SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________________
Commission file number: 333-1783
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KEYPORT LIFE INSURANCE COMPANY
------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 05-0302931
--------------------- ------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
125 High Street, Boston, Massachusetts 02110-2712
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(617) 526-1400
-------------------
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
There were 2,412 shares of the registrant's Common Stock, $1.25 par value,
outstanding as of September 30, 1996.
Exhibit Index - Page 16 Page 1 of 17
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KEYPORT LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1996
and December 31, 1995 3
Consolidated Income Statement for the Three Months and Nine
Months Ended September 30, 1996 and 1995 4
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 8-13
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
2
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<TABLE>
<CAPTION>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
September 30 December 31
1996 1995
------------ ------------
Unaudited
<S> <C> <C>
ASSETS
Cash and investments:
Fixed maturities available for sale, at fair value $10,710,754 $9,535,948
(amortized cost: 1996 - $10,602,664;
1995 - $9,227,834)
Equity securities, at fair value (cost:
1996 - $19,092; 1995 - $17,521) 36,112 25,214
Mortgage loans 68,477 74,505
Policy loans 521,276 498,326
Other invested assets 106,898 10,748
Cash and cash equivalents 995,502 777,384
------------ ------------
Total cash and investments 12,439,019 10,922,125
Accrued investment income 157,573 132,856
Deferred policy acquisition costs 295,514 179,672
Value of insurance in force 90,656 43,939
Intangible assets 19,468 20,314
Federal income taxes recoverable 14,201 9,205
Other assets 25,603 11,859
Separate account assets 1,033,218 959,224
------------ ------------
Total assets $14,075,252 $12,279,194
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $11,559,719 $10,084,392
Current federal income taxes 5,566 7,666
Deferred federal income taxes 28,374 32,823
Payable for investments purchased and loaned 540,207 317,715
Other liabilities 42,883 45,161
Separate account liabilities 974,978 889,106
------------ ------------
Total liabilities 13,151,727 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 45,046 85,772
Retained earnings 369,531 307,611
------------ ------------
Total stockholder's equity 923,525 902,331
------------ ------------
Total liabilities and stockholder's equity $14,075,252 $12,279,194
============ ============
</TABLE>
See accompanying notes.
3
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KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Investment income $ 206,197 $ 189,906 $ 589,096 $ 563,226
Interest credited to policyholders (152,015) (143,572) (433,122) (413,758)
--------- --------- --------- ---------
Investment spread 54,182 46,334 155,974 149,468
--------- --------- --------- ---------
Net realized investment gains (losses) 755 1,430 319 (4,942)
--------- --------- --------- ---------
Fee income:
Management fees 610 544 1,843 1,352
Surrender charges 3,423 3,356 10,929 11,353
Separate account fees 4,982 3,317 12,018 9,738
--------- --------- ---------- ---------
Total fee income 9,015 7,217 24,790 22,443
--------- --------- ---------- ---------
Expenses:
Policy benefits (741) (1,123) (2,728) (2,919)
Operating expenses (10,480) (10,023) (32,529) (33,841)
Amortization of deferred policy
acquisition costs (15,467) (12,025) (44,440) (38,186)
Amortization of value of insurance
in force (2,407) (3,133) (5,975) (9,986)
Amortization of intangible assets (282) (282) (846) (848)
--------- --------- ---------- ---------
Total expenses (29,377) (26,586) (86,518) (85,780)
--------- --------- ---------- ---------
Income before federal income taxes 34,575 28,395 94,565 81,189
Federal income tax expense (12,286) (10,144) (32,645) (28,897)
--------- --------- ---------- ---------
Net income $ 22,289 $ 18,251 $ 61,920 $ 52,292
========= ========= ========== =========
</TABLE>
See accompanying notes.
