<PAGE>
As filed with the Securities and Exchange Commission on August 2, 1996
Registration No. 333-1783
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Pre-Effective Amendment No. 1
to the
FORM S-1 REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
KEYPORT LIFE INSURANCE COMPANY
------------------------------
(Exact name of registrant as specified in its charter)
Rhode Island 05-0302931
------------------------------ -----------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6355
----------------------------------------------
(Primary Standard Industrial Classification Code Number)
--------------------------
125 High Street
Boston, Massachusetts 02110
(Address of Principal Executive Office)
--------------------------
Bernard R. Beckerlegge, Esquire
Senior Vice President and General Counsel
(617) 526-1610
(Name, address, and telephone number of agent for service)
--------------------------
Approximate date of commencement of proposed sale to the public. As soon as
practicable following effectiveness of this registration statement.
--------------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Class Maximum Maximum Amount of
of Securities to be Amount to Offering Aggregate Registration
Registered Be Registered(1) Price per Unit(1) Offering Price(2) Fee
- ------------------- ---------------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Deferred Group
Annuity Contracts
and Participating $100(3)
Interests therein
</TABLE>
- ------------------------------
(1) The amount being registered and the proposed maximum offering price per
unit is not applicable in that these contracts are not issued in predetermined
amounts or units.
(2) The maximum aggregate offering price is estimated solely for the
purpose of determining the registration fee. The maximum aggregate offering
price is estimated solely for the purpose of determining the registration fee.
(3) $100 paid with initial registration. Pursuant to Rule 429 under the
Securities Act of 1933, as amended, the prospectus contained herein includes
$300,000,000 aggregate amount of Deferred Annuity Contracts and Participating
Interests therein covered by Registration Statements on Form S-1, File Nos.
33-3630 and 33-28312, for which a total filing fee of $40,000 was paid.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
Form S-1 Item Number and Caption Heading in Prospectus
-------------------------------- ---------------------
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front Cover
3. Summary Information, Risk Factors and Summary; Accumulation
Ratio of Earnings to Fixed Charges.... Period
4. Use of Proceeds....................... Investments by Keyport
5. Determination of Offering Price....... Description of Contracts and
Certificates
6. Dilution.............................. Not Applicable
7. Selling Security Holders.............. Not Applicable
8. Plan of Distribution.................. Distribution of Contracts and
Certificates
9. Description of Securities to be
Registered............................ Description of Contracts and
Certificates
10. Interests of Named Experts and
Counsel............................... Experts; Legal Matters
11. Information with Respect to the
Registrant............................ The Company; Company
Management; Executive
Compensation; Compensation of
Directors; Financial
Statements; Legal Proceedings
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... See Part II, Item 17
<PAGE>
GROUP AND INDIVIDUAL SINGLE PREMIUM
ANNUITY CONTRACTS
KEYPORT LIFE INSURANCE COMPANY
EXECUTIVE & ADMINISTRATIVE OFFICES
125 HIGH STREET, BOSTON, MASSACHUSETTS 02110
(617) 526-1400
SUMMARY
-------
This prospectus describes participating interests in group
deferred annuity contracts ("Contract(s)") which are designed and
offered by Keyport Life Insurance Company ("Keyport") to provide
retirement benefits for eligible individuals. Eligible
individuals include persons who collectively form a group of
employees of an employer or participants in certain plans
established for eligible individuals and members of other
eligible groups. As required by certain states, the
(This "SUMMARY" section continues on page 2.)
THE CONTRACT MAY BE SOLD BY OR THROUGH BANKS OR OTHER DEPOSITORY
INSTITUTIONS. THE CONTRACT AND CERTIFICATES: ARE NOT INSURED BY
THE FDIC; ARE NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED
BY, THE DEPOSITORY INSTITUTION; AND ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED,
AS DESCRIBED BELOW.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH INFORMATION A PROSPECTIVE CERTIFICATE
OWNER SHOULD KNOW BEFORE PURCHASING A CERTIFICATE OR ENROLLING.
THIS PROSPECTUS SHOULD BE RETAINED FOR FURTHER REFERENCE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE OR
JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO
PERSON IS AUTHORIZED BY KEYPORT TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR
MADE, SUCH UNAUTHORIZED INFORMATION OR REPRESENTATIONS SHOULD NOT
BE RELIED UPON.
THESE SECURITIES MAY BE SUBJECT TO A SUBSTANTIAL SURRENDER CHARGE
AND/OR MARKET VALUE ADJUSTMENT IF NOT HELD TO THE END OF A TERM,
AS DESCRIBED BELOW. SURRENDER OF THESE SECURITIES AT OTHER TIMES
COULD RESULT IN THE RECEIPT OF LESS THAN THE CERTIFICATE OWNER'S
ORIGINAL SINGLE PREMIUM.
The date of this Prospectus is August [xx], 1996.
<PAGE>
Contracts may be offered as individual contracts. (See
"Distribution of Group Contracts and Certificates", page ___.)
Each individual's interest under an Allocated Contract is
held in a specific account established for that individual. Each
participant in a Non-Qualified plan and in certain Qualified Plans will be
issued a Certificate evidencing participation in an Allocated Contract and
will have a 100% vested interest in all values credited to the participant's
Account. Under certain Contracts issued with respect to Qualified Plans
("Non-Allocated Contracts"), however, a participant's interest may be vested
in the Plan in which they are participating rather than in a Certificate. In
such cases, the Certificate will usually be owned by the Trustee(s) of the
Plan, and a single account will be established and held on behalf of all
participants in the plan on a non-allocated basis. Unless otherwise noted or
the context so requires, all references to "Certificates" include Allocated
and Non-Allocated Contracts, Certificates issued thereunder, and Individual
Contracts.
A Single Premium of at least $5,000 per Certificate Owner's
Account must accompany the Contract application or the Enrollment
Form for a participant under an Allocated Contract. The Single
Premium is the only premium payment permitted or required with
respect to a particular Certificate. Eligible individuals,
however, may purchase more than one Certificate under an
Allocated Contract. (See "Enrollment Forms and Premium
Payments", page ___.)
The premium payment credited to a Certificate Owner's
Account becomes part of the assets of Keyport. Keyport owns its
General Account and Separate Account assets, and generally
intends to invest these payment amounts in U.S. Government
securities and certain commercial debt securities having
maturities generally matching the applicable Terms. Keyport may
also invest its assets in various instruments, including equity
options, futures, forwards, and other instruments based on the
Index to hedge its obligations with respect to Indexed Accounts.
Keyport may also buy and sell interest rate swaps and caps,
Treasury bond futures, and similar instruments to hedge its
exposure to changes in interest rates. (See "Investments by
Keyport", page ___ and "The Separate Account", page ____.)
The Certificate provides that the Single Premium may be
allocated to one of two types of accounts, Interest Accounts and
Indexed Accounts, of varying durations ("Terms"). Interest is
credited to Interest Accounts at a fixed rate set and guaranteed
at the beginning of the Term for the duration of the Term.
Interest is credited to Interest Accounts on an annual compound
guaranteed interest basis for the entire duration of the selected
Term. This means that Keyport adds interest to the amount
invested, so that credited interest may earn interest. (See
"Interest Accounts", page ___.)
Interest credited to Indexed Accounts ("Index Increases") is
calculated by reference to fixed interest rate factors, set and
guaranteed at the beginning of the Term for the duration of the
Term, which are applied to changes in the Standard & Poor's 500
Composite Stock Price Index (the "Index") using a formula set
forth in the Certificate. If the publication of the Index is
discontinued or the calculation of the Index is changed
substantially, Keyport will substitute a suitable index. Index
Increases are based on a percentage of the percentage increase in
the Index since the
2
<PAGE>
beginning of the Term. Index Increases are calculated and
credited proportionately over the selected Term at each Account
Anniversary. The total Index Increases that may be credited to
an Indexed Account during a Term are subject to a maximum and
minimum limit, both of which are set and guaranteed at the
beginning of the Term. The minimum may never be less than zero.
Thus, the Indexed Account Value will never decrease to reflect
declines in the value of the Index since the beginning of the
Term or from Account Anniversary to Account Anniversary. (See
"Indexed Accounts", page ___.) The amount of Index Increases
credited to an Indexed Account may be more or less than the
amount of interest credited to an Interest Account established at
the same time for the same Term. Moreover, it is possible that
no Index Increases will be credited at Account Anniversaries, if
the Index on any of the Account Anniversaries in the Term does
not exceed its value at the beginning of the Term. (See
"Establishment of Guaranteed Interest Rates and Guaranteed
Interest Rate Factors", page ___.)
The Certificate also provides for a minimum value to be used
in certain circumstances instead of the Indexed Account Value to
calculate benefits under a Certificate. This value, called the
Certificate Value, is equal to: 90% of the Single Premium; plus
any Excess Interest Credits (as described below); less any
amounts withdrawn by the Certificate Owner in a partial
surrender, such amounts being reduced by any applicable Surrender
Charge; plus, if the Account Value has ever been transferred, a
positive or negative amount reflecting the effect of any
applicable Market Value Adjustment on the Account Value at the
time of the transfer; plus interest credited on the foregoing at
an annual guaranteed rate of 3% per year. In addition, on each
Account Anniversary, additional interest, i.e., an "Excess
Interest Credit", may be credited to the Certificate Value, such
that the total interest credited to the Certificate Value will
equal the total interest and/or Index Increases ever credited to
the Certificate Owner's Account. The amount used to calculate
death benefits, withdrawal amounts, and annuity values will never
be less than the Certificate Value (subject to an adjustment to
reflect the effect of any applicable Market Value Adjustment on
the corresponding Account Value). If at the end of a Term the
Indexed Account Value is less than the Certificate Value, Keyport
will credit interest to the Indexed Account so that its value
will equal the Certificate Value. (See "Certificate Value", page
___, "Indexed Accounts," page __.)
Initial Terms of [one, two, three, four, five, six, seven,
eight, nine, and ten] years are currently available. Keyport may
discontinue offering terms of certain durations or offer Terms of
other durations from time to time. The interest rates and
interest rate factors declared by Keyport may vary depending on
the duration of the Term. Keyport should be contacted to
determine the Terms currently being offered. Subject to
contractual provisions and any applicable Surrender Charge and
Market Value Adjustment, a Certificate Owner may transfer from
one type of Account to the other and/or to Terms of greater or
lesser duration.
FACTORS IN DETERMINING GUARANTEED INTEREST RATES AND GUARANTEED
INTEREST RATE FACTORS
The level of Guaranteed Interest Rates and Guaranteed
Interest Rate Factors set by Keyport for Terms of a particular
duration will depend on a
3
<PAGE>
variety of factors, including the interest rates generally
available on the types of instruments in which Keyport will
invest Certificate Owners' premium payments, the duration of the
Term, regulatory and tax requirements, sales commissions and
expenses borne by Keyport, general economic trends, and
competitive factors.
RISK
The interest and Index Increases credited to a Certificate
Owner's Account are based on guarantees made by Keyport. The
initial and subsequent Guaranteed Interest Rates and Guaranteed
Interest Rate Factors apply to the original principal sum and
reinvested earnings.
AN INHERENT RISK IS THAT IN THE EVENT OF A SURRENDER PRIOR TO THE
END OF THE APPLICABLE TERM, THE MARKET VALUE ADJUSTMENT MIGHT
EFFECT A REDUCTION IN THE VALUE OF A CERTIFICATE OWNER'S ACCOUNT.
ON THE OTHER HAND, THE OPPOSITE MAY PROVE TO BE TRUE. (See
"Market Value Adjustment", page ___.)
KEYPORT'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION AS TO
GUARANTEED INTEREST RATES AND GUARANTEED INTEREST RATE FACTORS TO
BE DECLARED. KEYPORT CANNOT PREDICT OR GUARANTEE FUTURE
GUARANTEED RATES AND FACTORS. (See "Establishment of Guaranteed
Interest Rates and Guaranteed Interest Rate Factors", page ___.)
RENEWAL OF TERMS
At the end of each Term, a subsequent Term of the same type
of Account (Interest or Indexed) of one-year's duration will
begin, unless, within the thirty (30) day period before the end
of the Term, the Certificate Owner instructs Keyport otherwise.
The Certificate Owner will have the opportunity to apply the
Account Value to an Interest or Indexed Account that has a Term
of any duration then offered. (See "Renewal Terms", page ___.)
SURRENDERS: PARTIAL OR TOTAL
Subject to certain restrictions, partial and total
surrenders of a Certificate Owner's Account Value are permitted.
Such surrenders may be subject to a Surrender Charge and/or a
Market Value Adjustment. Except as described below, the
Surrender Charge will be deducted from any partial or total
surrender made before the end of a Term. The Surrender Charge
will be calculated as a percentage of the gross amount being
surrendered in excess of the Free Withdrawal Amount (as explained
below), before the addition or deduction of any applicable Market
Value Adjustment. The applicable percentage will decline
depending on the number of years (rounded up) remaining until the
end of the Term. The current maximum is 7% for surrenders with
seven (7) or more years remaining in the Term.
No Surrender Charge will apply to a partial or total
surrender within the first thirty (30) calendar days after the
end of any full Term, if a Certificate Owner notifies Keyport by
prior Written Request.
The first partial surrender in a particular Certificate Year
may be made without paying a Surrender Charge on the Free
Withdrawal Amount, which is that portion of the surrender amount
that does not exceed the
4
<PAGE>
sum of any interest or Index Increases earned by and credited to
the Certificate Owner's Account Value in the prior year (measured
from the date of the surrender to that same date in the prior
calendar year), up to the sum of any such amounts earned and
credited since the most recent partial surrender, if any, during
that prior year. Any partial surrender amount above the Free
Withdrawal Amount or any subsequent partial surrender during the
same Certificate Year will be subject to a Surrender Charge.
(See "Surrender Charge", page ___.)
PARTIAL SURRENDERS ARE NOT ALLOWED IF YOU HAVE CHOSEN AN INDEXED
ACCOUNT AND THE CONTRACT IS ISSUED UNDER A CORPORATE OR KEOGH
QUALIFIED PLAN THAT IS ESTABLISHED PURSUANT TO THE PROVISIONS OF
SECTION 401 OF THE INTERNAL REVENUE CODE.
As to total surrenders, if no partial surrender was made in
the same Certificate Year, only the portion of the surrendered
amount above the foregoing limit is subject to a Surrender
Charge. Otherwise, the total amount surrendered is subject to a
Surrender Charge.
The withdrawal of interest earnings from an Interest Account
pursuant to Keyport's systematic withdrawal program will not
incur a Surrender Charge or a Market Value Adjustment.
Systematic withdrawals may not be made from an Indexed Account.
(See "Systematic Withdrawal Program", page ___.)
The minimum partial surrender is $300, unless made pursuant
to the systematic withdrawal program, in which case the minimum
is $100. After a partial surrender, the minimum Account Value
must be at least $2500.
TRANSFERS
Subject to certain conditions, the Interest Account Value
may be transferred to another Account at any time before the
Income Date. The Indexed Account Value may only be transferred
at the end of a Term. Any amount transferred before the end of a
Term may be subject to a Market Value Adjustment, as described
below. Currently, there is no charge for transfers. Keyport in
its discretion may institute a transfer charge on transfers in
excess of a certain number of transfers annually. (See "Transfer
of Values", page ___; "Market Value Adjustment", page ___.)
MARKET VALUE ADJUSTMENT
The amount payable upon a partial or total surrender from,
or upon the application to an Annuity Option of Account Value of,
an Account with a Term of three (3) years or more may be adjusted
up or down by the application of the Market Value Adjustment.
However, no Market Value Adjustment will apply to a partial or
total surrender within the first thirty (30) calendar days after
the end of any full Term, if a Certificate Owner notifies Keyport
by prior Written Request.
Where a Market Value Adjustment is applicable to a surrender
or annuitization, if there has not previously been a partial
surrender in the
5
<PAGE>
same Certificate Year as the surrender or annuitization, the
Market Value Adjustment will be calculated based the gross amount
payable in excess of the Free Withdrawal Amount, before the
deduction of any applicable Surrender Charge. Otherwise, the
Market Value Adjustment is calculated based on the gross amount
payable, before the deduction of any applicable Surrender Charge.
(See "Market Value Adjustment", page ____.)
A Market Value Adjustment also applies to any transfer from
an Account with a Term of three (3) years or more, unless the
effective date of the transfer is: (a) within the last year of
the Term and the transfer is to an Account with a Term of three
(3) years or more; or (b) within the first ten (10) calendar days
after the end of each full Term. The Market Value Adjustment
upon transfer is calculated based on the Account Value or, if
there has not previously been a partial surrender in the same
Certificate Year as the transfer, on the Account Value in excess
of the Free Withdrawal Amount. (See "Market Value Adjustment",
page ___.)
The Market Value Adjustment for Indexed Accounts includes a
Scaling Factor. The Scaling Factor may reduce the positive or
negative amount of any Market Value Adjustment on an Indexed
Account. The Market Value Adjustment for Interest Accounts will
not include a Scaling Factor. (See "Market Value Adjustment",
page ___.)
The Market Value Adjustment reflects the relative difference
between: (a) the current Treasury Rate for a period of time
equivalent to the remaining duration of the current Term; and (b)
the Treasury Rate at the beginning of the Term for a period of
time equal to the full duration of the Term. It is possible,
therefore, that should such Treasury Rates increase significantly
from the beginning of a Term, the amount a Certificate Owner
would receive upon a total surrender would be less than the
original amount credited to the Certificate Owner's Account.
(See "Market Value Adjustment", page ___.)
DEFERRAL OF PAYMENT
Keyport may defer payment of any partial or total surrender
for a period not exceeding six (6) months from the date of
receipt of a request for surrender or for the period permitted by
state insurance law, if less. A deferral of payment for a period
greater than thirty (30) days would occur only under highly
unusual circumstances. (See "Payment upon Partial or Total
Surrender", page ___).
ANNUITY PERIOD
On the Income Date, Keyport will start to pay the designated
Annuitant a series of annuity payments under an Annuity Option.
The Annuity Option selected determines the timing and basis of
the annuity payments. (See "Annuity Period Provisions", page
___.)
DEATH BENEFIT
The Certificate provides for a special death benefit if the
Certificate Owner dies before the Income Date or if the Annuitant
dies before the Income Date and the Certificate Owner is not a
natural person. Within ninety (90)
6
<PAGE>
days of the date of death of any of the Certificate Owner or
Annuitant (if the Certificate Owner is not a natural person), the
Designated Beneficiary may surrender the Certificate to Keyport
for the greatest of: (a) the Certificate Owner's Account Value;
(b) the Certificate Value; or (c) the Certificate Withdrawal
Value, which is defined as the greater of (i) the Account Value,
subject to any applicable Market Value Adjustment, less any
applicable Surrender Charge, and (ii) the Certificate Value
adjusted proportionally to reflect the effect of any applicable
Market Value Adjustment on the Account Value. If the surrender
request is made after ninety (90) days or upon the death of a
Joint Certificate Owner, the Designated Beneficiary will receive
the Certificate Withdrawal Value. If the Certificate is not
surrendered, it may stay in force for up to five years after the
date of death, at the end of which time Keyport will pay the
Designated Beneficiary the Certificate Withdrawal Value, without
the deduction of any applicable Surrender Charge. (See "Death
Provisions", page ___; "Surrender Charge", page __.)
PREMIUM TAXES
Keyport will deduct the amount of any premium taxes levied
by any State or governmental entity when the premium tax is
actually paid, unless Keyport elects to defer such deduction
until the time of surrender or the Income Date. It is not
possible to describe precisely the amount of premium tax payable
on any transaction. Such premium taxes depend, among other
things, on the type of Certificate (Qualified or Non-Qualified),
on the state of residence of the Certificate Owner or
participant, the state of residence of the Annuitant, the status
of Keyport within such states, and the insurance tax laws of such
states. Currently such premium taxes range from 0% - 5.0%. For
a schedule of such taxes, see Appendix C, at page ____ of this
Prospectus.
ANNUAL REPORTS TO CERTIFICATE OWNERS
At least once each Certificate Year, Keyport will send each
Certificate Owner a report which will show the Account Value, the
Certificate Withdrawal Value, the Market Value Adjustment used to
calculate the Certificate Withdrawal Value, and any Surrender
Charge.
7
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GLOSSARY OF SPECIAL TERMS. . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF CONTRACTS AND CERTIFICATES. . . . . . . . . . . .
A. Ownership . . . . . . . . . . . . . . . . . . . . . . . . .
B. Enrollment Form and Premium Payments. . . . . . . . . . . .
C. Accumulation Period . . . . . . . . . . . . . . . . . . . .
1. Initial Term . . . . . . . . . . . . . . . . . . . .
2. Interest Accounts. . . . . . . . . . . . . . . . . .
3. Indexed Accounts . . . . . . . . . . . . . . . . . .
4. Renewal Terms. . . . . . . . . . . . . . . . . . . .
5. Information on Renewal Rates . . . . . . . . . . . .
6. Establishment of Guaranteed Interest Rates and
Guaranteed Interest Rate Factors . . . . . . . . . .
7. Certificate Value. . . . . . . . . . . . . . . . . .
8. Transfer of Values . . . . . . . . . . . . . . . . .
9. Surrenders . . . . . . . . . . . . . . . . . . . . .
(a) General . . . . . . . . . . . . . . . . . . . . .
(b) Systematic Withdrawal Program . . . . . . . . . .
(c) Surrender Procedures and Determination of
Surrender Value . . . . . . . . . . . . . . . . .
1. Partial Surrenders . . . . . . . . . . . . . . .
2. Total Surrenders . . . . . . . . . . . . . . . .
(d) Risk. . . . . . . . . . . . . . . . . . . . . . .
(e) Payment upon Partial or Total Surrender . . . . .
10. Deductions. . . . . . . . . . . . . . . . . . . . . .
(a) Surrender Charge. . . . . . . . . . . . . . . . .
(b) Market Value Adjustment . . . . . . . . . . . . .
11. Premium Taxes . . . . . . . . . . . . . . . . . . . .
12. Death Provisions. . . . . . . . . . . . . . . . . . .
(a) Non-Qualified Certificates. . . . . . . . . . . .
(b) Qualified Certificates. . . . . . . . . . . . . .
D. Annuity Period Provisions. . . . . . . . . . . . . . . . . .
1. Annuity Benefits. . . . . . . . . . . . . . . . . . . .
2. The Income Date and Form of Annuity . . . . . . . . . .
3. Change of Annuity Option. . . . . . . . . . . . . . . .
4. Annuity Options . . . . . . . . . . . . . . . . . . . .
5. Frequency and Amount of Payments. . . . . . . . . . . .
6. Proof of Age, Sex, and Survival of Annuitant. . . . . .
INVESTMENTS BY KEYPORT . . . . . . . . . . . . . . . . . . . . .
THE SEPARATE ACCOUNT . . . . . . . . . . . . . . . . . . . . . .
AMENDMENT OF CONTRACTS . . . . . . . . . . . . . . . . . . . . .
ASSIGNMENT OF CERTIFICATES . . . . . . . . . . . . . . . . . . .
8
<PAGE>
TABLE OF CONTENTS (CONTINUED)
Page
DISTRIBUTION OF CONTRACTS AND CERTIFICATES . . . . . . . . . . .
TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . .
A. General . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Taxation of Keyport . . . . . . . . . . . . . . . . . . . .
C. Taxation of Annuities in General. . . . . . . . . . . . . .
1. General. . . . . . . . . . . . . . . . . . . . . . . .
2. Surrender, Assignments, and Gifts. . . . . . . . . . .
3. Annuity Payments . . . . . . . . . . . . . . . . . . .
4. Penalty Tax. . . . . . . . . . . . . . . . . . . . . .
5. Income Tax Withholding . . . . . . . . . . . . . . . .
6. Section 1035 Exchanges . . . . . . . . . . . . . . . .
D. Qualified Plans . . . . . . . . . . . . . . . . . . . . . .
1. Tax Sheltered Annuities. . . . . . . . . . . . . . . .
2. Individual Retirement Annuities. . . . . . . . . . . .
3. Corporate Pension and Profit Sharing Plans . . . . . .
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Business. . . . . . . . . . . . . . . . . . . . . . . . . .
B. Selected Financial Data . . . . . . . . . . . . . . . . . .
C. Management Discussion and Analysis of Results of Operations
and Financial Condition . . . . . . . . . . . . . . . . . . . .
1. Overview. . . . . . . . . . . . . . . . . . . . . . .
2. Results of Operations . . . . . . . . . . . . . . . .
(a) 1995 Compared to 1994 . . . . . . . . . . .
(b) 1994 Compared to 1993 . . . . . . . . . . .
3. Guaranty Fund Assessments . . . . . . . . . . . . . .
4. Financial Conditions. . . . . . . . . . . . . . . . .
(a) Cash and Investments. . . . . . . . . . . .
(b) Deferred Policy Acquisition Costs . . . . .
(c) Liabilities . . . . . . . . . . . . . . . .
(d) Stockholder's Equity. . . . . . . . . . . .
5. Liquidity and Capital Resources . . . . . . . . . . .
D. Reinsurance . . . . . . . . . . . . . . . . . . . . . . . .
E. Reserves. . . . . . . . . . . . . . . . . . . . . . . . . .
F. Investments . . . . . . . . . . . . . . . . . . . . . . . .
G. Competition . . . . . . . . . . . . . . . . . . . . . . . .
H. Employees . . . . . . . . . . . . . . . . . . . . . . . . .
I. State and Federal Regulation. . . . . . . . . . . . . . . .
COMPANY MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . .
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . .
COMPENSATION OF DIRECTORS. . . . . . . . . . . . . . . . . . . .
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . .
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CHANGE IN ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . .
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A (TERM INTEREST AND INDEX INCREASE ILLUSTRATIONS). . .
