rate") will
affect both the basic payment level and the amount by which subsequent
payments increase or decrease. The basic payment level is calculated on the
assumption that the Net Investment Factors applicable to the Contract will be
equivalent on an annual basis to a net investment return at the Assumed
Interest Rate. If this assumption is met following the date any payment is
determined, then the amount of the next payment will be exactly equal to the
amount of the preceding payment. If the actual Net Investment Factors are
equivalent to a net investment return greater than the Assumed Interest Rate,
the next payment will be larger than the preceding one; if the actual Net
Investment Factors are equivalent to a net investment return smaller than the
Assumed Interest Rate, then
II-23
<PAGE>
the next payment will be smaller than the preceding payment. The definition of
the Assumed Interest Rate, and the effect of the level of the Assumed Interest
Rate on the amount of monthly payments is explained in the prospectus under
"Amount of Variable Annuity Payments."
The number of annuity units credited under a variable payment option is
determined as follows:
(1) The proceeds under a deferred Contract, or the net purchase payment
under an immediate Contract (at such time as immediate Contracts may be
made available), are applied at the Company's annuity purchase rates for
the selected Assumed Interest Rate to determine the basic payment level.
(The amount of Contract Value or Death Proceeds applied will be reduced by
any applicable Contingent Deferred Sales Charge, Administration Contract
Charge and the amount of any outstanding loan plus accrued interest.)
(2) The number of annuity units is determined by dividing the amount of
the basic payment level by the applicable annuity unit value(s) next
determined following the date of application of proceeds (in the case of a
deferred Contract) or net purchase payment (in the case of an immediate
Contract.)
The dollar amount of the initial payment will be at the basic payment level.
The dollar amount of each subsequent payment is determined by multiplying the
number of annuity units by the applicable annuity unit value which is
determined at least 14 days before the payment is due.
The value of an annuity unit for each sub-account depends on the Assumed
Interest Rate and on the Net Investment Factors applicable at the time of
valuation. The initial annuity unit values were set at $1.00 effective on or
about the date on which shares of the corresponding Eligible Funds were first
publicly available. The Net Investment Factor and, therefore, changes in the
value of an annuity unit under a variable payment option, reflect the
deduction of the Mortality and Expense Risk Charge and Administration Asset
Charge. (See "Net Investment Factor" above.)
The annuity unit value for each sub-account is equal to the corresponding
annuity unit value for the sub-account previously determined multiplied by the
applicable Net Investment Factor for that sub-account for the New York Stock
Exchange trading day then ended, and further multiplied by the assumed
interest factor ("Assumed Interest Factor") for each day of the valuation
period. The Assumed Interest Factor represents the daily equivalent of the
Contract's annual Assumed Interest Rate. In the calculation of annuity unit
values, the Assumed Interest Factor has the effect of reducing the Net
Investment Factor by an amount equal to the daily equivalent of the Contract's
Assumed Interest Rate. The result of this adjustment is that if the Net
Investment Factor for a valuation period is greater (when expressed as an
annual net investment return) than the Assumed Interest Rate, the annuity unit
value will increase. If the Net Investment Factor for the period is less (when
expressed as an annual net investment return) than the Assumed Interest Rate,
the annuity unit value will decrease. At an Assumed Interest Rate of 3.5%, the
Assumed Interest Factor is .9999058. Assumed Interest Factors for other
Assumed Interest Rates are computed on a consistent basis.
An illustration of annuity income payments under various hypothetical and
historical rates appear below. The monthly equivalents of the hypothetical
annual net returns of 0%, 5.71%, 6%, 8% and 10% shown in the tables at pages
II-23 and II-24 are 0%, 0.46 %, 0.49%, 0.64% and 0.80%.
II-24
<PAGE>
HYPOTHETICAL ILLUSTRATIONS OF ANNUITY INCOME PAYOUTS
The following tables have been prepared to show how variable annuity income
payments under the Contract change with investment performance over an
extended period of time. The tables illustrate how monthly annuity income
payments would vary over time if the return on assets in the selected
portfolios were a uniform gross annual rate of 0%, 5.71%, 6%, 8% or 10%. The
values would be different from those shown if the returns averaged 0%, 5.71%,
6%, 8% or 10%, but fluctuated over and under those averages throughout the
years.
The tables reflect the daily charge to the sub-accounts for assuming
mortality and expense risks, which is equivalent to an annual charge of .95%
and the daily administrative charge which is equivalent to an annual charge of
0.40%. The amounts shown in the tables also take into account the Eligible
Funds' management fees and operating expenses which are assumed to be at an
annual rate of .77% of the average daily net assets of the Eligible Funds.
Actual fees and expenses of the Eligible Funds associated with your Contract
may be more or less than .77%, will vary from year to year, and will depend on
how you allocate your Contract Value. See the section in your current
prospectus entitled "Expense Table" for more complete details. The monthly
annuity income payments illustrated are on a pre-tax basis. The federal income
tax treatment of annuity income considerations is generally described in the
section of your current prospectus entitled "Federal Income Tax Status."
The tables show both the gross rate and the net rate. The difference between
gross and net rates represents the 1.35% for mortality and expense risk and
administrative charges and the assumed .77% for investment management and
operating expenses. Since these charges are deducted daily from assets, the
difference between the gross and net rate is not exactly 2.12%.
Two tables follow. The first table assumes that 100% of the Contract Value
is allocated to a variable annuity income option, the second assumes that 50%
of the Contract Value is placed under a fixed annuity income option, using the
fixed crediting rate the Company offered on the fixed annuity income option at
the date of the illustration. Both illustrations assume that the final value
of the accumulation account is $100,000 and is applied at age 65 to purchase a
life annuity for a guaranteed period of 10 years certain and life thereafter.
When part of the Contract Value has been allocated to the fixed annuity
income option, the guaranteed minimum annuity income payment resulting from
this allocation is also shown. The illustrated variable annuity income
payments are determined through the use of standard mortality tables and an
assumed interest rate of 3.5% per year. Thus, actual performance greater than
3.5% per year will result in increasing annuity income payments and actual
performance less than 3.5% per year will result in decreasing annuity income
payments. The Company offers alternative Assumed Interest Rates from which you
may select. Fixed annuity income payments remain constant. Initial monthly
annuity income payments under a fixed annuity income payout are generally
higher than initial payments under a variable income payout option.
These tables show the monthly income payments for several hypothetical
constant assumed interest rates. Of course, actual investment performance will
not be constant and may be volatile. Actual monthly income amounts would
differ from those shown if the actual rate of return averaged the rate shown
over a period of years, but also fluctuated above or below those averages for
individual contract years. Upon request, and when you are considering an
annuity income option, the Company will furnish a comparable illustration
based on your individual circumstances.
II-25
<PAGE>
ANNUITY PAY-OUT ILLUSTRATION
(100% VARIABLE PAYOUT)
<TABLE>
<C> <C> <S> <C>
ANNUITANT: GROSS AMOUNT OF CONTRACT
John Doe VALUE: $100,000
SEX: Unisex DATE OF ILLUSTRATION: 4/1/98
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAYMENTS: Monthly
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT BASED ON CURRENT RATES, IF 100% FIXED
ANNUITY OPTION SELECTED FOR AGE 65: $562.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT.
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN CONSTANT: 3.5%
VARIABLE MONTHLY ANNUITY INCOME PAYMENT ON THE DATE OF THE
ILLUSTRATION: $581.00
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
<TABLE>
<CAPTION>
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN
WITH AN ASSUMED RATE OF RETURN OF:
----------------------------------------------
GROSS 0% 5.71% 6% 8% 10%
PAYMENT CALENDAR ----- ----------------- -------- -------- ----------
YEAR YEAR AGE NET** -2.10% 3.50% 3.78% 5.74% 7.70%
- ------- -------- --- ----- ----------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1998 65 581.00 581.00 581.00 581.00 581.00
2 1999 66 549.59 581.00 582.56 593.56 604.55
3 2000 67 519.87 581.00 584.13 606.39 629.05
4 2001 68 491.76 581.00 585.71 619.49 654.55
5 2002 69 465.18 581.00 587.26 632.88 681.08
10 2007 74 352.31 581.00 595.23 704.29 830.76
15 2012 79 266.82 581.00 603.29 783.76 1,013.34
20 2017 84 202.08 581.00 611.46 872.19 1,236.04
</TABLE>
IT IS EMPHASIZED THAT THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE.
ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY
THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED.
THE AMOUNT OF THE INCOME PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE
ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A
PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. SINCE IT IS HIGHLY LIKELY THAT PERFORMANCE WILL
FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME (BASED ON THE VARIABLE ACCOUNT)
WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS
THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period, payments
will be continued for the balance of the Certain Period. The cumulative
amount of income payments received under the annuity depends on how long the
Annuitant lives after the Certain Period. An annuity pools the mortality
experience of Annuitants. Annuitants who die earlier, in effect, subsidize
the payments for those who live longer.
** The illustrated Net Assumed Rates of Return reflect the deduction of
average fund expenses and the 1.35% Mortality and Expense Risk and
Administration Asset Charges from the Gross Rates of Return.
II-26
<PAGE>
ANNUITY PAY-OUT ILLUSTRATION
(50% VARIABLE--50% FIXED PAYOUT)
<TABLE>
<C> <C> <S> <C>
ANNUITANT: GROSS AMOUNT OF CONTRACT
John Doe VALUE: $100,000
SEX: Unisex DATE OF ILLUSTRATION: 4/1/98
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAYMENTS: Monthly
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT FOR AGE 65 BASED ON CURRENT RATES, IF
100% FIXED ANNUITY OPTION SELECTED: $562.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 50% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT AND 50% TO FIXED PAYOUT
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN CONSTANT: 3.5%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE, BUT WILL NEVER
BE LESS THAN: $281.00. THE MONTHLY GUARANTEED PAYMENT OF $281.00 IS BEING
PROVIDED BY THE $50,000 APPLIED UNDER THE FIXED ANNUITY OPTION.
<TABLE>
<CAPTION>
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN
WITH AN ASSUMED RATE OF RETURN OF:
-------------------------------------------------
GROSS 0% 5.71% 6% 8% 10%
PAYMENT CALENDAR ----- --------- --------- --------- --------- ---------
YEAR YEAR AGE NET** -2.10% 3.50% 3.78% 5.74% 7.70%
- ------- -------- --- ----- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1998 65 $571.50 $571.50 $571.50 $571.50 $571.50
2 1999 66 555.79 571.50 572.28 577.78 583.27
3 2000 67 540.94 571.50 573.07 584.19 595.53
4 2001 68 526.88 571.50 573.85 590.75 608.28
5 2002 69 513.59 571.50 574.64 597.44 621.54
10 2007 74 457.15 571.50 578.62 633.15 696.38
15 2012 79 414.41 571.50 582.64 672.88 787.67
20 2017 84 382.04 571.50 586.73 717.10 899.02
</TABLE>
IT IS EMPHASIZED THAT THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE.
ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY
THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED.
THE AMOUNT OF THE INCOME PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE
ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A
PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. SINCE IT IS HIGHLY LIKELY THAT PERFORMANCE WILL
FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME (BASED ON THE VARIABLE ACCOUNT)
WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS
THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period, payments
will be continued for the balance of the Certain Period. The cumulative
amount of income payments received under the annuity depends on how long the
Annuitant lives after the Certain Period. An annuity pools the mortality
experience of Annuitants. Annuitants who die earlier, in effect, subsidize
the payments for those who live longer.
** The illustrated Net Assumed Rates of Return apply only to the variable
portion of the monthly payment and reflect the deduction of average fund
expenses and the 1.35% Mortality and Expense Risk and Administration Asset
Charges from the Gross Rate of Return.
II-27
<PAGE>
HISTORICAL ILLUSTRATIONS OF ANNUITY INCOME PAYOUTS
The following tables have been prepared to show how variable annuity income
payments under the Contract change with investment performance over an
extended period of time. In comparison with hypothetical illustrations based
on a uniform annual rate of return, the table uses historical annual returns
to illustrate that monthly annuity income payments vary over time based on
fluctuations in annual returns.
The tables reflect the daily charge to the sub-accounts for assuming
mortality and expense risks, which is equivalent to an annual charge of .95%
and the daily administrative charge which is equivalent to an annual charge of
.40%. The amounts shown in the tables also take into account the actual
Eligible Funds' management fees and operating expenses. Actual fees and
expenses of the Eligible Funds associated with your Contract may be more or
less than the historical fees, will vary from year to year, and will depend on
how you allocate your Contract Value. See the section in your current
prospectus entitled "Expense Table" for more complete details. The monthly
annuity income payments illustrated are on a pre-tax basis. The federal income
tax treatment of annuity income considerations is generally described in the
section of your current prospectus entitled "Federal Income Tax Status."
The following tables assume that 100% of the Contract Value is allocated to
a variable annuity income option, that the final value of the accumulation
account is $100,000 and is applied at age 65 to purchase a life annuity for a
guaranteed period of 10 years certain and life thereafter. The table assumes
that the Annuitant was age 65 in 1983, the year of inception for the Capital
Growth, Back Bay Advisors Bond Income and Back Bay Advisors Money Market
Series, and that the Annuitant's age had increased by the time the other
Eligible Funds became available. The historical variable annuity income
payments are based on an assumed interest rate of 3.5% per year. Thus, actual
performance greater than 3.5% per year resulted in an increased annuity income
payment and actual performance less than 3.5% per year resulted in a decreased
annuity income payment. The Company offers alternative Assumed Interest Rates
(AIR) from which you may select: 0% and 5%. An AIR of 0% will result in a
lower initial payment than a 3.5% or 5% AIR. Similarly, an AIR of 5% will
result in a higher initial payment than a 0% or 3.5% AIR.
The table illustrates the amount of the first monthly payment for each year
shown. During each year, the monthly payments would vary to reflect
fluctuations in the actual rate of return on the Eligible Funds. Upon request,
and when you are considering an annuity income option, the Company will
furnish a comparable illustration based on your individual circumstances.
II-28
<PAGE>
ANNUITY PAY-OUT HISTORICAL ILLUSTRATION
(100% VARIABLE PAYOUT)
<TABLE>
<C> <C> <S> <C>
ANNUITANT: GROSS AMOUNT OF CONTRACT
John Doe VALUE: $100,000
SEX: Unisex DATE OF ILLUSTRATION: 4/1/98
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAYMENTS: Monthly
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT BASED ON CURRENT RATES, IF 100% FIXED
ANNUITY OPTION SELECTED: FOR AGE 65: $562.00; FOR AGE 69: $617.00; FOR AGE 75:
$720.00; AND FOR AGE 76: $739.00.
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT.