4
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KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------
1996 1995
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 61,920 $ 52,292
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to policyholders 433,122 413,758
Net realized investment (gains) losses (319) 4,942
Amortization of value of insurance in force
and intangible assets 6,821 10,834
Net amortization on investments 2,769 6,651
Change in deferred policy acquisition costs (16,427) (29,359)
Change in current and deferred
federal income taxes 15,385 (4,737)
Net change in other assets and liabilities (45,476) (61,648)
---------- -----------
Net cash provided by operating activities 457,795 392,733
---------- -----------
Cash flow from investing activities:
Investments purchased - held to maturity - (227,966)
Investments purchased - available for sale (3,116,451) (1,808,248)
Investments sold - held to maturity - 14,930
Investments sold - available for sale 760,455 340,978
Investments matured - held to maturity - 205,673
Investments matured - available for sale 927,439 672,353
Increase in policy loans (22,950) (14,334)
Decrease in mortgage loans 6,028 14,036
Acquisition of value of insurance in force (31,335) -
---------- -----------
Net cash used in investing activities (1,476,814) (802,578)
---------- -----------
Cash flows from financing activities:
Withdrawals from policyholder accounts (807,478) (680,636)
Deposits to policyholder accounts 1,849,683 935,045
Securities lending 194,932 544,010
---------- -----------
Net cash provided by financing activities 1,237,137 798,419
---------- -----------
Change in cash and cash equivalents 218,118 388,574
Cash and cash equivalents at beginning of period 777,384 684,618
---------- -----------
Cash and cash equivalents at end of period $ 995,502 $ 1,073,192
========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. General
The accompanying unaudited consolidated financial statements of Keyport
Life Insurance Company (the Company) include all adjustments, consisting of
normal recurring accruals, that management considers necessary for a fair
presentation of the Company's financial position and results of operations as of
and for the interim periods presented. Certain footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although the Company
believes the disclosures in these financial statements are adequate to present
fairly the information contained herein. The results of operations for the three
and nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
Certain prior period amounts in the accompanying unaudited consolidated
income statement have been reclassified to conform to the current period
presentation. The principal reclassifications relate to the presentation of
investment spread (the amount by which net investment income exceeds interest
credited to policyholder balances) and the components of the Company's fee
income. These reclassifications were made to provide additional information with
respect to the Company's major sources of revenue.
2. Coinsurance agreement
On August 9, 1996, the Company entered into a 100% coinsurance agreement
for a $965.3 million block of single premium deferred annuities issued by
Fidelity & Guaranty Life Insurance Company (F&G Life). Under this agreement (the
F&G Life transaction), the investment risk of the annuity policies was
transferred to the Company. However, the policies will continue to be
administered by F&G Life, and F&G Life remains contractually liable for the
performance of all policy obligations. The F&G Life transaction resulted in a
$934.0 million increase in investments and a $31.3 million increase in the value
of insurance in force.
3. Investments
The Company's general investment policy is to hold fixed maturity assets
for long-term investment and, accordingly, the Company does not have a trading
portfolio. To provide for maximum portfolio flexibility and enable appropriate
tax planning, the Company classifies its entire fixed maturities investments as
"available for sale" and accordingly records such investments at fair value.
6
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The following table summarizes the Company's investments in fixed
maturities available for sale as of September 30, 1996 (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities $ 430,957 $ 1,138 $ (1,559) $ 430,536
Mortgage backed securities
of U.S. government agencies 1,714,844 34,903 (17,332) 1,732,415
Obligations of states and
political subdivisions 56,365 715 (62) 57,018
Debt securities issued
by foreign governments 50,787 2,558 (216) 53,129
Corporate securities 4,326,971 122,322 (27,150) 4,422,143
Other mortgage backed
securities 2,281,123 34,916 (39,291) 2,276,748
Asset backed securities 1,459,453 9,353 (12,205) 1,456,601
Senior secured loans 282,164 - - 282,164
----------- ---------- ---------- -----------
Total fixed maturities
available for sale $10,602,664 $ 205,905 $ (97,815) $10,710,754
=========== ========== ========== ===========
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Net income was $22.3 million in the third quarter of 1996 compared to $18.3
million in the third quarter of 1995. This higher net income in the third
quarter of 1996 was due to higher investment spread and fee income. Partially
offsetting these items were lower net realized investment gains and higher
amortization expense. In the first nine months of 1996, net income was $61.9
million compared to $52.3 million in the first nine months of 1995. The higher
net income in the first nine months of 1996 was attributable to higher
investment spread and fee income and to net realized investment gains in 1996
compared to net realized investment losses in 1995. Partially offsetting these
items were increased amortization of deferred policy acquisition costs and
higher income tax expense.