APPENDIX B (MARKET VALUE ADJUSTMENT FORMULA AND ILLUSTRATIONS,
INCLUDING SURRENDER CHARGE CALCULATIONS) . . . . . . . . . . . .
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APPENDIX C (SCHEDULE OF STATE PREMIUM TAXES) . . . . . . . . . .
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GLOSSARY OF SPECIAL TERMS
The following terms in this Prospectus have the indicated
meanings:
ACCOUNT YEAR,
ACCOUNT ANNIVERSARY A continuous twelve-month period
commencing on the date that an Interest
or Indexed Account is opened by
allocation or transfer, and each
anniversary thereof including the end of
the Term.
ALLOCATED CONTRACT A Group Annuity Contract under which
amounts are allocated or credited to the
accounts of individual participants.
ANNUITANT The natural person upon whose life
annuity payments are based, and to whom
any annuity payments will be made
starting on the Income Date.
ANNUITY OPTIONS Options available for annuity payments.
CAP The maximum percentage by which the
value of an Indexed Account may increase
during a single Term.
CERTIFICATE The document issued to each participant
under an Allocated Contract evidencing
their participation in the Group Annuity
Contract as set forth in this
prospectus. As used in this Prospectus,
the term Certificate also includes any
Group Annuity Contract and any
Individual Contract, unless the context
requires otherwise.
CERTIFICATE
ANNIVERSARY,
CERTIFICATE YEAR A continuous twelve-month period
commencing on the Certificate Date and
each anniversary thereof.
CERTIFICATE DATE The effective date of participation
under an Allocated Contract as
designated in the Certificate or the
date a Contract is issued and the
Contract Owner's rights and benefits
begin.
CERTIFICATE OWNER The participant under Non-Qualified
Plans and Allocated Contracts issued to
Qualified Plans; the Contract Owner
under Individual Contracts and
Non-Allocated Contracts issued to
Qualified Plans.
CERTIFICATE OWNER'S
ACCOUNT The Account established by Keyport for a
Certificate Owner into which the Single
Premium paid by or on behalf of a
Certificate Owner is credited.
CERTIFICATE OWNER'S
ACCOUNT VALUE The value of all amounts under a
Certificate in an Indexed or Interest
Account prior to the Income Date.
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CERTIFICATE VALUE The guaranteed minimum value of the
Certificate at any time prior to any
then-applicable Market Value Adjustment,
calculated as described below.
CERTIFICATE
WITHDRAWAL VALUE The greater of: (a) the Account Value,
plus or minus any applicable Market
Value Adjustment, less any applicable
Surrender Charge, and (b) the
Certificate Value, multiplied by the
ratio of the Account Value, adjusted by
the applicable Market Value Adjustment,
to the unadjusted Account Value.
CONTRACT OWNER The person, persons, or entity entitled
to the ownership rights stated in the
Contract and in whose name(s) the
Contract is issued.
DESIGNATED
BENEFICIARY The person who may be entitled to
receive benefits following the death of
the Annuitant, the Certificate Owner, or
the Joint Certificate Owner. The
Designated Beneficiary will be the first
person among the following who is alive
on the date of death: Certificate
Owner; Joint Certificate Owner; Primary
Beneficiary, Contingent Beneficiary; and
otherwise the Certificate Owner's
estate. If the Certificate Owner and
Joint Certificate Owner are both alive,
they will be the Designated Beneficiary
together.
ENROLLMENT FORM A document signed by a participant that
serves as his or her application for
participation under an Allocated
Contract.
FLOOR The minimum percentage by which the
value of an Indexed Account may increase
during a single Term. The Floor will
never be less than zero.
FREE WITHDRAWAL
AMOUNT The amount that may be surrendered,
transferred, or applied to an Annuity
Option without any otherwise applicable
Surrender Charge or Market Value
Adjustment. If no partial surrender has
been made in the Certificate Year of the
transaction, the Free Withdrawal Amount
is equal to the sum of any interest or
Index Increases earned by and credited
to the Certificate Owner's Account Value
in the prior year (measured from the
date of the surrender to that same date
in the prior calendar year), up to the
sum of any such amounts earned and
credited since the most recent partial
surrender, if any, during that prior
year.
GENERAL ACCOUNT Keyport's general investment account
which contains all of Keyport's assets
except those in Separate Account C and
other separate accounts.
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GUARANTEED INTEREST
RATE The fixed rate of interest set and
guaranteed by Keyport at the beginning
of a Term of an Interest Account to be
used to calculate the interest to be
credited to the Interest Account during
the Term.
GUARANTEED INTEREST
RATE FACTORS The Participation Rate, Cap, and Floor,
which are set and guaranteed by Keyport
at the beginning of each Term of an
Indexed Account and used to calculate
Index Increases under a formula set
forth in the Certificate.
INCOME DATE The date on which annuity payments to an
Annuitant are to begin.
INDEX The Index (set forth in the Certificate)
that is used to calculate Index
Increases.
INDEXED ACCOUNT An account to which Keyport credits
Index Increases.
INDEXED ACCOUNT
VALUE The value of an Indexed Account, equal
to all allocations or transfers to the
Indexed Account, plus all Index
Increases credited to the Indexed
Account, less all amounts transferred or
surrendered from the Indexed Account.
INDEX INCREASE Interest credited to an Indexed Account,
which is calculated using the Guaranteed
Interest Rate Factors as applied to
changes in the Index.
INDIVIDUAL CONTRACT A Contract issued to an individual as
Contract Owner.
IN FORCE The status of a Certificate before the
Income Date, so long as it is not
totally surrendered and there has not
been a death of the Annuitant or any
Certificate Owner that would cause the
Certificate to end within at most five
years from the date of death.
INTEREST ACCOUNT An account to which Keyport credits
interest based on a specific and
guaranteed rate of interest.
INTEREST ACCOUNT
VALUE The value of an Interest Account, equal
to all allocations or transfers to the
Interest Account, plus all interest
credited to the Interest
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Account, less all amounts transferred or surrendered
from the Interest Account.
JOINT CERTIFICATE
OWNER Any person designated by the Certificate
Owner jointly to possess rights in the
Certificate Owner's Account. Keyport
requires that the Certificate Owner and
any Joint Certificate Owner act
together.
NON-ALLOCATED
CONTRACT A Contract under which a single account
is established and held on behalf of all
participants in a particular plan of an
employer or other eligible entity on a
non-allocated basis.
NON-QUALIFIED
CERTIFICATE Any Certificate that is not issued under
a Qualified Plan.
OFFICE Keyport's executive office, which is at
125 High Street, Boston, Massachusetts
02110.
PARTICIPATION RATE The percentage of the increase in the
Index used to calculate Index Increases.
QUALIFIED CERTIFICATE Any Certificate issued under a Qualified
Plan.
QUALIFIED PLAN A retirement plan established pursuant
to the provisions of Sections 401, 403
and 408 of the Internal Revenue Code and
HR-10 Plans for self-employed persons.
RESET DATE The date on which an amount is allocated
to an Interest or Indexed Account. The
first day of each subsequent Term is the
next Reset Date for that Account.
SEPARATE ACCOUNT A separate investment account of Keyport
in which assets underlying the
Certificates may be held and those
assets may be valued at market value.
Assets held in Separate Account C will
be subject to the claims of Keyport's
general creditors.
SINGLE PREMIUM The payment made by or an behalf of a
participant with respect to a
Certificate.
TERM The period for which either a Guaranteed
Interest Rate is credited to an Interest
Account or Guaranteed Interest Rate
Factors are used to calculate Index
Increases for an Indexed Account. Terms
may be selected by a Certificate Owner
from among those offered by Keyport.
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TREASURY RATE The Treasury Rate is the interest rate
in the Treasury Constant Maturity
Series, as published by the Federal
Reserve Board, for a maturity equal to
the appropriate number of years. The
Treasury Rate is used in calculating
Market Value Adjustments.
WRITTEN REQUEST A written request in a form satisfactory
to Keyport, signed by the Certificate
Owner, and received at Keyport's Office.
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DESCRIPTION OF CONTRACTS AND CERTIFICATES
A. OWNERSHIP
The Certificate Owner is the individual or legal entity that
has the power to exercise the rights of an owner under the
Certificate. The Certificate Owner is the person or entity
designated in the application for a Contract or the individual so
designated in the Enrollment Form for a Certificate issued under
an Allocated Contract.
The Certificate Owner may exercise all rights summarized in
the Certificate. Joint Certificate Owners are permitted but not
contingent Certificate Owners.
Prior to the Income Date, the Certificate Owner together
with any Joint Certificate Owner may, by Written Request, change
the Certificate Owner, Joint Certificate Owner, Beneficiary,
Contingent Beneficiary, Contingent Annuitant, or in certain
instances, the Annuitant. An irrevocably-named person may be
changed only with the written consent of such person.
Because a change of Certificate Owner by means of a gift
(i.e., a transfer without full and adequate consideration) may be
a taxable event, a Certificate Owner should consult a competent
tax adviser as to the tax consequences resulting from such a
transfer.
Any Qualified Certificate may have limitations on transfer
of ownership. A Certificate Owner should consult a competent tax
adviser as to the tax consequences resulting from such a
transfer.
B. ENROLLMENT FORM AND PREMIUM PAYMENTS
The Single Premium is due on the Certificate Date. The
Single Premium may not be less than $5,000. Although there is
currently no maximum for the Single Premium, Keyport reserves the
right to limit the total premiums paid on multiple Certificates
with respect to any one Certificate Owner. Keyport may reject
any premium payment.
The Single Premium is credited to a Certificate Owner's
Account, which is established on the date of receipt of a
properly completed application or Enrollment Form along with the
required premium payment. Keyport will issue a Certificate and
confirm the receipt of the Single Premium in writing. If the
Contract is issued on a Non-Allocated basis, a single Certificate
Owner's Account is opened for the Certificate Owner. A
Certificate Owner's Account starts earning interest on the day
following the date the Certificate Owner's Account is established
on his or her behalf. A Certificate Owner may choose to allocate
the Single Premium to an Interest Account or an Indexed Account,
as described below.
In the event Keyport determines that an application or
Enrollment Form is not properly completed, Keyport will attempt
to contact the Certificate Owner by letter or telephone to secure
the information necessary to complete the form.
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Keyport will return an improperly completed application or
Enrollment Form, along with the corresponding premium payment,
which cannot be properly completed within three weeks of its
receipt.
Keyport will permit others to act on behalf of an applicant
in certain instances, including the following two examples.
First, Keyport will accept an application for a Certificate that
contains a signature signed under a power of attorney, if a copy
of that power of attorney is submitted with the application.
Second, Keyport will issue a Certificate that is not replacing an
existing life insurance or annuity policy without having
previously received a signed application from the applicant.
Certain dealers or other authorized persons such as employers and
Qualified Plan fiduciaries will inform Keyport of an applicant's
answers to the questions in the application by telephone or by
order ticket and cause the Single Premium to be paid to Keyport.
If the information is in good order, Keyport will issue the
Certificate with a copy of an application completed with that
information. The Certificate will be delivered to the
Certificate Owner with a letter from Keyport that will give the
Certificate Owner an opportunity to respond to Keyport if any of
the application information is incorrect. Alternatively,
Keyport's letter may request the Certificate Owner to confirm the
correctness of the information by signing either a copy of the
application or a Certificate delivery receipt that ratifies the
application in all respects. (In either case, a copy of the
signed document would be returned to Keyport for its permanent
records.) All purchases are confirmed, in writing, to the
applicant by Keyport. Keyport's liability extends only to
purchases so confirmed.
C. ACCUMULATION PERIOD
1. INITIAL TERM
A Certificate Owner will select the type of Account, either
an Interest Account or an Indexed Account, to which the Single
Premium will be allocated, and the duration of the initial Term
from among those offered by Keyport. Initial Terms of [one, two,
three, four, five, six, seven, eight, nine, and ten] years are
currently available. Keyport may offer other durations from time
to time.
A Term begins on the date as of which the Single Premium is
allocated or an amount is transferred to an Account and ends when
the number of years in the Term elected has elapsed. The last
day of the Term is the expiration date for the Term. The
subsequent Term begins on the first day following the expiration
date of the previous Term.
The Single Premium (less surrenders made and premium taxes,
if any) will earn and be credited interest and/or Index Increases
in accordance with the formula applicable to the selected type of
Account, as described below. Interest is credited to Interest
Accounts at the Guaranteed Interest Rate specified and guaranteed
at the beginning of the Term for the duration of the Term. Index
Increases are credited to Indexed Accounts by reference to
Guaranteed Interest Rate Factors, guaranteed at the beginning of
the Term for the duration of the Term, as applied to changes in
the Standard & Poor's 500 Composite Stock Price Index (the
"Index").
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2. INTEREST ACCOUNTS
Through the Interest Accounts, Keyport offers specified
effective and guaranteed annual rates of interest, the Guaranteed
Interest Rates, for a specified period of time, the Term,
selected by the Certificate Owner. Although Guaranteed Interest
Rates may differ among Terms of different durations or
established at different times, a Guaranteed Interest Rate will
never be less than 3% per year and, once declared, will never be
changed during a Term.
An amount allocated or transferred to an Interest Account
will earn interest at the Guaranteed Interest Rate for a Term of
the selected duration. Interest will be credited daily at a rate
which, compounded, equals an effective annual rate equal to the
Guaranteed Interest Rate. If an amount remains in an Interest
Account until the end of the applicable Term, its value will be
equal to the amount originally allocated or transferred to the
Interest Account, less all amounts withdrawn, plus all interest
credited to the Account.
An illustrative example of how interest is credited to the
Interest Account is set forth in Appendix A.
3. INDEXED ACCOUNTS
Through the Indexed Accounts, Keyport offers Index Increases
that depend on increases in a specified Index. The Index
Increases are determined based on a formula utilizing specified
Guaranteed Interest Rate Factors (the Participation Rate, Cap,
and Floor) that are available for specified periods of time
(Terms) selected by the Certificate Owner. Although Guaranteed
Interest Rate Factors may differ among Terms of different
durations or established at different times, once declared, they
will never be changed during a Term.
An amount allocated or transferred to an Indexed Account
will earn Index Increases based on the Guaranteed Interest Rate
Factors for a Term of the selected duration. Index Increases may
be added to the Account on each Account Anniversary. If an
amount remains in an Indexed Account until the end of the
applicable Term, its value will be equal to the amount originally
allocated or transferred to the Indexed Account, less all amounts
withdrawn, plus all Index Increases credited to the Account.
Keyport will calculate and credit Index Increases at each
Account Anniversary after the start of a Term. The Certificates
contain a formula for using the Index and the Guaranteed Interest
Rate Factors established at the beginning of the Term to
calculate the Index Increases on each Account Anniversary in the
Term. All Index Increases are credited to the Indexed Account
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proportionately over the entire Term. Therefore, there are two
components of the Index Increases. The first part is the
proportionate credit for an increase (if any) in the Index from
its prior highest Account Anniversary value to its new highest
value on the current Account Anniversary. The second part is the
proportionate credit for an increase(s) (if any) in the Index
occurring on a prior Account Anniversary(ies). The second part
of the Index Increase will always be zero on the first Account
Anniversary in any Term.
Part one is calculated as follows:
Multiply the Participation Rate by the increase in the Index
from its prior highest Account Anniversary value to its
current Account Anniversary value divided by its beginning
of Term value. The result is then multiplied by the ratio of
the number of completed Account Years in the Term to the
total number of Account Years in the Term. This percentage
is then multiplied by the smaller of the Account Value at
the beginning of the Term and the Account Value (prior to
the crediting of any Index Increases) on any Account
Anniversary in the Term.
Part two is calculated as follows:
Multiply the Participation Rate by the percentage increase
in the Index since the beginning of the Term, calculated
using the highest value attained by the Index at any Account
Anniversary during the Term excluding the current Account
Anniversary. Divide the resulting percentage by the number
of Account Years in the Term. This percentage is then
multiplied by the smaller of the Account Value at the
beginning of the Term and the Account Value (prior to the
crediting of any Index Increases) on any Account Anniversary
in the Term.
The part one and two amounts as calculated above may be
reduced if the Cap is applicable and increased if a Floor in
excess of zero is applicable. The sum of the two parts equals the
total Index Increase that is added to the Account Value. If the
Index on each Account Anniversary in a Term is less than the
Index at the beginning of the Term, there will not be any Index
Increases credited during the Term. Because of the Floor of
zero, Index Increases can never be negative.
The effect of this formula is to provide that, in the
absence of any partial or total surrender during a Term, the
total Index Increases credited to an Indexed Account during a
Term will equal the Account Value at the beginning of the Term
multiplied by a percentage (Participation Rate) of the percentage
increase in the Index since the beginning of the Term (subject to
the Floor and Cap), using the highest value attained by the Index
on any Account Anniversary
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in the Term. Partial surrenders in excess of Index Increases
will reduce the amount of the Index Increases credited after such
surrender, but do not affect Index Increases previously
credited.
Total Index Increases credited to an Index Account may be
more or less than the amount of interest credited to an Interest
Account established at the same time for the same Term, depending
on the change in the Index over the course of the Term.
If no or small Index Increases are earned by and credited to
an Indexed Account, in time the value of an Indexed Account may
be less than the Certificate Value. In those circumstances, the
Certificate Value is used to calculate any benefit payable under
the Certificate. In addition, if at the end of a Term the value
of an Indexed Account is less than the Certificate Value, Keyport
will credit the Indexed Account with an End of the Term Increase
equal to the excess of the Certificate Value over the Indexed
Account Value. (See "Certificate Value" on page __.)
Currently the Index is the Standard and Poor's 500 Composite
Stock Price Index ("S&P 500"). The S&P 500 is a widely accepted
and broad measure of the performance of the major United States
stock markets. The S&P 500 is a market value weighted measure of
changes in the prices of the underlying securities and does not
reflect any stock dividend income on the underlying securities.
"S&P-Registered Trademark-", "S&P 500-Registered Trademark-", and
"Standard & Poor's 500" are trademarks of The McGraw Hill
Companies, Inc., and have been licensed for use by Keyport. The
Contract is not sponsored, endorsed, sold, or promoted by
Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of purchasing the Contract.
If the publication of the Index is discontinued, or the
calculation of the Index is changed substantially, Keyport will
substitute a suitable index and notify the Certificate Owner.
The formula used to calculate Index Increases and
illustrative examples are set forth in Appendix A.
4. RENEWAL TERMS
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A new Term will automatically begin at the end of a Term,
unless a Certificate Owner elects to make a total surrender.
(See "Surrenders".) Each subsequent Term will be for one-year's
duration, unless, within the thirty (30) day period immediately
prior to the end of the previous Term, the Certificate Owner by
Written Request chooses a Term of a different duration or elects
to transfer the Account Value to a different type of Account. A
Certificate Owner may choose from among the Terms offered by
Keyport at that time. Keyport may discontinue offering Terms of
certain durations currently available or offer Terms of different
durations from time to time. The then available Guaranteed
Interest Rates and Guaranteed Interest Rate Factors may vary
based on the duration of the Term selected, and may differ from
the rates currently available for new Certificate. The
Certificate Owner may not select a Term for a period longer than
the number of years remaining until the Income Date. If the
selected Term exceeds this limit, Keyport automatically will
allocate the Account Value to a Term of one-year's duration. In
addition, if less than one year remains until the Income Date,
Keyport automatically will allocate the Account Value to an
Interest Account with a Term of one year's duration.
The Account Value at the beginning of any subsequent Term
will be equal to the Account Value at the end of the previous
Term. In the absence of any partial or total surrender or
transfer (the effects of which are described below), the Account
Value will earn and be credited with interest or Index Increases
for each year in the subsequent Term using the Guaranteed
Interest Rates or Guaranteed Interest Rate Factors established at
the beginning of the subsequent Term for the type of Account and
Term selected by the Certificate Owner or established by default
(as described above) in the absence of other instructions.
5. INFORMATION ON RENEWAL RATES
A Certificate Owner is provided with a toll-free number to
call to inquire about rates for Terms then being offered. In
addition, prior to the beginning of each subsequent Term, Keyport
will notify the Certificate Owner in writing of the Terms then
available. At the end of any Term, a Certificate Owner has the
opportunity to select any other duration of Term then being
offered.
6. ESTABLISHMENT OF GUARANTEED INTEREST RATES AND
GUARANTEED INTEREST RATE FACTORS
A Certificate Owner will know the Guaranteed Interest Rate
or Guaranteed Interest Rate Factors for the Term chosen at the
time of the initial purchase. Different Guaranteed Interest
Rates and Guaranteed Interest Rate Factors may be established for
Terms of different durations. Guaranteed Interest Rates and
Guaranteed Interest Rate Factors for initial and renewal Terms
will be established periodically. Keyport may offer differing
Guaranteed Interest Rates and Guaranteed Interest Rate Factors
for initial allocations, transfers during Terms, and renewal
Terms.
Keyport has no specific formula for determining the
Guaranteed Interest Rates and Guaranteed Interest Rate Factors
that it will declare in the future. The determination of those
guaranteed rates and factors will be
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reflective of interest rates generally available on the types of
investments in which Keyport intends to invest the proceeds
attributable to the Certificate Owner's Account. (See
"Investments by Keyport".) In addition, Keyport's management may
consider various other factors in determining guaranteed rates
and factors for a given period, including, the duration of a
Term, regulatory and tax requirements, sales commissions and
administrative expenses borne by Keyport, general economic
trends, and competitive factors. The Guaranteed Interest Rates
declared by Keyport, however, (including the rate of interest
credited to the Certificate Value used in the determination of
the value of an Indexed Account), will never be less than 3%
annually. KEYPORT'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION
AS TO GUARANTEED INTEREST RATES AND GUARANTEED INTEREST RATE
FACTORS TO BE DECLARED. KEYPORT CANNOT PREDICT OR GUARANTEE
FUTURE GUARANTEED INTEREST RATES AND GUARANTEED INTEREST RATE
FACTORS.
7. CERTIFICATE VALUE
The Certificate also provides a minimum value, called the
Certificate Value, that will be used to calculate benefits under
a Certificate in circumstances in which the Certificate Value is
higher than the value of an Indexed Account calculated as
described above.
The Certificate Value is equal to: (a) 90% of the Single
Premium; plus (b) any Excess Interest Credits, as defined below;
less (c) all amounts withdrawn by the Certificate Owner in a
partial surrender, such amounts being reduced by any applicable
Surrender Charges; plus (d) if there has been a transfer to which
a Market Value Adjustment applied, the positive or negative
amount equal to the Adjusted Certificate Value (I.E., the
Certificate Value proportionately adjusted to reflect the effect
of any applicable Market Value Adjustment on the Account Value)
less the Certificate Value, at the time of the transfer; plus (e)
interest credited at an annual guaranteed rate of 3% per year.
In addition, at each Account Anniversary, additional interest,
called an "Excess Interest Credit", will be credited to the
Certificate Value, to the extent needed to ensure that the total
interest (including previous Excess Interest Credits) credited to
the Certificate Value equals the total interest or Index
Increases ever credited to the Certificate Owner's Account Value.
Interest amounts credited to the Certificate Value will earn
interest in subsequent Certificate Years.
The Certificate Value would be used to calculate benefits
if, for example, the Index were to remain level or decline for
several years and accordingly, Indexes Increases were not
credited to an Indexed Account. In such a circumstance, while
the value of the Indexed Account would not decline, the
Certificate Value might rise above the value of the Indexed
Account, as a result of the 3% annual interest credited to
Certificate Value.
8. TRANSFER OF VALUES
The Certificate Owner may transfer the entire Account Value
from an Interest or Indexed Account to another Interest or
Indexed Account, subject to the following:
(a) the transfer must be by Written Request or telephone
before the Income Date;
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(b) the number of transfers may not exceed any limit
Keyport may set for a specified time period; currently,
Keyport does not limit the number of permissible
transfers in a single Certificate Year;
(c) the Indexed Account Value may only be transferred
during the first ten (10) calendar days after the end
of each full Term;
(d) the Interest Account Value may be transferred at any
time before the Income Date;
(e) the amount transferred shall equal the total Account
Value, with a Market Value Adjustment (if any); partial
transfers are not permitted;
(f) no Market Value Adjustment shall apply to a transfer
(i) from an Account with a Term of less than three (3)
years, (ii) in the final year of a Term of three (3) or
more years to an Account with a Term of three (3) or
more years, or (iii) within the first ten (10) calendar
days after the end of each full Term; and
(g) for transfers not made within the first ten calendar
days of a Term, the Term of the new Account cannot be
less than the remaining number of Account Years
(rounded up) in the Term of the Account from which the
transfer is being made; and
(h) the Term of the new Account cannot be longer than the
number of years remaining until the Income Date.
While no charge currently applies to transfers, Keyport
reserves the right to charge $25 per transfer if a Certificate
Owner makes more than 4 transfers in a single Certificate Year.
Keyport reserves the right, at any time and without prior notice,
to terminate, modify, or suspend the transfer privileges
described above.
9. SURRENDERS
(a) GENERAL
A Certificate Owner may make a full or partial surrender of
a Certificate Owner's Account at any time prior to the Income
Date while it is In Force, subject to specified charges and
conditions described below. Partial surrenders may only be made
if:
(i) the surrender request is at least $300, unless the
partial surrender is made pursuant to Keyport's
systematic withdrawal plan, in which case the minimum
withdrawal is $100; and
(ii) the remaining Account Value after the partial surrender
has been made is at least $2500.
Keyport reserves the right to change the minimums described
above.
The net amount paid upon partial or total surrender will
reflect the deduction of any applicable Surrender Charge and any
Market Value Adjustment, calculated as described below.
Therefore, the amount actually received by a
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Certificate Owner may be greater than or less than the amount
subtracted from Account Value as a result of the surrender. As
described below, certain partial surrenders are not subject to a
Surrender Charge and/or Market Value Adjustment.