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN
CONSTANT: 3.50%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN WITH
100% OF THE CONTRACT VALUE INVESTED IN:
<TABLE>
<CAPTION>
MORGAN GOLDMAN WESTPEAK
LOOMIS STANLEY ALGER SACHS DAVIS GROWTH
PAYMENT CALENDAR SAYLES INTERNATIONAL FIDELITY EQUITY CAPITAL MIDCAP VENTURE AND
YEAR YEAR AGE SMALL CAP MAGNUM OVERSEAS GROWTH GROWTH VALUE** VALUE INCOME
- ------- -------- --- --------- ------------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1983 65 $ 581.00
2 1984 66 601.36
3 1985 67 569.73
4 1986 68 912.93
5 1987 69 $642.00 1,698.78
6 1988 70 581.39 2,472.75
7 1989 71 599.19 2,149.71
8 1990 72 721.30 2,679.54
9 1991 73 676.06 2,465.18
10 1992 74 695.98 3,618.49
11 1993 75 592.22 3,240.10 $ 747.00 $ 747.00
12 1994 76 $ 765.00 $765.00 775.38 $ 765.00 3,550.97 829.98 $ 765.00 826.38
13 1995 77 733.73 778.70 751.89 737.42 3,145.80 789.05 732.39 778.25
14 1996 78 901.19 788.57 786.11 1,045.27 4,139.22 980.46 972.43 1,012.42
15 1997 79 1,122.40 801.70 848.22 1,127.42 4,776.14 1,098.95 1,166.26 1,139.48
16 1998 80 1,335.81 754.27 901.98 1,350.12 5,621.74 1,229.02 1,484.12 1,449.76
</TABLE>
INVESTMENT PERFORMANCE RESULTS CONTAINED IN THIS REPORT REPRESENT PAST
PERFORMANCE AND ARE NOT INDICATIVE OF FUTURE RETURNS. THE PERFORMANCE RESULTS
OF A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER
AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED. SINCE IT IS HIGHLY
LIKELY THAT PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME
(BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE
MADE BY THE COMPANY OR THE FUNDS THAT THESE HISTORICAL RETURNS CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THE PAYMENTS IN THIS ILLUSTRATION ARE NET OF ALL CHARGES: MORTALITY AND
EXPENSE RISK CHARGE AND ADMINISTRATION ASSET CHARGE (1.35%), MANAGEMENT FEES
AND OTHER EXPENSES (These may vary from year to year. The following expenses
are for the year ended December 31, 1997 after giving effect to current
expense caps or deferrals: 1.00% Loomis Sayles Small Cap, 1.30% Morgan Stanley
International Magnum, 0.87% Alger Equity Growth, 0.85% Goldman Sachs Midcap
Value, 0.90% Davis Venture Value, 0.82% Westpeak Growth and Income, 0.40%
Westpeak Stock Index, 0.85% Loomis Sayles Balanced, 0.61% Back Bay Managed,
0.85% Salomon Strategic Bond Opportunities, 0.52% Back Bay Bond Income, 0.70%
Salomon US Government, 0.45% Back Bay Money Market. Effective May 1, 1998 the
Goldman Sachs Midcap Value Series is subject to a voluntary expense deferral
arrangement with an annual expense limit of .90% of net assets. The following
expenses are for the year ended December 31, 1997 and are unaffected by
expense caps or deferrals: 0.92% Fidelity Overseas, 0.67% Capital Growth,
0.58% Fidelity Equity-Income.)
- -------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period,
payments will be continued for the balance of the Certain Period. The
cumulative amount of income payments received under the annuity depends on
how long the Annuitant lives after the Certain Period. An annuity pools the
mortality experience of Annuitants. Annuitants who die earlier, in effect,
subsidize the payments for those who live longer.
** Rates of return and Contract values and benefits shown reflect the Goldman
Sachs Midcap Value Series' investment advisory fee of .70% of average
daily net assets. Beginning May 1, 1998, the Series' advisory fee is .75%.
II-29
<PAGE>
ANNUITY PAY-OUT HISTORICAL ILLUSTRATION
(100% VARIABLE PAYOUT)
<TABLE>
<C> <C> <S> <C>
ANNUITANT: GROSS AMOUNT OF CONTRACT
John Doe VALUE: $100,000
SEX: Unisex DATE OF ILLUSTRATION: 4/1/98
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAYMENTS: Monthly
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT BASED ON CURRENT RATES, IF 100% FIXED
ANNUITY OPTION SELECTED: FOR AGE 65: $562.00; FOR AGE 68: $602.00; FOR AGE
69: $617.00; FOR AGE 76: $739.00.
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT.
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN
CONSTANT: 3.50%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN WITH
100% OF THE CONTRACT VALUE INVESTED IN:
<TABLE>
<CAPTION>
SALOMON
FIDELITY WESTPEAK LOOMIS STRATEGIC BACK BAY SALOMON BACK BAY
PAYMENT CALENDAR EQUITY- STOCK SAYLES BACK BAY BOND BOND U.S. MONEY
YEAR YEAR AGE INCOME INDEX BALANCED MANAGED OPPORTUNITIES INCOME GOVERNMENT MARKET
- ------- -------- --- --------- --------- --------- --------- ------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1983 65 $ 581.00 $581.00
2 1984 66 593.85 589.21
3 1985 67 637.34 621.82
4 1986 68 $ 626.00 721.50 641.71
5 1987 69 615.48 $ 642.00 $ 642.00 789.77 653.31
6 1988 70 580.03 545.85 617.60 769.90 663.40
7 1989 71 678.42 605.30 644.48 795.21 679.85
8 1990 72 758.88 750.98 731.61 851.26 708.06
9 1991 73 612.74 686.15 719.75 877.02 730.20
10 1992 74 767.71 853.12 824.49 986.14 739.29
11 1993 75 855.28 872.44 838.49 1,016.77 731.38
12 1994 76 964.44 912.49 $ 765.00 884.40 $765.00 1,091.45 $765.00 717.90
13 1995 77 984.32 879.55 758.20 833.68 748.36 1,005.44 763.51 711.52
14 1996 78 1,267.62 1,147.99 901.95 1,043.17 851.64 1,161.63 837.15 716.92
15 1997 79 1,380.64 1,339.89 1,004.99 1,143.60 928.18 1,158.11 824.28 718.30
16 1998 80 1,686.00 1,692.29 1,112.99 1,379.69 982.75 1,224.15 852.27 721.25
</TABLE>
INVESTMENT PERFORMANCE RESULTS CONTAINED IN THIS REPORT REPRESENT PAST
PERFORMANCE AND ARE NOT INDICATIVE OF FUTURE RETURNS. THE PERFORMANCE RESULTS
OF A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER
AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED. SINCE IT IS HIGHLY
LIKELY THAT PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME
(BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE
MADE BY THE COMPANY OR THE FUNDS THAT THESE HISTORICAL RETURNS CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THE PAYMENTS IN THIS ILLUSTRATION ARE NET OF ALL CHARGES: MORTALITY AND
EXPENSE RISK CHARGE AND ADMINISTRATION ASSET CHARGE (1.35%), MANAGEMENT FEES
AND OTHER EXPENSES (These may vary from year to year. The following expenses
are for the year ended December 31, 1997, after giving effect to current
expense caps or deferrals: 1.00% Loomis Sayles Small Cap, 1.30% Morgan Stanley
International Magnum, 0.87% Alger Equity Growth, 0.85% Goldman Sachs Midcap
Value, 0.90% Davis Venture Value, 0.82% Westpeak Growth and Income, 0.40%
Westpeak Stock Index, 0.85% Loomis Sayles Balanced, 0.61% Back Bay Managed,
0.85% Salomon Strategic Bond Opportunities, 0.52% Back Bay Bond Income, 0.70%
Salomon US Government, 0.45% Back Bay Money Market. Effective May 1, 1998 the
Goldman Sachs Midcap Value Series is subject to a voluntary expense deferral
arrangement with an annual expense limit of .90% of net assets. The following
expenses are for the year ended December 31, 1997 and are unaffected by
expense caps or deferrals: 0.92% Fidelity Overseas, 0.67% Capital Growth,
0.58% Fidelity Equity-Income.)
- -------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period,
payments will be continued for the balance of the Certain Period. The
cumulative amount of income payments received under the annuity depends on
how long the Annuitant lives after the Certain Period. An annuity pools the
mortality experience of Annuitants. Annuitants who die earlier, in effect,
subsidize the payments for those who live longer.
** Rates of return and Contract values and benefits shown reflect the Goldman
Sachs Midcap Value Series' investment advisory fee of .70% of average daily
net assets. Beginning May 1, 1998 the Series' advisory fee is .75%.
II-30
<PAGE>
EXPERTS
The financial statements of The New England Variable Account of Metropolitan
Life Insurance Company ("MetLife") as of and for the year ended December 31,
1996, December 31, 1997, and the consolidated financial statements of
Metropolitan Life Insurance Company as of December 31, 1997 and 1996, and for
the three years in the period ended December 31, 1997, included in this
Statement of Additional Information, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein (whose
reports express unqualified opinions and, with respect to MetLife, includes an
explanatory paragraph referring to the changes in the basis of accounting),
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
LEGAL MATTERS
Legal matters in connection with the Contracts described in this
registration statement have been passed on by Christopher P. Nicholas,
Associate General Counsel of the Company. Sutherland, Asbill & Brennan L.L.P.,
Washington, D.C., have acted as special counsel on certain matters relating to
the Federal securities laws.
II-31
<PAGE>
APPENDIX A
ABC and affiliates Fortune Public Broadcasting
Atlanta Constitution Fox Newtwork and Service
Atlanta Journal affiliates Quinn, Jane Bryant
Austin American Fund Action (syndicated column)
Statesman Hartford Courant Registered
Baltimore Sun Houston Chronicle Representative
Barron's INC Research Magazine
Bond Buyer Indianapolis Star Resource
Boston Business Journal Institutional Investor Reuters
Boston Globe Investment Dealers Rukeyser's Business
Boston Herald Digest (syndicated column)
Broker World Investment Vision Sacramento Bee
Business Radio Network Investor's Daily San Francisco Chronicle
Business Week Journal of Commerce San Francisco Examiner
CBS and affiliates Kansas City Star San Jose Mercury
CFO LA Times Seattle Post-
Changing Times Leckey, Andrew Intelligencer
Chicago Sun Times (syndicated column) Seattle Times
Chicago Tribune Life Association News Smart Money
Christian Science Miami Herald St. Louis Post Dispatch
Monitor Milwaukee Sentinel St. Petersburg Times
Christian Science Money Standard & Poor's
Monitor News Service Money Maker Outlook
Cincinnati Enquirer Money Management Letter Standard & Poor's Stock
Cincinnati Post Morningstar Guide
CNBC National Public Radio Stanger's Investment
CNN National Underwriter Advisor
Columbus Dispatch NBC and affiliates Stockbroker's Register
Dallas Morning News New England Business Strategic Insight
Dallas Times-Herald New England Cable News Tampa Tribune
Denver Post New Orleans Times- Time
Des Moines Register Picayune Tobias, Andrew
Detroit Free Press New York Daily News (syndicated column)
Donoghues Money Fund New York Times UPI
Report Newark Star Ledger US News and World Report
Dorfman, Dan (syndicated Newsday USA Today
column) Newsweek Value Line
Dow Jones News Service Nightly Business Report Wall St. Journal
Economist Orange County Register Wall Street Letter
FACS of the Week Orlando Sentinel Wall Street Week
Financial News Network Pension World Washington Post
Financial Planning Pensions and Investments WBZ
Financial Services Week Personal Investor WBZ-TV
Financial World Philadelphia Inquirer WCVB-TV
Forbes Porter, Sylvia WEEI
Fort Worth Star-Telegram (syndicated column) WHDH
Portland Oregonian Worcester Telegram
Worth Magazine
WRKO
II-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of The New England Variable Account
of Metropolitan Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of The
New England Variable Account (comprised of Capital Growth Sub-Account, Bond
Income Sub-Account, Money Market Sub-Account, Stock Index Sub-Account, Managed
Sub-Account, Avanti Growth Sub-Account, Growth and Income Sub-Account
(formerly Value Growth Sub-Account), Small Cap Sub-Account, U.S. Government
Sub-Account, Balanced Sub-Account, Equity Growth Sub-Account, International
Equity Sub-Account, Venture Value Sub-Account, Strategic Bond Opportunities
Sub-Account, Equity-Income Sub-Account and Overseas Sub-Account) of
Metropolitan Life Insurance Company as of December 31, 1997, and the related
statements of operations and changes in net assets for the twelve months ended
December 31, 1997 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the respective
aforementioned sub-accounts comprising The New England Variable Account of
Metropolitan Life Insurance Company as of December 31, 1997, and the results
of their operations and changes in their net assets for the twelve months
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
April 17, 1998
F-1
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
Investments in sub-accounts, at value
(Note 2)
SHARES COST MARKET VALUE
------------- ------------ --------------
<S> <C> <C> <C>
NEW ENGLAND ZENITH FUND:
Capital Growth Series............... 1,662,289.240 $613,617,128 $ 664,234,159
Back Bay Advisors Bond Income Se-
ries............................... 1,188,537.310 127,504,140 128,968,183
Back Bay Advisors Money Market Se-
ries............................... 549,784.380 54,978,438 54,978,438
Westpeak Stock Index Series......... 388,253.970 36,205,782 60,474,438
Back Bay Advisors Managed Series.... 768,449.690 113,086,443 145,890,173
Loomis Sayles Avanti Growth Series.. 273,599.560 38,400,858 46,673,349
Westpeak Growth and Income Series... 385,324.000 55,292,004 69,346,759
Loomis Sayles Small Cap Series...... 481,362.360 68,942,911 76,498,106
Salomon Brothers U. S. Government
Series ............................ 963,298.370 10,792,858 10,721,511
Loomis Sayles Balanced Series ...... 3,159,421.550 41,231,278 46,949,004
Alger Equity Growth Series.......... 4,912,543.890 72,239,584 86,559,023
Morgan Stanley International Magnum
Equity Series...................... 1,750,019.850 19,055,775 19,005,216
Davis Venture Value Series.......... 5,625,578.990 87,353,660 117,012,043
Salomon Brothers Strategic Bond Op-
portunities Series................. 2,765,031.770 32,423,183 33,208,032
VARIABLE INSURANCE PRODUCTS FUND:
Equity-Income Portfolio............. 7,451,499.500 132,014,093 180,922,408
Overseas Portfolio.................. 4,841,789.170 84,048,286 92,962,352
Total investments in sub-accounts, at value..................... 1,834,403,194
Dividends receivable............................................ 254,587
--------------
Total assets................................................. 1,834,657,781
LIABILITIES
Due to Metropolitan Life Insurance Company...................... 2,160,488
--------------
NET ASSETS...................................................... $1,832,497,293
==============
CONTRACT OWNERS' EQUITY
Owners of annuity contracts..................................... $1,824,884,488
Annuity reserves (Note 2)....................................... 7,612,805
--------------
TOTAL FOR VARIABLE ANNUITY CONTRACTS......................... $1,832,497,293
==============
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY AVANTI
CAPITAL BOND MARKET STOCK GROWTH GROWTH SMALL U.S.
