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 Contracts may
(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 November 15, 1996.
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be offered as individual contracts. (See "Distribution of Group Contracts and
Certificates", page 17.)
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 8.)
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 15
and "The Separate Account", page 16.)
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 8.)
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 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 9.) 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 10.)
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 and at the time of a transfer, 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 10, "Indexed Accounts,"
page 9.)
Initial Terms of one, three, five, six, seven, and ten (Interest Account
only) 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.
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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 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 13.)
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 10.)
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 10.)
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 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 12.)
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 11.)
The minimum partial surrender is $250, 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 11;
"Market Value Adjustment", page 13.)
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
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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
same Certificate Year as the surrender or annuitization, the Market Value
Adjustment will be calculated based on 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 13).
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 13).
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 13).
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 13.)
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 12.)
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 14.)
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) 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 13; "Surrender Charge", page 12.)
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 54 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.
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TABLE OF CONTENTS
Page
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SUMMARY 1
GLOSSARY OF SPECIAL TERMS. 6
DESCRIPTION OF CONTRACTS AND CERTIFICATES. 8
A. Ownership 8
B. Enrollment Form and Premium Payments. 8
C. Accumulation Period 8
1. Initial Term 8
2. Interest Accounts. 8
3. Indexed Accounts 9
4. Renewal Terms. 10
5. Information on Renewal Rates 10
6. Establishment of Guaranteed Interest Rates and
Guaranteed Interest Rate Factors 10
7. Certificate Value. 10
8. Transfer of Values 11
9. Surrenders 11
(a) General 11
(b) Systematic Withdrawal Program 11
(c) Surrender Procedures and Determination of
Surrender Value 11
1. Partial Surrenders 11
2. Total Surrenders 11
(d) Risk 12
(e) Payment upon Partial or Total Surrender 12
10. Deductions 12
(a) Surrender Charge 12
(b) Market Value Adjustment 13
11. Premium Taxes 13
12. Death Provisions 13
(a) Non-Qualified Certificates 13
(b) Qualified Certificates 14
D. Annuity Period Provisions 14
1. Annuity Benefits 14
2. The Income Date and Form of Annuity 15
3. Change of Annuity Option 15
4. Annuity Options 15
5. Frequency and Amount of Payments 15
6. Proof of Age, Sex, and Survival of Annuitant 15
INVESTMENTS BY KEYPORT 15
THE SEPARATE ACCOUNT 16
AMENDMENT OF CONTRACTS 16
ASSIGNMENT OF CERTIFICATES 16
DISTRIBUTION OF CONTRACTS AND CERTIFICATES 17
TAX CONSIDERATIONS 17
A. General 17
B. Taxation of Keyport 17
C. Taxation of Annuities in General 17
1. General 17
2. Surrender, Assignments, and Gifts 17
3. Annuity Payments 18
4. Penalty Tax 18
5. Income Tax Withholding 18
6. Section 1035 Exchanges 18
D. Qualified Plans 18
1. Tax Sheltered Annuities 18
2. Individual Retirement Annuities 19
3. Corporate Pension and Profit Sharing Plans 19
THE COMPANY. 19
A. Business 19
B. Selected Financial Data 19
C. Management Discussion and Analysis of Results of
Operations and Financial Condition 20
1. Overview 20
2. Results of Operations 20
(a) 1995 Compared to 1994 20
(b) 1994 Compared to 1993 21
3. Guaranty Fund Assessments 22
4. Financial Conditions 22
(a) Cash and Investments. 22
(b) Deferred Policy Acquisition Costs 22
(c) Liabilities 22
(d) Stockholder's Equity 23
5. Liquidity and Capital Resources 23
D. Reinsurance 24
E. Reserves 24
F. Investments 24
G. Competition 25
H. Employees 25
I. State and Federal Regulation 25
COMPANY MANAGEMENT 26
EXECUTIVE COMPENSATION TABLES AND INFORMATION 26
COMPENSATION OF DIRECTORS. 29
LEGAL PROCEEDINGS. 29
EXPERTS 29
CHANGE IN ACCOUNTANTS 29
LEGAL MATTERS 29
FINANCIAL STATEMENTS 29
APPENDIX A (TERM INTEREST AND INDEX INCREASE
ILLUSTRATIONS) 50
APPENDIX B (MARKET VALUE ADJUSTMENT FORMULA AND
ILLUSTRATIONS, INCLUDING SURRENDER CHARGE CALCULATIONS) 52
APPENDIX C (SCHEDULE OF STATE PREMIUM TAXES) 54
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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.