If after complying with a request for a partial surrender
there would be insufficient Account Value to keep the Certificate
In Force, Keyport will treat the request as a request to
surrender only the excess amount over [$2500].
(b) SYSTEMATIC WITHDRAWAL PROGRAM
To the extent permitted by law, Keyport will make monthly,
quarterly, semi-annual, or annual distributions of interest
credited to an Interest Account to a Certificate Owner that has
enrolled in the Systematic Withdrawal Program (the "Program").
Under the Program, all distributions will be made directly to the
Certificate Owner and will be treated for federal tax purposes as
any other withdrawal or distribution of Account Value. (See "Tax
Considerations".) The selected frequency of payment may not
result in a payment of less than [$100] per payment. Systematic
withdrawals may not be made from an Indexed Account.
Distributions under the Systematic Withdrawal Program are not
subject to Surrender Charges or Market Value Adjustments.
(c) SURRENDER PROCEDURES AND DETERMINATION OF
SURRENDER VALUE
1. PARTIAL SURRENDERS
At any time prior to the Income Date, a Certificate Owner
may request by Written Request a partial surrender. The
surrender amount paid to the Certificate Owner will be the gross
surrender amount increased or decreased by any applicable Market
Value Adjustment and decreased by any applicable Surrender
Charge. Both the Surrender Charge and the Market Value
Adjustment are calculated based on the gross surrender amount.
Thus, for example, if the gross surrender amount were $10,000,
the Surrender Charge and the Market Value Adjustment were each
5%, and the Free Withdrawal Amount did not apply, the Surrender
Charge and the Market Value Adjustment would each be 5% of
$10,000, for a net surrender payment to the Certificate Owner of
$9,000 ($10,000 -$500 - $500). Keyport will attempt to honor
requests for a net partial surrender of a specific amount. If a
Market Value Adjustment applies, however, the amount actually
paid by Keyport may be more or less than the amount requested,
because of computational rounding. The total amount deducted
from the Account Value upon a partial surrender will be the gross
surrender amount (prior to the application of any Market Value
Adjustment) and any applicable Surrender Charge.
2. TOTAL SURRENDERS
The Certificate Owner may make a total surrender by Written
Request. Surrendering the Certificate will end it.
The surrender value will be determined as of the date that
Keyport receives the Written Request for surrender. Keyport will
pay the Certificate Owner the Certificate Withdrawal Value, which
is the greater of: (a) the Account Value (with any applicable
Market Value Adjustment applied), less any
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applicable Surrender Charge; or (b) the Certificate Value,
adjusted by the ratio of the Account Value (with any applicable
Market Value Adjustment applied) to the unadjusted Account Value.
In addition, Keyport will deduct any premium taxes not previously
paid.
For any total surrender made after the first Certificate
Year, the Certificate Owner may receive the surrender benefit
under an Annuity Option rather than in a lump sum.
Keyport will, upon request, inform a Certificate Owner of
the amount payable upon a full or partial surrender. Any full or
partial surrender may, in addition to certain Certificate charges
and adjustments, be subject to tax. (See "Tax Considerations".)
(d) RISK
The interest and Index Increases credited to a Certificate
Owner's Account are based on guarantees made by Keyport. The
initial and subsequent Guaranteed Interest Rates and Guaranteed
Interest Rate Factors apply to the original principal sum and
reinvested earnings.
AN INHERENT RISK IS THAT IN THE EVENT OF A SURRENDER PRIOR TO THE
END OF THE APPLICABLE TERM, THE MARKET VALUE ADJUSTMENT MIGHT
CAUSE A REDUCTION IN THE CERTIFICATE OWNER'S ACCOUNT VALUE. (See
"Market Value Adjustment".)
(e) PAYMENT UPON PARTIAL OR TOTAL SURRENDER
Keyport may defer payment of any partial or total surrender
for a period not exceeding six (6) months from the date of
receipt of a notice of surrender by a Certificate Owner, or the
period permitted by state insurance law, if less. Only under
highly unusual circumstances will a surrender payment be deferred
more than thirty (30) days. While all circumstances under which
deferral of payment might be involved upon surrender may not be
foreseeable at this time, such circumstances could include, for
example, a time of an unusually high number of surrenders by
Certificate Owner's, accompanied by a radical shift in interest
rates. If Keyport decides to withhold payment for more than
thirty (30) days, a Certificate Owner will be notified in writing
of such decision.
10. DEDUCTIONS
(a) SURRENDER CHARGE
No sales charge is deducted from the Single Premium when
received. Except as provided below, however, a Surrender Charge
will be deducted for any partial or total surrender, other than
partial or total surrenders effective within the first thirty
(30) calendar days after the end of any full Term or during the
Certificate Year preceding the Income Date.
The amount of any Surrender Charge is computed as a
percentage of the gross surrender amount in excess of the Free
Withdrawal Amount, adjusted as described below. A portion of the
first partial surrender in a particular Certificate Year, not
exceeding the Free Withdrawal Amount, may be made free of any
Surrender Charge. The Free Withdrawal
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Amount is equal to the sum of any interest or Index Increases
earned by and credited to the Certificate Owner's Account Value
in the prior year (measured from the date of the surrender to
that same date in the prior calendar year) up to the sum of any
such amounts earned and credited since the most recent partial
surrender, if any, during that prior year. The portion of the
first partial surrender in excess of the Free Withdrawal Amount
(if any), and any subsequent partial surrender in the same
Certificate Year, will be subject to a Surrender Charge.
As to total surrenders, if no partial surrender was made in
the same Certificate Year, only the portion of the gross
surrender amount in excess of the Free Withdrawal Amount is
subject to a Surrender Charge. Otherwise, the total amount
surrendered is subject to a Surrender Charge.
The amount of the Surrender Charge depends on the number of
Account Years (rounded up) remaining until the end of the Term of
the Account from which the partial surrender is withdrawn. The
amount of the Surrender Charge will be equal to (a) multiplied by
(b), where:
(a) is the amount of the partial surrender request, less
the Free Withdrawal Amount (if applicable); and
(b) is the applicable percentage from the Certificate
Schedule, depending on the number of Account Years
(rounded up) remaining until the end of the Term.
After each surrender, Keyport also will adjust its records
to reflect appropriate deductions from the Account Value and the
Certificate Value.
The chart below indicates the Surrender Charge percentage
that will be applied while the specified number of years are
remaining:
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Term (Length in Years)
Account
Years 10 9 8 7 6 5 4 3 2 1
Remaining
1 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%
2 2 2 2 2 2 2 2 2 2
3 3 3 3 3 3 3 3 3
4 4 4 4 4 4 4 4
5 5 5 5 5 5 5
6 6 6 6 6 6
7 7 7 7 7
8 7 7 7
9 7 7
10 7
Keyport reserves the right to increase or decrease the
amount of this charge, and the period of time for which it will
apply, on new Certificates up to a maximum of 7% and ten years.
Currently, the charge is 7%. If such amounts are ever increased,
the increase will only apply to new Certificates issued after full
disclosure to prospective new Certificate Owners or to existing
Certificate Owners purchasing additional Certificates.
The Surrender Charge will apply to a full or partial
surrender, in each Term of a Certificate. In other words, a
Surrender Charge may be payable in Terms after the first,
irrespective of how many Account Years have elapsed. Also, any
surrender may, in addition to certain Certificate charges and
adjustments, be subject to tax. (See "Tax Considerations".)
Illustrative examples of how the Surrender Charge is
determined are set forth in Appendix B.
(B) MARKET VALUE ADJUSTMENT
The amount payable upon a surrender prior to the Income
Date, upon a transfer, or upon application of Account Value to an
Annuity Option may be adjusted up or down by the application of a
Market Value Adjustment. The Market Value Adjustment reflects
the relative difference between (a) the current Treasury Rate for
a period of time equivalent to the remaining duration of the
current Term; and (b) the Treasury Rate at the beginning of the
Term for a period of time equal to the full duration of the Term.
More specifically, the amount payable upon a partial or
total surrender of, or upon application of Account Value to an
Annuity Option from, an Account with a Term of three (3) years or
more may be adjusted up or down by the application of the Market
Value Adjustment. No Market Value Adjustment will apply to a
partial or total surrender or the application of Account Value to
an Annuity Option within the first thirty (30) calendar days
after the end of any full Term. Where applicable, the Market
Value Adjustment upon
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a surrender is calculated based on the gross surrender amount
before the deduction of any applicable Surrender Charge.
A Market Value Adjustment also applies to any transfer from
an Account with a Term of three (3) years or more, unless the
effective date of the transfer is: (a) within the final Account
Year of the Term and the transfer is to an Account with a Term of
three (3) years or more; or (b) within the first ten (10)
calendar days after the end of any full Term. Where applicable,
the Market Value Adjustment upon transfer is calculated based on
the Account Value. In addition, as described above, a Market
Value Adjustment in connection with a transfer also will result
in an adjustment to Certificate Value. (See "Certificate
Value".)
The formula for calculating the Market Value Adjustment is
set forth in Appendix B to this prospectus. If there has not
previously been a partial surrender in the Certificate Year or a
transaction subject to a Market Value Adjustment, an amount not
exceeding the Free Withdrawal Amount will be subtracted from the
amount used to calculate the Market Value Adjustment. Otherwise,
the gross amount surrendered, transferred, or applied to an
Annuity Option is used as the basis to calculate the applicable
Market Value Adjustment.
The Market Value Adjustment for Indexed Accounts includes a
Scaling Factor. A Certificate Owner will know the Scaling Factor
for all Indexed Account Terms at the time of the initial
purchase. Different Scaling Factors may be established for Terms
of different durations. Keyport may change the Scaling Factors
from time to time for new Certificates issued after the time of
the change. The Scaling Factors will never be greater than one.
Where a Scaling Factor is less than one, the Scaling Factor will
reduce the positive or negative amount of any Market Value
Adjustment. The Scaling Factors are shown on the Certificate
Schedule and are guaranteed for the life of the Certificate. The
Market Value Adjustment for Interest Accounts will not include
a Scaling Factor.
Because the Market Value Adjustment is based on changes in
the yields on U.S. Treasury securities, the effect of the Market
Value Adjustment will be closely related to the levels of such
yields. It is possible, therefore, that, should such yields
increase significantly from the time of purchase of a
Certificate, coupled with any applicable Surrender Charge, the
amount a Certificate Owner would receive upon a total surrender
could be less than the Single Premium.
Illustrative examples of how the Market Value Adjustment is
determined are set forth in Appendix B.
UPON REQUEST, KEYPORT WILL FURNISH A CERTIFICATE OWNER WITH
ILLUSTRATIONS OF THE EFFECT OF THE MARKET VALUE ADJUSTMENT ON A
CERTIFICATE OWNER'S ACCOUNT VALUE IF ALL OR ANY PART OF THE
CERTIFICATE OWNER'S ACCOUNT VALUE IS SURRENDERED PRIOR TO THE END
OF A TERM.
11. PREMIUM TAXES
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Keyport will deduct the amount of any premium taxes levied
by any state or governmental entity when the premium tax is
incurred, unless Keyport elects to defer such deduction until the
time of surrender or the Income Date. It is not possible to
describe precisely the amount of premium tax payable on any
transaction involving a Certificate. Such premium taxes depend,
among other things, on the type of Certificate (Qualified or
Non-Qualified), on the state of residence of the Certificate
Owner, the state of residence of the Annuitant, the status of
Keyport within such states, and the insurance tax laws of such
states. Currently such premium taxes range from 0% to 5.0%. For
a schedule of such taxes, see Appendix C of this Prospectus.
12. DEATH PROVISIONS
These provisions do not apply to Non-Allocated Contracts. In
Non-Allocated Contracts, Annuitants or payees are unknown until
the Contract Owner requests that an annuity be effected.
(A) NON-QUALIFIED CERTIFICATES
DEATH OF CERTIFICATE OWNER, JOINT CERTIFICATE OWNER OR
CERTAIN NON-CERTIFICATE OWNER ANNUITANTS - These provisions apply
if, before the Income Date while the Certificate is In Force, the
Certificate Owner or any Joint Certificate Owner dies (whether or
not the decedent is also the Annuitant) or the Annuitant dies
under a Certificate with a non-natural Certificate Owner such as
a trust. The Designated Beneficiary will control the Certificate
Owner's Account after such a death.
If the decedent was the Certificate Owner or the Annuitant
(if the Certificate Owner is not a natural person), the
Designated Beneficiary may surrender the Certificate Owner's
Account within ninety (90) days of the date of death for the
death benefit on the date of surrender. The death benefit is
the greatest of: (a) the Account Value; (b) the Certificate
Value; or (c) the Certificate Withdrawal Value. For a surrender
after ninety (90) days and for a surrender following the death of
a Joint Certificate Owner, the Certificate Withdrawal Value is
payable instead. If the Certificate Owner's Account is not
surrendered, it will continue for the time period specified
below.
If the decedent's surviving spouse (if any) is the sole
Designated Beneficiary, the surviving spouse will automatically
become the new sole Certificate Owner as of the Certificate
Owner's or the Joint Certificate Owner's date of death. And, if
the decedent is the Annuitant, the new Annuitant will be any
living Contingent Annuitant named in the Enrollment Form,
otherwise the surviving spouse. The Certificate Owner's Account
can continue until another death occurs (I.E., until the death of
the Certificate Owner or Joint Certificate Owner). Except for
this paragraph, all of "Death Provisions" will apply to that
subsequent death.
In all other cases, the Certificate Owner's Account can
continue for up to five years from the date of death. During
this period, the Designated Beneficiary may exercise all
ownership rights, including the right to make transfers or
partial surrenders or the right to totally surrender the
Certificate pursuant to the surrender provisions of the
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Certificate. If the Certificate Owner's Account continues to the
end of the five-year period, Keyport will automatically end it
then by paying to the Designated Beneficiary the Certificate
Withdrawal Value, without the deduction of any applicable
Surrender Charge. If the Designated Beneficiary is not alive
then, Keyport will pay any Person(s) previously named by the
Designated Beneficiary in a Written Request, otherwise the
Designated Beneficiary's estate.
PAYMENT OF BENEFITS - Instead of receiving a lump sum, the
Certificate Owner or any Designated Beneficiary may direct by
Written Request that Keyport pay any benefit of $5,000 or more
under an Annuity Option that meets the following requirements:
(a) the first payment to the Designated Beneficiary must be made
no later than one year after the date of death; (b) payments must
be made over the life of the Designated Beneficiary or over a
period not extending beyond that person's life expectancy; and
(c) any Annuity Option that provides for payments to continue
after the death of the Designated Beneficiary will not permit the
successor payee to extend the period of time over which the
remaining payments are to be made. The Certificate Owner may
also direct that any benefit payable to a Designated Beneficiary
be paid under an Annuity Option meeting these same requirements.
DEATH OF CERTAIN NON-CERTIFICATE OWNER ANNUITANTS - These
provisions apply if, before the Income Date while the Certificate
is In Force, (a) the Annuitant dies, (b) the Annuitant is not a
Certificate Owner, and (c) the Certificate Owner is a natural
person. The Certificate will continue after the Annuitant's
death. The new Annuitant will be any living Contingent
Annuitant, otherwise the Certificate Owner.
(B) QUALIFIED CERTIFICATES
DEATH OF ANNUITANT - If the Annuitant dies while the
Certificate is In Force, the Designated Beneficiary will control
the Certificate after such a death. The Designated Beneficiary
may surrender the Certificate Owner's Account within ninety (90)
days of the date of death for the death benefit on the date of
surrender, calculated as described above. For a surrender after
ninety (90) days and for a surrender following the death of an
older Annuitant, the Certificate Withdrawal Value is payable
instead.
If the Certificate Owner's Account is not surrendered, it
can continue for the time period permitted by the Internal
Revenue Code provisions applicable to the particular Qualified
Plan. During this period, the Designated Beneficiary may
exercise all ownership rights, including the right to make
partial surrenders or the right to totally surrender the
Certificate pursuant to the surrender provisions of the
Certificate. If the Certificate Owner's Account continues to the
end of the period, Keyport will automatically end it then by
paying to the Designated Beneficiary the Certificate Withdrawal
Value. If the Designated Beneficiary is not alive then, Keyport
will pay any Person(s) named by the Designated Beneficiary in a
Written Request; otherwise the Designated Beneficiary's estate.
PAYMENT OF BENEFITS - Instead of receiving a lump sum, the
Certificate Owner or any Designated Beneficiary may, by Written
Request, direct that Keyport pay any benefit or $5,000 or more
under an Annuity Option that meets the following: (a) the first
payment to the Designated Beneficiary must be
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made no later than one year after the date of death; (b) payments
must be made over the life of the Designated Beneficiary or over
a period not extending beyond that person's life expectancy; and
(c) any payment option that provides for payments to continue
after the death of the Designated Beneficiary will not permit the
successor payee to extend the period of time over which the
remaining payments are to be made. The Certificate Owner may
also direct that any benefit payable to a Designated Beneficiary
be paid under an Annuity Option meeting these same requirements.
D. ANNUITY PERIOD PROVISIONS
1. ANNUITY BENEFITS
If the Annuitant is alive on the Income Date and the
Certificate is In Force, payments will begin under the payment
option or options the Certificate Owner has chosen. The amount
of the payments will be determined by applying the Annuity Value
(less any premium taxes not previously deducted) on the Income
Date in accordance with the option selected. The Annuity Value
is the greater of (a) the Account Value after application of any
applicable Market Value Adjustment, or (b) the Certificate Value,
adjusted to reflect the ratio of the Account Value (after
application of the Market Value Adjustment) to the unadjusted
Account Value.
2. THE INCOME DATE AND FORM OF ANNUITY
The Income Date is shown on the Certificate Schedule. The
Income Date is the later of the end of the Certificate Year in
which the Annuitant's 85th birthday occurs or the end of the 10th
Certificate Year.
Under Allocated Contracts, a Certificate Owner may elect, at
least thirty (30) days prior to the Income Date, to have the
Annuity Value applied on the Income Date under any of the Annuity
Options described below. In the absence of such election, the
Annuity Value will be applied on the Income Date under Option 2
to provide a monthly life annuity with ten (10) years of payments
guaranteed.
If a Contract is issued on a Non-Allocated basis, a Contract
Owner may request that a portion of the Account Value, as
modified by any applicable Surrender Charge and Market Value
Adjustment, be applied under an Annuity Option for a participant
in that Contract Owner's plan. We will then issue a Certificate
for such participant (who is also the Annuitant) and begin
annuity payments as directed by the Contract Owner.
No surrenders may occur after the Income Date. Other special
rules may apply to qualified retirement plans. (See "Qualified
Plans".)
3. CHANGE OF ANNUITY OPTION
A Certificate Owner may change the Annuity Option from time
to time, but such change must be made by Written Request and
received by Keyport at least thirty (30) days prior to the
scheduled Income Date.
4. ANNUITY OPTIONS
OPTION 1 - INCOME FOR A FIXED NUMBER OF YEARS
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Keyport will pay an annuity for a chosen number of years,
not less than five (5) nor over thirty (30). If, at the death of
the payee, Option 1 payments have been made for less than the
chosen number of years:
(a) payments will be continued during the remainder of the
period to the successor payee; or
(b) that successor payee may elect to receive in a lump sum
the present value of the remaining payments, commuted
at the interest rate used to create the annuity factor
for this option.
See "Annuity Payments" for the manner in which Option 1 may be
taxed.
OPTION 2 - LIFE INCOME WITH 10 YEARS GUARANTEED
Keyport will pay an annuity during the lifetime of the
payee. If, at the death of the payee, payments have been made
for less than ten (10) years:
(a) payments will be continued during the remainder of the
10 year period to the successor payee; or
(b) the successor payee may elect to receive in a lump sum
the present value of the remaining certain payments,
commuted at the interest rate used to create the
annuity factor for this option.
The amount of the annuity payments will depend on the age of the
payee at the time annuity payments are to begin and it may also
depend on the payee's sex.
OPTION 3 - JOINT AND LAST SURVIVORSHIP INCOME
Keyport will pay an annuity for as long as either the payee
or a designated second natural person is alive. The amount of
the annuity payments will depend on the age of both persons at
the time annuity payments are to begin and it may also depend on
each person's sex. IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE
ONLY ONE ANNUITY PAYMENT IF BOTH PAYEES DIE AFTER THE RECEIPT OF
THE FIRST PAYMENT OR TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF BOTH
PAYEES DIE AFTER RECEIPT OF THE SECOND PAYMENT AND SO ON.
OTHER ANNUITY OPTIONS
Other options may be arranged with the mutual consent of a
Certificate Owner and Keyport.
5. FREQUENCY AND AMOUNT OF PAYMENTS
Payments will normally be paid as monthly installments.
However, if the net amount available to apply under any Annuity
Option is less than $5,000, Keyport has the right to pay such
amount in one lump sum in lieu of the payment otherwise provided
for. In addition, if the payments provided for would be or
become less than $100, Keyport shall have the right to change the
frequency of payments to such intervals as will result in
payments of at least $100.
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6. PROOF OF AGE, SEX, AND SURVIVAL OF ANNUITANT
Keyport may require proof of age, sex, or survival of any
payee upon whose age, sex or survival payments depend. If the
age or sex has been misstated, Keyport will compute the amount
payable based on the correct age and sex. If income payments
have begun, any underpayment Keyport may have made will be paid
in full with the next annuity payment. Any overpayment, unless
repaid in one sum, will be deducted from future annuity payments
until Keyport is repaid in full.
INVESTMENTS BY KEYPORT
Assets of Keyport must be invested in accordance with the
requirements established by applicable state laws regarding the
nature and quality of investments that may be made by the general
accounts and separate accounts of life insurance companies and
the percentage of their assets that may be committed to any
particular type of investment. In general, these laws permit
investments, within specified limits and subject to certain
qualifications, in federal, state, and municipal obligations,
corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments. (See page
___ for further information on the investments of Keyport.)
All of Keyport's general account assets, the assets of
Separate Account C, and the assets of certain other separate
accounts will be available to fund a Certificate Owner's claims
under a Certificate.
In establishing the Guaranteed Interest Rates and Guaranteed
Interest Rate Factors under the Certificates, Keyport intends to
take into account, among other factors, the yields available on
the instruments in which it intends to invest the proceeds from
the Certificates. (See "Establishment of Guaranteed Interest
Rates and Guaranteed Interest Rate Factors", page ______.)
Keyport's obligations and the values and benefits under the
Certificates, however, do not vary as a function of the returns
on the instruments in which Keyport will have invested the
proceeds from the Certificates.
Keyport's investment strategy with respect to the proceeds
attributable to Certificates will generally be to invest in debt
securities which it will use to match its liabilities with
respect to the Terms to which the proceeds are allocated. This
will be done, in Keyport's sole discretion, by investing in any
type of investment which it is authorized under state law to
invest in. Keyport expects to invest a substantial portion of
the premiums received in securities issued by the United States
Government or its agencies or instrumentalities, which issues may
or may not be guaranteed by the United States Government. This
could include T-Bills, Notes, Bonds, Zero Coupon Securities and
Mortgage Pass-Through Certificates including Government National
Mortgage Association backed securities (GNMA Certificates),
Federal National Mortgage Association Guaranteed Pass-Through
Certificates (FNMA Certificates) and Federal Home Loan Mortgage
Corporation Mortgage Participation Certificates (FHLMC
Certificates), and others.
In addition, Keyport may invest its assets in various
instruments, including equity options, futures, forwards, and
other instruments based on the Index, in order to hedge Keyport's
obligations with respect to Indexed
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Accounts. Keyport may also buy and sell interest rate swaps and
caps, Treasury bond futures, and other instruments to hedge its
exposure to changes in interest rates. These derivative
instruments will be purchased from counterparties which conform
to Keyport's Policies and Guidelines regarding derivative
instruments. Investments in these instruments generally involve
the following types of risks: in the case of over-the-counter
options and forward contracts, there is no guarantee these
markets will exist for these investments when Keyport wants to
close out a position; futures exchange may impose trading limits
which may inhibit Keyport's ability to close out positions in
exchange-listed instruments; and if Keyport has an open position
with a dealer that becomes insolvent, Keyport may experience a
loss.
While the foregoing generally describes Keyport's investment
strategy with respect to the proceeds attributable to the
Certificates, Keyport is not obligated to invest assets,
including the proceeds attributable to the Certificates,
according to any particular strategy except as may be required by
Rhode Island and other state insurance laws.
THE SEPARATE ACCOUNT
Separate Account C is a nonunitized separate account
organized under and governed by the laws of the State of Rhode
Island, Keyport's state of domicile. The Separate Account
consists of assets set aside by Keyport, which are kept separate
from Keyport's general assets and all other separate account
assets Keyport maintains. Keyport owns the assets of the Separate
Account. Subject to applicable law, Keyport has sole discretion
over investment of assets in the Separate Account.
Keyport may transfer to its General Account assets which
exceed the reserves and other liabilities of the Separate
Account. Income and realized and unrealized gains or losses from
assets in the Separate Account are credited to or charged against
the account without regard to other income, gains or losses in
Keyport's other investment accounts.
Keyport's obligations under (and the values and benefits
under) the Certificates do not vary as a function of the
investment performance of the Separate Account. Certificate
Owners, Beneficiaries and payees with rights under a Certificate
do not participate in the investment gains or losses of the
assets of the Separate Account. Keyport retains the risk that the
value of the assets in the Separate Account may fall below the
reserves and other liabilities that it must maintain in
connection with its obligations under the Certificates. In such
an event, Keyport will transfer assets from its General Account
to the Separate Account to make up the difference.
The Separate Account is not registered as an investment
company under the Investment Company Act of 1940.