GROWTH INCOME SUB- INDEX MANAGED SUB- AND INCOME CAP GOVERNMENT
SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends........ $161,763,220 $ 9,529,570 $3,197,674 $ 1,024,357 $17,220,110 $3,704,356 $ 7,559,616 $ 8,757,892 $607,713
EXPENSES:
Mortality and ex-
pense risk
charge.......... 6,246,897 1,213,469 591,219 530,104 1,350,189 434,335 560,538 562,574 75,785
Administrative
charge.......... 3,213,419 602,791 294,841 257,635 664,749 216,662 272,633 277,826 36,256
------------ ----------- ---------- ----------- ----------- ---------- ----------- ----------- --------
Total expenses.. 9,460,316 1,816,260 886,060 787,739 2,014,938 650,997 833,171 840,400 112,041
------------ ----------- ---------- ----------- ----------- ---------- ----------- ----------- --------
Net investment in-
come............. 152,302,904 7,713,310 2,311,614 236,618 15,205,172 3,053,359 6,726,445 7,917,492 495,672
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVEST-
MENTS:
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of
year............ 99,512,468 (1,691,255) -- 12,902,146 22,986,104 6,145,766 6,583,356 4,882,438 (31,679)
End of year...... 50,617,028 1,464,043 -- 24,268,656 32,803,730 8,272,492 14,054,755 7,555,195 (71,347)
------------ ----------- ---------- ----------- ----------- ---------- ----------- ----------- --------
Net change in
unrealized
appreciation
(depreciation)... (48,895,440) 3,155,298 -- 11,366,510 9,817,626 2,126,726 7,471,399 2,672,757 (39,668)
Net realized gain
on investments... 16,549,232 383,618 -- 2,485,570 5,316,574 1,279,438 999,139 1,013,818 73,118
Net realized and
unrealized gain
(loss) on invest-
ments............ (32,346,208) 3,538,916 -- 13,852,080 15,134,200 3,406,164 8,470,538 3,686,575 33,450
------------ ----------- ---------- ----------- ----------- ---------- ----------- ----------- --------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS.. $119,956,696 $11,252,226 $2,311,614 $14,088,698 $30,339,372 $6,459,523 $15,196,983 $11,604,067 $529,122
============ =========== ========== =========== =========== ========== =========== =========== ========
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
STRATEGIC
BALANCED EQUITY INTERNATIONAL VENTURE BOND EQUITY-
SUB- GROWTH EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS
ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
---------- ----------- ------------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends.......... $2,574,941 $ 8,406,357 $ 489,126 $ 3,612,662 $2,297,507 $14,268,491 $ 7,264,725 $252,278,317
EXPENSES:
Mortality and ex-
pense risk charge. 357,339 741,935 178,093 860,855 258,490 1,571,862 905,411 16,439,095
Administrative
charge............ 175,322 372,290 88,722 417,577 120,433 780,309 459,082 8,250,547
---------- ----------- ----------- ----------- ---------- ----------- ----------- ------------
Total expenses.... 532,661 1,114,225 266,815 1,278,432 378,923 2,352,171 1,364,493 24,689,642
---------- ----------- ----------- ----------- ---------- ----------- ----------- ------------
Net investment in-
come............... 2,042,280 7,292,132 222,311 2,334,230 1,918,584 11,916,320 5,900,232 227,588,675
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS:
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of year.. 3,182,617 7,461,590 1,005,725 10,498,878 428,659 26,627,341 10,234,877 210,729,031
End of year........ 5,717,727 14,319,440 (50,559) 29,658,383 784,849 48,908,315 8,914,066 247,216,773
---------- ----------- ----------- ----------- ---------- ----------- ----------- ------------
Net change in
unrealized
appreciation
(depreciation)..... 2,535,110 6,857,850 (1,056,284) 19,159,505 356,190 22,280,974 (1,320,811) 36,487,742
Net realized gain on
investments........ 426,199 1,269,426 142,078 1,085,706 187,949 2,721,225 4,146,302 38,079,392
Net realized and
unrealized gain
(loss) on
investments........ 2,961,309 8,127,276 (914,206) 20,245,211 544,139 25,002,199 2,825,491 74,567,134
---------- ----------- ----------- ----------- ---------- ----------- ----------- ------------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS.... $5,003,589 $15,419,408 $ (691,895) $22,579,441 $2,462,723 $36,918,519 $ 8,725,723 $302,155,809
========== =========== =========== =========== ========== =========== =========== ============
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY AVANTI GROWTH SMALL U.S.
CAPITAL BOND MARKET STOCK GROWTH AND INCOME CAP GOVERNMENT
GROWTH INCOME SUB- INDEX MANAGED SUB- SUB- SUB- SUB-
SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
----------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends........ $31,999,855 $ 9,112,591 $3,139,887 $ 1,104,152 $12,337,781 $2,301,646 $4,082,957 $2,793,777 $ 338,892
EXPENSES:
Mortality and
expense risk
charge.......... 4,859,907 1,205,743 602,488 396,508 1,198,409 332,954 359,469 263,840 59,474
Administrative
charge.......... 2,677,508 624,409 307,765 204,120 623,890 172,884 182,994 133,281 28,496
----------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------
Total expenses.. 7,537,415 1,830,152 910,253 600,628 1,822,299 505,838 542,463 397,121 87,970
----------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------
Net investment
income (loss).... 24,462,440 7,282,439 2,229,634 503,524 10,515,482 1,795,808 3,540,494 2,396,656 250,922
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS:
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of
year............ 45,558,436 2,104,546 -- 7,142,155 22,213,497 4,321,917 5,157,858 1,612,398 124,160
End of year...... 99,512,468 (1,691,255) -- 12,902,146 22,986,104 6,145,766 6,583,356 4,882,438 (31,679)
----------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------
Net change in
unrealized
appreciation
(depreciation)... 53,954,032 (3,795,801) -- 5,759,991 772,607 1,823,849 1,425,498 3,270,040 (155,839)
Net realized gain
on investments... 12,365,009 343,759 -- 1,525,569 4,450,425 1,326,250 1,011,305 1,317,987 48,400
Net realized and
unrealized gain
(loss) on
investments...... 66,319,041 (3,452,042) -- 7,285,560 5,223,032 3,150,099 2,436,803 4,588,027 (107,439)
----------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------
NET INCREASE IN
NET ASSETS
RESULTING FROM
OPERATIONS....... $90,781,481 $ 3,830,397 $2,229,634 $ 7,789,084 $15,738,514 $4,945,907 $5,977,297 $6,984,683 $ 143,483
=========== =========== ========== =========== =========== ========== ========== ========== =========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EQUITY STRATEGIC
BALANCED GROWTH INTERNATIONAL VENTURE BOND EQUITY-
SUB- SUB- EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS
ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
---------- ---------- ------------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends........... $ 829,712 $ 108,507 $ 283,014 $ 1,361,224 $1,235,274 $ 5,031,305 $ 1,738,857 $ 77,799,431
EXPENSES:
Mortality and ex-
pense risk charge.. 195,209 484,256 154,128 389,994 119,831 1,190,303 733,944 12,546,457
Administrative
charge............. 95,720 244,251 78,029 193,853 56,968 614,753 390,905 6,629,826
---------- ---------- ---------- ----------- ---------- ----------- ----------- ------------
Total expenses..... 290,929 728,507 232,157 583,847 176,799 1,805,056 1,124,849 19,176,283
---------- ---------- ---------- ----------- ---------- ----------- ----------- ------------
Net investment income
(loss).............. 538,783 (620,000) 50,857 777,377 1,058,475 3,226,249 614,008 58,623,148
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS:
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of year... 835,377 2,819,660 540,103 3,190,020 170,662 18,248,552 4,472,393 118,511,734
End of year......... 3,182,617 7,461,590 1,005,725 10,498,878 428,659 26,627,341 10,234,877 210,729,031
---------- ---------- ---------- ----------- ---------- ----------- ----------- ------------
Net change in
unrealized apprecia-
tion (depreciation). 2,347,240 4,641,930 465,622 7,308,858 257,997 8,378,789 5,762,484 92,217,297
Net realized gain on
investments......... 310,945 1,521,066 260,731 1,324,964 192,688 3,362,763 2,100,157 31,462,018
Net realized and
unrealized gain
(loss) on invest-
ments............... 2,658,185 6,162,996 726,353 8,633,822 450,685 11,741,552 7,862,641 123,679,315
---------- ---------- ---------- ----------- ---------- ----------- ----------- ------------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS..... $3,196,968 $5,542,996 $ 777,210 $ 9,411,199 $1,509,160 $14,967,801 $ 8,476,649 $182,302,463
========== ========== ========== =========== ========== =========== =========== ============
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CAPITAL BOND MONEY STOCK AVANTI GROWTH SMALL
GROWTH INCOME MARKET INDEX MANAGED GROWTH AND INCOME CAP
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ------------ ------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT
ACTIVITIES:
Net investment
income........... $152,302,904 $ 7,713,310 $ 2,311,614 $ 236,618 $ 15,205,172 $ 3,053,359 $ 6,726,445 $ 7,917,492
Net realized and
unrealized gain
(loss) on
investments...... (32,346,208) 3,538,916 -- 13,852,080 15,134,200 3,406,164 8,470,538 3,686,575
------------ ------------ ------------ ----------- ------------ ----------- ----------- -----------
Increase
(decrease) in net
assets derived
from investment
activities....... 119,956,696 11,252,226 2,311,614 14,088,698 30,339,372 6,459,523 15,196,983 11,604,067
FROM CONTRACT-
RELATED
TRANSACTIONS:
Net premiums
transferred from
Metropolitan Life
Insurance
Company.......... 46,257,229 8,122,820 26,202,879 1,596,374 4,382,922 4,762,144 8,083,274 12,260,075
Net transfers (to)
from other sub-
accounts......... (11,155,639) (7,699,535) (26,940,036) 3,556,922 (5,331,048) (2,056,660) 4,010,673 13,987,149
Net transfers to
Metropolitan Life
Insurance Company
Surrenders...... (45,954,925) (10,678,232) (10,908,433) (3,938,868) (12,262,286) (3,040,666) (2,840,124) (2,651,643)
Annuity
benefits....... (3,916,643) (1,098,100) (958,554) (172,634) (952,879) (150,287) (369,616) (144,703)
------------ ------------ ------------ ----------- ------------ ----------- ----------- -----------
Increase
(decrease) in net
assets derived
from contract-
related
transactions..... (14,769,978) (11,353,047) (12,604,144) 1,041,794 (14,163,291) (485,469) 8,884,207 23,450,878
------------ ------------ ------------ ----------- ------------ ----------- ----------- -----------
Net increase
(decrease) in net
assets............ 105,186,718 (100,821) (10,292,530) 15,130,492 16,176,081 5,974,054 24,081,190 35,054,945
NET ASSETS, AT
BEGINNING OF THE
YEAR.............. 558,255,137 128,933,716 65,459,331 45,270,391 129,559,412 40,641,154 45,184,792 41,350,703
------------ ------------ ------------ ----------- ------------ ----------- ----------- -----------
NET ASSETS, AT END
OF THE YEAR....... $663,441,855 $128,832,895 $ 55,166,801 $60,400,883 $145,735,493 $46,615,208 $69,265,982 $76,405,648
============ ============ ============ =========== ============ =========== =========== ===========
<CAPTION>
U.S.
GOVERNMENT
SUB-ACCOUNT
------------
<S> <C>
FROM INVESTMENT
ACTIVITIES:
Net investment
income........... $ 495,672
Net realized and
unrealized gain
(loss) on
investments...... 33,450
------------
Increase
(decrease) in net
assets derived
from investment
activities....... 529,122
FROM CONTRACT-
RELATED
TRANSACTIONS:
Net premiums
transferred from
Metropolitan Life
Insurance
Company.......... 1,636,443
Net transfers (to)
from other sub-
accounts......... 2,710,896
Net transfers to
Metropolitan Life
Insurance Company
Surrenders...... (807,465)
Annuity
benefits....... (77,123)
------------
Increase
(decrease) in net
assets derived
from contract-
related
transactions..... 3,462,751
------------
Net increase
(decrease) in net
assets............ 3,991,873
NET ASSETS, AT
BEGINNING OF THE
YEAR.............. 6,716,308
------------
NET ASSETS, AT END
OF THE YEAR....... $10,708,181
============
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
STRATEGIC
EQUITY INTERNATIONAL VENTURE BOND EQUITY-
BALANCED GROWTH EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- ------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT
ACTIVITIES:
Net investment
income........... $ 2,042,280 $ 7,292,132 $ 222,311 $ 2,334,230 $ 1,918,584 $ 11,916,320 $ 5,900,232
Net realized and
unrealized gain
(loss) on
investments...... 2,961,309 8,127,276 (914,206) 20,245,211 544,139 25,002,199 2,825,491
----------- ----------- ----------- ------------ ----------- ------------ -----------
Increase
(decrease) in net
assets derived
from investment
activities....... 5,003,589 15,419,408 (691,895) 22,579,441 2,462,723 36,918,519 8,725,723
FROM CONTRACT-
RELATED
TRANSACTIONS:
Net premiums
transferred from
Metropolitan Life
Insurance
Company.......... 10,177,262 11,337,797 2,837,941 20,349,676 7,395,953 16,562,140 8,859,341
Net transfers (to)
from other sub-
accounts......... 5,283,098 1,159,125 (395,960) 21,589,697 5,504,230 (2,177,097) (2,045,815)
Net transfers to
Metropolitan Life
Insurance Company
Surrenders...... (1,672,676) (3,601,726) (1,020,990) (4,625,595) (1,644,665) (8,919,993) (5,776,847)
Annuity
benefits....... (344,852) (529,258) (177,635) (513,124) (203,636) (925,776) (265,135)
----------- ----------- ----------- ------------ ----------- ------------ -----------
Increase (decrease)
in net assets
derived from
contract-related
transactions...... 13,442,832 8,365,938 1,243,356 36,800,654 11,051,882 4,539,274 771,544
----------- ----------- ----------- ------------ ----------- ------------ -----------
Net increase
(decrease) in net
assets............ 18,446,421 23,785,346 551,461 59,380,095 13,514,605 41,457,793 9,497,267
NET ASSETS, AT
BEGINNING OF THE
YEAR.............. 28,461,555 62,667,072 18,431,146 57,486,566 19,654,553 139,236,727 83,353,740
----------- ----------- ----------- ------------ ----------- ------------ -----------
NET ASSETS, AT END
OF THE YEAR....... $46,907,976 $86,452,418 $18,982,607 $116,866,661 $33,169,158 $180,694,520 $92,851,007
=========== =========== =========== ============ =========== ============ ===========
<CAPTION>
TOTAL
---------------
<S> <C>
FROM INVESTMENT
ACTIVITIES:
Net investment
income........... $ 227,588,675
Net realized and
unrealized gain
(loss) on
investments...... 74,567,134
---------------
Increase
(decrease) in net
assets derived
from investment
activities....... 302,155,809
FROM CONTRACT-
RELATED
TRANSACTIONS:
Net premiums
transferred from
Metropolitan Life
Insurance
Company.......... 190,824,270
Net transfers (to)
from other sub-
accounts......... --
Net transfers to
Metropolitan Life
Insurance Company
Surrenders...... (120,345,134)
Annuity
benefits....... (10,799,955)
---------------
Increase (decrease)
in net assets
derived from
contract-related
transactions...... 59,679,181
---------------
Net increase
(decrease) in net
assets............ 361,834,900
NET ASSETS, AT
BEGINNING OF THE
YEAR.............. 1,470,662,303
---------------
NET ASSETS, AT END
OF THE YEAR....... $1,832,497,293
===============
</TABLE>
See Notes to Financial Statements
F-8
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CAPITAL BOND MONEY STOCK AVANTI GROWTH SMALL
GROWTH INCOME MARKET INDEX MANAGED GROWTH AND INCOME CAP
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ------------ ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT
ACTIVITIES:
Net investment
income........... $ 24,462,440 $ 7,282,439 $ 2,229,634 $ 503,524 $ 10,515,482 $ 1,795,808 $ 3,540,494 $ 2,396,656
Net realized and
unrealized gain
(loss) on
investments...... 66,319,041 (3,452,042) -- 7,285,560 5,223,032 3,150,099 2,436,803 4,588,027
------------ ------------ ----------- ----------- ------------ ----------- ----------- -----------
Increase in net
assets derived
from investment
activities....... 90,781,481 3,830,397 2,229,634 7,789,084 15,738,514 4,945,907 5,977,297 6,984,683
FROM CONTRACT-
RELATED
TRANSACTIONS:
Net premiums
transferred from
Metropolitan Life
Insurance
Company.......... 47,336,231 11,677,458 34,222,659 1,670,783 4,562,605 6,302,457 6,822,870 8,775,631
Net transfers (to)
from other sub-
accounts......... (18,117,765) (4,899,751) (22,911,631) 869,176 (3,513,923) 2,463,232 2,577,617 10,285,086
Net transfers to
Metropolitan Life
Insurance Company
Surrenders...... (28,837,335) (8,641,055) (9,500,843) (1,956,188) (8,730,471) (1,538,955) (1,432,839) (1,219,696)
Annuity
benefits....... (3,710,248) (1,293,526) (948,004) (373,468) (1,466,713) 17,753 (212,197) 24,816
------------ ------------ ----------- ----------- ------------ ----------- ----------- -----------
Increase (decrease)
in net assets
derived from
contact-related
transactions...... (3,329,117) (3,156,874) 862,181 210,303 (9,148,502) 7,244,487 7,755,451 17,865,837
------------ ------------ ----------- ----------- ------------ ----------- ----------- -----------
Net increase in net
assets............ 87,452,364 673,523 3,091,815 7,999,387 6,590,012 12,190,394 13,732,748 24,850,520
NET ASSETS, AT
BEGINNING OF THE
YEAR.............. 470,802,773 128,260,193 62,367,516 37,271,004 122,969,400 28,450,760 31,452,044 16,500,183
------------ ------------ ----------- ----------- ------------ ----------- ----------- -----------
NET ASSETS, AT END
OF THE YEAR....... $558,255,137 $128,933,716 $65,459,331 $45,270,391 $129,559,412 $40,641,154 $45,184,792 $41,350,703
============ ============ =========== =========== ============ =========== =========== ===========
<CAPTION>
U.S.