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.
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.
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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 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.
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.
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, three, five, six, seven, and ten (Interest Account
only) 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").
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
8
<PAGE>
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
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 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 10.)
Currently the Index is the Standard & 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", "S&P 500", 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.
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<PAGE>
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
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 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 and at the time of a
transfer, 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,
Index 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.
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<PAGE>
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;
(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 $250, 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
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
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greater of: (a) the Account Value (with any applicable Market Value
Adjustment applied), less any 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 Owners, 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 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:
<TABLE>
<CAPTION>
Term (Length in Years)
Account
Years
Remaining 10 9 8 7 6 5 4 3 2 1
-------------- ------ ------ ------ ------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0% 0% 0% 1% 1% 1% 1% 1% 1% 1%
2 0 0 1 2 2 2 2 2 2
3 0 1 2 3 3 3 3 3
4 1 2 3 4 4 4 4
5 2 3 4 5 5 5
6 3 4 5 6 6
7 4 5 6 7
8 5 6 7
9 6 7
10 7
</TABLE>
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<PAGE>
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 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
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
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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 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, 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 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.
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<PAGE>
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. Keyport 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
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.
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.
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 24 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.
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<PAGE>
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 10.) 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 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.
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 limita-tions
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 States 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
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 believes that
this means the amount of any distribution under one Certificate will be
includable in gross income to the extent
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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 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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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 & Poor's ("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 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.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands)
As of or for the Year Ended December 31
<TABLE>
<CAPTION>
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>
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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 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.
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.
20
<PAGE>
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
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 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
21
<PAGE>
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
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.
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
22
<PAGE>
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 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.
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.
23
<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 $74.5 million of mortgage loans.
The following table sets forth the composition, carrying value and fair value
of Keyport's investment portfolio as of December 31, 1995.
<TABLE>
<CAPTION>
Carrying Value Fair Value
--------------------------- ---------------------------
Amount
($ in % of % of
thousands) Portfolio Amount Portfolio
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
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%
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%
============== ============ ============== ============
</TABLE>
(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.
24
<PAGE>
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 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
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".)
25
<PAGE>
COMPANY MANAGEMENT
The following are the principal officers and directors of the Company:
<TABLE>
<CAPTION>
Position with Keyport Other Business, Vocation or Employment
Name, Age Year of Election for Past Five Years
-------------------------------- -------------------------------------- ----------------------------------------------------
<S> <C> <C>
Kenneth R. Leibler, 47 Chairman of the Board, 12/31/94 Chief Executive 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 Providence Plan, Providence, RI
and Assistant Secretary, 4/9/96
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 Operating Officer of the Company;
Executive Officer Chairman of the Board and Director of KFSC,
and Director, 12/30/92; 11/12/92; Chairman of the Board and Director of
KASC, 1/8/93; 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.
John E. Arant, III, 51 Senior Vice President Vice President, Chief Sales Officer of KFSC,
and Chief Sales Officer, 5/16/94 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 and General Counsel of
President and General Independence Life and Annuity Company, 10/9/95;
Counsel, 9/1/95 formerly General Counsel for B.T. Variable Insurance
Co.