AMENDMENT OF CERTIFICATES
Keyport reserves the right to amend the Group Contracts and
Certificate to meet the requirements of any applicable federal or
state laws or regulations. Keyport will notify the Certificate
Owners in writing of any such amendments.
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ASSIGNMENT OF CERTIFICATES
A Certificate Owner may assign a Certificate at any time, as
permitted by applicable law. A copy of any assignment must be
filed with Keyport. An assignment will not be binding upon
Keyport until it receives a written copy. The Certificate
Owner's rights and those of any revocably-named person will be
subject to the assignment. Any Qualified Certificate may have
limitations on assignability. Keyport assumes no responsibility
for the validity or effect of any assignment.
Because an assignment may be a taxable event, a Certificate
Owner should consult a competent tax adviser as to the tax
consequences resulting from any assignment.
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DISTRIBUTION OF CONTRACTS AND CERTIFICATES
Keyport Financial Services Corp. ("KFSC") serves as the
Principal Underwriter for the Contracts and the Certificates
described in this prospectus. The Certificate will be sold by
salespersons who represent Keyport Life Insurance Company (KFSC's
corporate parent) as insurance agents and who are registered
representatives of broker-dealers who have entered into
distribution agreements with KFSC. KFSC is a wholly-owned
subsidiary of Keyport and is registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934
("Exchange Act") as a broker-dealer. KFSC is a member of the
National Association of Securities Dealers, Inc. ("NASD"). It is
located at 125 High Street, Boston, Massachusetts 02110.
Keyport will pay a maximum commission to broker-dealers of
5.25% of the Single Premium, and may pay a reduced commission at
the start of each Term after the first.
TAX CONSIDERATIONS
A. GENERAL
SINCE THE LAW IS COMPLICATED AND SINCE TAX CONSEQUENCES WILL VARY
ACCORDING TO THE ACTUAL STATUS OF THE CONTRACT OWNER OR
CERTIFICATE OWNER INVOLVED, LEGAL AND TAX ADVICE MAY BE NEEDED BY
A PERSON, EMPLOYER, OR OTHER ENTITY CONTEMPLATING THE PURCHASE OF
A CONTRACT OR CERTIFICATE DESCRIBED IN THIS PROSPECTUS.
It should be understood that any detailed description of the
tax consequences regarding the purchase of a Contract or
Certificate cannot be made in this prospectus and that special
tax rules may be applicable with respect to certain purchase
situations not discussed herein. In addition, no attempt is made
to consider any applicable state or other tax laws. For detailed
information, a competent tax adviser should always be consulted.
This discussion is based upon Keyport's understanding of
Federal income tax laws as they are currently interpreted. The
United Sates Congress has in the past and may in the future
consider legislation that, if enacted, could adversely affect the
tax treatment of annuity contracts, including distributions and
undistributed appreciation. There is no way of predicting
whether, when or in what form Congress will enact legislation
affecting annuity contracts. Any such legislation could have
retroactive effect regardless of the date of enactment. No
representation is made regarding the likelihood of continuation
of those current federal income tax laws or of the current
interpretations by the Internal Revenue Service.
B. TAXATION OF KEYPORT
Keyport is taxed as a life insurance company under Part I of
Subchapter L of the Internal Revenue Code ("Code"). The assets
underlying the Certificates will be owned by Keyport. Any income
earned on those assets will be Keyport's income.
C. TAXATION OF ANNUITIES IN GENERAL
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1. GENERAL
Section 72 of the Internal Revenue Code governs the taxation
of annuities in general. A Certificate Owner is not taxed on
increases in Account Value until a distribution occurs, either in
the form of a lump sum payment (full or partial surrender of the
Account), an assignment or gift of the Certificate, or as annuity
payments. The provisions of Section 72 of the Code concerning
distributions are briefly summarized below.
2. SURRENDERS, ASSIGNMENTS, AND GIFTS
A Certificate Owner who fully surrenders his or her
Certificate is taxed on the portion of the payment that exceeds
his or her cost basis in the Certificate. For Non-Qualified
Certificates, the cost basis is generally the amount of the
Single Premium and the taxable portion of the surrender payment
is taxed as ordinary income. For Qualified Certificates, the
cost basis is generally zero and the taxable portion of the
surrender payment is generally taxed as ordinary income subject
to special 5-year income averaging. A Designated Beneficiary
receiving a lump sum surrender benefit after the death of the
Annuitant or Certificate Owner is taxed on the portion of the
amount that exceeds the Certificate Owner's cost basis in the
Certificate. If the Designated Beneficiary elects to receive
annuity payments within sixty (60) days of the decedent's death,
different tax rules apply. See "Annuity Payments" below.
Partial surrenders received under Non-Qualified Certificates
prior to the Income Date are first included in gross income to
the extent the Account Value (plus or minus any Market Value
Adjustment that would apply to the Account Value assuming it were
totally surrendered) exceeds the Single Premium. Then, to the
extent the Account Value (plus or minus any Market Value
Adjustment that would apply to the Account Value assuming it were
totally surrendered) does not exceed the Single Premium, such
surrenders are treated as a non-taxable return of principal to
the Certificate Owner. For partial surrenders under a Qualified
Certificate, payments are treated first as a non-taxable return
of principal up to the cost basis and then a taxable return of
income. Since the cost basis of Qualified Certificates is
generally zero, partial surrender amounts will generally be fully
taxed as ordinary income.
A Certificate Owner who assigns or pledges a Non-Qualified
Certificate is treated as if he or she had received the amount
assigned or pledged and thus is subject to taxation under the
rules applicable to surrenders. A Certificate Owner who gives
away the Certificate (I.E., transfers it without full and
adequate consideration) to anyone other than his or her spouse is
treated for income tax purposes as if he or she had fully
surrendered the Certificate.
A special computational rule applies if Keyport issues to
the Certificate Owner, during any calendar year, (a) two or more
Certificates or (b) one or more Certificates and one or more of
Keyport's other annuity contracts. Under this rule, the amount
of any distribution includable in the Certificate Owner's gross
income is to be determined under Section 72(e) of the Code by
treating all the Keyport contracts as one contract. Keyport
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believes that this means the amount of any distribution under one
Certificate will be includable in gross income to the extent that
at the time of distribution the sum of the values for all the
Certificates or contracts exceeds the sum of the cost bases for
all the contracts. The discussion in this paragraph applies to
"laddered" Certificates, which are multiple Certificates with
different Term lengths that are purchased during one calendar
year under Allocated Contracts.
3. ANNUITY PAYMENTS
The non-taxable portion of each annuity payment is
determined by an "exclusion ratio" formula which establishes the
ratio that the cost basis of the Certificate bears to the total
expected value of annuity payments for the term of the annuity.
The remaining portion of each payment is taxable. Such taxable
portion is taxed at ordinary income rates. For Qualified
Certificates, the cost basis is generally zero. With annuity
payments based on life contingencies, the payments will become
fully taxable once the payee lives longer than the life
expectancy used to calculate the non-taxable portion of the prior
payments.
4. PENALTY TAX
Payments received by Certificate Owners, Annuitants, and
Designated Beneficiaries under Certificates may be subject to
both ordinary income taxes and a penalty tax equal to 10% of the
amount received that is includable in income. The penalty tax is
not imposed on amounts received: (a) after the taxpayer attains
age 59-1/2; (b) in a series of substantially equal payments made
for life or life expectancy; (c) after the death of the
Certificate Owner (or, where the Certificate Owner is not a human
being, after the death of the Annuitant); (d) if the taxpayer
becomes totally and permanently disabled; or (e) under a Non-Qualified
Certificate's annuity payment option that provides for
a series of substantially equal payments, provided the
Certificate is not issued as a result of a Section 1035 exchange
and the first annuity payment begins in the first Certificate
Year.
5. INCOME TAX WITHHOLDING
Keyport is required to withhold federal income taxes on
taxable amounts paid under Certificates unless the recipient
elects not to have withholding apply. Keyport will notify
recipients of their right to elect not to have withholding apply.
See "Tax-Sheltered Annuities" ("TSAs"), for an alternative type
of withholding that may apply to distributions from TSAs that are
eligible for rollover to another TSA or an individual retirement
annuity or account ("IRA").
6. SECTION 1035 EXCHANGES
A Non-Qualified Certificate may be purchased with proceeds
from the surrender of an existing annuity contract. Such a
transaction may qualify as a tax-free exchange pursuant to
Section 1035 of the Code. It is Keyport's understanding that in
such an event: (a) the new Certificate will be subject to the
distribution-at-death rules described in "Death Provisions for
Non-Qualified Certificates"; (b) purchase payments made between
8/14/82 and 1/18/85 and the income allocable to them will,
following an exchange, no
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<PAGE>
longer be covered by a "grandfathered" exception to the penalty
tax for a distribution of income that is allocable to an
investment made over ten years prior to the distribution; and (c)
purchase payments made before 8/14/82 and the income allocable to
them will, following an exchange, continue to receive the
following "grandfathered" tax treatment under prior law: (i) the
penalty tax does not apply to any distribution; (ii) partial
surrenders are treated first as a non-taxable return of principal
and then a taxable return of income; and (iii) assignments are
not treated as surrenders subject to taxation. Keyport's
understanding of the above is principally based on legislative
reports prepared by the Staff of the Congressional Joint
Committee on Taxation.
D. QUALIFIED PLANS
The Certificate is designed for use with several types of
Qualified Plans. The tax rules applicable to participants in
such Qualified Plans vary according to the type of plan and the
terms and conditions of the plan itself. Therefore, no attempt
is made herein to provide more than general information about the
use of the Certificate with the various types of Qualified Plans.
Participants under such Qualified Plans as well as Certificate
Owners, Annuitants, and Designated Beneficiaries are cautioned
that the rights of any person to any benefits under such
Qualified Plans may be subject to the terms and conditions of the
plans themselves regardless of the terms and conditions of the
Certificate issued in connection therewith. Following are brief
descriptions of the various types of Qualified Plans and of the
use of the Certificate in connection therewith. Purchasers of the
Certificate should seek competent advice concerning the terms and
conditions of the particular Qualified Plan and use of the
Certificate with that Plan.
1. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees
and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the
Code to purchase annuity contracts and, subject to certain
contribution limitations, exclude the amount of premium payments
from gross income for tax purposes. However, such premium
payments may be subject to Social Security ("FICA") taxes. This
type of annuity contract is commonly referred to as a "Tax-Sheltered Annuity".
Section 403(b)(11) of the Code contains distribution
restrictions. Specifically, benefits may be paid, through
surrender of the Certificate or otherwise, only (a) when the
employee attains age 59-1/2, separates from service, dies or
becomes totally and permanently disabled (within the meaning of
Section 72(m)(7) of the Code) or (b) in the case of hardship. A
hardship distribution must be of employee contributions only and
not of any income attributable to such contributions. Section
403(b)(11) does not apply to distributions attributable to assets
held as of December 31, 1988. Thus, it appears that the law's
restrictions would apply only to distributions attributable to
contributions made after 1988, to earnings on those
contributions, and to earnings on amounts held as of 12/31/88.
The Internal Revenue Service has indicated that the distribution
restrictions of Section 403(b)(11) are not applicable when TSA
funds are being transferred tax-free directly to another TSA
issuer, provided the transferred funds continue to be subject to
the Section 403(b)(11) distribution restrictions.
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<PAGE>
Keyport will notify a Certificate Owner who has requested a
distribution from a Certificate if all or part of such
distribution is eligible for rollover to another TSA or to an
IRA. Any amount eligible for rollover treatment will be subject
to mandatory federal income tax withholding at a 20% rate if the
Certificate Owner receives the amount rather than directing
Keyport by Written Request to transfer the amount as a direct
rollover to another TSA or IRA.
2. INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to
contribute to an individual retirement program known as an
"Individual Retirement Annuity." These Individual Retirement
Annuities are subject to limitations on the amount which may be
contributed, the persons who may be eligible, and on the time
when distributions may commence. In addition, distributions from
certain types of Qualified Plans may be placed on a tax-deferred
basis into an Individual Retirement Annuity.
3. CORPORATE PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of retirement plans for
employees. Such retirement plans may permit the purchase of the
Certificate to provide benefits under the plans.
THE COMPANY
A. BUSINESS
Keyport was incorporated in Rhode Island in 1957 as a stock
life insurance company. Its executive and administrative offices
are located at 125 High Street, Boston, Massachusetts 02110, and
its home office is at 235 Promenade Street, Providence, Rhode
Island 02903.
Keyport is a wholly-owned subsidiary of Liberty Financial
Companies, Inc., ("Liberty Financial") which is a publicly traded
holding company and a majority-owned subsidiary of LFC Holdings,
Inc., which is an indirect wholly-owned subsidiary of Liberty
Mutual Insurance Company ("Liberty"), a multi-line insurance
company. Liberty acquired all of the capital stock of Keyport
from the Travelers Insurance Company on December 13, 1988.
Keyport writes individual life insurance and individual and
group annuity contracts on a non-participating basis. Keyport is
licensed to do business in all states except New York and is also
licensed in the District of Columbia and the Virgin Islands.
Keyport has been rated A+ (Superior) by A.M. Best and Company
("Best"), independent analysts of the insurance industry. Keyport
has been rated A+ each year since 1976, the first year Keyport
was subject to Best's alphabetic rating system. Standard and
Poor's Corporation ("S&P") has rated Keyport AA- for excellent
financial security, Moody's Investor Services ("Moody's") has
rated Keyport A1 for good financial strength and Duff & Phelps
has rated Keyport AA- for very high claims paying ability. The
Best's A+ rating is in the highest rating category, which also
includes A++. S&P and Duff & Phelps have one rating category
above AA and
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Moody's has two rating categories above A. The Moody's "1"
modifier signifies that Keyport is at the higher end of the A
category while the S&P and Duff & Phelps "-" modifier signifies
that Keyport is at the lower end of the AA category. These
ratings merely reflect the opinion of the rating company as to
the relative financial strength of Keyport and Keyport's ability
to meet its contractual obligations to its policyholders.
B. SELECTED FINANCIAL DATA
The following selected consolidated financial data for
Keyport should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
AS OF OR FOR THE YEAR ENDED DECEMBER 31
----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 783,170 $ 706,628 $ 699,228 $ 722,391 $ 715,508
Benefits and Expenses 675,229 611,352 612,523 690,994 654,738
--------- --------- --------- --------- ---------
Income Before Federal
Income Taxes $ 107,941 $ 95,276 $ 86,705 $ 31,397 $ 60,770
--------- --------- --------- --------- ---------
Net Income $ 69,610 $ 63,225 $ 57,995 $ 22,587 $ 42,080
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total Cash and Investments $10,922,125 $9,274,793 $8,912,526 $8,787,912 $8,018,522
Total Assets 12,279,194 10,873,604 10,227,327 9,707,115 8,839,110
Stockholder's Equity 902,331 682,485 684,270 556,416 532,317
</TABLE>
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
1. OVERVIEW
Keyport offers a diversified line of fixed, variable
and indexed annuity products designed to serve the growing
retirement savings market. These annuity products are sold
through a wide ranging network of banks, agents and broker-dealers.
Substantially all of Keyport's operating earnings
relates to the net investment income derived from the
investments
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<PAGE>
which support Keyport's fixed annuity and closed block of
single premium whole life insurance.
Net investment income and interest credited to
policyholders are Keyport's largest revenue and expense
items, respectively. The amount by which net investment
income exceeds interest credited to policyholders is the
"investment spread". The "investment spread percentage" is
the excess of the weighted average investment yield over the
weighted average interest credited rate. Net investment
income is determined primarily by interest rates, the
maturities of Keyport's portfolio, market conditions and the
overall investment policy of Keyport. Interest credited to
policyholders is determined primarily by the interest rate
environment, market conditions and competitive conditions.
Keyport's profitability is substantially dependent on its
ability to effectively manage its investment spread. Keyport
seeks to manage investment spread through, among other
things, its setting of renewal rates and by investment
portfolio actions, including utilizing interest rate swaps
and caps designed to address the interest rate sensitivity
of asset cash flows in relation to liability cash flows. See
"-Liquidity and Capital Resources."
As reflected in the table below, in 1995, net
investment income and interest credited increased compared
to 1994, but the investment spread percentage decreased. In
1994, net investment income increased and interest credited
decreased compared to 1993, and the net investment spread
percentage increased.
Year Ended December 31
----------------------
1995 1994 1993
---- ---- ----
($ IN MILLIONS)
Net Investment Income $ 757.4 $ 689.6 $ 669.7
Interest Credited
to Policyholders 557.2 481.9 504.2
------- ------- -------
------- ------- -------
Investment Spread $ 200.2 $ 207.7 $ 165.5
------- ------- -------
------- ------- -------
Investment Spread Percentage 1.91% 2.16% 1.81%
------- ------- -------
------- ------- -------
The investment spread percentage in 1995 decreased compared
to 1994 principally as a result of an increase in the
weighted average interest credited rate during the period.
This increase resulted primarily from the impact of higher
renewal rates set during the latter half of 1994 and early
1995 attributable to the rising interest rate environment
beginning in early 1994. Although interest rates decreased
significantly during 1995, the full impact of this rate
decrease was not realized on interest credited since rates
on policyholder liabilities are renewed continually
throughout the year. Both net investment income and interest
credited increased in 1995 primarily due to higher average
investment and policyholder liability balances,
respectively.
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The investment spread percentage in 1994 increased compared
to 1993 primarily as a result of a decrease in the weighted
average interest credited rate during the period. Although
interest rates, particularly short-term interest rates,
continually increased throughout 1994, the full impact on
interest credited was not realized because renewal rates are
set continually throughout the year. Net investment income
increased during 1994 primarily due to higher average
investment balances.
2.RESULTS OF OPERATIONS
(a) 1995 COMPARED TO 1994
1. NET INCOME
Net income was $69.6 million in 1995 compared to $63.2
million in 1994. The higher net income in 1995 primarily
reflected lower operating expenses, decreased guaranty fund
expense, and reduced amortization of value of insurance in
force, offset in part by lower investment spread and higher
amortization of deferred policy acquisition costs.
2. REVENUES
Net investment income is derived from the investments
which support Keyport's fixed annuity business and its
closed block of single premium whole life insurance. Net
investment income was $757.4 million during 1995 compared to
$689.6 million in 1994, an increase of $67.8 million, or
9.8%. This increase in net investment income was primarily
due to a higher level of portfolio assets during the period.
The impact of this higher level of assets on net investment
income was approximately $62.2 million. The overall
portfolio yield also increased during 1995. The impact of
this higher yield was approximately $5.6 million. In 1995,
the overall yield on investments (the ratio of net
investment income to average monthly total investments) was
7.75% compared to 7.68% in 1994.
Insurance revenues are the separate account fees earned
on variable contract policyholder account balances and
surrender charges on policyholder withdrawals of fixed and
variable annuities. Such revenues were $29.8 million in 1995
compared to $25.3 million in 1994, an increase of $4.5
million, or 17.8%. This increase was primarily due to higher
surrender charges of $2.6 million. Total fixed annuity
surrenders, as a percentage of average policyholder
liabilities, were approximately 9.4% in 1995 compared to
12.3% in 1994.
Net realized investment losses were $4.0 million in
1995 compared to $8.2 million in 1994. The realized losses
in 1995 were primarily attributable to sales of fixed
maturities during the year which were sold on the basis of
relative value and credit quality and were realized
primarily for tax purposes since these losses may be carried
back to prior years against previously recognized capital
gains. The realized losses in 1994 were primarily due to
write-downs of investments whose declines in value were
determined to be other than temporary.
3. EXPENSES
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Interest credited to policyholders is the expense Keyport incurs on its
fixed annuity and whole life insurance policyholder liabilities. Interest
credited was $557.2 million in 1995 compared to $481.9 million in 1994, an
increase of $75.3 million or 15.6%. This increase was due to growth in
policyholder liabilities and to an increase in the weighted average crediting
rate on the policyholder liabilities. The increase in policyholder
liabilities had the effect of increasing interest credited by $47.9 million,
while the impact of the higher average crediting rate was approximately $27.4
million. The weighted average crediting rate on policyholder liabilities was
5.84% in 1995 compared to 5.54% in 1994. This increase in interest credited
of $75.3 million combined with the increase in net investment income of $67.8
million discussed above resulted in a decrease in investment spread in 1995
of approximately $7.5 million and a decrease in the investment spread
percentage in 1995 to 1.91% from 2.14% in 1994.
Policy benefits represent death benefits incurred in excess of
policyholder account balances. Policy benefits were $4.4 million in 1995
compared to $4.8 million in 1994, a decrease of $0.4 million or 8.3%. This
decrease was due to favorable mortality experience in 1995.
Operating expenses were $42.5 million in 1995 compared to $47.1 million
in 1994, a decrease of $4.6 million, or 9.8%. These expenses primarily
represent compensation, other general and administrative expenses, and taxes,
licenses and fees. The decrease in 1995 was primarily due to lower state
income taxes and licensing fees.
Guaranty fund expense was $2.0 million in 1995 compared to $7.2 million
in 1994, a decrease of $5.2 million. This decrease relates to a smaller
provision for possible future guaranty fund assessments in 1995. See
"Guaranty Fund Assessments."
Amortization of deferred policy acquisition costs was $58.5 million in
1995, compared to $52.2 million in 1994, an increase of $6.3 million. This
increase in amortization was primarily attributable to changes in estimates
relating to reductions in the amortization periods and lower projected
surrender charges primarily on fixed annuities. In addition, this increase
was attributable to the growth in business in force during 1995 and 1994.
Amortization of value of insurance in force was $9.5 million in 1995
compared to $17.0 million in 1994. Value of insurance in force is amortized
in relation to the estimated gross profits to be realized over the life of
the underlying policies and is adjusted to reflect actual experience. The
decrease in amortization in 1995 of $7.5 million was primarily related to the
actual experience relating to the closed block of whole life insurance and to
changes in estimates on the life of the policies and higher expected future
profits.
(b) 1994 COMPARED TO 1993
1. NET INCOME
Net income was $63.2 million in 1994 compared to $58.0 million in 1993.
The higher net income in 1994 primarily reflected the higher levels of
investment spread (offset in part by increased amortization of deferred
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<PAGE>
policy acquisition costs) and decreased amortization of
value of insurance in force, offset in part by increased
operating expenses and guaranty fund expense, and realized
investment losses in 1994 compared to realized investment
gains in 1993.
2. REVENUES
Net investment income was $689.6 million during 1994
compared to $669.7 million in 1993, an increase of $19.9
million or 3.0%. This increase in net investment income was
primarily due to a higher level of portfolio assets during
the period. The impact of this higher level of assets on net
investment income was approximately $33.8 million. This
favorable impact was offset in part by a decline in
Keyport's overall portfolio yield during 1994. The impact of
this lower yield was approximately $13.9 million. In 1994,
the overall yield on investments was 7.68% compared to 7.85%
in 1993.
Insurance revenues were $25.3 million for 1994 compared
to $18.2 million in 1993, an increase of $7.1 million or
39.0%. This increase was primarily due to increased separate
account fees earned on higher levels of variable annuity and
variable life policyholder account balances. Surrender
charge income on withdrawals included in insurance revenues
totaled $8.5 million in 1994 compared to $7.3 million in
1993.
Net realized investment losses were $8.2 million in
1994 compared to realized investment gains of $11.4 million
in 1993. The realized losses in 1994 were primarily due to
write-downs of investments whose declines in value were
determined to be other than temporary. The realized gains in
1993 were primarily attributable to the higher level of
calls on portfolio bonds and, to a lesser extent, sales of
fixed maturities classified as "held to maturity" which were
sold because of deteriorating credit quality. Realized
investment gains include gross gains and losses and, for
periods prior to 1994, provisions for possible investment
losses. The provision was $9.1 million for 1993.
3. EXPENSES
Interest credited to policyholders was $481.9 million
in 1994 and $504.2 million in 1993, a decrease of $22.3
million or 4.4%. This decrease was primarily due to a
reduction in the weighted average crediting rate on
policyholder liabilities to 5.54% in 1994 from 6.04% in
1993. This reduction had a favorable impact of $42.7
million. Total interest credited also reflected growth in
policyholder liabilities which had the effect of increasing
interest credited by $20.4 million during the period. The
decrease in interest credited and the increase in net
investment income discussed above resulted in an increase in
investment spread of approximately $42.2 million and an
increase in the investment spread percentage in 1994 to
2.14% from 1.81% in 1993.
Policy benefits were $4.8 million in 1994 compared to
$3.1 million in 1993, an increase of $1.7 million or 49.0%.
This increase was due to unfavorable mortality experience in
1994.
Operating expenses were $47.1 million in 1994 compared
to $37.0 million in 1993, an increase of $10.1 million, or
27.3%. These expenses increased
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<PAGE>
primarily due to higher personnel costs, higher levels of
professional fees, and investments in information
technology.
Guaranty fund expense was $7.2 million in 1994 compared
to $3.7 million in 1993, an increase of $3.5 million. This
increase relates to a larger provision for possible future
guaranty fund assessments in 1994. See "Guaranty Fund
Assessments".
Amortization of deferred policy acquisition costs were
$52.2 million in 1994, compared to $41.0 million in 1993, an
increase of $11.2 million. This increase in amortization is
related to the higher levels of investment spread in 1994
and the growth of business in force during 1994 and 1993. As
a result of the acceleration of profits associated with
existing contracts, amortization was adjusted to reflect
actual investment experience.
Amortization of value of insurance in force was $17.0
million in 1994 compared to $22.4 million in 1993, a
decrease of $5.4 million or 24.1%. This decrease was
attributable primarily to the scheduled amortization of
specific blocks of business which were no longer subject to
surrender charges beginning in the fourth quarter of 1992.