GOVERNMENT
SUB-
ACCOUNT
-----------
<S> <C>
FROM INVESTMENT
ACTIVITIES:
Net investment
income........... $ 250,922
Net realized and
unrealized gain
(loss) on
investments...... (107,439)
-----------
Increase in net
assets derived
from investment
activities....... 143,483
FROM CONTRACT-
RELATED
TRANSACTIONS:
Net premiums
transferred from
Metropolitan Life
Insurance
Company.......... 1,820,592
Net transfers (to)
from other sub-
accounts......... (149,842)
Net transfers to
Metropolitan Life
Insurance Company
Surrenders...... (183,343)
Annuity
benefits....... (35,087)
-----------
Increase (decrease)
in net assets
derived from
contact-related
transactions...... 1,452,320
-----------
Net increase in net
assets............ 1,595,803
NET ASSETS, AT
BEGINNING OF THE
YEAR.............. 5,120,505
-----------
NET ASSETS, AT END
OF THE YEAR....... $6,716,308
===========
</TABLE>
See Notes to Financial Statements
F-9
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
STRATEGIC
EQUITY INTERNATIONAL VENTURE BOND EQUITY-
BALANCED GROWTH EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
----------- ----------- ------------- ----------- ------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT
ACTIVITIES:
Net investment
income........... $ 538,783 $ (620,000) $ 50,857 $ 777,377 $ 1,058,475 $ 3,226,249 $ 614,008 $ 58,623,148
Net realized and
unrealized gain
(loss) on
investments...... 2,658,185 6,162,996 726,353 8,633,822 450,685 11,741,552 7,862,641 123,679,315
----------- ----------- ----------- ----------- ----------- ------------ ----------- --------------
Increase in net
assets derived
from investment
activities....... 3,196,968 5,542,996 777,210 9,411,199 1,509,160 14,967,801 8,476,649 182,302,463
FROM CONTRACT-
RELATED
TRANSACTIONS:
Net premiums
transferred from
Metropolitan Life
Insurance
Company.......... 10,013,329 18,130,543 4,022,067 13,755,448 6,207,842 21,165,185 9,339,879 205,825,579
Net transfers (to)
from other sub-
accounts......... 2,999,684 7,892,262 2,909,321 10,535,441 5,505,494 2,766,414 789,185 --
Net transfers to
Metropolitan Life
Insurance Company
Surrenders...... (1,068,120) (2,440,300) (1,078,027) (2,067,055) (638,840) (5,636,063) (3,733,623) (78,702,753)
Annuity
benefits....... (165,175) (344,976) (69,120) (94,350) (35,658) (627,188) (203,490) (9,536,631)
----------- ----------- ----------- ----------- ----------- ------------ ----------- --------------
Increase
(decrease) in net
assets derived
from contract-
related
transactions..... 11,779,718 23,237,529 5,784,241 22,129,484 11,038,838 17,668,348 6,191,951 117,586,195
----------- ----------- ----------- ----------- ----------- ------------ ----------- --------------
Net increase in net
assets............ 14,976,686 28,780,525 6,561,451 31,540,683 12,547,998 32,636,149 14,668,600 299,888,658
NET ASSETS, AT
BEGINNING OF THE
YEAR.............. 13,484,869 33,886,547 11,869,695 25,945,883 7,106,555 106,600,578 68,685,140 1,170,773,645
----------- ----------- ----------- ----------- ----------- ------------ ----------- --------------
NET ASSETS, AT END
OF THE YEAR....... $28,461,555 $62,667,072 $18,431,146 $57,486,566 $19,654,553 $139,236,727 $83,353,740 $1,470,662,303
=========== =========== =========== =========== =========== ============ =========== ==============
</TABLE>
See Notes to Financial Statements
F-10
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS.
New England Variable Account (the "Account") is registered as a unit
investment trust under the Investment Company Act of 1940 and is a funding
vehicle for individual variable annuity contracts. The operations of the
Account are part of Metropolitan Life Insurance Company (the "Company"). Prior
to August 30, 1996, the Account was a part of New England Mutual Life
Insurance Company. Effective August 30, 1996, New England Mutual Life
Insurance Company merged into Metropolitan Life Insurance Company. The Account
has sixteen investment sub-accounts as of December 31, 1997, each of which
invests in one series of the New England Zenith Fund ("Zenith Fund") or one
portfolio of the Variable Insurance Products Fund. The Zenith Fund and the
Variable Insurance Products Fund ("VIP") are diversified, open-end management
investment companies. The series of the Zenith Fund and portfolios of the
Variable Insurance Products Fund in which the sub-accounts invest are referred
to herein as the "Eligible Funds."
2. SIGNIFICANT ACCOUNTING POLICIES.
The following is a summary of the significant accounting policies consistently
followed by the Account.
A. Security Valuation--The Eligible Fund shares are valued at the closing
net asset value per share as determined by each fund as of the close of the
New York Stock Exchange (normally 4:00 p.m. Eastern Standard Time) on each day
the Exchange is open for trading.
B. Security Transactions and Related Investment Income--Security
transactions are accounted for on the trade date (the date the order to buy or
sell is executed) and dividend income is recorded on the ex-dividend date. Net
investment income and net realized and unrealized gains and losses on
investments are allocated to the contracts on each valuation date based upon
the contract's pro rata share of each sub-account. Realized gains and losses
from sales of investments are computed on the basis of first in first out.
C. Federal Income Taxes--The operations of the 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 (the "Code"). Under
the current provisions of the Code, the Company does not expect to incur
federal income taxes on the earnings of the Account to the extent the earnings
are credited under the contracts. Based on this, no charge is being made
currently to the Account for federal income taxes. The Company will review
periodically the status of such decision based on changes in the tax law. Such
a charge may be made in future years for any federal income taxes that would
be attributable to the earnings associated with and credited to the contracts.
D. Annuity Reserves--Annuity reserves are computed for currently payable
contracts according to the 1983-a Mortality Tables. The assumed interest rate
may be 0%, 3.5%, or 5% as elected by the annuitant and as regulated by laws of
the respective states. Adjustments to annuity reserves are reimbursed to or
from the Company. For contracts payable on or after January 1, 1998 annuity
reserves will be computed according to the Annuity 2000 Mortality Tables.
E. Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-11
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PURCHASES AND SALES OF INVESTMENT SECURITIES.
The following table shows the aggregate cost of shares purchased and proceeds
from sales of Eligible Funds for the year ended December 31, 1997:
<TABLE>
<CAPTION>
SERIES PURCHASES SALES
------ ------------ ------------
<S> <C> <C>
NEW ENGLAND ZENITH FUND:
Capital Growth..................................... $252,153,594 $114,495,888
Back Bay Advisors Bond Income...................... 29,010,253 32,665,818
Back Bay Advisors Money Market..................... 105,110,764 115,425,814
Westpeak Stock Index............................... 11,510,024 10,211,638
Back Bay Advisors Managed.......................... 27,264,498 26,219,975
Loomis Sayles Avanti Growth........................ 13,097,580 10,522,462
Westpeak Growth and Income......................... 25,917,014 10,288,022
Loomis Sayles Small Cap............................ 46,190,270 14,785,190
Salomon Brothers U.S. Government................... 7,825,922 3,867,839
Loomis Sayles Balanced............................. 23,033,106 7,544,362
Alger Equity Growth................................ 29,522,916 13,837,581
Morgan Stanley International Magnum Equity......... 7,451,680 5,989,165
Davis Venture Value................................ 54,783,806 15,578,772
Salomon Brothers Strategic Bond Opportunities...... 20,455,000 7,472,324
VARIABLE INSURANCE PRODUCTS FUND:
Equity-Income Portfolio............................ 46,701,068 30,180,326
Overseas Portfolio................................. 51,180,013 44,494,539
</TABLE>
The Account purchases or redeems shares of the sixteen Eligible Funds based
on the amount of net premiums invested in the account, transfers among the
sub-accounts, policy loans, surrender payments, and annuity payments.
4. CHARGES DEDUCTED BY THE COMPANY.
A. Administrative charge--a fixed administrative charge of $30.00 per
contract year is deducted from the contract value on each contract
anniversary.
B. Mortality and expense risk charges--a charge for mortality/expense risk
assumed by the Company equal to an annual rate of 1.35% of the net assets of
the Account is deducted on a daily basis. The mortality risk is the risk that
guaranteed annuity payments or minimum death benefit payments made by the
Company exceed amounts deducted from the net assets of the Account. The
expense risk is the risk that administrative costs incurred by the company
exceed amounts deducted from the net assets of the account.
C. Contingent deferred sales charge--In the event of a partial or full
surrender, a contingent deferred sales charge may be imposed. Charges for
investment Advisery fees and other expenses are deducted from the assets of
the Eligible Funds.
F-12
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INVESTMENT ADVISERS.
The investment adviser and sub-adviser for each of the Eligible Funds are
listed in the chart below. TNE Advisers, Inc. which is an indirect, wholly
owned subsidiary of the Company, and each of the sub-advisers are registered
with the SEC as investment advisers under the Investment Advisers Act of 1940.
<TABLE>
<CAPTION>
SERIES ADVISER SUB-ADVISER
------ ---------------------------------- ---------------------------------------
<S> <C> <C>
Capital Growth Capital Growth Management, L.P.* --
Back Bay Advisors Bond
Income TNE Advisers, Inc.* Back Bay Advisors, L.P.*
Back Bay Advisors Money
Market TNE Advisers, Inc.* Back Bay Advisors, L.P.*
Westpeak Stock Index TNE Advisers, Inc.* Westpeak Investment Advisors, L.P.*
Back Bay Advisors
Managed TNE Advisers, Inc.* Back Bay Advisors, L.P.*
Loomis Sayles Avanti
Growth TNE Advisers, Inc.* Loomis Sayles & Company, L.P.*
Westpeak Growth and
Income TNE Advisers, Inc.* Westpeak Investment Advisors, L.P.*
Loomis Sayles Small Cap TNE Advisers, Inc.* Loomis Sayles & Company, L.P.*
Salomon Brothers U.S.
Government TNE Advisers, Inc.* Salomon Brothers Asset Management Inc
Loomis Sayles Balanced TNE Advisers, Inc.* Loomis Sayles & Company, L.P.*
Alger Equity Growth TNE Advisers, Inc.* Fred Alger Management, Inc.
Morgan Stanley
International Magnum
Equity TNE Advisers, Inc.* Morgan Stanley Asset Management Inc.
Davis Venture Value TNE Advisers, Inc.* Davis Selected Advisers, Inc.(a)
Salomon Brothers
Strategic Bond
Opportunities TNE Advisers, Inc.* Salomon Brothers Asset Management Inc(b)
VIP Equity-Income
Portfolio Fidelity Management & Research Co. --
VIP Overseas Portfolio Fidelity Management & Research Co. --
</TABLE>
- -------
* An Affiliate of the Company
(a). Davis Selected Advisers, L.P. may also delegate any of its
responsibilities to Davis Selected Advisers-NY, Inc. a wholly-owned
subsidiary of Davis Selected Advisers, L.P.
(b). In connection with Salomon Brothers Asset Management Inc's service as
subadviser to the Strategic Bond Opportunities Series, Salomon Brothers
Asset Management Inc's London based affiliate, Solomon Brothers Asset
Management Limited provides certain subadvisory services to Salomon Brothers
Asset Management Inc.
Effective May 1, 1997 the Draycott International Equity Series was renamed
the Morgan Stanley International Magnum Equity Series and a new Sub-Advisory
agreement between TNE Advisers, Inc. and Morgan Stanley Asset Management Inc.
went into effect replacing the prior agreement between TNE Advisers, Inc. and
Draycott Partners Ltd.
On January 28, 1998 the Zenith Fund's Board of Trustees approved new
advisory and subadvisory agreements (the "New Agreements") relating to the
Loomis Sayles Avanti Growth Series between TNE Advisers, Inc. and the Zenith
Fund on behalf of the Series, and between TNE Advisers, Inc. and Goldman Sachs
Asset Management ("Goldman Sachs"), respectively. The New Agreements, which
are subject to shareholder approval, are expected to become effective on or
about May 1, 1998. Under the New Agreements, Goldman Sachs would become the
subadvisor of the Series, succeeding Loomis Sayles & Company, L.P., and would
become responsible for the day-to-day management of the Series' investment
operations under the oversight of TNE Advisers, Inc. Accordingly, the name of
the Series would be changed to the "Goldman Sachs Midcap Value Series" at the
time the New Agreements take effect. Goldman Sachs is a separate operating
division of Goldman, Sachs & Co., a privately-owned global financial services
company.
6. REGISTRATION EXPENSES.
The company has assumed the cost of registering the Account and its
contracts for distribution under applicable federal and state laws.
F-13
<PAGE>
THE NEW ENGLAND VARIABLE ACCOUNT
OF
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. VARIABLE ANNUITY CONTRACT UNIT ACTIVITY.
A summary of units outstanding for variable annuity contracts at December 31,
1997:
<TABLE>
<CAPTION>
CAPITAL BOND MONEY STOCK AVANTI
GROWTH INCOME MARKET INDEX MANAGED GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
--------------- --------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Units Outstand-
ing 1/1/97...... 41,363,155.2827 41,138,874.3801 33,412,517.3847 15,623,252.8181 52,130,165.1639 24,345,379.2325
Units Purchased. 3,011,234.0642 2,506,348.9124 13,125,959.5560 1,557,288.8586 1,377,767.9020 2,654,579.8044
Units Redeemed.. (4,023,787.3008) (6,071,335.6677) (19,443,397.5085) (1,234,402.1448) (6,546,944.0518) (2,875,500.8862)
--------------- --------------- ---------------- --------------- --------------- ---------------
Units Outstand-
ing 12/31/97.... 40,350,602.0461 37,573,887.6248 27,095,079.4322 15,946,139.5319 46,960,989.0141 24,124,458.1507
=============== =============== ================ =============== =============== ===============
Unit Value
12/31/97........ $16.441932 $3.428788 $2.036045 $3.787806 $3.103331 $1.932280
=============== =============== ================ =============== =============== ===============
<CAPTION>
STRATEGIC
U. S. EQUITY INTERNATIONAL VENTURE BOND
GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
--------------- --------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Units Outstand-
ing 1/1/97...... 5,785,147.6169 20,107,323.9381 40,025,594.3868 16,322,861.6667 34,997,024.1285 15,034,554.3857
Units Purchased. 3,576,303.8733 10,173,106.2337 6,867,349.0080 2,498,312.8451 21,780,480.0785 9,477,505.6384
Units Redeemed.. (742,496.5451) (1,368,667.5522) (2,343,091.4709) (1,556,961.0069) (2,759,172.9468) (1,358,957.3809)
--------------- --------------- ---------------- --------------- --------------- ---------------
Units Outstand-
ing 12/31/97.... 8,618,954.9451 28,911,762.6196 44,549,851.9239 17,264,213.5049 54,018,331.2602 23,153,102.6432
=============== =============== ================ =============== =============== ===============
Unit Value
12/31/97........ $1.242399 $1.622453 $1.940577 $1.099535 $2.163463 $1.432601
=============== =============== ================ =============== =============== ===============
<CAPTION>
GROWTH SMALL
AND INCOME CAP
SUB-ACCOUNT SUB-ACCOUNT
---------------- ----------------
<S> <C> <C>
Units Outstand-
ing 1/1/97...... 26,104,464.7017 26,307,747.9854
Units Purchased. 5,891,744.3014 14,835,072.0478
Units Redeemed.. (1,607,448.9772) (1,679,885.3314)
---------------- ----------------
Units Outstand-
ing 12/31/97.... 30,388,760.0259 39,462,934.7018
================ ================
Unit Value
12/31/97........ $2.279329 $1.936137
================ ================
<CAPTION>
EQUITY
INCOME OVERSEAS
SUB-ACCOUNT SUB-ACCOUNT
---------------- ----------------
<S> <C> <C>
Units Outstand-
ing 1/1/97...... 44,037,797.6224 44,846,316.1031
Units Purchased. 4,629,575.2709 4,339,169.0147
Units Redeemed.. (3,450,651.3585) (3,795,441.9777)
---------------- ----------------
Units Outstand-
ing 12/31/97.... 45,216,721.5348 45,390,043.1401
================ ================
Unit Value
12/31/97........ $3.996188 $2.045625
================ ================
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
Metropolitan Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Metropolitan
Life Insurance Company (the "company") as of December 31, 1997 and 1996 and
the related consolidated statements of earnings, equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the company at
December 31, 1997 and 1996 and the consolidated results of its operations and
its consolidated cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the company
has changed the method of accounting for investment income on certain
structured securities.