Paul H. LeFevre, Jr., 54 Senior Vice President Director and Senior Vice President and Chief
amd Chief Financial Financial Officer of KASC, 1/8/93; Director, Senior
Officer, 4/5/90 Vice President and Chief Financial Officer of
Independence Life and Annuity Company, 10/1/93
Francis E. Reinhart, 56 Senior Vice President Director, 3/15/95 and Vice President,
and Chief Administrative Administration, 10/24/85, of KFSC; Senior Vice
Officer, 4/5/90 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 Chief Actuary of Independence
Actuary, 11/9/90 Life and Annuity Company, 10/1/93
Jeffery J. Lobo, 35 Vice President, Risk Formerly Assistant Vice President of Quantitative
Management 5/4/96 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, Investments, of KASC, 1/8/93; Vice
Chief Investment Officer, President and Chief Investment Officer of
5/16/94 Independence Life and Annuity Company, 10/1/93;
formerly Vice President of Investments for the
Company, 8/92
</TABLE>
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 $50,000 or 10%
of such officer's total salary and bonus for such year.
Summary Compensation Table. The following table sets forth compensation
information for 1995 for each of Keyport's chief executive officer and the
other four most highly compensated executive officers:
26
<PAGE>
Summary Compensation Table
1995 Compensation
<TABLE>
<CAPTION>
Securities All other
Name and Bonus underlying Compensation
Principal Base Salary ($) ($)(1) options (#) ($)(2)
- ----------------------------------------------------- ------------------- ----------------------- ----------------
<S> <C> <C> <C> <C>
John W. Rosensteel,
President and Chief Executive Officer 381,150 187,000 15,000 31,535
Paul H. LeFevre, Jr.
Senior Vice President and Chief Financial Officer 262,000 112,000 7,500 19,860
John E. Arant, III
Senior Vice President and Chief Sales Officer 232,000 90,500 7,500 16,827
Francis E. Reinhart,
Senior Vice President and Chief Administrative Officer 223,000 87,000 6,000 16,105
Stewart R. Morrison
Vice President and Chief Investment Officer 174,000 54,000 4,000 10,293
</TABLE>
(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, $9,260 of moving expenses reimbursement.
Option Grant Table. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1995 by Liberty
Financial to the executive officers named in the above summary compensation
table.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in Price Per Expiration ($)(2)
Name Granted (#) 1995 Share ($) on Date(1) 5% 10%
- --------------------- ------------ --------------- ----------- ------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
John W. Rosensteel 15,000 3.1% 25.75 6/13/05 242,911 615,583
Paul H. LeFevre Jr. 7,500 1.6% 25.75 6/13/05 121,455 307,792
John E. Arant, III 7,500 1.6% 25.75 6/13/05 121,455 307,792
Francis E. Reinhart 6,000 1.2% 25.75 6/13/05 97,164 246,233
Stewart R. Morrison 4,000 0.8% 25.75 6/13/05 64,776 164,155
</TABLE>
(1) Each option becomes exercisable in four equal annual installments
commencing on June 14, 1996, and vests in full upon the death, disability or
retirement of the optionee.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable SEC regulations,
compounded annually from the dates the options were granted until their
expiration dates and, therefore, are not intended to forecast possible future
appreciation in the Common Stock. This table does not take into account any
appreciation in the price of the Common Stock after the date of grant.
27
<PAGE>
Option Exercises and Year-End Values Table. The following table sets forth
certain information regarding (i) the 1995 exercises of stock options and
(ii) the stock options held as of December 31, 1995 by the executive officers
named in the above summary compensation table.
Aggregate Option Exercises in Last Financial Year and Option Values at Fiscal
Year-End
<TABLE>
<CAPTION>
Shares
Acquired Number of Securities Value of Unexercised
Upon Exercise Value Underlying Unexercised In-the-Money Options
Name (#) Realized ($) Options at Year-End (#) at Year-End
- ---------------------- ---------------- ------------- ------------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John W. Rosensteel -- -- 24,958 56,601 391,649 580,476
Paul H. LeFevre, Jr. 49,913 736,250 29,116 28,298 578,859 447,381
John E. Arant, III -- -- 3,328 17,485 24,261 106,541
Francis E. Reinhart 19,965 296,460 12,478 13,488 248,013 175,891
Stewart R. Morrison -- -- -- 4,000 -- 18,000
</TABLE>
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 15 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
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.