3. GUARANTY FUND ASSESSMENTS
Under insurance guaranty fund laws existing in each
state, insurers can be assessed for certain obligations of
insolvent insurance companies. The amounts actually assessed
to Keyport by guaranty fund associations under such laws for
the years ended December 31, 1995, 1994 and 1993, were
approximately $8.1 million, $7.7 million and $7.3 million,
respectively. Assessments are typically not made for several
years after an institution fails and, therefore, the Company
cannot precisely determine the amount or timing of such
assessments and whether the Company's existing reserve will
be sufficient to cover the actual assessments. In 1995, 1994
and 1993, Keyport recorded guaranty fund expense of
approximately $2.0 million, $7.2 million and $3.7 million,
respectively. At December 31, 1995 Keyport's reserve for
such assessments was $21.9 million. Based on information
recently provided by the industry association with respect
to aggregate assessments related to known insolvencies, the
range of future assessments with respect to known
insolvencies is estimated by the Company to be between
$16,500 and $25,500, taking into account the industry
association information as well as the Company's own
estimate of its potential share of such aggregate
assessments.
4. FINANCIAL CONDITION
(a) CASH AND INVESTMENTS
Cash and investments grew to $10.9 billion as of
December 31, 1995 compared to $9.3 billion as of December
31, 1994, or an increase of 17.8%. This growth reflects
policyholder deposits received during 1995 and the excess of
net investment income over policy acquisition costs and
operating expenses. This growth also reflects the change in
net unrealized investment gains. The portfolio of fixed
maturity investments had a weighted average quality rating
of A+ by S&P.
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<PAGE>
The percentage of Keyport's portfolio invested in below
investment grade securities increased slightly during 1995.
As of December 31, 1995, the carrying value of Keyport's
total investments in below investment grade securities
consisted of investments in 106 issuers totaling $811.8
million or 7.4% of the investment portfolio compared to 84
issuers totaling $618.7 million, or 6.7%, as of December 31,
1994. As of December 31, 1995, the yield on Keyport's below
investment grade portfolio was 9.6% compared to 7.3% for the
investment grade portfolio.
Keyport analyzes its investment portfolio at least
quarterly in order to determine if its ability to realize
the carrying value on any investment has been impaired. If
impairment in value is determined to be other than
temporary, the cost basis of the impaired security is
written down to fair value and becomes the security's new
cost basis. The amount of the write down is recorded as a
realized investment loss. During 1995, there were no
adjustments to Keyport's investment portfolio in connection
with an impairment in value that was other than temporary.
Cash and cash equivalents increased to approximately
$777.4 million as of December 31, 1995 from $684.6 million
as of December 31, 1994. Substantially all of this increase
related to securities being held as collateral in connection
with securities lending and dollar roll transactions.
Keyport records the collateral received from its securities
lending and dollar roll transactions as an asset and its
obligation to return the collateral, when the transaction is
closed, as a liability. As of December 31, 1995, Keyport had
an asset, and a corresponding liability of $317.7 million
for cash pledged as collateral. Keyport did not engage in
any such transactions during 1994.
(b) DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs decreased to $179.7
million as of December 31, 1995 from $439.2 million as of
December 31, 1994. Deferral of current period costs
(primarily commissions) incurred to generate annuity sales
totaled $83.2 million, while amortization of these costs
totaled $58.5 million. The adjustment to deferred policy
acquisition costs related to the valuation of fixed maturity
securities designated as available for sale under SFAS No.
115 reduced deferred policy acquisition costs by $286.4
million during 1995.
(c) LIABILITIES
Policyholder liabilities increased by $740.3 million,
or 7.9%, during 1995 and totaled $10.1 billion as of
December 31, 1995. This growth primarily reflects the
policyholder deposits received during the period and
interest credited to policyholder liabilities.
Keyport incorporates a number of features in its
annuity products designed to reduce the early withdrawal or
surrender of the policies and to partially compensate for
acquisition costs incurred if policies are surrendered
early. Surrender charge periods on annuity policies
currently range from five to seven years. Substantially all
policies issued during 1995 had a surrender charge period of
five years or more. The initial surrender charge on annuity
policies ranges from 5% to 7% of the premium and decreases
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<PAGE>
over the surrender charge period. As of December 31, 1995,
approximately 89.7% of Keyport's SPDA policyholder
liabilities are subject to surrender charges.
(d) STOCKHOLDER'S EQUITY
As of December 31, 1995, stockholder's equity was
$902.3 million compared to $682.5 million as of December 31,
1994, an increase of $219.8 million. Net unrealized
investment gains increased stockholder's equity by $150.2
million. This amount includes $13.9 million attributable to
an election made on December 31, 1995 pursuant to a Guide to
Implementation of SFAS 115 issued by the Financial
Accounting Standards Board. Keyport elected to reclassify
all previously classified "held to maturity" securities as
"available for sale." This election was made to allow
Keyport to more effectively manage its asset/liability
management process. Net income during the period was $69.6
million.
5. LIQUIDITY AND CAPITAL RESOURCES
Liquidity needs and financial resources pertain to the
management of the general account assets and policyholder
liabilities. Keyport uses cash for the payment of annuity
and life insurance benefits, operating expenses and policy
acquisition costs, and the purchase of investments. Keyport
generates cash from net investment income, annuity premiums
and deposits, and from maturities of fixed investments.
Cash received by Keyport for annuity premiums, from the
maturity of investments and from net investment income have
historically been sufficient to meet Keyport's requirements.
Keyport monitors cash and cash equivalents in an effort to
maintain sufficient liquidity and has strategies in place to
maintain sufficient liquidity in changing interest rate
environments. Consistent with the nature of its obligations,
Keyport has invested a substantial amount of its general
account assets in readily marketable securities. As of
December 31, 1995, 70.0% of Keyport's total investments,
including short-term investments, are considered readily
marketable.
Keyport manages its portfolio, in part, based on the
effective duration of its portfolio investments and the
anticipated effective duration of its policyholder
liabilities. As of December 31, 1995, the duration of
Keyport's fixed income portfolio (representing 93.2% of
Keyport's total general account investments, and calculated
including cash and short term investments) was 2.6 years.
Keyport's investment management strategy takes into
account the anticipated cash flow requirements of its policy
liabilities. Liability cash outflows are affected by policy
maturities, surrender experience and interest crediting
rates; simulation models are used to estimate policy cash
flows under a wide range of future interest rate scenarios.
Based on analyses of these scenarios, investment strategies
are designed to meet policy obligations, maintain the
desired investment spread between assets and liabilities,
and limit the potential adverse impact of changing market
interest rates.
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<PAGE>
A key element of Keyport's business activities is its
asset/liability management process. This process integrates
investment management and liability management to reduce the
risk presented by changing market interest rates.
Interest rate risk occurs when interest rate changes
cause asset cash flows (general account investment income,
principal payments and calls) to react differently than
liability cash flows (policyholder benefits). Keyport seeks
to manage this risk through, among other things, its setting
of renewal rates and by investment portfolio actions
designed to address the interest rate sensitivity of asset
cash flows in relation to liability cash flows. Portfolio
actions used to manage interest rate risk include targeting
the effective duration of the investment portfolio and
utilizing interest rate swaps and caps to hedge asset and
liability cash flow sensitivities. Interest rate swaps and
caps involve, to varying degrees, elements of credit risk
and market risk which are not reflected in the Company's
Consolidated Financial Statements. (See Note 4 of Notes to
the Consolidated Financial Statements) The Company
periodically monitors credit risk and the financial
stability of its counterparties according to prudent
investment guidelines and established procedures.
Credit risk also arises from the possibility that a
default by the issuer would affect adversely a fixed
maturity investment's anticipated return by the issuer.
Keyport seeks to manage this risk by careful credit analysis
and ongoing credit monitoring.
Strict investment guidelines limit the total exposure
of debt and derivative instruments in any single issuer as a
percentage of Keyport's stockholder's equity and total
invested assets. In addition, the portfolio is monitored to
maintain diversification across industry and security type.
Keyport also monitors its investment portfolio monthly to
identify securities that may exhibit a deterioration in
credit quality.
Keyport invests in certain below investment grade
securities to enhance overall portfolio yield. Investments
in below investment grade securities have greater risks than
investments in investment grade securities. Keyport actively
manages its below investment grade portfolio to optimize its
risk return profile.
In 1995, Keyport introduced a new fixed annuity policy
linked to an equity index. These policies guarantee a
return equal to the highest price return of the S&P 500
Index for any anniversary date during the term of the policy
multiplied by a participation rate. Policies are issued
with terms of one or five years. Keyport's KeyIndex hedging
strategy uses S&P 500 options and S&P 500 futures contracts
to hedge against this S&P 500 Index exposure. Sales of the
indexed product in 1995 were approximately $85.0 million.
The Company anticipates significantly higher sales in 1996
as Keyport launches an aggressive marketing campaign. As of
December 31, 1995, Keyport had positions in S&P 500 futures
with an aggregate face amount of approximately $2.4 million
and positions in S&P 500 call options with an aggregate face
amount of approximately $69.3 million. The carrying value
of the S&P options and futures were $7.8 million and were
included in other invested assets.
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<PAGE>
To the extent that unanticipated surrenders cause
Keyport to sell a material amount of securities prior to
their maturity for liquidity purposes, such surrenders could
have a material adverse effect on the Company. However,
Keyport believes that liquidity to fund withdrawals would be
available through incoming cash flow, the sale of short-term
or floating-rate instruments or securities in its short
duration portfolio, thereby precluding the sale of fixed
maturity investments in a potentially unfavorable market.
Although the Company believes that Keyport will have
adequate liquidity to meet anticipated surrender levels, a
material increase in actual surrenders could have a material
adverse effect on the Company's operations and liquidity.
Regulatory authorities restrict dividend payments from
Keyport to Liberty Financial in excess of the lesser of (i)
10% of statutory surplus as of the preceding December 31 or
(ii) the net gain from operations for the preceding fiscal
year. The Company considers these requirements in managing
its cash flows and liquidity needs. As of December 31, 1995,
Keyport could not declare dividends in excess of $34.6
million without the approval of the Commissioner of
Insurance of the State of Rhode Island. Keyport has not paid
any dividends since its acquisition by Liberty Financial in
1988.
D. REINSURANCE
Portions of the Keyport's life insurance risks are
reinsured with other companies. The maximum net insurance
retention on any one life is $150,000.
E. RESERVES
Keyport is obligated to record actuarial reserves to
meet obligations on outstanding life insurance and annuity
contracts. The reserves for such contracts are based on
mortality and morbidity tables in general use in the United
States and are computed amounts that, with additions from
premiums to be received, and with interest on such reserves
compounded annually at certain assumed rates, will be
sufficient to meet the Company's policy obligations at their
maturities if death occurs in accordance with the mortality
tables employed. In the accompanying Consolidated Financial
Statements, these life insurance reserves are adjusted in
accordance with generally accepted accounting principles.
F. INVESTMENTS
Keyport manages interest rate risk and monitors
investment activities to conform with its investment
policies. Stein Roe & Farnham Incorporated an affiliated
company, manages a substantial portion of Keyport's general
account portfolio (approximately $8.9 billion of a total of
approximately $10.9 billion as of December 31, 1995) within
Keyport's overall investment policies. A portion of
Keyport's general account assets ($1.2 billion as of
December 31, 1995) are managed by separate unaffiliated
investment advisers who specialize in certain types of
investments. As of December 31, 1995, Keyport's general
account also included approximately $498.3 million of
policyholder loans and approximately $74.5 million of
mortgage loans.
The following table sets forth the composition,
carrying value and fair value of Keyport's investment
portfolio as of December 31, 1995.
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CARRYING VALUE FAIR VALUE
-------------- ----------
AMOUNT % OF % OF
($ in PORTFOLIO AMOUNT PORTFOLIO
thousands --------- ------ ---------
---------
Fixed Maturities
(1):Investment
Grade Bonds $6,688,036 61.2% $6,688,036 61.2%
U.S. Government
and Agency
Securities 2,036,064 18.7% 2,036,064 18.7%
Below Investment
Grade Bonds 811,848 7.4% 811,848 7.4%
Total Fixed
Maturities: 9,535,948 87.3% 9,535,948 87.3%
Mortgage Loans 74,505 0.7% 79,697 0.7%
Cash and Cash
Equivalents 777,384 7.1% 777,384 7.1%
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<PAGE>
Equity
Securities 25,215 0.2% 25,215 0.2%
Policy Loans 498,326 4.6% 498,326 4.6%
Other 10,747 0.1% 10,747 0.1%
TOTAL INVESTMENT
PORTFOLIO: $10,922,125 100.0% $10,927,317 100.0%
(1) Includes private placement bonds with a carrying value
(estimated fair value) of approximately $2.7 billion
(24.4% of the portfolio). Fair values of private
placement bonds are typically determined by obtaining
market indications from various broker-dealers. Keyport
attempts to validate these valuations by selectively
monitoring trades in the secondary private placement
market that involve these holdings.
Consistent with the nature of the obligations involved
in Keyport's operations, the majority of the General Account
assets are invested in fixed-income obligations such as
government and corporate debt securities and mortgage-backed
securities. The investment program is intended to provide a
rate of return which will persist during the expected
durations of the liabilities regardless of future interest
rate movements.
At December 31, 1995 and 1994, Keyport's investments in
bonds which are carried at fair value, were $9.5 billion and
$8.2 billion, respectively. At December 31, 1995,
approximately $2.0 billion, or 18.7% was invested in United
States Government and government agency securities. During
the 1995 period Keyport maintained an average bond quality
rating of at least A+ (Moody's/Standard & Poor's).
During periods considered appropriate, Keyport
purchases higher-yielding securities which are below
investment grade to enhance the average yield on its
investment portfolio. The risk of potential loss due to
default is generally considered to be greater for high yield
securities because these securities are generally issued by
highly leveraged companies or are often subordinated to
other debt of the issuer. Keyport believes that in the
aggregate the additional yields received compensate for the
risk of default on certain high yield securities. At
December 31, 1995, Keyport had below investment grade bonds
of $811 million, representing approximately 7.4% of total
cash and investments.
Keyport continually evaluates the creditworthiness of
each issuer whose securities are held in the portfolio. It
is Keyport's policy to write-down the value of specific
investments which are determined to be permanently impaired.
Specific write-downs included in realized gains and losses
during the 1995 period were $1.3 million.
As discussed above, Keyport may also invest its assets
in various instruments, including equity options, futures,
forwards, and other instruments based on the Index to hedge
its obligations with respect to Indexed Accounts. Keyport
may also buy and sell interest rate swaps and
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<PAGE>
and caps, Treasury bond futures, and similar instruments to hedge its exposure
to changes in interest rates.
G. COMPETITION
Keyport competes with a large number of life insurance companies, some of
which are larger, more highly capitalized and have higher ratings. No one
company dominates the industry. In addition, Keyport's products compete with
alternative investment vehicles available through financial institutions,
brokerage firms and investment managers. Keyport relies heavily on distribution
of its annuities through the bank channel. The overall growth of annuity sales
through the banks has caused several other insurance companies to emphasize this
distribution channel, including a number of companies which are larger and have
greater access to capital. Keyport believes it can continue to compete
successfully in this market by offering innovative products and superior
services.
H. EMPLOYEES
As of December 31, 1995, Keyport had 342 employees.
I. STATE AND FEDERAL REGULATION
The insurance business of Keyport is subject to comprehensive and detailed
regulation and supervision throughout the United States.
The laws of the various states establish supervisory agencies with broad
administrative powers with respect to licenses to transact business, trade
practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
it does business and its operations and accounts are subject to examination by
such agencies at regular intervals.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for policyholder losses incurred
by insolvent companies. The amount of any future assessments of Keyport under
these laws cannot be reasonably estimated. Most of these laws do provide,
however, that an assessment may be excused or deferred if it would threaten an
insurer's own financial strength.
In addition, several states, including Rhode Island, regulate affiliated
groups of insurers, such as Keyport and its affiliates.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
controls on medical care costs, removal of barriers preventing banks from
engaging in the insurance business, tax law changes affecting the
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<PAGE>
taxation of insurance companies, the tax treatment of insurance products and the
relative desirability of various personal investment vehicles, and the use of
gender in determining insurance and pension rates and benefits.
KFSC, a subsidiary of Keyport, is regulated as a broker-dealer under the
Exchange Act and is a member of the NASD. (See "Distribution of Contracts and
Certificates".)
COMPANY MANAGEMENT
The following are the principal officers and directors of the Company:
POSITION WITH OTHER BUSINESS, VOCATION
KEYPORT OR EMPLOYMENT FOR PAST
NAME, AGE YEAR OF ELECTION FIVE YEARS
- --------- ---------------- ------------------------
Kenneth R. Leibler, 47 Chairman of the Chief Executive
Board, 12/31/94 Officer, 1/1/95, and
formerly President of
Liberty Financial
Companies Inc.
F. Remington Ballou, 67 Director, 3/7/62 President of B. A.
Ballou & Co., Inc.,
East Providence, RI
Frederick Lippit, 79 Director, 3/7/62, Chairman of The
and Assistant Providence Plan,
Secretary, 4/9/69 Providence, RI
Robert C. Nyman, 60 Director, 4/11/96 President and
Chairman
of Nyman Manufacturing
Co., East Providence, RI
John W. Rosensteel, 56 President, Chief Formerly Chief
Executive Officer Operating Officer of
and Director, 12/30/92; the Company, 11/5/92
Chairman of the Board and
Director of KFSC,
11/12/92; Chairman of the
Board and Director of
KASC, 1/8/93;
55
<PAGE>
President, Chief
Executive Officer, and
Chairman of the Board of
Independence Life and
Annuity Co., 10/1/93;
formerly Senior Vice
President Aetna Life
& Casualty, Hartford, CT
John E. Arant, III, 51 Senior Vice President
and Chief Sales
Officer, 5/16/94 Vice President, Chief
Sales Officer of KFSC,
5/20/94; Director,
3/1/95, Senior Vice
President and Chief Sales
Officer, 5/20/94 of
Independence Life and
Annuity Company; Director
and Senior Vice President
and Chief Sales Officer,
KASC, 3/10/95; Formerly
Vice President of Aetna
Investment Management
Company and Senior Vice
President of Aetna
Capital Management
Company
Bernard R. Beckerlegge, 50 Senior Vice Senior Vice President
President and General and General Counsel
Counsel, 9/1/95 of Independence Life
and Annuity Company,
10/9/95; formerly General
Counsel for B.T. Variable
Insurance Co.
Paul H. LeFevre, Jr., 54 Senior Vice President Director and Senior
and Chief Financial Vice President and
Officer, 4/5/90 Chief Financial Officer
of KASC, 1/8/93;
Director, Senior Vice
President and Chief
Financial Officer of
56
<PAGE>
Independence Life and
Annuity Company, 10/1/93
Francis E. Reinhart, 56 Senior Vice President Director, 3/15/95 and
and Chief Vice President,
Administrative Officer, Administration,
4/5/90 10/24/85, of KFSC; Senior
Vice President and Chief
Administrative Officer of
KASC, 1/8/93; Senior Vice
President and Chief
Administrative Officer of
Independence Life and
Annuity Company, 10/1/93
Bruce J. Crozier, 50 Vice President and Chief Vice President and
Actuary, 11/9/90 Chief Actuary of
Independence Life and
Annuity Company,
10/1/93
Jeffery J. Lobo, 35 Vice President, Risk Formerly Assistant
Management 5/4/96 Vice President of
Quantitative Research for
the Company, 2/8/95;
formerly Vice President
of Credit Suisse
Financial Products,
11/94; trader for SBCI
Securities (Asia) Inc.
7/93; trader for O'Connor
& Associates, 5/92
Stewart R. Morrison, 39 Vice President and Vice President,
Chief Investment Officer, Investments, of KASC,
5/16/94 1/8/93; Vice President
and Chief Investment
Officer of Independence
Life and Annuity Company,
10/1/93; formerly Vice
President of Investments
for the Company, 8/92
58
<PAGE>
EXECUTIVE COMPENSATION TABLES AND INFORMATION
The tables that appear below, along with the accompanying text and
footnotes, provide information on compensation and benefits for the named
executive officers, in accordance with applicable SEC requirements. All the
data regarding values for stock options pertain to options to purchase shares of
Keyport's parent corporation, Liberty Financial Companies, Inc. ("Liberty
Financial"). Such data are hypothetical in terms of the amounts that an
individual may or may not receive, because such amounts are contingent on
continued employment with Keyport and the price of Liberty Financial's Common
Stock ("Common Stock"). All year-end values shown in these tables for
outstanding stock options reflect a price of $30.25 per share, which was the
closing price of the Common Stock on the New York Stock Exchange on December 29,
1995 (the last trading day of 1995). None of the named executive officers
received any perquisites during 1995 exceeding the lesser of $50,000 or 10% of
such officer's total salary and bonus for such year.
SUMMARY COMPENSATION TABLE. The following table sets forth compensation
information for 1995 for each of Keyport's chief executive officer and the other
four most highly compensated executive officers:
SUMMARY COMPENSATION TABLE
59
<PAGE>
1995 COMPENSATION
Name and Securities All other
Principal Base Salary Bonus underlying Compensation
Position ($) ($)(1) Options (#) ($)(2)
John W. 381,150 187,000 15,000 31,535
Rosensteel,
President and
Chief Executive
Officer
Paul LeFevre, Jr. 262,000 112,000 7,500 19,860
Senior Vice
President and
Chief Financial Officer
John E. Arant 232,000 90,500 7,500 16,827
Senior Vice
President and
Chief Sales Officer
Francis E. 223,000 87,000 6,000 16,105
Reinhart, Senior
Vice President and
Chief Administrative
Officer
Stewart Morrison 174,000 54,000 4,000 10,293
Vice President
and Chief Investment
Officer
____________________________________________
(1) The amounts presented are bonuses earned in 1995 and paid in 1996.
(2) Consists of (a) in the case of Mr. Rosensteel, $5,000 of insurance premiums
paid by Keyport with respect to term life insurance purchased for his benefit;
(b) contributions and interest accruals under defined contribution plans for the
benefit of the named executive officers, individually as follows: Mr.
Rosensteel, $26,535; Mr. LeFevre, $19,860; Mr. Arant, $7,567; Mr. Reinhart,
$16,105; and Mr. Morrison, $10,293; and (c) in the case of Mr. Arant, $9,260 of
moving expenses reimbursement.
OPTION GRANT TABLE. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1995
60
<PAGE>
by Liberty Financial to the executive officers named in the above summary
compensation table.
OPTION GRANTS IN LAST FISCAL YEAR
Name Number of Percent of Exercise Expiration Potential
Securities Total Options Price Per on Date (1) Realizable
Underlying Granted to Share ($) Value at
Options Employees in Assumed
Granted (#) 1995 Annual Rates of
Stock Price
Appreciation
for Option Term
($)(2)
5% 10%
John W. 15,000 3.1% 25.75 6/13/05 242,911 615,583
Rosensteel
Paul 7,500 1.6% 25.75 6/13/05 121,455 307,792
LeFevre
Jr.
John E. 7,500 1.6% 25.75 6/13/05 121,455 307,792
Arant III
Francis 6,000 1.2% 25.75 6/13/05 97,164 246,233
E. Reinhart
Stewart
Morrison 4,000 0.8% 25.75 6/13/05 64,776 164,155
______________________
(1) Each option becomes exercisable in four equal annual installments
commencing on June 14, 1996, and vests in full upon the death, disability
or retirement of the optionee.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable SEC regulations,
compounded annually from the dates the options were granted until their
expiration dates and, therefore, are not intended to forecast possible future
appreciation in the Common Stock. This table does not take into account any
appreciation in the price of the Common Stock after the date of grant.
OPTION EXERCISES AND YEAR-END VALUES TABLE. The following table sets forth
certain information regarding (i) the 1995 exercises of stock options
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<PAGE>
and (ii) the stock options held as of December 31, 1995 by the executive
officers named in the above summary compensation table.
AGGREGATE OPTION EXERCISES IN LAST FINANCIAL YEAR AND OPTION VALUES AT
FISCAL YEAR-END
Name Shares Value Number of Value of
Acquired Realized Securities Unexercised
Upon ($) Underlying In-the-Money
Exercise Unexercised Options at
(#) Options at Year-End
Year-End (#) ($)
Exerc- Unexer- Exerc- Unexer-
isable cisable isable cisable
John W. ---- ---- 24,958 56,601 391,649 580,476
Rosensteel
Paul 49,913 736,250 29,116 28,298 578,859 447,381
LeFevre,
Jr.
John E. ---- ---- 3,328 17,485 24,261 106,541
Arant III
Francis 19,965 296,460 12,478 13,488 248,013 175,891
E.
Reinhart
Stewart ---- ---- ---- 4,000 ---- 18,000
Morrison
CERTAIN ADDITIONAL INFORMATION REGARDING EXECUTIVE OFFICER COMPENSATION
DEFINED BENEFIT RETIREMENT PROGRAMS
Each of the executive officers in the above summary compensation table
participates in Keyport's Pension Plan and Supplemental Pension Plan
(collectively, the "Pension Plans"). The following table shows the estimated
annual pension benefits payable upon retirement for the specified compensation
and years of service classification under Liberty Financial's Pension Plans.