Deloitte & Touche LLP
New York, New York
February 12, 1998, except for Note 17,
as to which the date is March 12, 1998
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1997 1996
----- -------- --------
<S> <C> <C> <C>
ASSETS
Investments:
Fixed Maturities:.................................... 2,15
Available for Sale, at Estimated Fair Value........ $ 92,630 $ 75,039
Held to Maturity, at Amortized Cost................ -- 11,322
Equity Securities.................................... 2,15 4,250 2,816
Mortgage Loans on Real Estate........................ 2,15 20,247 18,964
Policy Loans......................................... 15 5,846 5,842
Real Estate.......................................... 2 6,111 7,498
Real Estate Joint Ventures........................... 4 680 851
Other Limited Partnership Interests.................. 4 855 1,004
Leases and Leveraged Leases.......................... 2 2,123 1,763
Short-Term Investments............................... 15 705 741
Other Invested Assets................................ 2,338 2,692
-------- --------
Total Investments.................................. 135,785 128,532
Cash and Cash Equivalents.............................. 15 2,871 2,325
Deferred Policy Acquisition Costs...................... 6,436 7,227
Accrued Investment Income.............................. 1,860 1,611
Premiums and Other Receivables......................... 5 3,280 2,916
Deferred Income Taxes Recoverable...................... 6 -- 37
Other Assets........................................... 3,055 2,340
Separate Account Assets................................ 48,620 43,763
-------- --------
Total Assets........................................... $201,907 $188,751
======== ========
LIABILITIES AND EQUITY
Liabilities
Future Policy Benefits................................. 5 $ 72,125 $ 69,115
Policyholder Account Balances.......................... 15 48,533 47,674
Other Policyholder Funds............................... 4,681 4,758
Policyholder Dividends Payable......................... 1,373 1,348
Short- and Long-Term Debt.............................. 9,15 7,203 5,257
Income Taxes Payable:.................................. 6
Current.............................................. 480 599
Deferred............................................. 472 --
Other Liabilities...................................... 4,695 4,618
Separate Account Liabilities........................... 48,338 43,399
-------- --------
Total Liabilities...................................... 187,900 176,768
-------- --------
Commitments and Contingencies (Notes 2 and 10)
Equity
Retained Earnings...................................... 12,140 10,937
Net Unrealized Investment Gains........................ 3 1,898 1,028
Foreign Currency Translation Adjustments............... (31) 18
-------- --------
Total Equity........................................... 16 14,007 11,983
-------- --------
Total Liabilities and Equity........................... $201,907 $188,751
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, AND 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1997 1996 1995
----- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Premiums...................................... 5 $11,299 $11,462 $11,178
Universal Life and Investment-Type Product
Policy Fee Income............................ 1,458 1,243 1,177
Net Investment Income......................... 3 9,475 8,993 8,837
Investment Gains (Losses), Net................ 3 798 231 (157)
Commissions, Fees and Other Income............ 1,344 1,256 834
------- ------- -------
Total Revenues............................ 24,374 23,185 21,869
------- ------- -------
BENEFITS AND OTHER DEDUCTIONS
Policyholder Benefits......................... 5 12,328 12,399 11,915
Interest Credited to Policyholder Account Bal-
ances........................................ 2,874 2,868 3,143
Policyholder Dividends........................ 1,720 1,728 1,786
Other Operating Costs and Expenses............ 11 5,759 4,784 4,281
------- ------- -------
Total Benefits and Other Deductions....... 22,681 21,779 21,125
------- ------- -------
Earnings from Continuing Operations Before In-
come Taxes................................... 1,693 1,406 744
Income Taxes.................................. 6 476 482 407
------- ------- -------
Earnings from Continuing Operations........... 1,217 924 337
------- ------- -------
Discontinued Operations: 13
Loss from Discontinued Operations (Net of
Income Tax (Benefit) Expense of $(8) in
1997, $(18) in 1996 and $32 in 1995)....... (14) (52) (54)
(Loss) Gain on Disposal of Discontinued Op-
erations (Net of Income Tax (Benefit) Ex-
pense of $(11) in 1996 and $106 in 1995)... -- (19) 416
------- ------- -------
(Loss) Earnings from Discontinued Operations.. (14) (71) 362
------- ------- -------
Net Earnings.................................. 16 $ 1,203 $ 853 $ 699
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1997 1996 1995
----- ------- ------- -------
<S> <C> <C> <C> <C>
Retained Earnings, Beginning of Year.......... $10,937 $10,084 $ 9,385
Net Earnings.................................. 1,203 853 699
------- ------- -------
Retained Earnings, End of Year................ 12,140 10,937 10,084
------- ------- -------
Net Unrealized Investment Gains (Losses), Be-
ginning of Year.............................. 1,028 1,646 (955)
Change in Unrealized Investment Gains (Loss-
es).......................................... 3 870 (618) 2,601
------- ------- -------
Net Unrealized Investment Gains, End of Year.. 1,898 1,028 1,646
------- ------- -------
Foreign Currency Translation Adjustments, Be-
ginning of Year.............................. 18 24 (2)
Change in Foreign Currency Translation Adjust-
ments........................................ (49) (6) 26
------- ------- -------
Foreign Currency Translation Adjustments, End
of Year...................................... (31) 18 24
------- ------- -------
Total Equity, End of Year..................... 16 $14,007 $11,983 $11,754
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net Earnings $ 1,203 $ 853 $ 699
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:
<CAPTION>
Change in Deferred Policy Acquisition Costs, Net. (159) (391) (376)
<S> <C> <C> <C>
Change in Accrued Investment Income.............. (215) 350 (191)
Change in Premiums and Other Receivables......... (819) (106) (29)
Change in Undistributed Income of Real Estate
Joint Ventures and Other
Limited Partnership Interests................... 163 (45) (221)
Gains from Sales of Investments and Businesses,
Net............................................. (1,029) (428) (595)
Depreciation and Amortization Expenses........... 516 (18) 30
Interest Credited to Policyholder Account Bal-
ances........................................... 2,874 2,868 3,143
Universal Life and Investment-Type Product Policy
Fee Income...................................... (1,458) (1,243) (1,177)
Change in Future Policy Benefits................. 1,641 2,149 2,332
Change in Other Policyholder Funds............... 88 181 (66)
Change in Income Taxes Payable................... (99) (134) 327
Other, Net....................................... 512 (348) 947
-------- -------- --------
Net Cash Provided by Operating Activities.......... 3,218 3,688 4,823
-------- -------- --------
Cash Flows from Investing Activities
Sales, Maturities and Repayments of:
Fixed Maturities................................ 75,346 76,117 64,372
Equity Securities............................... 1,821 2,069 694
Mortgage Loans on Real Estate................... 2,381 2,380 3,182
Real Estate..................................... 1,875 1,948 1,193
Real Estate Joint Ventures...................... 205 410 387
Other Limited Partnership Interests............. 166 178 42
Leases and Leveraged Leases..................... 192 102 123
Purchases of:
Fixed Maturities................................ (76,603) (76,225) (66,693)
Equity Securities............................... (2,121) (2,742) (781)
Mortgage Loans on Real Estate................... (4,119) (4,225) (2,491)
Real Estate..................................... (387) (859) (904)
Real Estate Joint Ventures...................... (72) (130) (285)
Other Limited Partnership Interests............. (338) (307) (87)
Assets to be Leased............................. (738) (585) (383)
Net Change in Short-Term Investments.............. 37 1,028 (634)
Net Change in Policy Loans........................ 17 (128) (112)
Other, Net........................................ 442 45 (308)
-------- -------- --------
Net Cash Used by Investing Activities.............. (1,896) (924) (2,685)
-------- -------- --------
Cash Flows from Financing Activities
Policyholder Account Balances:
Deposits....................................... 16,061 17,167 16,017
Withdrawals.................................... (18,831) (19,321) (19,142)
Additions to Long-Term Debt....................... 828 -- 692
Repayments of Long-Term Debt...................... (99) (284) (389)
Net Increase (Decrease) in Short-Term Debt........ 1,265 69 (78)
-------- -------- --------
Net Cash Used by Financing Activities.............. (776) (2,369) (2,900)
-------- -------- --------
Change in Cash and Cash Equivalents................ 546 395 (762)
Cash and Cash Equivalents, Beginning of Year....... 2,325 1,930 2,692
-------- -------- --------
Cash and Cash Equivalents, End of Year............. $ 2,871 $ 2,325 $ 1,930
======== ======== ========
Supplemental Cash Flow Information
Interest Paid.................................... $ 422 $ 310 $ 280
======== ======== ========
Income Taxes Paid................................ $ 589 $ 497 $ 283
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNLESS OTHERWISE INDICATED, ALL AMOUNTS ARE IN MILLIONS OF DOLLARS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Metropolitan Life Insurance Company ("MetLife") and its subsidiaries
(collectively, the "company") provide life insurance and annuity products and
pension, pension-related and investment-related products and services to
individuals, corporations and other institutions. The company also provides
nonmedical health, disability and property and casualty insurance and offers
investment management, investment advisory and commercial finance services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). The New York State
Insurance Department (the "Department") recognizes only statutory accounting
practices for determining and reporting the financial condition and results of
operations of an insurance company for determining solvency under the New York
Insurance Law. No consideration is given by the Department to financial
statements prepared in accordance with GAAP in making such determination.
The consolidated financial statements include the accounts of MetLife and
its subsidiaries, partnerships and joint venture interests in which MetLife
has control. Other equity investments in affiliated companies, partnerships
and joint ventures are generally reported on the equity basis. Minority
interest relating to certain consolidated entities amounted to $277 and $149
at December 31, 1997 and 1996, respectively, and is included in other
liabilities. Significant intercompany transactions and balances have been
eliminated in consolidation.
Prior years' amounts have been reclassified to conform to the 1997
presentation.
On December 31, 1995, the company reclassified (under one-time accounting
implementation guidance) to available for sale certain held to maturity
securities. On July 1, 1997, the company reclassified to available for sale
all securities classified as held to maturity on that date as management
concluded that all securities are now available for sale. As a result,
consolidated equity at July 1, 1997 and December 31, 1995 increased by $198
and $135, respectively, excluding the effects of deferred income taxes,
amounts attributable to participating pension contracts, and adjustments of
deferred policy acquisition costs and future policy benefit loss recognition.
During 1997 management changed to the retrospective interest method of
accounting for investment income on structured note securities in accordance
with authoritative guidance issued in late 1996. As a result, net investment
income increased by $175. The cumulative effect of this accounting change on
prior years' income is not material.
VALUATION OF INVESTMENTS
SECURITIES--As mentioned above, during 1997 management reclassified all of
the company's fixed maturity securities to available for sale. Accordingly, as
of December 31, 1997, all of the company's investment securities are carried
at estimated fair value. Prior to this reclassification, certain fixed
maturity securities (principally bonds and redeemable preferred stock) were
carried at amortized cost. Unrealized investment gains and losses on
investment securities are recorded directly as a separate component of equity
net of related deferred income taxes, amounts attributable to participating
pension contracts and adjustments of deferred policy acquisition costs and
future policy benefit loss recognition. Costs of securities are adjusted for
impairments in value considered other than temporary. Such adjustments are
recorded as realized investment losses.
All security transactions are recorded on a trade date basis.
MORTGAGE LOANS in good standing are carried at amortized cost. A provision
is made for a realized investment loss (and a corresponding allowance is
established) when it becomes probable that the company will be unable to
collect all amounts due under the terms of the loan agreement. The provision
generally is equal to the excess of the carrying value of the mortgage loan
over its estimated fair value. Estimated fair value is based on either the
present value of
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the collateral.
Mortgage loans considered to be uncollectible are charged against the
allowance and subsequent recoveries are credited to the allowance. Interest
income earned on loans where the collateral value is used to measure
impairment is recorded on a cash basis. Interest income earned on loans where
the present value method is used to measure impairment is accrued on the net
carrying value amount of the loan at the interest rate used to discount the
cash flows.
POLICY LOANS are stated at unpaid principal balances.
INVESTMENT REAL ESTATE is generally stated at depreciated cost. Real estate
acquired in satisfaction of debt is recorded at estimated fair value at the
date of foreclosure. If events or changes in circumstances indicate that the
carrying amount of the investment exceeds its expected future cash flows, a
realized investment loss is recorded for the impairment. Real estate
investments that management intends to sell in the near term are reported at
the lower of cost or estimated fair market value less allowances for the
estimated cost of sales. Changes in the allowance relating to real estate to
be disposed of and impairments of real estate are reported as realized
investment gains or losses.
Depreciation of real estate is computed evenly over the estimated useful
lives of the properties (20 to 40 years).
LEASES AND LEVERAGED LEASES--The company is the lessor of equipment in both
direct financing and operating lease transactions. At lease commencement, the
company records the aggregate future minimum lease payments due and the
estimated residual value of the leased equipment less the unearned lease
income for direct financing leases. The unearned lease income represents the
excess of aggregate future minimum lease receipts plus the estimated residual
value over the cost of the leased equipment. Lease income is recognized over
the term of the lease in a manner which reflects a level yield on the net
investment in the lease. Certain origination fees and costs are deferred and
recognized over the term of the lease using the interest method. For operating
lease transactions, the cost of equipment or its net realizable value is
depreciated evenly over its estimated economic life.
The company participates in leasing transactions in which it supplies only a
portion of the purchase price, but generally has the entire equity interest in
the equipment and rentals receivable (leveraged leases). These interests,
however, are subordinated to the interests of the lenders supplying the
nonequity portion of the purchase price. The financing is generally in the
form of long-term debt that provides for no recourse against the company and
is collateralized by the property. The investment in leveraged leases is
recorded net of the nonrecourse debt. Revenue, including related tax benefits,
is recorded over the term of the lease at a level rate of return. Management
regularly reviews residual values and writes down residuals to expected values
as needed.
SHORT-TERM INVESTMENTS are stated at amortized cost, which approximates fair
value.