Pretax income was $34.6 million in the third quarter of 1996 compared to
$28.4 million in the third quarter of 1995. This higher pretax income in the
third quarter 1996 was primarily attributable to higher investment spread and
fee income. For the first nine months of 1996, pretax income was $94.6 million
compared to $81.2 million in the first nine months of 1995. The higher pretax
income in the first nine months of 1996 was primarily attributable to higher
investment spread and fee income and to net realized investment gains in 1996
compared to net realized investment losses in 1995.
Investment spread is the amount by which investment income earned on the
Company's investments exceeds interest credited to policyholder balances.
Investment spread was $54.2 million in the third quarter of 1996 compared to
$46.3 million in the third quarter of 1995. The amount by which the average
yield on investments exceeds the average interest credited rate on policyholder
balances is the investment spread percentage. Such investment spread percentage
in the third quarter of 1996 was 1.79% compared to 1.64% in the third quarter of
1995. For the first nine months of 1996, investment spread was $156.0 million
compared to $149.5 million in the first nine months of 1995. The investment
spread percentage was 1.79% in the first nine months of 1996 compared to 1.84%
in the first nine months of 1995. For the remainder of 1996, assuming a constant
interest rate environment, the Company anticipates a lower investment yield and
a lower interest credited rate compared to 1995. The investment spread
percentage for the remainder of the year is expected to be comparable to the
investment spread percentage for the first nine months of the year.
Investment income was $206.2 million in the third quarter of 1996, compared
to $189.9 million in the third quarter of 1995. Investment income increased in
the 1996 period primarily as a result of a higher level of average invested
assets, partially offset by a decrease in the average investment yield. The
average investment yield was 7.32% in the third quarter of 1996 compared to
7.40% in the 1995 period. The decreased investment yield in 1996 reflects the
lower interest rates prevailing during the latter half of 1995 and early 1996.
For the first nine months of 1996, investment income was $589.1 million compared
to $563.2 million in the first nine months of 1995. Investment income increased
in the 1996 nine-month period primarily as a result of the higher level of
average invested assets, partially offset by a decrease in the average
investment yield. The average investment yield was 7.29% in the first nine
months of 1996 compared to 7.51% in the 1995 period. The decreased investment
yield in 1996 reflects the lower interest rates prevailing during the latter
half of 1995 and early 1996.
Interest credited to policyholders totaled $152.0 million in the third
quarter of 1996 compared to $143.6 million in the third quarter of 1995.
Interest credited to policyholders increased in the 1996 period primarily as a
result of a higher level of policyholder balances, partially offset by a
decrease in the average interest credited rate. Policyholder balances averaged
$11.0 billion in the third quarter of 1996 compared to $10.0 billion in the
third quarter of 1995. The average interest credited rate was 5.53% in 1996
compared to 5.76% in 1995. For the first nine months of 1996, interest credited
to policyholders was
8
<PAGE>
$433.1 million compared to $413.8 million in the first nine months of 1995.
Interest credited to policyholders increased in the 1996 nine-month period
primarily as a result of the higher level of average policyholder balances,
partially offset by a decrease in the average interest credited rate.
Policyholder balances averaged $10.5 billion in the first nine months of 1996
compared to $9.7 billion in the first nine months of 1995. The average interest
credited rate was 5.50% in 1996 compared to 5.67% in 1995.
Average investments (computed without giving effect to SFAS 115), including
a portion of the Company's cash and cash equivalents, were $11.3 billion in the
third quarter of 1996 compared to $10.3 billion in the third quarter of 1995.
This increase of $1.0 billion was primarily due to the F&G Life transaction
during the period. The F&G Life transaction increased investments $934.0 million
as a result of coinsuring the liabilities. For the first nine months of 1996,
average investments were $10.8 billion compared to $10.0 billion in the first
nine months of 1995. Fixed and indexed annuity premiums totaled $863.3 million
in the first nine months of 1996 compared to $892.9 million in the first nine
months of 1995. The decrease in premiums in the 1996 period was primarily
attributable to the general decline in interest rates from the first six months
of 1995 through the first quarter of 1996. Fixed and indexed annuity premiums
during 1996 include $474.9 million of the Company's innovative KeyIndex product.