28
<PAGE>
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
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 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.
29
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- --------------
<S> <C> <C>
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
============== ==============
</TABLE>
30
<PAGE>
KEYPORT LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME
(in thousands) Unaudited
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
KEYPORT LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Unaudited
<TABLE>
<CAPTION>
Six months ended
June 30
-----------------------------
1996 1995
-------------- --------------
<S> <C> <C>
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
============== ==============
</TABLE>
31
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands) Unaudited
<TABLE>
<CAPTION>
Net
Additional Unrealized
Paid-In Investment Retained
Common Stock Capital Gains (Losses) Earnings Total
--------------- ------------ --------------- ----------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
32
<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
KPMG Peat Marwick LLP
33
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Assets
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.
34
<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.
KEYPORT LIFE INSURANCE COMPANY
Consolidated Statements of Stockholder's Equity
(in thousands)
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid-In Investment Retained
Stock Capital Gains (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 (1,206 shares) 1,507 (1,507) --
Change in net unrealized investment ains (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.
35
<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.
36
<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
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
37
<PAGE>
policy is to write down the investment security to fair value with the charge
to realized investment losses. Sales of securities supporting the Company's
single premium deferred annuities and single premium whole life products
result in adjustments to the amortization of the deferred policy acquisition
costs and the value of insurance in force. The increase or decrease in
amortization relating to such adjustments is included in realized investment
gains and losses to reflect the acceleration or delay in the incidence of the
estimated gross profits.
(c) Derivative Financial Instruments
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" ("SFAS 119"). SFAS 119
requires specific disclosures about derivative financial instruments such as
forward, swap and option contracts and requires distinguishing between
financial instruments held or issued for trading purposes and financial
instruments held or issued for purposes other than trading.
As part of the Company's overall risk management policy, the Company uses
interest rate swaps and interest rate caps. Interest rate swaps are used to
reduce the risk in a rising interest rate environment by providing additional
investment income to cover higher competitive credited rates to policyholders
to reduce the invested asset duration, and to better match the interest rates
earned on invested assets with those interest rates credited to
policyholders. Interest rate swaps are considered synthetic alterations since
the objective of the swaps is to change the characteristics of the underlying
invested assets to reduce the impact of rising interest rates. Since interest
rate swaps are designated as synthetic alterations of securities available
for sale, interest rate swaps are carried at fair value for those securities,
and the unrealized gain or loss is included in stockholder's equity.
The net differential to be paid or received on interest rate swaps is
recorded monthly in investment income as interest rates change. From time to
time, swap positions may be terminated. If the terminated swap was accounted
for as a hedge, realized gains or losses are amortized over the remaining
life of the swap. Conversely, if the terminated swap was not accounted for as
a hedge, or the assets and liabilities that were altered no longer exist, the
swap position is marked to market, and realized gains or losses are
immediately recognized in income. The Company is exposed to potential credit
loss in the event of nonperformance by the counterparty to the interest rate
swap agreements with respect to only the net differential payments.
Interest rate caps are used to minimize exposure to rising interest rates.
The Company receives payments when the indexed rate exceeds the stated strike
rate. The cost of interest rate caps is amortized on a straight-line basis
over the period to maturity. Since interest rate caps are designed as
synthetic alterations of securities available for sale, interest rate caps
are carried at fair value and the unrealized gain or loss is included in
stockholder's equity.
The Company also utilizes derivative financial instruments to replicate
positions in a trading portfolio of pass-through mortgage backed securities.
As a result, these derivative financial instruments are classified as trading
instruments and are recorded at fair value. Realized and unrealized changes
in fair value are recognized in realized investment gains and losses.
Interest income arising from these trading instruments is included in net
investment income.