INVESTMENT RESULTS
Realized investment gains and losses are determined by specific
identification and are presented as a component of revenues. Valuation
allowances are deducted from asset categories to which they apply and
provisions for losses for investments are included in investment gains and
losses. Investment gains and losses are reduced by amounts attributable to
participating pension contracts and adjustments of deferred policy acquisition
costs and future policy benefit loss recognition.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
PROPERTY AND EQUIPMENT
Property and equipment and leasehold improvements are included in other
assets, and are stated at cost, less accumulated depreciation and
amortization. Depreciation, including charges relating to capitalized leases,
is provided evenly or using sum of the years digits method over the lesser of
estimated useful lives of the assets or, where
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
appropriate, the term of the lease. Estimated lives range from 20 to 40 years
for real estate and 5 to 15 years for all other property and equipment.
Amortization of leasehold improvements is provided evenly over the lesser of
the term of the lease or the estimated useful life of the improvements.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business that vary with and are primarily related
to the production of new business are deferred. Such costs, which consist
principally of commissions, agency and policy issue expenses, are amortized
over 40 years for participating traditional life and 30 years for universal
life and investment-type products. Amortization is recorded based on a
constant percentage of estimated gross margins or profits (arising principally
from surrender charges and interest, mortality and expense margins based on
historical and anticipated future experience). Changes to amounts previously
amortized are reflected in earnings in the period related estimates are
revised.
For nonparticipating traditional life and annuity policies with life
contingencies, deferred policy acquisition costs are amortized in proportion
to anticipated premiums. Assumptions as to anticipated premiums are made at
the date of policy issue and are consistently applied during the life of the
contracts. Deviations from estimated experience are reflected in earnings when
they occur. For these contracts, the amortization periods generally are for
the estimated life of the policy.
For nonmedical health insurance contracts, deferred policy acquisition costs
are amortized over the estimated life of the contracts (generally 10 years) in
proportion to anticipated premium revenue at the time of issue.
For property and liability insurance, deferred policy acquisition costs are
amortized over the terms of policies or reinsurance treaties.
OTHER INTANGIBLE ASSETS
The value of insurance acquired and the excess of purchase price over the
fair value of net assets acquired are included in other assets. The value of
insurance acquired is amortized over the expected policy or contract duration
in relation to the present value of estimated gross profits from such policies
and contracts. The excess of purchase price over the fair value of net assets
acquired is amortized evenly over 10 years.
FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES
Future policy benefit liabilities for participating traditional life
insurance policies are equal to the aggregate of (a) net level premium
reserves for death and endowment policy benefits (calculated based on the
nonforfeiture interest rate, ranging from 2.5 percent to 7.0 percent, and
mortality rates guaranteed in calculating the cash surrender values described
in such contracts), (b) the liability for terminal dividends, and (c) premium
deficiency reserves, which are established when the liabilities for future
policy benefits plus the present value of expected future gross premiums are
insufficient to provide for expected future policy benefits and expenses after
deferred policy acquisition costs are written off.
Future policy benefit liabilities for traditional annuities are equal to
accumulated contractholder fund balances during the accumulation period and
the present value of expected future payments after annuitization. Interest
rates used in establishing such liabilities range from 6.0 percent to 8.25
percent.
Policyholder account balances for universal life and investment-type
contracts are equal to the policy account values, which consist of an
accumulation of gross premium payments plus credited interest less expense and
mortality charges and withdrawals.
Benefit liabilities for nonmedical health insurance are calculated using the
net level premium method and assumptions as to future morbidity, withdrawals
and interest, which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of
benefits method and experience assumptions as to claim terminations, expenses
and interest.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For property and liability insurance, the liability for unpaid reported
losses is based on a case by case or overall estimate using the company's past
experience. A provision is also made for losses incurred but not reported on
the basis of estimates and past experience. Revisions of estimates are
reflected in net earnings in the year such refinements are made.
RECOGNITION OF INCOME AND EXPENSE
Premiums from traditional life and annuity policies with life contingencies
are recognized as income when due. Benefits and expenses are matched with such
income resulting in the recognition of profits over the life of the contract.
This match is accomplished through the provision for future policy benefits
and the deferral and subsequent amortization of policy acquisition costs.
Premiums due over a significantly shorter period than the total period over
which benefits are provided are recorded as income when due with any excess
profit deferred and recognized as income in a constant relationship to
insurance in-force or, for annuities, the amount of expected future benefit
payments.
Premiums from nonmedical health contracts are recognized as income on a pro
rata basis over the contract term.
Premiums from universal life and investment-type contracts are credited to
policyholder account balances. Revenues from such contracts consist of amounts
assessed against policyholder account balances for mortality, policy
administration and surrender charges. Amounts that are charged to expense
include benefit claims incurred in the period in excess of related
policyholder account balances and interest credited to policyholder account
balances.
Property and liability premiums are generally recognized as revenue on a pro
rata basis over the policy term. Unearned premiums are included in other
liabilities.
POLICYHOLDER DIVIDENDS
The amount of policyholder dividends to be paid is determined annually by
the board of directors. The aggregate amount of policyholder dividends is
related to actual interest, mortality, morbidity and expense experience for
the year and management's judgment as to the appropriate level of statutory
surplus to be retained by the company.
INCOME TAXES
MetLife and its eligible life insurance and nonlife insurance subsidiaries
file a consolidated U.S. federal income tax return and separate income tax
returns as required. The future tax consequences of temporary differences
between financial reporting and tax bases of assets and liabilities are
measured as of the balance sheet dates and are recorded as deferred income tax
assets or liabilities.
SEPARATE ACCOUNT OPERATIONS
Separate Accounts are established in conformity with insurance laws and are
generally not chargeable with liabilities that arise from any other business
of the company. Separate Account assets are subject to general account claims
only to the extent the value of such assets exceeds the Separate Account
liabilities.
Investments held in the Separate Accounts (stated at estimated fair value)
and liabilities of the Separate Accounts (including participants'
corresponding equity in the Separate Accounts) are reported separately as
assets and liabilities. Deposits to Separate Accounts are reported as
increases in Separate Account liabilities and are not reported in revenues.
Mortality, policy administration and surrender charges to all Separate
Accounts are included in revenues.
DISCONTINUED OPERATIONS
Certain operations have been discontinued and, accordingly, are segregated
in the consolidated statements of earnings.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations and subsidiaries are translated
at the exchange rate in effect at year-end. Revenues and benefits and other
expenses are translated at the average rate prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are charged or credited directly to equity.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 125 Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
and SFAS No. 127 Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 provide accounting and reporting standards relating to
transfers of security interests, repurchase agreements, dollar rolls,
securities lending and similar transactions which will be effective in 1998.
The company believes that the application of these standards will not have a
material impact on the company's results of operations, financial position or
liquidity.
SFAS No. 130 Reporting Comprehensive Income establishes standards for
reporting and presentation of comprehensive income and its components and will
be effective in 1998. Comprehensive income, which includes all changes to
equity except those resulting from investments by owners or distributions to
owners, was $2,024, $229 and $3,326 in 1997, 1996 and 1995, respectively.
Consolidated statements of comprehensive income have not been presented, as
the company has not determined the individual amounts to be displayed in such
statements.
2. INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
The cost or amortized cost, gross unrealized gain and loss, and estimated
fair value of fixed maturity and equity securities, by category, were as
follows:
<TABLE>
<CAPTION>
COST OR GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- --------- -----------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Available for Sale Securities:
Fixed Maturities:
Bonds:
U. S. Treasury securities and
obligations of U. S. government
corporations and agencies............ $ 10,619 $ 1,511 $ 2 $ 12,128
States and political subdivisions..... 486 22 -- 508
Foreign governments................... 3,420 371 52 3,739
Corporate............................. 41,191 2,343 290 43,244
Mortgage-backed securities............ 22,191 572 21 22,742
Other................................. 9,463 428 134 9,757
-------- --------- ------ --------
Total bonds......................... 87,370 5,247 499 92,118
Redeemable preferred stocks............. 494 19 1 512
-------- --------- ------ --------
Total fixed maturities.............. $ 87,864 $ 5,266 $ 500 $ 92,630
======== ========= ====== ========
Equity Securities:
Common stocks........................... $ 2,444 $ 1,716 $ 105 $ 4,055
Nonredeemable preferred stocks.......... 201 5 11 195
-------- --------- ------ --------
Total equity securities............. $ 2,645 $ 1,721 $ 116 $ 4,250
======== ========= ====== ========
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- --------- ------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Available for Sale Securities:
Fixed Maturities:
Bonds:
U. S. Treasury securities and
obligations of U. S. government
corporations and agencies........... $12,949 $ 901 $128 $13,722
States and political subdivisions.... 536 13 1 548
Foreign governments.................. 2,597 266 6 2,857
Corporate............................ 32,520 1,102 294 33,328
Mortgage-backed securities........... 21,200 407 91 21,516
Other................................ 2,511 90 30 2,571
------- --------- ------- -------
Total bonds........................ 72,313 2,779 550 74,542
Redeemable preferred stocks............ 500 -- 3 497
------- --------- ------- -------
Total fixed maturities............. $72,813 $ 2,779 $ 553 $75,039
======= ========= ======= =======
Equity Securities:
Common stocks.......................... $ 1,882 $ 648 $ 55 $ 2,475
Nonredeemable preferred stocks......... 371 51 81 341
------- --------- ------- -------
Total equity securities............ $ 2,253 $ 699 $ 136 $ 2,816
======= ========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Held to Maturity Securities:
Fixed Maturities:
Bonds:
U.S. Treasury securities and obliga-
tions of U.S. government corpora-
tions and
agencies............................ $ 48 $ 3 $ 51
States and political subdivisions.... 58 1 59
Foreign governments.................. 260 5 265
Corporate............................ 7,520 236 $ 64 7,692
Mortgage-backed securities........... 689 1 16 674
Other................................ 2,746 85 24 2,807
------- -------- -------- -------
Total bonds........................ 11,321 331 104 11,548
Redeemable preferred stocks............ 1 -- -- 1
------- -------- -------- -------
Total fixed maturities............. $11,322 $ 331 $ 104 $11,549
======= ======== ======== =======
</TABLE>
The amortized cost and estimated fair value of bonds, by contractual
maturity, were as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
DECEMBER 31, 1997
Due in one year or less.............................. $ 1,916 $ 1,927
Due after one year through five years................ 15,830 16,260
Due after five years through 10 years................ 23,023 24,067
Due after 10 years................................... 24,410 27,122
------- -------
Subtotal........................................... 65,179 69,376
Mortgage-backed securities........................... 22,191 22,742
------- -------
Total.............................................. $87,370 $92,118
======= =======
</TABLE>
Bonds not due at a single maturity date have been included in the above table
in the year of final maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MORTGAGE LOANS
Mortgage loans are collateralized by properties principally located
throughout the United States and Canada. At December 31, 1997, approximately
15 percent, 7 percent and 6 percent of the properties were located in
California, Illinois and Florida, respectively. Generally, the company (as the
lender) requires that a minimum of one-fourth of the purchase price of the
underlying real estate be paid by the borrower.
The mortgage loan investments were categorized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
DECEMBER 31
Office buildings................................................ 32% 30%
Retail.......................................................... 16% 19%
Residential..................................................... 15% 16%
Agricultural.................................................... 18% 18%
Other........................................................... 19% 17%
---- ----
Total......................................................... 100% 100%
==== ====
</TABLE>
Many of the company's real estate joint ventures have mortgage loans with
the company. The carrying values of such mortgages were $753 and $869 at
December 31, 1997 and 1996, respectively.
Mortgage loan valuation allowances and changes thereto were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Balance, January 1............................... $ 444 $ 466 $ 483
Additions charged to income...................... 61 144 107
Deductions for writedowns and dispositions....... (241) (166) (124)
------ ------ ------
Balance, December 31............................. $ 264 $ 444 $ 466
====== ====== ======
Impaired mortgage loans and related valuation allowances were as follows:
<CAPTION>
1997 1996
------ ------
<S> <C> <C> <C>
DECEMBER 31
Impaired mortgage loans with valuation allow-
ances........................................... $1,231 $1,677
Impaired mortgage loans with no valuation allow-
ances........................................... 306 165
------ ------
Recorded investment in impaired mortgage loans... 1,537 1,842
Valuation allowances............................. (250) (427)
------ ------
Net impaired mortgage loans...................... $1,287 $1,415
====== ======
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Average recorded investment in impaired mortgage
loans........................................... $1,680 $2,113 $2,365
====== ====== ======
</TABLE>
Interest income on impaired mortgage loans recorded on a cash basis totaled
$110 , $122 and $169 for the years ended December 31, 1997, 1996 and 1995,
respectively.
REAL ESTATE
Accumulated depreciation on real estate was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Balance, January 1................................ $2,109 $2,187 $2,757
Depreciation expense.............................. 332 348 427
Deductions for dispositions....................... (475) (426) (997)
------ ------ ------
Balance, December 31.............................. $1,966 $2,109 $2,187
====== ====== ======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Real estate valuation allowances and changes thereto were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Balance, January 1................................... $ 529 $ 743 $ 622
(Credited) charged to income......................... (52) 127 358
Deductions for writedowns and dispositions........... (436) (341) (237)
----- ----- -----
Balance, December 31................................. $ 41 $ 529 $ 743
===== ===== =====
</TABLE>
The above table does not include valuation allowances of $55, $118 and $167
at December 31, 1997, 1996 and 1995, respectively, relating to investments in
real estate joint ventures.
Prior to 1996, the company established valuation allowances for all impaired
real estate investments including real estate held for investment. During
1996, $150 of allowances relating to real estate held for investment were
applied as writedowns to specific properties. During 1997, allowances of $94
relating to real estate held for sale were applied as writedowns to specific
properties. The balances in the real estate valuation allowances at December
31, 1997 and 1996, relate to properties that management has committed to a
plan of sale. The carrying values, net of valuation allowances, of properties
committed to a plan of sale were $206 and $1,844 at December 31, 1997 and
1996, respectively. Net investment income relating to such properties was $8
and $60 for the years ended December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, the company owned real estate acquired in
satisfaction of debt of $218 and $456, respectively.
LEASES AND LEVERAGED LEASES
The company's investment in direct financing leases and leveraged leases was
as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING LEVERAGED
LEASES LEASES TOTAL
-------------- ------------- --------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31
Investment................ $1,137 $1,247 $ 851 $ 387 $1,988 $1,634
Estimated residual values. 183 238 641 543 824 781
------ ------ ------ ----- ------ ------
Total................... 1,320 1,485 1,492 930 2,812 2,415
Unearned income........... (261) (336) (428) (316) (689) (652)
------ ------ ------ ----- ------ ------
Net investment............ $1,059 $1,149 $1,064 $ 614 $2,123 $1,763
====== ====== ====== ===== ====== ======
</TABLE>
The investment amounts set forth above are generally due in monthly
installments. The payment periods generally range from three to eight years,
but in certain circumstances are as long as 20 years. Average yields range
from 7 percent to 12 percent. These receivables are generally collateralized
by the related property.
Scheduled aggregate receipts for the investment and estimated residual
values in direct financing leases were as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING RESIDUALS TOTAL
--------- --------- ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
1998......................................... $ 229 $ 14 $ 243
1999......................................... 211 19 230
2000......................................... 192 25 217
2001......................................... 147 19 166
2002......................................... 114 22 136
Thereafter................................... 244 84 328
------ ---- ------
Total........................................ $1,137 $183 $1,320
====== ==== ======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Historical collection experience indicates that a portion of the above
amounts will be paid prior to contractual maturity. Accordingly, the future
receipts, as shown above, should not be regarded as a forecast of future cash
flows.
FINANCIAL INSTRUMENTS
The company has a securities lending program whereby large blocks of
securities are loaned to third parties, primarily major brokerage firms.