ESTIMATED ANNUAL RETIREMENT BENEFITS AT AGE 65
UNDER PENSION PLANS
FIVE YEAR AVERAGE
------------------
COMPENSATION 5 20 25 30 35
$200,000 $ 52,178 $ 69,570 $ 86,963 $ 93,629 $100,296
400,000 106,178 141,570 176,963 190,296 203,629
600,000 160,178 213,570 266,963 286,963 306,963
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<PAGE>
800,000 214,178 285,570 356,963 383,629 410,296
1,000,000 268,178 357,570 446,963 480,296 513,629
1,200,000 322,178 429,570 536,963 576,963 616,963
Benefits under the Pension Plans are based on an employee's average pay for the
five highest consecutive years during the last ten years of employment, the
employee's estimated social security retirement benefit and years of credited
service with Keyport. The current compensation covered by the Pension Plans for
each participating executive officer in the above summary compensation table is
as follows: Mr. Rosensteel, $606,150; Mr. LeFevre, $402,000; Mr. Reinhart,
$333,000; Mr. Arant, $307,000; and Mr. Morrison, $240,500. For purposes of
determining benefits payable upon retirement under the Pension Plans,
compensation includes base salary and annual bonus. Benefits are payable in the
form of a single-life annuity providing for monthly payments. Actuarially
equivalent methods of payment may be elected by the recipient. As of June 30,
1996, the executive officers named in the above summary compensation table had
the following full credited years of service under the Pension Plans: Mr.
Rosensteel, 3 years; Mr. LeFevre, 16 years; Mr. Arant, 2 years; Mr. Reinhart, 11
years; and Mr. Morrison, 6 years.
CHANGE OF CONTROL PROVISIONS OF 1990 STOCK OPTION PLAN
Certain Liberty Financial options held by the executive officers named in
the above summary compensation table were issued under Liberty Financial's 1990
Stock Option Plans, as amended (the "1990 Plan"), including 66,559 shares held
by Mr. Rosensteel (33,276 of which were vested as of June 30, 1996), 49,914
shares held by Mr. LeFevre (29,116 of which were then vested); and 19,966 shares
held by Mr. Reinhart (12,478 of which were then vested). No additional options
will be granted under the 1990 Plan. Upon a change of control of Liberty
Financial (defined as the transfer of 50% or more of the equity ownership of
Liberty Financial other than solely pursuant to a public offering in which
securities are issued for cash), all non-vested options will automatically vest
and Liberty Financial's Compensation and Stock Option Plan committee may, in its
discretion, elect to cancel all outstanding options by paying the holders
thereof an amount equal to the difference between the formula value of the
Common Stock (as defined in the 1990 Plan) and the exercise price of the
options.
COMPENSATION OF DIRECTORS
Directors of Keyport who are also employees receive no compensation in
addition to their compensation as employees of Keyport. The three outside
directors (Lippitt, Ballou, and Nyman) receive $2,000 per quarter, plus $500 for
each meeting of the Board of Directors and $200 for each Audit Committee meeting
that they attend. Three meetings of the Board of Directors and two meetings of
the Audit Committee are scheduled annually.
LEGAL PROCEEDINGS
Keyport is engaged in various kinds of routine litigation which in its
judgment is not of material importance in relation to the total capital and
surplus of Keyport. There are no legal proceedings to which KFSC is a party.
EXPERTS
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<PAGE>
The consolidated financial statements of Keyport Life Insurance Company as
of December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995 and the related financial statement Schedule as of
December 31, 1995, have been included herein in reliance on the report of
KPMG Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
KPMG Peat Marwick LLP ("KPMG") has served as the independent accountants
for Liberty Financial Companies, Inc. ("LFC") and its audited subsidiaries,
including Keyport Life Insurance Company ("Keyport"). On March 13, 1996,
following a competitive proposal process, the Audit Committee of LFC's Board of
Directors terminated KPMG's appointment as independent accountants for LFC and
its audited subsidiaries, including Keyport, effective March 14, 1996, and, on
April 9, 1996, approved the engagement of Ernst & Young LLP as the independent
accountants for LFC and its audited subsidiaries, including Keyport, for the
fiscal year ending December 31, 1996. On April 11, 1996, Keyport's Board of
Directors approved such engagement of Ernst & Young LLP.
In connection with the audits of Keyport's financial statements for the two
fiscal years ended December 31, 1995, and the subsequent interim period through
March 14, 1996, there were no disagreements between Keyport and KPMG on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to KPMG's
satisfaction would have caused KPMG to make reference to the subject matter of
the disagreement in connection with KPMG's audit reports on the financial
statements of Keyport. In addition, the audit reports of KPMG on the financial
statements of Keyport as of and for the two fiscal years ended December 31, 1995
did not contain any adverse opinion or disclaimer of opinion, nor were such
reports qualified or modified as to uncertainty, audit scope, or accounting
principles.
LEGAL MATTERS
Legal matters with respect to the organization of Keyport, its authority to
issue annuity contracts and the validity of the Certificates, as well as matters
relating to the Federal securities laws, have been passed upon by Bernard R.
Beckerlegge, General Counsel. In addition, certain matters relating to the
Federal securities laws have been passed upon by Katten Muchin & Zavis as
Special Counsel for Keyport.
FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, that Keyport's management
considers necessary for a fair presentation of Keyport's financial position and
results of operations as of and for the interim periods presented. Keyport
believes the disclosures in these consolidated financial statements are adequate
to present fairly the information contained herein. The results of operations
for the six months ended June 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
There were no material changes or significant events affecting the
financial statements as of, and for the three and six month periods ended June
30, 1996. Income before federal income taxes of $60.0 million for the
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<PAGE>
six months ended June 30, 1996 increased 13.6% compared to $52.8 million for the
same period in 1995. The increase was primarily due to decreased operating
expense and decreased net realized investment losses. The decrease in operating
expenses in the 1996 period was primarily attributable to lower consulting fees.
The higher net realized investment losses in the 1995 period were primarily due
to investments sold on the basis of relative value.
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<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
June 30, December 31,
1996 1995
ASSETS
Assets:
Fixed maturities (amortized cost:
1996-$9,373,620; 1995-$9,227,834) $ 9,451,230 $ 9,535,948
Equity securities (cost: 1996-$19,881;
1995-$17,521) 36,363 25,214
Mortgage loans 70,521 74,505
Policy loans 511,861 498,326
Other invested assets 82,334 10,748
Cash and cash equivalents 1,043,164 777,384
Accrued investment income 132,275 132,856
Deferred policy acquisition costs 304,221 179,672
Value of insurance in force 65,073 43,939
Intangible assets 19,750 20,314
Federal income taxes recoverable 9,209 9,205
Other assets 16,756 11,859
Separate account assets 1,013,051 959,224
Total assets $12,755,808 $12,279,194
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $10,389,378 $10,084,392
Current federal income taxes 3,283 7,666
Deferred federal income taxes 18,529 32,823
Payable for investments purchased
and loaned 454,329 317,715
Guaranty association fees 17,800 21,940
Other liabilities 24,161 23,221
Separate account liabilities 955,587 889,106
Total liabilities 11,863,067 11,376,863
Stockholder's equity:
Common stock, $1.25 par value;
authorized 8,000 shares; issued
and outstanding 2,412 shares 3,015 3,015
Additional paid-in capital 505,933 505,933
Net unrealized investment gains (losses) 36,551 85,772
Retained earnings 347,242 307,611
Total stockholder's equity 892,741 902,331
$12,755,808 $12,279,194
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<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
Unaudited
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
Revenues:
Net investment income $382,899 $373,322 $192,384 $189,538
Investment management revenues 1,233 806 644 416
Insurance revenues 14,542 14,424 7,362 7,503
Net realized investment gains
(losses) (436) (6,372) (2,487) (719)
398,238 382,180 197,903 196,738
Expenses:
Interest credited to policyholders 281,107 270,186 140,210 139,268
Operating expenses 18,615 20,531 8,521 9,290
Policy benefits 1,987 1,796 821 988
Commission expense 3,434 3,282 1,703 1,761
Amortization of deferred policy 28,973 26,161 14,865 12,367
Amortization of value of insurance 3,568 6,854 1,850 3,330
Amortization of intangible assets 564 566 282 283
338,248 329,376 168,252 167,287
Income before federal income taxes 59,990 52,804 29,651 29,451
Federal income tax expense 20,359 18,754 9,708 10,777
Net income $ 39,631 $ 34,050 $ 19,943 $ 18,674
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KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Six months ended
June 30
1996 1995
Cash flows from operating activities:
Net income $ 39,631 $ 34,050
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to policyholders 281,107 270,186
Net realized investment (gains) losses 436 6,373
Amortization of value of insurance in force
and intangible assets 4,132 7,418
Net amortization (accretion) on investments 2,159 4,669
Change in deferred policy acquisition costs (9,830) (24,725)
Change in current and deferred federal
federal income taxes 7,830 (2,197)
Change in guaranty association fees (4,140) (58)
Net change in other assets and liabilities (2,857) (43,548)
Total adjustments 278,837 218,118
Net cash provided by
operating activities 318,468 252,168
Cash flow from investing activities:
Investments purchased - held to maturity - (117,576)
Investments purchased - available for sale (1,315,854) (1,274,799)
Investments sold - held to maturity - 14,929
Investments sold - available for sale 478,675 183,619
Investments matured - held to maturity - 145,275
Investments matured - available for sale 679,987 426,978
Increase in policy loans (13,535) (19,558)
Decrease in mortgage loans 3,984 3,797
Net cash used in investing (166,743) (637,335)
Cash flows from financing activities:
Withdrawals from policyholder accounts (548,205) (480,564)
Deposits to policyholder accounts 572,084 776,716
Securities lending 90,176 564,421
Net cash provided by (used in
financing activities 114,055 860,573
Change in cash and cash equivalents 265,780 475,406
Cash and cash equivalents at beginning of year 777,384 684,618
Cash and cash equivalents at end of year $1,043,164 $1,160,024
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<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Unaudited
Net
Unrealized
Additional Investment
Common Paid-In Gains Retained
Stock Capital (Losses) Earnings Total
Balance,
December 31, 1995 $3,015 $505,933 $ 85,772 $307,611 $902,331
Net income 39,631 39,631
Change in net unrealized
investment gains (49,221) (49,221)
Balance, June 30, 1996 $3,015 $505,933 $ 36,551 $347,242 $892,741
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<PAGE>
Independent Auditors' Report
The Board of Directors
Keyport Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Keyport Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Keyport Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 2(b) to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, effective January 1, 1994.
February 16, 1996 /s/KPMG Peat Marwick LLP
------------------------
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<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Assets December 31,
------ 1995 1994
---- ----
<S> <C> <C>
Cash and investments:
Fixed maturities available for sale (amortized
cost: 1995 - $9,227,834; 1994 - $6,795,065) $ 9,535,948 $ 6,509,815
Fixed maturities held to maturity (fair value:
1995 - 0; 1994 - $1,442,665) - 1,448,680
Equity securities (cost: 1995-$17,521; 1994-$13,627) 25,214 12,941
Mortgage loans 74,505 129,452
Policy loans 498,326 477,293
Other invested assets 10,748 11,994
Cash and cash equivalents 777,384 684,618
Total cash and investments 10,922,125 9,274,793
Accrued investment income 132,856 111,936
Deferred policy acquisition costs 179,672 439,232
Value of insurance in force 43,939 139,221
Deferred federal income taxes - 42,361
Intangible assets 20,314 21,444
Federal income taxes recoverable 9,205 4,911
Other assets 11,859 10,772
Separate account assets 959,224 828,934
Total assets $12,279,194 $10,873,604
Liabilities and Stockholder's Equity
Policy liabilities:
Policyholder account balances $10,073,806 $ 9,333,755
Other policyholders' funds 10,586 10,289
Total policy liabilities 10,084,392 9,344,044
Current federal income taxes 7,666 -
Deferred federal income taxes 32,823 -
Payable for investments purchased and loaned 317,715 -
Guaranty association fees 21,940 24,688
Other liabilities 23,221 57,978
Separate account liabilities 889,106 764,409
Total liabilities 11,376,863 10,191,119
Stockholder's equity:
Common stock, $1.25 par value; authorized 8,000
shares; issued and outstanding 2,412 shares 3,015 3,015
Additional paid-in capital 505,933 505,933
Net unrealized investment gains (losses) 85,772 (64,464)
Retained earnings 307,611 238,001
Total stockholder's equity 902,331 682,485
Total liabilities and stockholder's equity $12,279,194 $10,873,604
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Consolidated Income Statements
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income $757,361 $689,575 $669,667
Insurance revenues 29,767 25,273 18,158
Net realized investment gains (losses) (3,958) (8,220) 11,403
Total revenues 783,170 706,628 699,228
Benefits and expenses:
Interest credited to policyholders 557,156 481,926 504,205
Policy benefits 4,448 4,838 3,113
Operating expenses 42,475 47,095 36,983
Guaranty association expenses 2,000 7,200 3,714
Amortization of deferred policy acquisition costs 58,541 52,174 41,003
Amortization of value of insurance in force 9,479 16,989 22,375
Amortization of intangible assets 1,130 1,130 1,130
Total benefits and expenses 675,229 611,352 612,523
Income before federal income taxes 107,941 95,276 86,705
Federal income tax expense 38,331 32,051 28,710
Net income $ 69,610 $ 63,225 $ 57,995
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Consolidated Statements of Stockholder's Equity
(in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Investment
Common Paid-In Gains Retained
Stock Capital (Losses) Earnings Total
----- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $1,508 $430,933 $ 5,687 $118,288 $556,416
Net income 57,995 57,995
Capital contribution by parent 75,000 75,000
Change in net unrealized
investment gains (losses) (5,141) (5,141)
Balance, December 31, 1993 1,508 505,933 546 176,283 684,270
Net income 63,225 63,225
Common stock dividend 1,507 (1,507) -
(1,206 shares)
Change in net unrealized
investment gains (losses) (65,010) (65,010)
Balance, December 31, 1994 3,015 505,933 (64,464) 238,001 682,485
Net income 69,610 69,610
Change in net unrealized
investment gains (losses) 150,236 150,236
Balance, December 31, 1995 $3,015 $ 505,933 $ 85,772 $307,611 $902,331
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 69,610 $ 63,225 $ 57,995
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to policyholders 557,156 478,797 501,073
Net realized investment losses (gains) 3,958 8,220 (11,403)
Amortization of value of insurance in force
and intangible assets 10,609 18,120 23,505
Net amortization (accretion) on investments 9,688 12,215 (3,132)
Change in deferred policy acquisition costs (24,630) (38,852) (50,531)
Change in current and deferred federal
income taxes 1,953 7,731 10,988
Change in guaranty association fees (2,748) 140 (3,669)
Net change in other assets and liabilities (61,058) (13,729) (102)
Total adjustments 494,928 472,642 466,729
Net cash provided by operating
activities 564,538 535,867 524,724
Cash flows from investing activities:
Investments purchased - held to maturity - (277,626) (2,674,315)
Investments purchased - available for sale (2,851,013) (2,624,493) -
Investments sold - held to maturity 14,930 10,637 97,816
Investments sold - available for sale 605,197 950,885 387,305
Investments matured - held to maturity 317,773 576,021 1,195,083
Investments matured - available for sale 906,522 854,441 758,279
Increase in policy loans (21,033) (35,143) (38,661)
Decrease in mortgage loans 54,947 26,520 3,416
Acquisition of subsidiary, net of cash acquired - (961) (24,831)
Net cash used in investing activities (972,677) (519,719) (295,908)
Cash flows from financing activities:
Withdrawals from policyholder accounts (933,785) (1,034,464) (1,295,617)
Deposits to policyholder accounts 1,116,975 1,202,076 856,339
Capital contribution by parent - - 75,000
Securities lending 317,715 - -
Net cash provided by (used in)
financing activities 500,905 167,612 (364,278)
Change in cash and cash equivalents 92,766 183,760 (135,462)
Cash and cash equivalents at beginning of year 684,618 500,858 636,320
Cash and cash equivalents at end of year $ 777,384 $ 684,618 $ 500,858
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(in thousands)
(1) Organization
Keyport Life Insurance Company offers a diversified line of fixed and
variable annuity products designed to serve the growing retirement savings
market. These annuity products primarily consist of single premium deferred
and variable annuities that are sold through a wide ranging network of banks,
agents, and securities dealers.
The consolidated financial statements include Keyport Life Insurance Company
and its wholly owned subsidiaries, Independence Life and Annuity Company
("Independence Life"), Keyport Advisory Services Corporation, and Keyport
Financial Services Corporation (collectively, the "Company"). The Company is
a wholly owned subsidiary of Stein Roe Services Incorporated ("Stein Roe").
Stein Roe is a wholly owned subsidiary of Liberty Financial Companies,
Incorporated ("Liberty Financial") which is a majority-owned indirect subsidiary
of Liberty Mutual Insurance Company ("Liberty Mutual").
(2) Summary of Significant Accounting Policies
(a) Basis of Reporting and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could subsequently differ from
such estimates. All significant intercompany transactions and balances have
been eliminated.
(b) Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 , "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). SFAS 115 segregates fixed maturity
investments into three classifications: "held to maturity", "trading" and
"available for sale." Securities may be designated as held to maturity only
if there is the positive intent and ability to hold these securities to
maturity. Held to maturity securities are carried at amortized cost. Securities
purchased for short-term resale are classified as trading and are carried at
fair value. Unrealized gains and losses on trading account securities are
recognized in income. Fixed maturity investments are classified as available for
sale if they might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, general liquidity needs, or other
factors. Available for sale securities are carried at fair value and unrealized
gains and losses (net of related adjustments to deferred policy acquisition
costs, value of insurance in force and deferred income taxes) are recorded
directly to stockholder's equity. Equity
75
<PAGE>
securities are classified as available for sale and are carried at fair value.
Unrealized gains and losses on equity securities are credited or charged
directly to stockholder's equity net of applicable deferred income taxes.
Accordingly, as of January 1, 1994, the Company reclassified certain fixed
maturity investments from the held to maturity to the available for sale
category to conform to the classification criteria prescribed in SFAS 115.
This had the effect of recording a net unrealized gain of $41,614 directly
to stockholder's equity.
As of December 31, 1995, pursuant to a Guide to Implementation of SFAS 115
issued by the Financial Accounting Standards Board in November 1995, the
Company made a one-time reclassification from fixed maturities held to
maturity to fixed maturities available for sale. This had the effect of
recording a net unrealized gain of $13,867 directly to stockholder's equity.
The Company enters into dollar roll transactions to enhance the yield of its
mortgage backed portfolio. Dollar roll transactions represent a one month
reverse repurchase agreement involving mortgage backed securities, frequently
those issued by a U.S. Government Agency. Dollar roll transactions under
which substantially the same securities are received at the end of the
repurchase period are accounted for as financing arrangements. Accordingly,
both the collateral and repurchase liability are reflected on the balance sheet
and the transaction fee is recorded over the period of the agreement. As of
December 31, 1995, the Company was engaged in one dollar roll agreement
classified as a financing arrangement involving a FNMA mortgage backed security
with market value of $87,198. The Company did not enter into dollar roll
agreements during 1994.
The Company from time to time engages in securities lending under which it
lends certain U.S. Government and corporate bonds to approved counterparties
to enhance the yield of its bond portfolio. The carrying values of the loaned
securities are unaffected by the transaction, and the lending fee is recorded
during the period the securities are loaned. The Company records the
collateral received for the security lending transaction as an asset and its
obligation to return the collateral at the end of the transaction as a
liability. As of December 31, 1995, the Company had recorded an asset, and a
corresponding liability of $230,517 for cash pledged as collateral. The
Company did not enter into any securities lending transactions in 1994.
Fixed maturities and mortgage loans with premiums and discounts are amortized
using the interest method. Unamortized premiums and discounts on mortgage
backed securities are amortized using the interest method over the estimated
remaining term of the securities, adjusted for anticipated prepayments.
Policy loans are carried at the unpaid principal balance plus accrued
interest. Cash and cash equivalents are carried at cost, which approximates
market.
Realized investment gains and losses are calculated on a first-in, first-out
basis. For each investment security where a decline in value is determined to
be other than temporary, the Company's policy is to write down the investment
security to fair value with the charge to realized investment losses. Sales
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<PAGE>
of securities supporting the Company's single premium deferred annuities and
single premium whole life products result in adjustments to the amortization
of the deferred policy acquisition costs and the value of insurance in force.
The increase or decrease in amortization relating to such adjustments is
included in realized investment gains and losses to reflect the acceleration or
delay in the incidence of the estimated gross profits.
(c) Derivative Financial Instruments
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" ("SFAS 119"). SFAS 119
requires specific disclosures about derivative financial instruments such as
forward, swap and option contracts and requires distinguishing between
financial instruments held or issued for trading purposes and financial
instruments held or issued for purposes other than trading.
As part of the Company's overall risk management policy, the Company uses
interest rate swaps and interest rate caps. Interest rate swaps are used to
reduce the risk in a rising interest rate environment by providing additional
investment income to cover higher competitive credited rates to policy-
holders to reduce the invested asset duration, and to better match the
interest rates earned on invested assets with those interest rates credited
to policyholders. Interest rate swaps are considered synthetic alterations
since the objective of the swaps is to change the characteristics of the
underlying invested assets to reduce the impact of rising interest rates. Since
interest rate swaps are designated as synthetic alterations of securities
available for sale, interest rate swaps are carried at fair value for those
securities, and the unrealized gain or loss is included in stockholder's equity.
The net differential to be paid or received on interest rate swaps is
recorded monthly in investment income as interest rates change. From time to
time, swap positions may be terminated. If the terminated swap was accounted
for as a hedge, realized gains or losses are amortized over the remaining
life of the swap. Conversely, if the terminated swap was not accounted for as
a hedge, or the assets and liabilities that were altered no longer exist, the
swap position is marked to market, and realized gains or losses are immediately
recognized in income. The Company is exposed to potential credit loss in the
event of nonperformance by the counterparty to the interest rate swap agreements
with respect to only the net differential payments.
Interest rate caps are used to minimize exposure to rising interest rates.
The Company receives payments when the indexed rate exceeds the stated strike
rate. The cost of interest rate caps is amortized on a straight-line basis
over the period to maturity. Since interest rate caps are designed as
synthetic alterations of securities available for sale, interest rate caps
are carried at fair value and the unrealized gain or loss is included in
stockholder's equity.
The Company also utilizes derivative financial instruments to replicate
positions in a trading portfolio of pass-through mortgage backed securities.
As a result, these derivative financial instruments are classified as trading
instruments and are recorded at fair value. Realized and unrealized changes
in fair value are recognized in realized investment gains and losses.
77
<PAGE>
Interest income arising from these trading instruments is included in net
investment income.
(d) Recognition of Insurance Revenues and Policy Benefits
Revenues from single premium whole life policies and single premium deferred
annuities include mortality charges, surrender charges, policy fees and
contract fees and are recognized when assessed. Policyholder account balances
consist of deposits received plus credited interest, less accumulated policy-
holder charges, assessments, and withdrawals. Policy benefits that are
charged to expenses include benefit claims incurred in the period in excess
of related policy account balances. Interest crediting rates ranged from 3.60%
to 8.35%, 3.75% to 8.50%, and 3.75% to 8.90% at December 31, 1995, 1994, and
1993, respectively.
(e) Deferred Policy Acquisition Costs and Value of Insurance in Force
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. These
costs are deferred to the extent they are deemed recoverable from future
gross profits. Such costs include commissions, costs of policy issuance and
underwriting, and variable agency expenses. Costs deferred are amortized in
relation to the present value of estimated gross profits from mortality,
investment and expense margins. Amortization of such cost is adjusted to
reflect the effect of differences between original assumptions and actual
experience.
Value of insurance in force represents the actuarially-determined present
value of projected future profits from policies in force at the date of their
acquisition. This amount is amortized in proportion to the projected
emergence of profits over periods not exceeding fifteen years for annuities
and twenty-five years for life insurance.
Deferred policy acquisition costs and value of insurance in force are
adjusted to reflect the amounts associated with realized and unrealized
investment gains and losses pertaining to single premium deferred annuities
and single premium whole life products.
(f) Intangible Assets
Intangible assets consist primarily of goodwill. Goodwill is the excess of
the purchase price over the fair value of the net assets acquired by Liberty
Mutual and is amortized on a straight-line basis over twenty-five years.
(g) Separate Account
Separate account assets, which are carried at fair value, consist principally
of investments in mutual funds and are included as a separate caption in the
consolidated balance sheets. Investment income and changes in asset values
are fully allocated to variable annuity and variable life policyholders and,
therefore, do not affect the operating results of the Company. The Company
provides administrative services and bears the mortality risk related to
these contracts. Fees earned by the Company related to these contracts were
$14,646, $13,694 and $8,489, for the years ended December 31, 1995, 1994 and
1993, respectively. As of December 31, 1995 and 1994, the Company also
classified $72,533 and $64,962, respectively, of its investments in certain
mutual funds sponsored by the Company and its affiliates as separate account
assets.
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<PAGE>
(h) Federal Income Taxes
Beginning in 1994, the Company is included in Liberty Mutual's consolidated
tax return. The Company calculates its consolidated income tax liability as
if it filed its own consolidated federal income tax return.
(i) Cash and Cash Equivalents
Cash and cash equivalents include short-term investments which have an
original maturity of three months or less from the time of purchase.
(j) Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statement amounts to conform to the current year presentation.
(3) Acquisition
On October 1, 1993, the Company acquired the common stock of Crown America
Life Insurance Company (Crown America), a Michigan insurance company, for
$27,877. The acquisition was accounted for as a purchase and, accordingly,
operating results are included in the accompanying consolidated financial
statements from date of acquisition. In connection with the acquisition, the
Company acquired assets with a fair value of $185,735 and assumed liabilities
of $157,858.
On February 22, 1994, the acquisition was completed with the contingent
purchase price payment of $1,479, which increased the value of insurance in
force.
On December 29, 1993, Crown America was redomesticated to the state of Rhode
Island and, on January 10, 1994, the name was changed to Keyport America Life
Insurance Company. On July 19, 1995, the name was changed to Independence
Life and Annuity Company.