This indexed annuity provides the investor with the potential to participate in
returns based upon the S&P 500, while providing a guarantee of principal
associated with a traditional annuity.
Net realized investment gains totaled $0.8 million in the third quarter of
1996 compared to $1.4 million in the third quarter of 1995. For the first nine
months of 1996, net realized investment gains were $0.3 million compared to net
realized investment losses of $4.9 million in the first nine months of 1995. The
net realized investment gains in the 1996 period were primarily attributable to
sales of corporate investment securities. The realized losses in 1995 were
attributable to sales of the Company's fixed maturity investments to maximize
total return.
Management fees are primarily investment advisory fees related to the
separate account assets. The fees are based on the levels of assets under
management, which are affected by product sales and redemptions and changes in
the market values of the investments managed. Management fees were $0.6 million
in the third quarter of 1996 compared to $0.5 million in the third quarter of
1995. This increase of $0.1 million primarily reflects a higher level of average
assets under management. For the first nine months of 1996, management fees were
$1.8 million compared to $1.4 million in the first nine months of 1995. The
increase reflects growth of assets under management during the period.
Surrender charges are revenues earned on the early withdrawal of fixed,
indexed and variable annuity policyholder balances. Surrender charges on fixed,
indexed and variable annuity withdrawals generally are assessed at declining
rates applied to policyholder balances during the first five to seven years of
the contract. Total surrender charges were $3.4 million in the third quarter of
1996 and 1995, and, for the first nine months of 1996 were $10.9 million
compared to $11.4 million in the first nine months of 1995.
On an annualized basis, total fixed, indexed and variable annuity
withdrawals represented 11.5% and 8.2% of the total average annuity policyholder
and separate account balances in the third quarter of 1996 and 1995,
respectively, and 10.4% and 9.9% of the total average policyholder and separate
account balances in the first nine months of 1996 and 1995, respectively. The
increase in withdrawals in the 1996 period was expected and was attributable to
surrenders of annuities acquired in the F&G Life transaction; excluding these
surrenders, the annualized withdrawal percentage in the third quarter of 1996
was 8.9%.
Separate account fees are primarily mortality and expense charges earned on
variable annuity and variable life policyholder balances. These fees, which are
based on the market values of the assets supporting the contracts in separate
accounts, were $5.0 million in the third quarter of 1996 compared to $3.3
million in the third quarter of 1995. For the first nine months of 1996, these
fees were $12.0 million
9
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compared to $9.7 million in the first nine months of 1995. Such fees represented
1.7% and 1.6%, respectively, of average variable annuity and variable life
separate account balances.
Operating expenses primarily represent compensation and other general and
administrative expenses. These expenses were $10.5 million in the third quarter
of 1996, compared to $10.0 million in the third quarter of 1995, an increase of
$0.5 million. For the first nine months of 1996, operating expenses were $32.5
million compared to $33.8 million in the first nine months of 1995, a decrease
of $1.3 million. The decrease in the 1996 nine-month period was primarily due to
IRS interest penalties of $1.7 million recorded in 1995 related to a federal
income tax assessment.
Amortization of deferred policy acquisition costs was $15.5 million in the
third quarter of 1996 compared to $12.0 million in the third quarter of 1995,
and $44.4 million in the first nine months of 1996 compared to $38.2 million in
the first nine months of 1995. The increase in amortization during 1996 was
primarily due to a decrease in estimated amortization periods in the last
quarter of 1995 relating to shorter average policy lives, and to the growth of
business in force associated with fixed, indexed and variable annuity sales.
Amortization expense represented 0.52% and 0.45%, on an annualized basis, of the
total average policyholder and separate account balances in the third quarter of
1996 and 1995, respectively, and 0.52% and 0.48% of the total average
policyholder and separate account balances in the first nine months of 1996 and
1995, respectively.
Amortization of value of insurance in force totaled $2.4 million in the
third quarter of 1996 compared to $3.1 million in the third quarter of 1995, and
$6.0 million in the first nine months of 1996 compared to $10.0 million in the
first nine months of 1995. The decrease in amortization during 1996 was
primarily due to an increase in estimated amortization periods in the last
quarter of 1995 relating to longer average policy lives on the Company's closed
block of whole life insurance, partially offset by $0.5 million of amortization
recorded in the third quarter of 1996 relating to the F&G Life transaction.