Company policy requires a minimum of 102 percent of the fair value of the
loaned securities to be separately maintained as collateral for the loans. The
collateral is recorded in memorandum records and is not reflected in the
consolidated balance sheets. To further minimize the credit risks related to
this lending program, the company regularly monitors the financial condition
of the borrowers.
The company engages in a variety of derivative transactions. Certain
derivatives, such as forwards, futures, options and swaps, which do not
themselves generate interest or dividend income, are acquired or sold in order
to hedge or reduce risks applicable to assets held, or expected to be
purchased or sold, and liabilities incurred or expected to be incurred. The
company also may occasionally sell covered call options. The company does not
engage in trading of derivatives.
Derivative financial instruments involve varying degrees of market risk
resulting from changes in the volatility of interest rates, foreign currency
exchange rates or market values of the underlying financial instruments. The
company's risk of loss is typically limited to the fair value of these
instruments and not by the notional or contractual amounts which reflect the
extent of involvement but not necessarily the amounts subject to risk. Credit
risk arises from the possible inability of counterparties to meet the terms of
the contracts. Credit risk due to counterparty nonperformance associated with
these instruments is the unrealized gain, if any, reflected by the fair value
of such instruments.
During the three year period ended December 31, 1997, the company employed
several ongoing derivatives strategies. The company entered into a number of
anticipatory hedge agreements using securities forwards, futures and interest
rate swaps to limit the interest rate exposure of investments expected to be
acquired or sold within one year. The company also executed swaps and foreign
currency forwards to hedge, including on an anticipatory basis, the foreign
currency risk of foreign currency denominated investments. The company also
used interest rate swaps and forwards to reduce risks from changes in interest
rates and exposures arising from mismatches between assets and liabilities. In
addition, the company has used interest rate caps to reduce the market and
interest rate risks relating to certain assets and liabilities.
Income and expense related to derivatives used to hedge or manage risks are
recorded on the accrual basis as an adjustment to the yield of the related
securities over the periods covered by the derivative contracts. Gains and
losses relating to early terminations of interest rate swaps used to hedge or
manage interest rate risk are deferred and amortized over the remaining period
originally covered by the swap. Gains and losses relating to derivatives used
to hedge the risks associated with anticipated transactions are deferred and
utilized to adjust the basis of the transaction once it has closed. If it is
determined that the transaction will not close, such gains and losses are
included in realized investment gains and losses.
ASSETS ON DEPOSIT
As of December 31, 1997 and 1996, the company had assets on deposit with
regulatory agencies of $4,695 and $4,062, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. NET INVESTMENT INCOME AND INVESTMENT GAINS
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Fixed maturities............................ $ 6,455 $ 6,042 $ 6,006
Equity securities........................... 50 60 45
Mortgage loans on real estate............... 1,684 1,523 1,501
Policy loans................................ 368 399 394
Real estate................................. 1,566 1,647 1,833
Real estate joint ventures.................. 42 21 41
Other limited partnership interests......... 302 215 149
Leases and leveraged leases................. 131 135 113
Cash, cash equivalents and short-term in-
vestments.................................. 169 214 231
Other investment income..................... 235 281 326
------- ------- -------
Gross investment income..................... 11,002 10,537 10,639
Investment expenses......................... (1,527) (1,544) (1,802)
------- ------- -------
Investment income, net...................... $ 9,475 $ 8,993 $ 8,837
======= ======= =======
Investment gains (losses), including changes in valuation allowances, were as
follows:
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Fixed maturities............................ $ 118 $ 234 $ 621
Equity securities........................... 224 78 (5)
Mortgage loans on real estate............... 56 (86) (51)
Real estate................................. 249 165 (375)
Real estate joint ventures.................. 117 61 (142)
Other limited partnership interests......... 103 82 117
Other....................................... 162 (76) (92)
------- ------- -------
Subtotal................................ 1,029 458 73
Investment gains relating to:
Participating pension contracts........... (35) (20) --
Amortization of deferred policy acquisi-
tion costs............................... (70) (4) (78)
Future policy benefit loss recognition.... (126) (203) (152)
------- ------- -------
Net investment gains (losses)............... $ 798 $ 231 $ (157)
======= ======= =======
Sales of bonds were as follows:
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Bonds classified as available for sale
Proceeds.................................. $72,396 $74,580 $58,537
Gross realized gains...................... 691 1,069 1,013
Gross realized losses..................... 584 842 402
Bonds classified as held to maturity
Proceeds.................................. $ 352 $ 1,281 $ 1,806
Gross realized gains...................... 5 10 17
Gross realized losses..................... 1 1 4
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net unrealized investment gains (losses), which are included in the
consolidated balance sheets as a component of equity, and the changes for the
corresponding years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
DECEMBER 31
Balance, comprised of:
Unrealized investment gains on:
Fixed maturities.......................... $4,766 $2,226 $ 5,166
Equity securities......................... 1,605 563 210
Other..................................... 294 474 380
------ ------ -------
6,665 3,263 5,756
------ ------ -------
Amounts allocable to:
Participating pension contracts............. 312 9 350
Loss recognition............................ 2,189 1,219 2,064
Deferred policy acquisition cost............ 1,147 420 748
Deferred income taxes....................... 1,119 587 948
------ ------ -------
4,767 2,235 4,110
------ ------ -------
Total................................... $1,898 $1,028 $ 1,646
====== ====== =======
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Balance, January 1............................ $1,028 $1,646 $ (955)
Unrealized investment gains (losses) during
year......................................... 3,402 (2,493) 7,665
Unrealized investment (gains) losses allocable
to:
Participating pension contracts............. (303) 341 (258)
Loss recognition............................ (970) 845 (2,063)
Deferred policy acquisition costs........... (727) 328 (1,247)
Deferred income taxes......................... (532) 361 (1,496)
------ ------ -------
Balance, December 31.......................... $1,898 $1,028 $ 1,646
====== ====== =======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. JOINT VENTURES AND OTHER LIMITED PARTNERSHIPS
Combined financial information for real estate joint ventures and other
limited partnership interests accounted for under the equity method, in which
the company has an investment of at least $10 and an equity interest of at
least 10 percent, was as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
DECEMBER 31
Assets:
Investments in real estate, at depreciated cost........ $ 938 $1,030
Investments in securities, at estimated fair value..... 717 621
Cash and cash equivalents.............................. 141 37
Other.................................................. 984 1,030
------ ------
Total assets......................................... 2,780 2,718
------ ------
Liabilities:
Borrowed funds--third party............................ 384 243
Borrowed funds--MetLife................................ 136 69
Other.................................................. 678 915
------ ------
Total liabilities.................................... 1,198 1,227
------ ------
Partners' capital........................................ $1,582 $1,491
====== ======
MetLife equity in partners' capital included above....... $ 822 $ 786
====== ======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Operations:
Revenues of real estate joint ventures......... $ 291 $ 275 $ 364
Revenues of other limited partnership inter-
ests.......................................... 276 297 417
Interest expense--third party.................. (25) (11) (26)
Interest expense--MetLife...................... (16) (19) (31)
Other expenses................................. (396) (411) (501)
----- ----- -----
Net earnings..................................... $ 130 $ 131 $ 223
===== ===== =====
MetLife earnings from real estate joint ventures
and other limited partnership interests included
above........................................... $ 59 $ 34 $ 28
===== ===== =====
</TABLE>
5. REINSURANCE AND OTHER INSURANCE TRANSACTIONS
The company assumes and cedes insurance with other insurance companies. The
consolidated statements of earnings are presented net of reinsurance ceded.
The effect of reinsurance on premiums earned was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Direct premiums............................ $12,749 $12,569 $11,944
Reinsurance assumed........................ 360 508 812
Reinsurance ceded.......................... (1,810) (1,615) (1,578)
------- ------- -------
Net premiums earned........................ $11,299 $11,462 $11,178
======= ======= =======
Reinsurance recoveries netted against
policyholder benefits..................... $ 1,689 $ 1,667 $ 1,523
======= ======= =======
</TABLE>
Premiums and other receivables in the consolidated balance sheets include
reinsurance recoverables of $1,579 and $700 at December 31, 1997 and 1996,
respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Activity in the liability for unpaid losses and loss adjustment expenses
relating to property and casualty and group accident and nonmedical health
policies and contracts was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Balance at January 1........................... $3,345 $3,296 $2,670
Reinsurance recoverables..................... (215) (214) (104)
------ ------ ------
Net balance at January 1....................... 3,130 3,082 2,566
------ ------ ------
Incurred related to:
Current year................................. 2,855 2,951 3,420
Prior years.................................. 88 (114) (68)
------ ------ ------
Total incurred............................. 2,943 2,837 3,352
------ ------ ------
Paid related to:
Current year................................. 1,832 1,998 2,053
Prior years.................................. 815 791 783
------ ------ ------
Total paid................................. 2,647 2,789 2,836
------ ------ ------
Net balance at December 31..................... 3,426 3,130 3,082
Plus reinsurance recoverables................ 229 215 214
------ ------ ------
Balance at December 31......................... $3,655 $3,345 $3,296
====== ====== ======
</TABLE>
The company has exposure to catastrophes, which are an inherent risk of the
property and casualty insurance business and could contribute to material
fluctuations in the company's results of operations. The company uses excess
of loss and quota share reinsurance arrangements to reduce its catastrophe
losses and provide diversification of risk.
6. INCOME TAXES
Income tax expense for U. S. operations has been calculated in accordance
with the provisions of the Internal Revenue Code, as amended (the "Code").
Under the Code, the amount of federal income tax expense incurred by mutual
life insurance companies includes an equity tax calculated by a prescribed
formula that incorporates a differential earnings rate between stock and
mutual life insurance companies.
The income tax expense (benefit) of continuing operations was as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1997
Federal......................................... $432 $(26) $406
State and local................................. 10 9 19
Foreign......................................... 26 25 51
---- ---- ----
Total......................................... $468 $ 8 $476
==== ==== ====
1996
Federal......................................... $346 $ 66 $412
State and local................................. 25 6 31
Foreign......................................... 27 12 39
---- ---- ----
Total......................................... $398 $ 84 $482
==== ==== ====
1995
Federal......................................... $241 $ 65 $306
State and local................................. 52 3 55
Foreign......................................... 22 24 46
---- ---- ----
Total......................................... $315 $ 92 $407
==== ==== ====
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reconciliations of the differences between income taxes of continuing
operations computed at the federal statutory tax rates and consolidated
provisions for income taxes were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Earnings from continuing operations before
income taxes................................... $1,693 $1,406 $744
Income tax rate................................. 35% 35% 35%
------ ------ ----
Expected income tax expense at federal statutory
income tax rate................................ 593 492 260
Tax effect of:
Tax exempt investment income.................. (30) (18) (9)
Goodwill...................................... 9 -- --
Differential earnings amount.................. (40) 38 67
State and local income taxes.................. 15 23 37
Foreign operations............................ 7 (7) 25
Tax credits................................... (15) (15) (15)
Prior year taxes.............................. (2) (46) (3)
Sale of subsidiary............................ (41) -- --
Other, net.................................... (20) 15 45
------ ------ ----
Income taxes.................................... $ 476 $ 482 $407
====== ====== ====
</TABLE>
The deferred income tax assets or liabilities recorded at December 31, 1997
and 1996 represent the net temporary differences between the tax bases of
assets and liabilities and their amounts for financial reporting. The
components of the net deferred income tax asset or liability were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
DECEMBER 31
Deferred income tax assets:
Policyholder liabilities and receivables........ $3,010 $2,889
Net operating loss carryforwards................ 33 38
Other, net...................................... 938 698
------ ------
Total gross deferred income tax assets........ 3,981 3,625
Less valuation allowance........................ 24 14
------ ------
Deferred income tax assets, net of valuation al-
lowance.......................................... 3,957 3,611
------ ------
Deferred income tax liabilities:
Investments..................................... 1,227 848
Deferred policy acquisition costs............... 1,890 1,940
Net unrealized capital gains.................... 1,119 587
Other, net...................................... 193 199
------ ------
Total deferred income tax liabilities......... 4,429 3,574
------ ------
Net deferred income tax (liability) asset......... $ (472) $ 37
====== ======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The sources of deferred income tax expense (benefit) and their tax effects
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Policyholder liabilities and receivables........... $(109) $ 53 $(105)
Net operating loss carryforwards................... 5 (19) 89
Investments........................................ 382 50 199
Deferred policy acquisition costs.................. (51) 55 49
Change in valuation allowance...................... 10 4 (6)
Other, net......................................... (229) (59) (134)
----- ----- -----
Total............................................ $ 8 $ 84 $ 92
===== ===== =====
The valuation allowance for the tax benefits of net operating loss
carryforwards reflects management's assessment, based on available information,
that it is more likely than not that the deferred income tax asset for net
operating loss carryforwards will not be realized. The benefit will be
recognized when management believes that it is more likely than not that the
deferred income tax asset is realizable. U.S. tax basis net operating loss
carryforwards of $15 are available, subject to statutory limitation, to offset
taxable income through the year 2012.
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The company is both the sponsor and administrator of defined benefit pension
plans covering all eligible employees and sales representatives of MetLife and
certain of its subsidiaries. Retirement benefits are based on years of credited
service and final average earnings history.
Components of the net periodic pension (credit) cost for the defined benefit
qualified and nonqualified pension plans were as follows:
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Service cost....................................... $ 73 $ 77 $ 62
Interest cost on projected benefit obligation...... 244 232 222
Actual return on assets............................ (318) (273) (280)
Net amortization and deferrals..................... (5) (12) (13)
----- ----- -----
Net periodic pension (credit) cost................. $ (6) $ 24 $ (9)
===== ===== =====
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the qualified and nonqualified defined benefit pension
plans and a comparison of the accumulated benefit obligation, plan assets and
projected benefit obligation were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31
Actuarial present value of
obligations:
Vested.................... $2,804 $ 251 $2,668 $223
Nonvested................. 33 2 36 2
------ ----- ------ ----
Accumulated benefit obliga-
tion...................... $2,837 $ 253 $2,704 $225
====== ===== ====== ====
Projected benefit obliga-
tion...................... $3,170 $ 353 $2,958 $310
Plan assets (principally
company investment
contracts) at contract
value 3,831 151 3,495 133
------ ----- ------ ----
Plan assets in excess of
(less than) projected
benefit obligation........ 661 (202) 537 (177)
Unrecognized prior service
cost...................... 125 25 139 26
Unrecognized net (gain)
loss from past experience
different from that
assumed................... (130) 21 (27) 60
Unrecognized net asset at
transition................ (140) -- (176) --
------ ----- ------ ----
Prepaid (accrued) pension
cost at December 31....... $ 516 $(156) $ 473 $(91)
====== ===== ====== ====
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation ranged from 7.25 percent to 7.75
percent for 1997 and 7.25 percent to 8.0 percent for 1996. The weighted
average assumed rate of increase in future compensation levels ranged from 4.5
percent to 8.5 percent in 1997 and from 4.0 percent to 8.0 percent in 1996.
The assumed long-term rate of return on assets used in determining the net
periodic pension cost was 8.75 percent in 1997 and ranged from 8.0 percent to
8.5 percent in 1996. In addition, several other factors, such as expected
retirement dates and mortality, enter into the determination of the actuarial
present value of the accumulated benefit obligation.
SAVINGS AND INVESTMENT PLANS
The company sponsors savings and investment plans available for
substantially all employees under which the company matches a portion of
employee contributions. During 1997, 1996 and 1995, the company contributed
$44, $42 and $49, respectively, to the plans.
OTHER POSTRETIREMENT BENEFITS
The company also provides certain postretirement health care and life
insurance benefits for retired employees through insurance contracts.
Substantially all of the company's employees may, in accordance with the plans
applicable to such benefits, become eligible for these benefits if they attain
retirement age, with sufficient service, while working for the company.