(4) Investments
(a) Fixed Maturities
Fair values of publicly-traded securities are determined using values
reported by an independent pricing service. Fair values of conventional
mortgage backed securities not actively traded in a liquid market are
obtained through broker-dealer quotations. Fair values of private placement
bonds are determined by obtaining market indications from various
broker-dealers. The amortized cost and fair values of investments in fixed
maturities at December 31, 1995 and 1994 were as follows:
December 31,1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U.S. Treasury securities $ 360,157 $ 9,020 $ (209) $ 368,968
Mortgage backed securities of
U.S. government
corporations and agencies 1,585,538 58,795 (5,250) 1,639,083
Obligations of states and
political subdivisions 26,688 1,324 - 28,012
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Debt securities issued by
foreign governments 57,446 4,258 - 61,704
Corporate securities 3,479,584 224,332 (7,309) 3,696,607
Other mortgage backed securities 1,951,480 66,530 (71,754) 1,946,256
Asset backed securities 1,543,891 29,823 (1,446) 1,572,268
Senior secured loans 223,050 - - 223,050
Total fixed maturities
available for sale $9,227,834 $394,082 $(85,968) $9,535,948
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Mortgaged backed securities of
U.S. Government
corporations and agencies $ 206,569 $ 8,683 $ (18) $ 215,234
Obligations of states and
political subdivisions 21,452 277 (28) 21,701
Corporate Securities 843,669 14,564 (17,005) 841,228
Other mortgage backed securities 79,164 44 (3,385) 75,823
Asset backed securities 297,826 88 (9,235) 288,679
Total fixed maturities
held to maturity $1,448,680 $23,656 $ (29,671) $1,442,665
Available for sale:
U.S. Treasury securities $ 271,700 $ 2 $ (8,390) $ 263,312
Mortgaged backed securities of
U.S. Government
corporations and agencies 1,238,925 1,244 (76,651) 1,163,518
Obligations of states and
political subdivisions 37,718 433 - 38,151
Debt securities issued by
foreign governments 82,608 1,049 (4,079) 79,578
Corporate securities 2,607,712 17,951 (116,077) 2,509,586
Other mortgage backed securities 1,186,515 14,577 (70,250) 1,130,842
Asset backed securities 1,123,803 654 (45,713) 1,078,744
Senior secured loans 246,084 - - 246,084
Total fixed maturities
available for sale $6,795,065 $35,910 $(321,160) $6,509,815
At December 31, 1995 and 1994, bonds with an amortized cost of $7,710 and
$7,657, respectively, were on deposit with regulatory authorities.
(b) Contractual Maturities
The amortized cost and fair value of fixed maturities for the various
categories at December 31, 1995, by contractual maturity, are set forth
below. Expected maturities may differ from contractual maturities as
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borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties.
December 31, 1995
Amortized Fair
Cost Value
Available for sale:
Due in one year or less $ 254,299 $ 256,055
Due after one year through five years 1,503,507 1,564,132
Due after five years through ten years 1,838,679 1,953,542
Due after ten years 550,440 604,612
4,146,925 4,378,341
Mortgage and asset
backed securities 5,080,909 5,157,607
Total fixed maturities
available for sale $9,227,834 $9,535,948
(c) Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) as of December 31, 1995 and 1994
were as follows:
December 31
1995 1994
Fixed maturities available for sale:
Gross unrealized gains $ 394,082 $ 35,910
Gross unrealized losses (85,968) (321,160)
308,114 (285,250)
Adjustments for:
Deferred acquisition costs (151,351) 135,059
Value of insurance in force (32,459) 53,344
Total fixed maturities 124,304 (96,847)
Equity securities and investments in separate account:
Gross unrealized gains 16,927 1,932
Gross unrealized losses (1,980) (4,261)
Total equity securities 14,947 (2,329)
Interest rate caps (7,294) -
131,957 (99,176)
Deferred federal income taxes (46,185) 34,712
Net unrealized investment gains (losses) $ 85,772 $ (64,464)
(d) Net Investment Income
Net investment income is summarized as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities $683,429 $635,947 $619,847
Equity securities 4,807 2,132 2,368
Mortgage loans 12,444 15,416 17,252
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Policy loans 28,485 26,295 22,766
Cash and cash equivalents 41,643 20,727 18,551
Gross investment income 770,808 700,517 680,784
Investment expenses (13,447) (10,942) (11,117)
Net investment income $757,361 $689,575 $669,667
As of December 31, 1994, the carrying value of fixed maturity investments
that were non-income producing for the preceding twelve months was $4,967.
There were no non-income producing fixed maturity investments as of December
31, 1995.
(e) Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities - held to maturity
Gross gains $ 1,306 $ 3,493 $ 31,594
Gross losses (64) (755) (3,070)
Other than temporary declines - (7,904) -
Provisions for possible investment losses - - (16,609)
Fixed maturities - available for sale
Gross gains 8,156 26,043 7,097
Gross losses (15,982) (26,831) (6,311)
Other than temporary declines - (3,610) -
Provisions for possible investment losses - - 7,487
Equity securities 1,279 (845) 11,228
Interest rate swaps (860) (28) (16,193)
Interest rate caps - - (6,082)
Other (13) (809) 1,412
Gross realized investment gains (losses) (6,178) (11,246) 10,553
Amortization adjustments:
Deferred policy acquisition costs 2,220 2,675 785
Value of insurance in force - 351 65
Net realized gains (losses) $ (3,958) $ (8,220) $11,403
Proceeds from sales of fixed maturities were as follows:
Year Ended December 31,
1995 1994 1993
Fixed maturities - available for sale $565,366 $927,779 $313,568
Fixed maturities - held to maturity 14,930 10,637 97,816
Total proceeds $580,296 $938,416 $411,384
The sale of fixed maturities held to maturity during 1995 and 1994 relate to
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certain securities, with an amortized cost of $14,994 and $10,630, respectively,
which were sold specifically due to a significant deterioration in the issuer's
creditworthiness.
(f) Concentration of Investments
Investments in a single entity (all of which are fully collateralized and
guaranteed by an agency or agencies of the U.S. Government) in excess of ten
percent of total stockholder's equity as of December 31, 1995 and 1994 were
as follows:
Carrying Value at
December 31,
1995 1994
Mortgage backed securities
FNMA Pool #303075 $134,884 $125,212
Morgan Stanley CMO (33-5) 108,051 101,832
FNMA Pool #303074 105,832 98,470
Investments in fixed maturities are diversified among more than one hundred
industries. Significant concentrations of credit risk are classified as
follows:
Carrying Value at
December 31,
1995 1994
Financial services $547,872 $539,537
Telecommunications 324,029 276,559
Banks 323,579 247,514
Electrical services 271,822 437,339
Oil and gas 261,161 274,026
Paper products 205,889 146,472
Retail 197,064 247,874
Transportation equipment 168,588 146,593
Credit institutions - 173,565
Food and beverage - 151,758
(g) Quality Ratings
The carrying values of publicly traded and privately placed fixed maturities
at December 31, 1995 represented by each quality ratings category were as
follows:
Carrying Value at December 31, 1995
Publicly Privately
Traded Placed Total
Investment grade:
U.S. government $ 368,969 - $ 368,969
Class 1 4,996,275 $1,480,089 6,476,364
Class 2 982,096 896,673 1,878,769
Total Investment grade 6,347,340 2,376,762 8,724,102
Below investment grade:
Class 3 317,131 147,517 464,648
Class 4 201,718 123,032 324,750
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Class 5 - 22,448 22,448
Total below investment grade 518,849 292,997 811,846
Total fixed maturities $6,866,189 $2,669,759 $9,535,948
The Company held no securities rated Class 6 at December 31, 1995.
Securities that are rated class 1 or 2 by the Securities Valuation Office of
the National Association of Insurance Commissioners (NAIC), or, if not so rated,
securities that are rated "BBB-" or above by S&P, or "Baa3" or above by Moody's
(using the lower of the S&P or Moody's rating) are considered "investment grade"
securities. Securities included in the U.S. government category in the preceding
table are those as defined by the NAIC.
The distribution of fixed maturities quality ratings were as follows:
December 31,
1995 1994
Class 1 (including U.S. government) 71.8% 72.3%
Class 2 19.7% 19.9%
Class 3 4.9% 5.6%
Class 4 3.4% 2.0%
Class 5 0.2% 0.2%
(h) Derivative Financial Instruments
The Company's primary objective in acquiring certain derivative financial
instruments is the management of interest rate risk. Interest rate risk results
from a mismatch in the timing and amount of invested asset and policyholder
liability cash flows. The Company seeks to manage this risk through various
asset/liability management strategies such as the setting of renewal rates and
by investment portfolio actions designed to address the interest rate
sensitivity of asset cash flows in relation to liability cash flows. Portfolio
actions used to manage interest rate risk include managing the effective
duration of portfolio securities and utilizing interest rate swaps and caps.
Interest rate swaps
The Company uses a combination of three distinct classes of interest rate swaps
to reduce interest rate risk. The following table summarizes the categories of
swaps used, their notional amounts, their weighted average interest rates as of
the reporting period date, and their effects on the consolidated balance sheets
and statements of income. The majority of swaps mature beginning in 1999
through 2001. The fair values of the interest rate swaps are primarily obtained
from dealer quotes. These values represent the estimated amounts the Company
would receive or pay to terminate the contracts, taking into account current
interest rates and, when appropriate, the current creditworthiness of the
counterparties.
December 31,
1995 1994
Interest rate swaps:
(1) Pay fixed, receive variable rate - notional amount $1,975,000 $775,000
Average pay rate 6.79% 7.19%
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Average receive rate 5.88% 7.61%
Amount included in net investment income $ (2,751) $ (1,213)
Fair value $ (64,124) $ 27,587
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale $ (64,124) $ 27,587
Deferred loss - included in fixed maturities
available for sale $ (3,662) -
(2) Pay variable, receive variable rate - notional amount - $300,000
Average pay rate - 5.85%
Average receive rate - 6.42%
Amount included in net investment income $ (1,251) $ 6,781
Fair value - $(14,550)
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale - $(14,550)
Deferred loss - included in fixed maturities
available for sale $ (6,952) -
(3) Spread lock swap - notional amount - $150,000
Seven year swap spread - 0.34%
Amount included in net investment income $ 746 -
Fair value - $ 731
Carrying value - unrealized gain (loss) included in
fixed maturities available for sale - $ 731
1) The Company had thirty-six interest rate swap contracts with a notional
amount $1,975,000 and twenty contracts with a notional amount of $775,000 as of
December 31, 1995 and 1994, respectively, on which it pays a fixed rate of
interest and receives variable rates based on the two, five, and ten year
"constant maturity" treasury or swap rate. The variable rates are reset to
current market levels at six month intervals. The objective of holding this
class of derivatives is to reduce invested asset duration and better match the
interest rates earned on medium to long-term (greater than two year maturity)
fixed rate assets with the interest rates credited to policyholders. The Company
has medium to long-term invested assets of approximately $8,624,000 and
$5,600,000 in 1995 and 1994, respectively. For the majority of new and existing
single premium deferred annuities, credited rates are reset annually. In
addition, rates credited on annuity policies are closely correlated with longer
term interest rates, e.g., five or ten year market interest rates. This
derivative class allows the Company to swap the fixed interest rates received on
the medium to long-term fixed rate invested assets for a variable rate which is
better correlated with rates credited to policyholders. This reduces the
Company's risk in rising interest rate environments by providing investment
income to cover higher competitive credited rates.
2) In 1994, the Company had six interest rate swaps contracts with a notional
amount of $300,000 on which it paid a variable rate of interest based on the six
month LIBOR and received a variable rate based on the ten year swap rate minus
1.50%. The objective of holding this class of derivatives is to better match
the interest rates earned on short term and floating rate assets with the
interest credited to policyholders. The Company had approximately $850,000 of
invested assets where the Company received interest income based on interest
rates closely correlated with
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short-term LIBOR. This derivative class allowed the Company to swap variable
interest income received on short term and floating rate assets for a variable
rate which was better correlated with rates credited to policyholders.
During 1995, certain swaps were sold as part of the Company's overall tax
planning strategy. The Company unwound one pay fixed and six pay variable
interest rate swap contracts with a notional amount of $350,000. In 1992 the
Company unwound 3 contracts with a notional amount of $300,000. The resulting
loss of $10,691 in 1995 and the gain of $16,230 in 1992 were deferred and
amortized over the original remaining terms of the contracts, in accordance with
hedge accounting. The following table summarizes the deferred gain (loss)
amounts included in the consolidated balance sheet and the expected recognition
of income by year:
December 31,
1995 1994
Amounts expected to be includes in net
invested income:
Within one year $ (1,861) $ 4,720
Within one to five years (7,862) 891
Total $ (9,723) $ 5,611
During 1993, the Company unwound interest rate swap contracts with a notional
amount of $200,000. The swaps were unwound when the associated liabilities no
longer existed, resulting in a loss of $16,193, which was recognized
immediately.
3) In 1993, the Company entered into a $150,000 notional "spread lock" that
terminated in 1995. The Company received/(paid) the present value of the
seven year swap if corporate spreads widened/(compressed) above/(below) the
seven year swap spread of 26 basis points based on the 7.5% U.S. Treasury note
maturing November 15, 2001. As the result of the termination, the Company
recognized income of $746 during 1995. The objective of this derivative was to
reduce the exposure of the Company's fixed maturity investments to widening
corporate spreads. The value of the Company's corporate bond portfolio decreased
as corporate spreads widened. The Company's spread lock swap increased in value
as spreads widened and thus reduced the Company's risk.
Interest rate caps
The Company had seven interest rate caps with a $450,000 notional amount and
six interest rate caps with a $400,000 notional amount as of December 31, 1995
and 1994, respectively. These contracts are indexed to either the three month
LIBOR, or to the two or five year constant maturity swap (CMS) rates. Under
these contracts, the Company has paid a premium for the right to receive
payments when the index rises above a predetermined level, i.e., the strike
rate. The objective of holding these derivatives is to reduce the Company's
risk in rising interest rate environments by providing additional investment
income to cover higher competitive interest credited rates on policy
liabilities.
The following table summarizes the interest rate caps, their notional amounts,
their weighted average strike and index rates as of the reporting
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period date, and their effects on the consolidated balance sheets and income
statements. The majority of caps mature in 1997 and 1999. The fair values of the
interest rate caps are obtained from dealer quotes. These values represent the
estimated amounts the Company would receive or pay to terminate the contracts,
taking into account current interest rates and, when appropriate, the current
credit-worthiness of the counterparties.
December 31,
1995 1994
Interest rate caps:
Index: three month LIBOR - notional amount $ 200,000 $200,000
Weighted average strike rate 8.50% 8.50%
Weighted average current index 5.63% 6.44%
Amortization expense included in net investment income $ (648) $ (649)
Fair value $ 46 $ 2,698
Carrying value $ 1,254 $ 1,903
Unrealized gain (loss) included in fixed maturities AFS $ (1,208) $ 795
Index: two year CMS - notional amount $ 150,000 $100,000
Weighted average strike rate 7.60% 7.25%
Weighted average current index 5.28% 7.91%
Amortization expense included in net investment income $ (1,305) $ (144)
Fair Value $ 1,001 $ 4,930
Carrying value $ 5,269 $ 5,001
Unrealized gain (loss) included in fixed maturities AFS $ (4,268) $ (71)
Index: five year CMS - notional amount $ 100,000 $100,000
Weighted average strike rate 8.26% 7.93%
Weighted average current index 5.66% 7.83%
Amortization expense included in net investment income $ (564) $ (38)
Fair value $ 414 $ 2,806
Carrying value $ 2,232 $ 2,800
Unrealized gain (loss) included in fixed maturities AFS $ (1,818) $ 6
During 1993, the Company sold interest rate caps with notional amounts of
$300,000, resulting in realized losses of $4,082. In 1993, due to an other than
temporary decline in value, the Company reduced the carrying value of the
remaining interest rate caps by $2,000 resulting in a realized loss.
Trading Instruments
During 1995, a $50,000 notional current coupon mortgage swap matured. The
Company paid a total return of a seven year swap to receive the total return of
a current coupon, thirty year FNMA pass-through mortgage backed security plus
.40%. The swap reset to market levels at two month intervals. The objective of
the strategy was to replicate a position in FNMA pass-throughs with an enhanced
return.
The following table summarizes the current coupon mortgage swap and the effects
on the consolidated balance sheets and income statements. The swap matured in
1995. The fair value represents the estimated amount the Company had paid to
terminate the contracts in 1994, taking into account current interest rates and,
when appropriate, the current creditworthiness of the counterparties.
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December 31,
1995 1994
Current coupon mortgage swap:
Notional amount - $ 50,000
Pay rate at reporting date - 8.05%
Receive rate at reporting date - 8.90%
Amount included in net investment income - $ 455
Amount included in net realized investment gains (losses) $ (860) $ (28)
Fair value - $ 153
(5) Fair Value of Financial Instruments
Estimated fair values of the Company's investments in fixed maturities, equity
securities and derivative financial instruments are set forth in Note 4.
Estimated fair values, methods and assumptions of the Company's other financial
instruments are set forth below.
(a) Mortgage loans
For purposes of estimating fair value, mortgage loans are segregated into
commercial real estate loans and residential mortgages. The fair value of
commercial real estate loans is calculated by discounting scheduled cash flows
through the stated maturity using estimated market rates. The estimated market
rate is based on the five year prime mortgage rate. The fair value of
residential mortgages is estimated by discounting contractual cash flows
adjusted for expected prepayments using an estimated discount rate. The discount
rate is an estimated market rate adjusted to reflect differences in servicing
costs, and the expected prepayments are estimated based upon Company experience.
Mortgage loans are summarized as follows:
December 31, 1995
Average Estimated Estimated
Carrying Historical Discount Fair
Value Yield Rate Value
Commercial real estate loans $ 39,500 9.4% 7.5% $ 40,351
Residential mortgages 35,005 13.6% 7.5% 39,346
December 31, 1994
Average Estimated Estimated
Carrying Historical Discount Fair
Value Yield Rate Value
Commercial real estate loans $ 87,000 9.4% 8.3% $ 89,795
Residential mortgages 42,452 13.7% 8.3% 49,003
The weighted average maturities (which may be different from the stated
maturities) for the cash flows used in deriving the estimated fair values for
commercial real estate loans and residential mortgages are 0.3 years and 2.3
years, respectively, at December 31, 1995, and 1.3 years and 2.7 years,
respectively, at December 31, 1994.
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(b) Policy Loans
The carrying value of policy loans approximates fair value at December 31, 1995
and 1994.
(c) Policy Liabilities
The fair value of deposit liabilities with no stated maturity is equal to the
amount payable on demand. The Company considers its policy liabilities to be
similar to deposit liabilities.
The carrying value and estimated fair value of the policy liabilities at
December 31, 1995 were $10,084,392 and $9,650,113, respectively. The carrying
value and estimated fair value of the policy liabilities at December 31, 1994
were $9,344,044 and $8,961,971, respectively.
(6) Employee Benefit Plans
Keyport employees and certain employees of Liberty Financial are eligible to
participate in the Liberty Financial Companies, Inc. Pension Plan (the "Plan").
Under the Plan, all employees are vested after five years of service. Benefits
are based on years of service, the employee's average pay for the highest five
consecutive years during the last ten years of employment, and the employee's
estimated social security retirement benefit. The Company's funding policy is to
contribute the minimum required employer contribution under the Employee
Retirement Income Security Act of 1974. The Company may, from time to time,
increase its employer contributions beyond the minimum amount, but within IRS
guidelines.
Changes in prior service costs are amortized over the expected future service
periods of active participants expected to receive benefits under the Plan as of
the date such costs are first recognized. Cumulative net actuarial gains and
losses in excess of a corridor amount are amortized over the expected future
service periods of active participants expected to receive benefits under the
Plan.
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated balance sheets. Substantially all of the Plans'
assets are invested in mutual funds sponsored by an affiliated company.
December 31,
1995 1994
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $6,082 and $4,197 $ 6,915 $ 5,025
Projected benefit obligation for service to date $ 9,185 $ 6,523
Plan assets at fair value (5,703) (4,459)
Projected benefit obligation in excess of Plan assets 3,482 2,064
Unrecognized net actuarial loss (1,740) (227)
Prior service cost not yet recognized in net periodic
pension cost (206) (660)
Accrued pension cost $ 1,536 $ 1,177
Year Ended December 31,
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1995 1994 1993
Pension cost includes the following components:
Service cost benefits earned during the period $ 541 $ 532 $ 392
Interest cost on projected benefit obligation 603 534 423
Actual return on Plan assets (999) 63 (185)
Net amortization and deferred amounts 600 (338) (88)
Net periodic pension cost $ 745 $ 791 $ 542
The assumptions used to develop the actuarial present value of the projected
benefit obligation, and the expected long-term rate of return on Plan assets are
as follows:
Years Ended December 31,
1995 1994 1993
Discount rate 7.25% 8.25% 7.25%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
Rate of increase in compensation levels 5.25% 5.25% 5.25%
The Company also provides a savings and investment plan with a matching savings
program containing several investment options for which substantially all
employees are eligible. In addition, the Company has a non-qualified deferred
compensation plan for certain employees.
(7) Deferred Policy Acquisition Costs and Value of Insurance In Force
The amounts of policy acquisition costs deferred and amortized are summarized
below:
Year Ended December 31,
1995 1994 1993
Balance, beginning of year $ 439,232 $ 262,646 $ 211,330
Additions:
Policy acquisition costs deferred during period:
Commissions 70,484 82,626 81,515
Other expenses 12,687 8,400 10,019
Total deferrals 83,171 91,026 91,534
Adjustments for unrealized investment losses - 135,059 -
Adjustments for realized investment losses 2,220 2,675 785
Total additions 85,391 228,760 92,319
Deductions:
Amortization expense (58,541) (52,174) (41,003)
Adjustments for unrealized investment gains (286,410) - -
Total deductions (344,951) (52,174) (41,003)
Balance, end of year $ 179,672 $ 439,232 $ 262,646
The value of insurance in force is summarized below:
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Year Ended December 31,
1995 1994 1993
Balance, beginning of year $ 139,221 $ 101,036 $ 115,824
Additions:
Value of insurance purchased - 1,479 7,522
Interest accrued on unamortized balance 4,578 4,994 6,124
Adjustments for unrealized investment losses - 53,344 -
Adjustments for realized investment losses - 351 65
Total additions 4,578 60,168 13,711
Deductions:
Amortization expense (14,057) (21,983) (28,499)
Adjustments for unrealized investment gains (85,803) - -
Total deductions (99,860) (21,983) (28,499)
Balance, end of year $ 43,939 $ 139,221 $ 101,036
Interest is accrued on the unamortized value of insurance in force balance at
the contract rate of 5.58%, 5.49% and 6.01% for the years ended December 31,
1995, 1994 and 1993, respectively.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1995, is as follows: 1996 - $7,747; 1997 - $8,169; 1998 - $7,218;
1999 - $6,648; 2000 - $6,199; and thereafter - $40,417.
(8) Federal Income Taxes
The provision for federal income taxes, computed under the asset and liability
method, is summarized as follows:
Year Ended December 31,
1995 1994 1993
Current $37,746 $18,118 $24,878
Deferred 585 13,933 3,832
Federal income tax expense $38,331 $32,051 $28,710
A reconciliation of federal income tax expense as recorded in the accompanying
consolidated statements of operations with expected federal income tax expense
computed at the applicable federal tax rate of 35% is as follows:
Year Ended December 31,
1995 1994 1993
Expected income tax expense $37,779 $33,347 $30,347
Increase (decrease) in income taxes resulting from:
Nontaxable investment income (1,737) (2,099) (2,189)
Amortization of goodwill 396 396 396
Other, net 1,893 407 156
Actual federal income tax expense $38,331 $32,051 $28,710
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In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted. This
law increased the Company's top marginal tax rate to 35% from 34% retroactive to
January 1, 1993. The effect of this change in tax rates on the Company's
consolidated financial statements was not material.
The components of deferred federal income taxes are as follows:
December 31,
1995 1994
Deferred tax assets:
Policy liabilities $ (140,971) $ (127,558)
Excess of tax over book bases - investments - (69,039)
Guaranty association fees (7,679) (8,642)
Net operating loss carryforward (3,041) (3,573)
Deferred gain on interest rate swap agreements (312) (1,964)
Other (1,039) (3,914)
Total deferred tax assets (153,042) (214,690)
Deferred tax liabilities:
Excess book over tax basis - investments 130,530 -
Deferred policy acquisition costs 44,468 137,909
Value of insurance inforce and intangibles 7,152 34,420
Deferred loss on interest rate swap agreements 3,715 -
Total deferred tax liabilities 185,865 172,329
Net deferred federal income tax liability (asset) $ 32,823 $ (42,361)
The Company believes that is more likely than not that the Company will realize
the benefits of the total deferred tax assets and, accordingly, believes that a
valuation allowance with respect to the realization of the total deferred tax
assets is not necessary. While there are no assurances that this benefit will be
realized, the Company expects that the net deductible amounts will be
recoverable through the reversal of taxable temporary differences, taxes paid in
the carryback period, tax planning strategies, and future expectations of
taxable income.
As of December 31, 1995 and 1994, the Company had approximately $8,688 and
$10,208 respectively, of net operating loss carryforwards relating to
Independence Life's operations prior to the acquisition by the Company. These
operating loss carryforwards are limited to use against future taxable profits
of Independence Life and expire through 2006.
Income taxes paid were $44,694, $28,811, and $17,722 for the years ended
December 31, 1995, 1994 and 1993, respectively.