(d) Recognition of Insurance Revenues and Policy Benefits
Revenues from single premium whole life policies and single premium deferred
annuities include mortality charges, surrender charges, policy fees and
contract fees and are recognized when assessed. Policyholder account balances
consist of deposits received plus credited interest, less accumulated
policyholder 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, respec-
38
<PAGE>
tively. As of December 31, 1995 and 1994, the Company also classified $72,533
and $64,962, respectively, of its investments in certain mutual funds
sponsored by the Company and its affiliates as separate account assets.
(h) Federal Income Taxes
Beginning in 1994, the Company is included in Liberty Mutual's consolidated
tax return. The Company calculates its consolidated income tax liability as
if it filed its own consolidated federal income tax return.
(i) Cash and Cash Equivalents
Cash and cash equivalents include short-term investments which have an
original maturity of three months or less from the time of purchase.
(j) Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statement amounts to conform to the current year presentation.
(3) Acquisition
On October 1, 1993, the Company acquired the common stock of Crown America
Life Insurance Company (Crown America), a Michigan insurance company, for
$27,877. The acquisition was accounted for as a purchase and, accordingly,
operating results are included in the accompanying consolidated financial
statements from date of acquisition. In connection with the acquisition, the
Company acquired assets with a fair value of $185,735 and assumed liabilities
of $157,858.
On February 22, 1994, the acquisition was completed with the contingent
purchase price payment of $1,479, which increased the value of insurance in
force.
On December 29, 1993, Crown America was redomesticated to the state of Rhode
Island and, on January 10, 1994, the name was changed to Keyport America Life
Insurance Company. On July 19, 1995, the name was changed to Independence
Life and Annuity Company.
(4) Investments
(a) Fixed Maturities
Fair values of publicly-traded securities are determined using values
reported by an independent pricing service. Fair values of conventional
mortgage backed securities not actively traded in a liquid market are
obtained through broker-dealer quotations. Fair values of private placement
bonds are determined by obtaining market indications from various
broker-dealers. The amortized cost and fair values of investments in fixed
maturities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 360,157 $ 9,020 $ (209) $ 368,968
Mortgage backed securities of U.S. government corporations and
agencies 1,585,538 58,795 (5,250) 1,639,083
Obligations of states and political subdivisions 26,688 1,324 -- 28,012
Debt securities issued by foreign governments 57,446 4,258 --- 61,704
Corporate securities 3,479,584 224,332 (7,309) 3,696,607
Other mortgage backed securities 1,951,480 66,530 (71,754) 1,946,256
Asset backed securities 1,543,891 29,823 (1,446) 1,572,268
Senior secured loans 223,050 -- -- 223,050
------------- ------------ ------------ ------------
Total fixed maturities available for sale $9,227,834 $394,082 $(85,968) $9,535,948
============= ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
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
============= ============ ============= =============
</TABLE>
39
<PAGE>
At December 31, 1995 and 1994, bonds with an amortized cost of $7,710 and
$7,657, respectively, were on deposit with regulatory authorities.
(b) Contractual Maturities
The amortized cost and fair value of fixed maturities for the various
categories at December 31, 1995, by contractual maturity, are set forth
below. Expected maturities may differ from contractual maturities as
borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties.
December 31, 1995
-----------------------------
Amortized Cost Fair 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:
<TABLE>
<CAPTION>
December 31
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
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)
============ ============
</TABLE>
(d) Net Investment Income
Net investment income is summarized as follows:
Year Ended December 31,
-----------------------------------
1995 1994 1993
----------- ----------- -----------
Fixed maturities $683,429 $635,947 $619,847
Equity securities 4,807 2,132 2,368
Mortgage loans 12,444 15,416 17,252
Policy loans 28,485 26,295 22,766
Cash and cash equivalents 41,643 20,727 18,551
----------- ----------- -----------
Gross investment income 770,808 700,517 680,784
Investment expenses (13,447) (10,942) (11,117)
----------- ----------- -----------
Net investment income $757,361 $689,575 $669,667
=========== =========== ===========
40
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
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
========== =========== ===========
</TABLE>
Proceeds from sales of fixed maturities were as follows:
Year Ended December 31,
-----------------------------------
1995 1994 1993
----------- ----------- -----------
Fixed maturities--available for sale $565,366 $927,779 $313,568
Fixed maturities--held to maturity 14,930 10,637 97,816
----------- ----------- -----------
Total proceeds $580,296 $938,416 $411,384
=========== =========== ===========
The sale of fixed maturities held to maturity during 1995 and 1994 relate to
certain securities, with an amortized cost of $14,994 and $10,630,
respectively, which were sold specifically due to a significant deterioration
in the issuer's creditworthiness.