The components of the net periodic nonpension postretirement benefit cost
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Service cost......................................... $ 31 $ 41 $ 28
Interest cost on accumulated postretirement benefit
obligation.......................................... 122 127 115
Actual return on plan assets (company insurance
contracts).......................................... (66) (58) (63)
Net amortization and deferrals....................... (5) 2 (9)
---- ---- ----
Net periodic nonpension postretirement benefit cost.. $ 82 $112 $ 71
==== ==== ====
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the postretirement health care and life
insurance plans' combined status reconciled with the amount included in the
company's consolidated balance sheets.
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
DECEMBER 31
Accumulated postretirement benefit obligation:
Retirees............................................. $1,251 $1,228
Fully eligible active employees...................... 115 145
Active employees not eligible to retire.............. 397 400
------ ------
Total............................................... 1,763 1,773
Plan assets (company insurance contracts) at contract
value................................................ 1,004 897
------ ------
Plan assets less than accumulated postretirement
benefit obligation................................... (759) (876)
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions.... (173) (60)
------ ------
Accrued nonpension postretirement benefit cost at
December 31.......................................... $ (932) $ (936)
====== ======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
nonpension postretirement benefit obligation was generally 9.0 percent in
1997, gradually decreasing to 5.25 percent over five years and generally 9.5
percent in 1996 decreasing to 5.25 percent over 12 years. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation ranged from 7.25 percent to 7.75 percent at December 31, 1997 and
7.0 percent to 7.75 percent at December 31, 1996.
If the health care cost trend rate assumptions were increased 1.0 percent,
the accumulated postretirement benefit obligation as of December 31, 1997
would be increased 6.75 percent. The effect of this change on the sum of the
service and interest cost components of the net periodic postretirement
benefit cost for the year ended December 31, 1997, would be an increase of 9.7
percent.
8. LEASES
RENTAL INCOME ON REAL ESTATE OWNED AND LEASE EXPENSE
In accordance with industry practice, certain of the company's lease
agreements with retail tenants result in income that is contingent on the
level of the tenants' sales revenues. Additionally, the company, as lessee,
has entered into various lease and sublease agreements for office space, data
processing and other equipment. Future minimum rental income, gross minimum
rental payments and minimum sublease rental income relating to these lease
agreements were as follows:
<TABLE>
<CAPTION>
GROSS
RENTAL RENTAL SUBLEASE
INCOME PAYMENTS INCOME
------ -------- --------
<S> <C> <C> <C>
DECEMBER 31
1998.......................................... $ 697 $146 $55
1999.......................................... 657 127 52
2000.......................................... 604 103 50
2001.......................................... 560 82 44
2002.......................................... 496 59 36
2003 and thereafter........................... 2,724 103 68
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
SCHEDULED
MATURITY 1997 1996
--------- ------ ------
<S> <C> <C> <C>
DECEMBER 31
Surplus notes:
6.300% 2003 $ 397 $ 396
7.000% 2005 249 248
7.700% 2015 198 197
7.450% 2023 296 296
7.875% 2024 148 148
7.800% 2025 248 248
Floating rate notes, interest rates
based on LIBOR................................. 1999-2007 358 49
Fixed rate notes, interest rates ranging from
5.80%-10.50%................................... 1998-2007 519 135
Zero coupon Eurobonds........................... 1999 79 71
Other........................................... 124 158
------ ------
Total long-term debt............................ 2,616 1,946
Short-term debt................................. 4,587 3,311
------ ------
Total........................................... $7,203 $5,257
====== ======
</TABLE>
Payments of interest and principal on the surplus notes may be made only
with the prior approval of the Superintendent of Insurance of the State of New
York (Superintendent). Subject to the prior approval of the Superintendent,
the 7.45 percent surplus notes may be redeemed, in whole or in part, at the
election of the company at any time on or after November 1, 2003.
At December 31, 1997, aggregate maturities of the long-term debt based on
required principal payments at maturity for 1998 and the succeeding four years
amounted to $80, $377, $178, $9 and $11, respectively, and $1,979 thereafter.
10. CONTINGENCIES
The company is currently a defendant in numerous state and federal lawsuits
(including individual suits and putative class actions) raising allegations of
improper marketing of individual life insurance. Litigation seeking
compensatory and/or punitive damages relating to the marketing by the company
of individual life insurance (including putative class and individual actions)
continues to be brought by or on behalf of policyholders and others. These
cases, most of which are in the early stages of litigation, seek substantial
damages, including in some cases claims for punitive and treble damages and
attorneys' fees, and raise, among other claims, allegations that individual
life insurance policies were improperly sold in replacement transactions or
with inadequate or inaccurate disclosure as to the period for which premiums
would be payable, or were misleadingly sold as savings or retirement plans.
Putative classes have been certified, conditionally or subject to appeal, in
state court actions covering certain policyholders in California and West
Virginia; class certification has been denied in a state court action in Ohio
thus far. A number of the federal cases alleging improper marketing of
individual life insurance have been consolidated in the United States District
Court for the Western District of Pennsylvania and the United States District
Court in Massachusetts for pretrial proceedings. Additional litigation
relating to the company's marketing of individual life insurance may be
commenced in the future. The company is vigorously defending itself in these
actions.
Regulatory authorities in a small number of states, including both insurance
departments and attorneys general, have ongoing investigations of the
company's sales of individual life insurance, including investigations of
alleged improper replacement transactions and alleged improper sales of
insurance with inaccurate or inadequate disclosures
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
as to the period for which premiums would be payable. In addition, an
investigation by the Office of the United States Attorney for the Middle
District of Florida, which commenced in 1994, into certain of the retirement
and savings plan selling allegations that have been a subject of regulatory
inquiries, has not been closed.
In addition to the foregoing matters, the company is a defendant in a large
number of asbestos lawsuits relating to allegations regarding certain
research, advice and publication activity that occurred decades ago. While the
company believes that it has significant defenses to these claims and has
effected settlements in many of these cases and has prevailed in certain
cases, it is not possible to predict the number of such cases that may be
brought or the aggregate amount of any liability that may ultimately be
incurred by the company.
Various litigation, claims and assessments against the company, in addition
to the aforementioned and those otherwise provided for in the company's
financial statements, have arisen in the course of the company's business,
including in connection with its activities as an insurer, employer, investor
and taxpayer. Further, state insurance regulatory authorities and other state
authorities regularly make inquiries and conduct investigations concerning the
company's compliance with applicable insurance and other laws and regulations.
In certain of the matters referred to above, very large and/or indeterminate
amounts, including punitive and treble damages, are sought. While it is not
feasible to predict or determine the ultimate outcome of all pending
investigations and legal proceedings or to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome in all
such matters, it is the opinion of the company's management that their
outcome, after consideration of the provisions made in the company's financial
statements, is not likely to have a material adverse effect on the company's
financial position.
11. OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Compensation costs............................. $2,072 $1,813 $1,607
Commissions.................................... 766 722 853
Interest and debt issue costs.................. 453 311 285
Amortization of policy acquisition costs....... 771 633 606
Capitalization of policy acquisition costs..... (1,000) (1,028) (1,060)
Rent expense, net of sublease.................. 179 180 184
Restructuring charges.......................... -- 18 88
Minority interest.............................. 51 30 22
Other.......................................... 2,467 2,105 1,696
------ ------ ------
Total.......................................... $5,759 $4,784 $4,281
====== ====== ======
</TABLE>
During 1996 and 1995, the company recorded restructuring charges primarily
related to the consolidation of administration and agency sales force leased
office space and costs relating to workforce reductions.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. OTHER INTANGIBLE ASSETS
The value of business acquired and the excess of purchase price over the
fair value of net assets acquired and changes thereto were as follows:
<TABLE>
<CAPTION>
EXCESS OF PURCHASE PRICE
OVER FAIR VALUE OF
VALUE OF BUSINESS ACQUIRED NET ASSETS ACQUIRED
---------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31
Net Balance, January 1.. $ 358 $ 381 $ 6 $ 544 $ 377 $ 413
Acquisitions............ 176 7 396 387 197 221
Dispositions............ -- -- -- -- -- (236)
Amortization............ (36) (30) (21) (47) (30) (21)
-------- -------- -------- -------- -------- --------
Net balance, December
31..................... $ 498 $ 358 $ 381 $ 884 $ 544 $ 377
======== ======== ======== ======== ======== ========
<CAPTION>
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31
Accumulated amortiza-
tion................... $ 87 $ 51 $ 21 $ 148 $ 101 $ 71
======== ======== ======== ======== ======== ========
</TABLE>
13. DISCONTINUED OPERATIONS
In January 1995 the company contributed its group medical benefits
businesses to a corporate joint venture, The MetraHealth Companies, Inc.
("MetraHealth"). In October 1995, the company sold its investment in
MetraHealth to United HealthCare Corporation. For its interest in MetraHealth,
the company received $485 face amount of United HealthCare Corporation
convertible preferred stock and $326 in cash (including additional
consideration of $50 in 1996). The sale resulted in an aftertax loss of $36 in
1996 and an aftertax gain of $372 in 1995. Operating losses in 1997 and 1996
related principally to the finalization of the transfer of group medical
contracts to United HealthCare Corporation.
During 1995 the company also sold its real estate brokerage, mortgage
banking and mortgage administration operations for an aggregate consideration
of $251 (including additional cash consideration of $25 in 1996), resulting in
aftertax gains of $17 in 1996 and $44 in 1995.
14. CONSOLIDATED CASH FLOWS INFORMATION
During 1997 the company acquired assets of $3,777 and assumed liabilities of
$3,347 through the acquisition of certain insurance and noninsurance
companies. The aggregate purchase prices were allocated to the assets and
liabilities acquired based upon their estimated fair values. During 1997 the
company also reduced assets and liabilities by $4,342 and $4,207,
respectively, through the sale of certain insurance operations, resulting in a
pretax gain of $139. During 1995 the company also reduced assets and
liabilities by $919 and $413, respectively, through the sale of its real
estate brokerage, mortgage banking and mortgage administration operations.
During 1997 the company assumed liabilities of $227 and received assets of
$227 and during 1995 the company assumed liabilities of $1,573 and received
assets of $1,573 through assumption of certain businesses from other insurance
companies.
For the years ended December 31, 1997, 1996 and 1995, respectively, real
estate of $151, $189 and $429 was acquired in satisfaction of debt.
During 1997 and 1995, fixed maturity securities with an amortized cost of
$11,682 and $3,058, respectively, were transferred from held to maturity to
available for sale.
15. FAIR VALUE INFORMATION
The estimated fair value amounts of financial instruments presented below
have been determined by the company using market information available as of
December 31, 1997 and 1996, and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value for financial instruments for which there
are no available market value quotations.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The estimates presented below were not necessarily indicative of the amounts
the company could have realized in a market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
NOTIONAL CARRYING ESTIMATED
AMOUNT VALUE FAIR VALUE
-------- -------- ----------
<S> <C> <C> <C>
DECEMBER 31, 1997
Assets:
Fixed maturities................................ $92,630 $92,630
Equity securities............................... 4,250 4,250
Mortgage loans on real estate................... 20,247 21,133
Policy loans.................................... 5,846 6,110
Short-term investments.......................... 705 705
Cash and cash equivalents....................... 2,871 2,871
Liabilities:
Policyholder account balances................... 36,433 36,664
Short- and long-term debt....................... 7,203 7,258
Other financial instruments:
Interest rate swaps............................. $1,464 (1) (19)
Interest rate caps.............................. 1,545 16 12
Foreign currency swaps.......................... 254 -- (28)
Foreign currency forwards....................... 150 -- --
Covered call options............................ 88 (31) (31)
Other options................................... 565 -- (2)
Futures contracts............................... 2,262 10 10
Unused lines of credit.......................... 2,310 -- 2
<CAPTION>
NOTIONAL CARRYING ESTIMATED
AMOUNT VALUE FAIR VALUE
-------- -------- ----------
<S> <C> <C> <C>
DECEMBER 31, 1996
Assets:
Fixed maturities................................ $86,361 $86,588
Equity securities............................... 2,816 2,816
Mortgage loans on real estate................... 18,964 19,342
Policy loans.................................... 5,842 5,796
Short-term investments.......................... 741 741
Cash and cash equivalents....................... 2,325 2,325
Liabilities:
Policyholder account balances................... 30,470 30,611
Short- and long-term debt....................... 5,257 5,223
Other Financial Instruments:
Interest rate swaps............................. $1,242 -- (14)
Interest rate caps.............................. 1,946 20 14
Foreign currency swaps.......................... 207 -- (23)
Foreign currency forwards....................... 151 3 3
Covered call options............................ 25 (2) (2)
Unused lines of credit.......................... 1,821 -- 1
</TABLE>
Estimated fair values were determined as follows: publicly traded fixed
maturities (approximately 78 percent of the estimated fair value of total
fixed maturities) from an independent market pricing service; all other bonds
at estimated fair value determined by management (based primarily on interest
rates, maturity, credit quality and average life); equity securities, on
quoted market prices; mortgage loans, based on discounted projected cash flows
using interest rates offered for loans to borrowers with comparable credit
ratings and for the same maturities; policy loans, based on
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
discounted projected cash flows using U.S. Treasury rates to approximate
interest rates and company experience to project patterns of loan accrual and
repayment; cash and cash equivalents and short-term investments, at carrying
amount, which is considered to be a reasonable estimate of fair value.
Included in fixed maturities are loaned securities with estimated fair
values of $6,537 and $7,293 at December 31, 1997 and 1996, respectively.
The fair values for policyholder account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
The estimated fair value of short- and long-term debt was determined using
rates currently available to the company for debt with similar terms and
remaining maturities.
For interest rate and foreign currency swaps, interest rate caps, foreign
currency forwards, covered call options, other options and futures contracts,
estimated fair value is the amount at which the contracts could be settled
based on estimates obtained from dealers. The estimated fair values of unused
lines of credit were based on fees charged to enter into similar agreements.
16. STATUTORY FINANCIAL INFORMATION
The reconciliation of the net change in statutory surplus and statutory
surplus determined in accordance with accounting practices prescribed or
permitted by insurance regulatory authorities with net earnings and equity on
a GAAP basis was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Net change in statutory surplus...................... $ 227 $366 $229
Adjustments for GAAP:
Future policy benefits and policyholder account
balances.......................................... (445) (165) (17)
Deferred policy acquisition costs.................. 159 391 376
Deferred income taxes.............................. 62 (74) (97)
Valuation of investments........................... (387) (84) 106
Statutory asset valuation reserves................. 1,170 599 30
Statutory interest maintenance reserve............. 53 19 284
Surplus notes...................................... -- -- (622)
Other, net......................................... 364 (199) 410
------ ---- ----
Net earnings..................................... $1,203 $853 $699
====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
DECEMBER 31
Statutory surplus..................................... $ 7,378 $ 7,151
Adjustments for GAAP:
Future policy benefits and policyholder account bal-
ances (7,305) (5,742)
Deferred policy acquisition costs................... 6,436 7,227
Deferred income taxes............................... (242) 264
Valuation of investments............................ 3,474 610
Statutory asset valuation reserves.................. 3,854 2,684
Statutory interest maintenance reserve.............. 1,261 1,208
Surplus notes....................................... (1,396) (1,393)
Other, net.......................................... 601 (26)
------- -------
Equity............................................ $14,061 $11,983
======= =======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENT
On March 12, 1998 the company reached an agreement, subject to regulatory
approval, to sell substantially all of its Canadian operations to a
nonaffiliated life insurance company at a gain. Financial information for the
Canadian operations was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
Total revenue......................................... $ 969 $ 920 $903
Total benefits and other deductions................... 831 802 804
Net earnings.......................................... 87 83 22
<CAPTION>
1997 1996
----- -----
<S> <C> <C> <C>
DECEMBER 31
Total assets.......................................... 5,881 5,826
Total equity.......................................... 957 917
</TABLE>