(9) Statutory Information and Dividend Restrictions
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. In
converting to GAAP, adjustments to the Company's statutory amounts include: the
deferral and amortization of the costs of acquiring new policies, such as
commissions and other issue costs; the deferral of federal income taxes; the
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recognition as revenues of premiums for investment-type products for statutory
purposes but as deposits to policyholders' accounts under GAAP. In addition,
different assumptions are used in calculating policyholder liabilities,
different methods are used for calculating valuation allowances for statutory
and GAAP purposes, and the Company's realized gains and losses on fixed income
investments due to interest rate changes are not deferred for GAAP. Statutory
surplus and statutory net income are presented below:
Year Ended December 31,
1995 1994 1993
Statutory surplus $ 535,179 $ 546,440 $ 517,181
Statutory net income 25,689 24,871 65,315
The maximum amount of dividends which can be paid by the Company without prior
approval of the Insurance Commissioner of the State of Rhode Island is subject
to restrictions related to statutory surplus and statutory net gains from
operations. As of December 31, 1995, such restriction would limit dividends to
approximately $34,604. The Company has not paid dividends since the acquisition
by Liberty Mutual.
(10) Transactions with Affiliated Companies
As of December 31, 1995 and 1994, the Company had $39,500 and $87,000,
respectively, of commercial real estate loans of affiliated investment
partnerships. These mortgages are unconditionally guaranteed by Liberty Mutual.
The Company reimbursed Liberty Financial and certain affiliates for expenses
incurred on its behalf for the years ended December 31, 1995, 1994 and 1993.
These reimbursements included corporate general and administrative expenses,
corporate overhead, such as executive and legal support, and investment
management services. The total amounts reimbursed were $7,626, $7,345 and
$7,444 for the years ended December 31, 1995, 1994 and 1993, respectively.
During 1993 the Company received a $75,000 capital contribution from Liberty
Financial.
(11) Commitments and Contingencies
The Company leases data processing equipment, furniture and certain office
facilities from others under operating leases expiring in various years through
2001. Rental expense amounted to $3,221, $3,011 and $3,042 for the years ended
December 31, 1995, 1994 and 1993, respectively. For each of the next five years,
and in the aggregate, as of December 31, 1995, the following are the minimum
future rental payments under noncancelable operating leases having remaining
terms in excess of one year:
1996 $ 3,211
1997 2,641
1998 2,491
1999 2,347
2000 2,310
Thereafter 2,308
93
<PAGE>
Total minimum future rental payments $15,308
Under existing guaranty fund laws in all states, insurers licensed to do
business in those states can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. The actual amount of such
assessments will depend upon the final outcome of rehabilitation proceedings and
will be paid over several years. In 1995, 1994 and 1993, the Company was
assessed $8,143, $7,674 and $7,314, respectively. During 1995, 1994 and 1993,
the Company recorded $2,000, $7,200, and $3,714, respectively, of provisions for
state guaranty fund association expenses.
Based on information recently provided by the industry association with respect
to aggregate assessments related to known insolvencies, the range of future
assessments with respect to known insolvencies is estimated by the Company to be
between $16,500 and $25,500, taking into account the industry association
information as well as the Company's own estimate of its potential share of such
aggregate assessments. At December 31, 1995 and 1994, the reserve for such
assessments was $21,940 and $24,688, respectively.
The Company is contingently liable for certain structured settlements written by
a subsidiary of Liberty Mutual and assigned to Keyport Life. The Company
guarantees to the policyholder payment in the event of nonperformance. The loss
contingency related to the structured settlements is approximately $160,000. In
the opinion of management, the likelihood of loss is remote.
The Company is involved, from time to time, in litigation incidental to its
business. In the opinion of management, the resolution of such litigation is not
expected to have a material adverse effect on the Company's financial condition.
94
<PAGE>
APPENDIX A
95
<PAGE>
TERM INTEREST ILLUSTRATIONS
96
<PAGE>
Set forth below is an illustration of how interest will be credited to an
Interest Account during a ten-year Term and a Indexed Account during a five-year
Term. The illustration also applies to a shorter Term if values for
inapplicable years are ignored. For the purpose of this illustration certain
assumptions are made as indicated.
NOTE: THE FOLLOWING EXAMPLES ASSUME NO SURRENDERS OF ANY AMOUNT DURING THE
ENTIRE TERM. A MARKET VALUE ADJUSTMENT OR SURRENDER CHARGE MAY APPLY TO ANY
SUCH INTERIM SURRENDER. (SEE "SURRENDERS".) THE HYPOTHETICAL GUARANTEED
INTEREST RATE, GUARANTEED INTEREST RATE FACTORS, AND INCREASES IN THE INDEX ARE
ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE GUARANTEED INTEREST
RATES OR RATE FACTORS TO BE DECLARED UNDER A CERTIFICATE OR FUTURE CHANGES IN
THE INDEX. AS TO INTEREST ACCOUNTS, ACTUAL GUARANTEED INTEREST RATES DECLARED
FOR ANY GIVEN TERM MAY BE MORE OR LESS THAN THE 6% SHOWN. LIKEWISE, ACTUAL
GUARANTEED INTEREST RATE FACTORS DECLARED FOR INDEXED ACCOUNTS AT ANY GIVEN TIME
MAY BE HIGHER OR LOWER THAN THE FACTORS SHOWN IN THE ILLUSTRATION (PROVIDED THAT
THE FLOOR MAY NEVER BE LESS THAN 0). MOREOVER, THERE ARE NO GUARANTEES THAT THE
INDEX WILL INCREASE DURING THE COURSE OF A TERM OR THAT IT WILL BE HIGHER THAN
THE INDEX AT THE BEGINNING OF THE TERM OR AT ANY TIME DURING THE TERM WHEN INDEX
INCREASES ARE CREDITED.
A. Illustration of Interest Account
Beginning Account Value: $100,000
Guaranteed Interest Rate: 6% per year compounded annually
Account Value at End of Certificate Year:
-----------------------------------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
$106,000.00 $112,360.00 $119,101.60 $126,247.70 $133,822.56
YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10
$141,851.91 $150,363.03 $159,384.81 $168,947.90 $179,084.77
97
<PAGE>
B. Illustration of Index Account
The Certificate provides that the Index Increase to be credited on each Account
Anniversary is the sum of two parts:
Part 1 represents the proportionate credit for an increase (if any) in the Index
from its prior highest Account Anniversary value to its value on the current
Account Anniversary. The formula for Part 1 is:
A x ((C-B)/D) x (E/F) x G
Part 2 represents the proportionate credit for an increase(s) (if any) in the
Index occurring on a prior Account Anniversary(ies). The formula for Part 2 is:
A x ((B-D)/D) x (1/F) x G
where:
A is the Participation Rate for the Term
B is the highest Index value on all Account Anniversaries, including the
Index value at the beginning of the Term, but EXCLUDING the value of the
Index on the current Account Anniversary. The value of B can never be less
than the Minimum S&P Index Value nor greater than the Maximum S&P Index
Value. The Minimum S&P Index Value and the Maximum S&P Index Value are
defined below.
C is the value of the Index on the current Account Anniversary, not less
than B or greater than the Maximum S&P Index Value for the Term.
D is the Index value at the beginning of the Term
E is the number of completed Account Years in the Term
F is the total number of Account Years in the Term
G is the smaller of the Account Value at the beginning of the term and the
Account Value
98
<PAGE>
(prior to the crediting of any Index Increases) on any Account Anniversary
in the Term, including the current Account Anniversary
The Minimum S&P Index Value and the Maximum S&P Index Value are defined as
follows:
Minimum S&P Index Value = [(Floor / Participation Rate for Term) + 1] x
Beginning of Term Index value]
Maximum S&P Index Value = [(Cap / Participation Rate for Term) + 1] x
Beginning of Term Index value]
The Index Increase to be credited on the Account Anniversary is equal to Part 1
+ Part 2.
** Using the assumptions below, we have prepared the following three
illustrations using different assumptions as to changes in the Index value
during the course of the Term. THESE ASSUMPTIONS AND ILLUSTRATIONS ARE NOT
AND ARE NOT INTENDED AS PREDICTIONS OF CHANGES IN THE INDEX DURING THE COURSE
OF ANY TERM. THE INDEX MAY RISE OR FALL DURING THE COURSE OF A TERM, AND AT
THE END OF A TERM THE INDEX VALUE MAY BE HIGHER OF LOWER THAN AT THE
BEGINNING OF THE TERM. KEYPORT MAKES NO PREDICTIONS, REPRESENTATIONS, OR
GUARANTEES AS TO FUTURE CHANGES IN THE INDEX. THESE VALUES ARE BASED ON THE
ASSUMPTION THAT NO PARTIAL SURRENDERS ARE
MADE.
Beginning Account Value = $100,000.00
Beginning Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = [(80% / 80%) + 1] x 500 = 1000
Floor = 0%
Minimum S&P Index Value = [(0% / 80%) + 1] x 500 = 500
99
<PAGE>
ILLUSTRATION NO. 1
- ------------------
Year Year-End Cumulative Value Value Part Part Indexed
Index Change of of 1 2 Account
Value in Index B C Value
0 500 $100,000
1 600 20% 500 600 $ 3,200 $ -- $103,200
2 690 38% 600 690 $ 5,760 $ 3,200 $112,160
3 775 55% 690 775 $ 8,160 $ 6,080 $126,400
4 900 80% 775 900 $16,000 $ 8,800 $151,200
5 1035 107% 900 1000 $16,000 $12,880 $180,000
ILLUSTRATION NO. 2
- ------------------
Year Year-End Cumulative Value Value Part Part Indexed
Index Change of of 1 2 Account
Value in Index B C Value
0 500 $100,000
1 550 10% 500 550 $1,600 $ -- $101,600
2 500 0% 550 550 $ -- $1,600 $103,200
3 560 12% 550 560 $ 960 $1,600 $105,760
4 620 24% 560 620 $7,680 $1,920 $115,360
5 660 32% 620 660 $6,400 $3,840 $125,600
ILLUSTRATION NO. 3
- ------------------
Year Year-End Cumulative Value Value Part Part Indexed
Index Change of of 1 2 Account
Value in Index B C Value
0 500 $100,000.00
1 450 -10% 500 500 $ -- $ -- $100,000.00
100
<PAGE>
2 425 -15% 500 500 $ -- $ -- $100,000.00
3 450 -10% 500 500 $ -- $ -- $100,000.00
4 515 3% 500 515 $1,920 $ -- $101,920.00
5 530 6% 515 530 $2,400 $480 $104,800.00
101
<PAGE>
APPENDIX B
MARKET VALUE ADJUSTMENT FORMULA AND ILLUSTRATIONS, INCLUDING SURRENDER CHARGE
CALCULATIONS
MARKET VALUE ADJUSTMENT
**The applicable surrender or transfer value is multiplied by the Market Value
Adjustment Factor to arrive at the Market Value Adjustment. The formula that
will be used to determine the Market Value Adjustment Factor:
[(1+a)/(1+b)](n/12) - 1, where
** a = the Treasury rate for the Term of the Account from which the
surrender or transfer amount is being taken.
** b = the Treasury Rate for a period equal to the time remaining (rounded
up to the next whole number of Account Years) to the expiration of
the Term for the Account from which the surrender or transfer amount
is being taken; and
n = the number of complete Account Months remaining before the expiration
of the Term for the Account from which the surrender or transfer is
being taken. The first Account Month begins on the day that the Term
begins and each subsequent Account Month begins on the same day one
month later.
** 5 The Treasury Rate for an Account is the interest rate in the Treasury
Constant Maturity Series as published by the Federal Reserve Board, for a
maturity equal to the number of years specified in "a" and "b". To determine
"a", Keyport uses the Treasury Rate for the week which includes the most
recent Determination Date on or before the first day of the Account's current
Term. To determine "b", Keyport uses the Treasury Rate for the week which
includes the most recent Determination date on or before the date on which
the Market Value Adjustment is calculated. The Determination Dates are the
last business days prior to the first and fifteenth days of each month.
If the number of years specified in "a" or "b" does not equal a maturity in the
treasury Constant Maturity Series, the Treasury Rate will be determined by
straight line interpolation between the interest rate for the next highest and
next lowest maturities.
EXAMPLES OF MARKET VALUE ADJUSTMENTS
EXAMPLE 1
** 6 Assume that the Certificate Owner purchased a Certificate for $10,000
and allocated his interest to an Interest Account with a five year Term and a
Guaranteed Interest Rate of 6%. Exactly two years later, the Certificate
Owner's Account was surrendered when the Surrender Charge was 3%. There had
been no prior Surrenders and the interest earned in the previous twelve
months is equal to $1,236 ($10,000 x (1.062-1)). Therefore, the Surrender
102
<PAGE>
Charge and the Market Value Adjustment do not apply to $1,236 of the Interest
Account Value. At the beginning of the Term, the Treasury Rate for 5-year
Treasury Notes was 7% and, at the time of the surrender, the Treasury Rate for
3-year Treasury Notes was 4.5%.
According to the Certificate, the Market Value Adjustment is
(A - Free Withdrawal Amount) x B = C
where:
A = the amount surrendered
= $10,000 x 1.06 x 1.06
= $11,236.00
B = the Market Value Adjustment Factor
= [(1+a)/(1+b)](n/12) - 1, where
** 7 a = the Treasury Rate for the Term of the Account from which the
surrender amount is being taken. Here, a = 7%.
** 8 b = the Treasury Rate for a period equal to the time remaining (roun
ded up to the next whole number of Account Years) to the expiration of the Term
for the Account from which the surrender amount is being taken. Here, b = 4.5%
n = the number of complete months remaining before the expiration of the
Term for the Account from which the surrender is being taken, times the
applicable Scaling Factor from the Certificate Schedule for the Term of the
Account from which the amount is taken, if the Account is an Indexed
Account. Here, n = 36
B = [(1+.07)/(1+.045)](36/12) - 1
= [(1+.07)/(1+.045)]3 - 1
= .0735
Therefore,
C = (A - 1,236) x B
= ($11,236 - 1,236) x .0735
** 9 = $735.00 is the Market Value Adjustment, which would be
added to the Account Value in determining the Certificate Withdrawal Value.
The Surrender Charge is equal to I x (A - Free Withdrawal Amount), where
A = the surrendered amount = $11,236, and
I = the Surrender Charge Percentage. Here, I = 3%
Therefore,
The Surrender Charge = .03 x ($11,236 - 1,236)
= .03 x $10,000 = $300.00
103
<PAGE>
The Certificate Value = [((.9 x $10,000 x 1.03) + 330) x 1.03] + 348
= $10,236.00
The Adjusted Certificate Value = $10,236.00 x [($11,236.00 +
$735.00) / $11,236.00]
= $10,905.59
Under the Certificate, the Certificate Withdrawal Value is equal to the greater
of (1) the amount surrendered, less any Surrender Charge plus any Market Value
Adjustment or (2) the Adjusted Certificate Value. Here, therefore, the
Certificate Withdrawal Value would be the greater of ($11,236.00 - $300.00 +
$735.00 = $11,671.00) or $10,905.59. Therefore, the Certificate Withdrawal
Value is equal to $11,671.00.
EXAMPLE 2
- ---------
Given the same circumstances as in Example 1, but using a Treasury Rate of
7.5% instead of 4.5% at the time of surrender, the Market Value Adjustment is
computed as follows:
B = [(1+.07)/(1+.075)](36/12) - 1
= [(1+.07)/(1+.075)]3 - 1
= -.0139
Therefore,
C = (A - 1,236) x B
= ($11,236 - 1,236) x -.0139
-- 10 = Negative $139.00 is the Market Value Adjustment, which would be
subtracted from the Account Value in determining the Certificate
Withdrawal Value.
** 11 As described in the previous example, the Surrender Charge would equal
$300.00.
The Adjusted Certificate Value = $10,236.00 x [($11,236.00 -
$139.00) / $11,236.00]
= $10,109.37
Accordingly, the Certificate Withdrawal Value would be the greater of
($11,236.00 - $300.00 - $139.00 = $10,797.00) or $10,109.37. Therefore, the
Certificate Withdrawal Value is equal to $10,797.00.
104
<PAGE>
EXAMPLE 3
- ---------
Given the same circumstances as in Example 2, but assuming (1) an Indexed
Account instead of an Interest Account with an Account Value of $11,236, (2)
Index Increases credited in the prior year equal to $1,236.00, and (3) a scaling
factor ("k") of .9, the Market Value Adjustment is computed as follows:
B = [(1+.07)/(1+.075)]((36 x k)/12) - 1
= [(1+.07)/(1+.075)]((36 x .9) / 12) - 1
= [(1+.07)/(1+.075)](2.7) - 1
= -.0125
Therefore,
C = (A - 1,236) x B
= ($11,236 - 1,236) x -.0125
** 12 = Negative $125.00 is the Market Value Adjustment, which would be
subtracted from the Account Value in determining the Certificate
Withdrawal Value.
** 13 As described in the previous example, the Surrender Charge would
equal $300.00.
The Certificate Value = [((.9 x $10,000 x 1.03) + 0) x 1.03] + 687.90
= $10,236.00
The Adjusted Certificate Value = $10,236.00 x [($11,236.00 -
$125.00) / $11,236.00]
= $10,122.12
Accordingly, the Certificate Withdrawal Value would be the greater of
($11,236.00 - $300.00 - $125.00 = $10,811.00) or $10,122.12. Therefore, the
Certificate Withdrawal Value is equal to $10,811.00.
105
<PAGE>
APPENDIX C
SCHEDULE OF STATE PREMIUM TAXES
NON-TAX QUALIFIED TAX-QUALIFIED
CONTRACTS/CERTIFICATES CONTRACTS/CERTIFICATES
STATE RATE OF TAX RATE OF TAX
Alabama 1.00% 1.00%
California 2.35 0.50
District of Columbia 2.00 2.00
Kansas 2.00 0.00
Kentucky 2.00 2.00
Maine 2.00 0.00
Mississippi 2.00 0.00
Nevada 3.50 0.00
North Carolina 1.75 0.00
South Dakota 1.25 0.00
Virgin Islands 5.00 5.00
West Virginia 1.00 1.00
Wyoming 1.00 0.00
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Not Applicable
Item 14. Indemnification of Directors and Officers
The following provisions regarding the Indemnification of Directors
and Officers of the Registrant ("Keyport") are applicable:
By-Laws, Article IX
SECTION 6 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------------------
Any person who at any time serves or shall serve as a Director or
Officer of the Corporation whether or not in office at the time shall
be indemnified or reimbursed against and for any and all claims and
liabilities to which he may be or become subject by reason of such
service and against and for any and all expenses necessarily incurred
or amounts paid in connection with the defense or reasonable
settlement or any legal or administrative proceedings to which he is
made a party by reason of such service, except in relation to matters
to which he shall be finally adjudged to be liable of negligence or
misconduct in the performance of his official duties. Such a right of
indemnification and reimbursement shall also extend to the personal
representatives of any such person. Such rights shall not be deemed
exclusive of any other rights to which any such Director, officer or
his personal representatives may be entitled, under any other by-law
or any agreement or vote of the stockholders or Directors or
otherwise.
Consistent with such By-Laws, Keyport has obtained insurance from
Liberty Mutual Insurance Company for its directors and officers that
supplements the indemnification provisions of the By-Laws.
Item 15. Recent Sales of Unregistered Securities
Not applicable
Item 16. Exhibits and Financial Statement Schedules
EXHIBITS
--------
1 Principal Underwriters Agreement*
3(a) Articles of Incorporation -- Incorporated by Reference to
Registration Statement on Form N-4, filed on February 16,
1996 (File No. 333-01043; 811-07543)
<PAGE>
3(b) By-Laws -- Incorporated by Reference to Registration
Statement on Form N-4, filed on February 16, 1996 (File No.
333-01043; 811-07543)
4(a) Group Annuity Contract*
4(b) Group Annuity Certificate*
4(c) Group Annuity Application*
4(d) Group Annuity Certificate Application*
4(e) Endorsements*
(i) Tax-Sheltered Annuity (TSA)
(ii) Corporate/Keogh 401(a) Plan
(iii) Individual Retirement Annuity (IRA)
(iv) Qualified Plan Endorsement
5 Opinion regarding Legality
21 Subsidiaries of the Registrant*
23(a) Consent of Counsel
23(b) Consent of Certified Public Accountants
24 Powers of Attorney*
27 Financial Data Schedule
FINANCIAL STATEMENTS
--------------------
28 Schedule I
Incorporated by reference to Registration Statement (File No.
333-1783) filed on or about March 18, 1996.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial BONA FIDE
offering thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, State of
Massachusetts on July 31, 1996.
KEYPORT LIFE INSURANCE COMPANY
BY: /s/ John W. Rosensteel*
-------------------------
John W. Rosensteel
President
* James J. Klopper has signed this document on the indicated date on behalf
of Mr. Rosensteel pursuant to a power of attorney duly executed by him and
included as part of Exhibit 24 in the Registration Statement filed on or
about March 18, 1996.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and the dates indicated.
Signature Title Date
- --------- ----- ----
(i) Principal Executive Officer
/s/ John W. Rosensteel* Principal Executive Officer
----------------------
John W. Rosensteel
(ii) Principal Financial Officer
/s/ Paul H. Lefevre, Jr.* Senior Vice President and
------------------------ Chief Financial Officer
Paul H. LeFevre, Jr.
(iii) Majority of Board of Directors
/s/ Kenneth R. Leibler* *By: /s/ James J. Klopper
---------------------- --------------------
Kenneth R. Leibler James J. Klopper
Attorney-in-fact
/s/ F. Remington Ballou* July 31, 1996
-----------------------
F. Remington Ballou
/s/ Frederick Lippitt*
---------------------
Frederick Lippitt
/s/ Erskine N. White, Jr.*
------------------------
Erskine N. White, Jr.
/s/ John W. Rosensteel*
----------------------
John W. Rosensteel
* James J. Klopper has signed this document on the indicated date on behalf
of each of the above Directors and Officers of the Registrant pursuant to
powers of attorney duly executed by such persons and included as part of
Exhibit 24 in the Registration Statement filed on or about March 18, 1996.
<PAGE>
EXHIBIT INDEX
PAGE
5 Opinion regarding Legality............................................
23(a) Consent of Counsel....................................................
23(b) Consent of Certified Public Accountants...............................
27 Financial Data Schedule...............................................
28 Schedule I............................................................
<PAGE>
EXHIBIT 5
<PAGE>
July 29, 1996
John W. Rosensteel, President
Keyport Life Insurance Company
125 High Street
Boston, MA 02110
Dear Mr. Rosensteel:
With reference to the Registration Statement on Form S-1 filed by Keyport
Life Insurance Company with the Securities and Exchange Commission governing
Group and Individual Annuity contracts, I have examined such documents and such
law as I have considered necessary and appropriate, and on the basis of such
examination, it is my opinion that:
1. Keyport Life Insurance Company is duly organized and existing under
the laws of the State of Rhode Island and has been duly authorized to
do such business and to issue such contracts by the Insurance
Commissioner of the State of Rhode Island.
2. The Group and Individual Deferred Annuity contracts covered by the
above Registration Statement have been or will be approved and
authorized by the Insurance Commissioner of the State of Rhode Island
and when issued, will be valid, legal and binding obligations of
Keyport Life Insurance Company.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
Sincerely,
/s/Bernard R. Beckerlegge
Bernard R. Beckerlegge
Senior Vice President and
General Counsel
<PAGE>
Exhibit 23(a)
<PAGE>
CONSENT OF COUNSEL
I hereby consent to the use of my name in the caption "Legal Matters" in
the prospectus of Keyport Life Insurance Company contained in Form S-1.
Boston, Massachusetts /s/Bernard R. Beckerlegge
-------------------------
Bernard R. Beckerlegge
July 29, 1996
- ---------------------
Date
<PAGE>
EXHIBIT 23(b)
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Keyport Life Insurance Company
The audit referred to in our report dated February 16, 1996, included the
related financial statement schedule as of December 31, 1995, which is
included in the registration statement. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Our report dated February 16, 1996 contains an explanatory paragraph that
refers to a change in accounting by the Company to adopt the provisions of
the Statement of Financial Accounting Standards No. 115. "Accounting for
Certain Investments in Debt and Equity Securities", effective January 1, 1994.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
July 30, 1996
=95770
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 JUN-30-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 9,535,948 9,451,230
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 25,214 36,363
<MORTGAGE> 74,505 70,521
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 10,922,125 11,195,473
<CASH> 777,384 1,043,164
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 179,672 304,221
<TOTAL-ASSETS> 12,279,194 12,755,808
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 10,586 18,200
<POLICY-HOLDER-FUNDS> 10,073,806 10,371,178
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 3,015 3,015
<OTHER-SE> 899,316 889,456
<TOTAL-LIABILITY-AND-EQUITY> 12,279,194 12,755,808
0 0
<INVESTMENT-INCOME> 757,361 382,899
<INVESTMENT-GAINS> (3,958) (436)
<OTHER-INCOME> 29,767 15,775
<BENEFITS> 4,448 1,987
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> 107,941 59,990
<INCOME-TAX> 38,331 20,359
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 69,610 39,361
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
<PAGE>
EXHIBIT 28
<PAGE>
SCHEDULE I
SUMMARY OF INVESTMENTS
(in thousands)
Balance
Amortized Fair Sheet
Cost Value Amount
Type of investment
Fixed Maturities
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $1,945,695 $2,008,051 $2,008,051
Obligations of states and
political subdivisions 26,688 28,012 28,012
Foreign governments 57,446 61,704 61,704
Corporate and other securities 5,246,525 5,491,925 5,491,925
Mortgage-backed securities 1,951,480 1,946,256 1,946,256
Total fixed maturities 9,227,834 9,535,948 9,535,948
Equity securities
Common stocks
Industrial, miscellaneous
and all others 17,521 25,214 25,214
Mortgage loans on real estate(1) 74,505 79,697 74,505
Policy loans 498,326 498,326 498,326
Other long term investments 18,042 10,748 10,748
Cash and cash equivalents 777,384 777,384 777,384
Total investments 10,613,612 10,927,317 10,922,125
=95771
- -------------------------
(1)Includes mortgage notes relating to certain investment property owned by
Liberty Mutual in the amount of $39,500 at December 31, 1995.