Federal income tax expense was $12.3 million or 35.5% of income before
income taxes, in the third quarter of 1996 compared to $10.1 million, or 35.7%
of income before income taxes, in the third quarter of 1995. For the first nine
months of 1996, federal income tax expense was $32.6 million or 34.5% of income
before income taxes compared to $28.9 million, or 35.6% for the first nine
months of 1995.
Financial Condition
Stockholder's Equity as of September 30, 1996 was $923.5 million compared
to $902.3 million as of December 31, 1995. The increase in stockholder's equity
was due to net income of $61.9 million, partially offset by a $40.7 million
decrease in net unrealized investment gains during the period.
Investments, not including cash and cash equivalents, totaled $11.4 billion
as of September 30, 1996 compared to $10.1 billion as of December 31, 1995. This
increase reflects the F&G transaction and fixed and indexed annuity sales in the
first nine months of 1996, partially offset by a decrease in net unrealized
investment gains of approximately $188.1 million.
The Company's total investments at September 30, 1996 reflected net
unrealized gains of $120.4 million related to its fixed maturities available for
sale and equity portfolios. As of December 31, 1995, such net unrealized
investment gains were $308.5 million. The decrease in net unrealized gains in
the first nine months of 1996 principally reflects the higher relative
prevailing interest rates during the period.
Approximately $10.5 billion, or 98.1%, of the fixed maturities investments
at September 30, 1996, was rated by Standard & Poor's Corporation, Moody's
Investors Service or under comparable statutory rating guidelines established by
the National Association of Insurance Commissioners ("NAIC"). At
10
<PAGE>
September 30, 1996, the carrying value of investments in below investment grade
securities totaled $966.3 million, or 8.1% of total investments (including a
portion of cash and cash equivalents) of $11.9 billion. Below investment grade
securities generally provide higher yields and involve greater risks than
investment grade securities because their issuers typically are more highly
leveraged and more vulnerable to adverse economic conditions than investment
grade issuers. In addition, the trading market for these securities is usually
more limited than for investment grade securities.
Investment Management
Asset-liability matching is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed and indexed policyholder balances should be backed by investments,
principally comprised of fixed maturities, that generate predictable rates of
return. The Company does not have a specific target rate of return. Instead, its
rates of return vary over time depending on the current interest rate
environment, the slope of the yield curve and the excess at which fixed
maturities are priced over the yield curve. Its portfolio strategy is designed
to achieve adequate risk-adjusted returns consistent with the investment
objectives of effective asset-liability matching, liquidity and safety.
The Company conducts its investment operations to closely match the
duration of the assets in its investment portfolio to its policyholder balances.
The Company seeks to achieve a predictable spread between what it earns on its
assets and what it pays on its policyholder balances by investing principally in
fixed maturities. The Company's fixed-rate products incorporate surrender
charges to encourage persistency, discourage withdrawals and make the cost of
its policyholder balances more predictable. Approximately 85.7% of the Company's
fixed annuity policyholder balances were subject to surrender charges at
September 30, 1996.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its policyholder balances under a
variety of possible future interest rate scenarios. At September 30, 1996 the
effective duration of the Company's fixed maturities investments (approximately
93.6% of total investments) was approximately 2.7 years.
As a component of its investment strategy, the Company utilizes interest
rate swap agreements ("swap agreements") to match assets more closely to
liabilities. Swap agreements are agreements to exchange with a counterparty
interest rate payments of differing character (fixed-rate payments exchanged for
variable-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company currently
utilizes swap agreements to reduce asset duration and to better match interest
rates earned on longer-term fixed rate assets with interest rates credited to
policyholders. At September 30, 1996, the Company had 39 outstanding swap
agreements with an aggregate notional principal amount of $2.3 billion. These
agreements mature in various years through 2001. In addition, with respect to
the Company's indexed annuity, the Company buys call options on the S&P 500
Index to manage its obligation to provide returns based upon this Index. At
September 30, 1996, the Company had options with a fair value of $62.9 million.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap
agreements is the risk associated with counterparty nonperformance. The Company
believes that the counterparties to its swap agreements are financially
responsible and that the counterparty risk associated with these transactions is
minimal. In addition, swap agreements have interest rate risk. However, these
swap agreements hedge fixed-rate assets; any interest
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rate movements that adversely affect the market value of swap agreements would
be more than offset by changes in the market values of such fixed rate assets.