(f) Concentration of Investments
Investments in a single entity (all of which are fully collateralized and
guaranteed by an agency or agencies of the U.S. Government) in excess of ten
percent of total stockholder's equity as of December 31, 1995 and 1994 were
as follows:
Carrying Value at
December 31,
-----------------------
1995 1994
----------- -----------
Mortgage backed securities
FNMA Pool #303075 $134,884 $125,212
Morgan Stanley CMO (33--5) 108,051 101,832
FNMA Pool #303074 105,832 98,470
41
<PAGE>
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:
<TABLE>
<CAPTION>
Carrying Value at December 31, 1995
-----------------------------------------------
Publicly Trades Privately Placed Total
---------------- ----------------- ------------
<S> <C> <C> <C>
Investment grade:
U.S. government $ 368,969 -- $ 368,969
Class 1 4,996,275 $1,480,089 6,476,364
Class 2 982,096 896,673 1,878,769
---------------- ----------------- ------------
Total investment grade 6,347,340 2,376,762 8,724,102
---------------- ----------------- ------------
Below investment grade:
Class 3 317,131 147,517 464,648
Class 4 201,718 123,032 324,750
Class 5 -- 22,448 22,448
---------------- ----------------- ------------
Total below investment grade 518,849 292,997 811,846
---------------- ----------------- ------------
Total fixed maturities $6,866,189 $2,669,759 $9,535,948
================ ================= ============
</TABLE>
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.
42
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
------------- ------------
<S> <C> <C>
Interest rate swaps:
(1) Pay fixed, receive variable rate--notional amount $1,975,000 $775,000
Average pay rate 6.79% 7.19%
Average receive rate 5.88% 7.61%
Amount included in net investment income $ (2,751) $ (1,213)
Fair value $ (64,124) $ 27,587
Carrying value--unrealized gain (loss) included in fixed maturities available for sale $ (64,124) $ 27,587
Deferred loss--included in fixed maturities available for sale $ (3,662) --
(2) Pay variable, receive variable rate--notional amount -- $300,000
Average pay rate -- 5.85%
Average receive rate -- 6.42%
Amount included in net investment income $ (1,251) $ 6,781
Fair value -- $(14,550)
Carrying value--unrealized gain (loss) included in fixed maturities available for sale -- $(14,550)
Deferred loss--included in fixed maturities available for sale $ (6,952) --
(3) 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
</TABLE>
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 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.
43
<PAGE>
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 included in net invested income:
Within one year $(1,861) $4,720
Within one to five years (7,862) 891
----------- ---------
Total $(9,723) $5,611
=========== =========
During 1993, the Company unwound interest rate swap contracts with a notional
amount of $200,000. The swaps were unwound when the associated liabilities no
longer existed, resulting in a loss of $16,193, which was recognized
immediately.
3) In 1993, the Company entered into a $150,000 notional "spread lock" that
terminated in 1995. The Company received/(paid) the present value of the
seven year swap if corporate spreads widened/(compressed) above/(below) the
seven year swap spread of 26 basis points based on the 7.5% U.S. Treasury
note maturing November 15, 2001. As the result of the termination, the
Company recognized income of $746 during 1995. The objective of this
derivative was to reduce the exposure of the Company's fixed maturity
investments to widening corporate spreads. The value of the Company's
corporate bond portfolio decreased as corporate spreads widened. The
Company's spread lock swap increased in value as spreads widened and thus
reduced the Company's risk.