The Company routinely reviews its portfolio of investment securities.
Monthly, the Company identifies any investments that require additional
monitoring and carefully reviews the carrying value of such investments at least
quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews, the Company principally considers the
adequacy of collateral (if any), compliance with contractual covenants, the
borrower's recent financial performance, new reports and other externally
generated information concerning the creditor's affairs. In the case of publicly
traded fixed maturities investments, management also considers market value
quotations if available.
Liquidity
The Company's annuity insurance operations, liquidity needs and financial
resources pertain to the management of the general account assets and
policyholder balances. The Company uses cash for the payment of annuity and life
insurance benefits, operating expenses and policy acquisition costs, and the
purchase of investments. The Company generates cash from net investment income,
annuity premiums and deposits, and from maturities of fixed investments.
Annuity premiums, maturing investments and net investment income have
historically been sufficient to meet the Company's cash requirements. The
Company 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, the Company has invested a substantial amount of its general
account assets in readily marketable securities. As of September 30, 1996, $9.7
billion of the Company's total investments, including short-term investments,
are considered readily marketable.
To the extent that unanticipated surrenders cause the Company 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,
the Company believes that liquidity to fund withdrawals would be available
through incoming cash flow, the sale of short-term or floating-rate instruments
or investment securities in its short duration portfolio, thereby precluding the
sale of fixed maturity investments in a potentially unfavorable market.
The Company is an indirect, wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"). Regulatory authorities permit dividend
payments from the Company to Liberty Financial up to 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. As of September 30, 1996, the Company
could declare dividends of up to $34.6 million without the approval of the
Commissioner of Insurance of the State of Rhode Island.
Based upon the historical cash flow of the Company, the Company's current
financial condition and the Company's expectation that there will not be a
material adverse change in the results of operations of the Company and its
subsidiaries during the next twelve months, the Company believes that cash flow
provided by operating activities over this period will provide sufficient
liquidity for the Company to meet its liquidity needs. The Company's cash flow
may be influenced by, among other things, general economic conditions, realized
investment gains and losses, the interest rate environment, market changes,
regulatory changes and tax law changes.
12
<PAGE>
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated results of
operations. The Company manages its investment portfolio in part to reduce its
exposure to interest rate fluctuations. In general, the fair value of the
Company's fixed maturity portfolio increases or decreases in inverse
relationship with fluctuations in interest rates, and the Company's net
investment income increases or decreases in direct relationship with interest
rate changes. (If interest rates decline the Company's fixed maturity
investments generally will increase in market value, while net investment income
will decrease as fixed maturity investments mature or are sold and the proceeds
are reinvested at reduced rates.)
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended September
30, 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYPORT LIFE INSURANCE COMPANY
/s/ Jeff Whitehead
-----------------------------------
Jeff Whitehead
Vice President and Treasurer
(Duly Authorized Officer and
Chief Accounting Officer)
Date: November 13, 1996
15
<PAGE>
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 17
16
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<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 10,710,754
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 36,112
<MORTGAGE> 68,477
<REAL-ESTATE> 0
<TOTAL-INVEST> 11,443,517
<CASH> 995,502
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 295,514
<TOTAL-ASSETS> 14,075,252
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 11,559,719
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,015
<OTHER-SE> 920,510
<TOTAL-LIABILITY-AND-EQUITY> 14,075,252
0
<INVESTMENT-INCOME> 589,096
<INVESTMENT-GAINS> 319
<OTHER-INCOME> 24,790
<BENEFITS> 2,728
<UNDERWRITING-AMORTIZATION> 44,440
<UNDERWRITING-OTHER> 32,529
<INCOME-PRETAX> 94,565
<INCOME-TAX> 32,645
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,920
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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<CUMULATIVE-DEFICIENCY> 0
</TABLE>