Interest rate caps
The Company had seven interest rate caps with a $450,000 notional amount and
six interest rate caps with a $400,000 notional amount as of December 31,
1995 and 1994, respectively. These contracts are indexed to either the three
month LIBOR, or to the two or five year constant maturity swap (CMS) rates.
Under these contracts, the Company has paid a premium for the right to
receive payments when the index rises above a predetermined level, i.e., the
strike rate. The objective of holding these derivatives is to reduce the
Company's risk in rising interest rate environments by providing additional
investment income to cover higher competitive interest credited rates on
policy liabilities.
The following table summarizes the interest rate caps, their notional
amounts, their weighted average strike and index rates as of the reporting
period date, and their effects on the consolidated balance sheets and income
statements. The majority of caps mature in 1997 and 1999. The fair values of
the interest rate caps are obtained from dealer quotes. These values
represent the estimated amounts the Company would receive or pay to terminate
the contracts, taking into account current interest rates and, when
appropriate, the current credit-worthiness of the counterparties.
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
----------------------
<S> <C> <C>
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
</TABLE>
44
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
------------------
<S> <C> <C>
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
</TABLE>
(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:
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------------
Average Estimated Estimated
Carrying Value Historical Yield Discount Rate Fair Value
--------------- --------------------------------- -------------
<S> <C> <C> <C> <C>
Commercial real estate loans $39,500 9.4% 7.5% $40,351
Residential mortgages 35,005 13.6% 7.5% 39,346
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------------------------------
Average Estimated Estimated
Carrying Value Historical Yield Discount Rate Fair Value
--------------- --------------------------------- -------------
<S> <C> <C> <C> <C>
Commercial real estate loans $87,000 9.4% 8.3% $89,795
Residential mortgages 42,452 13.7% 8.3% 49,003
</TABLE>
The weighted average maturities (which may be different from the stated
maturities) for the cash flows used in deriving the estimated fair values for
commercial real estate loans and residential mortgages are 0.3 years and 2.3
years, respectively, at December 31, 1995, and 1.3 years and 2.7 years,
respectively, at December 31, 1994.
(b) Policy Loans
The carrying value of policy loans approximates fair value at December 31,
1995 and 1994.
(c) Policy Liabilities
The fair value of deposit liabilities with no stated maturity is equal to the
amount payable on demand. The Company considers its policy liabilities to be
similar to deposit liabilities.
45
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1994
--------- ----------
<S> <C> <C>
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
========= ==========
</TABLE>
Year Ended December 31,
-------------------------
1995 1994 1993
------- ------ --------
Pension cost includes the following components:
Service cost benefits earned during the period $ 541 $ 532 $ 392
Interest cost on projected benefit obligation 603 534 423
Actual return on Plan assets (999) 63 (185)
Net amortization and deferred amounts 600 (338) (88)
------- ------- -------
Net periodic pension cost $ 745 $ 791 $ 542
======= ======= =======
The assumptions used to develop the actuarial present value of the projected
benefit obligation, and the expected long-term rate of return on Plan assets
are as follows:
Year 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.
46
<PAGE>
(7) Deferred Policy Acquisition Costs and Value of Insurance In Force
The amounts of policy acquisition costs deferred and amortized are summarized
below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
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
============ =========== ===========
</TABLE>
The value of insurance in force is summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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
========= ========= ==========
47
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
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
========= ========= ==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
------------- -------------
<S> <C> <C>
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)
============= =============
</TABLE>
The Company believes that it is more likely than not that the Company will
realize the benefits of the total deferred tax assets and, accordingly,
believes that a valuation allowance with respect to the realization of the
total deferred tax assets is not necessary. While there are no assurances
that this benefit will be realized, the Company expects that the net
deductible amounts will be recoverable through the reversal of taxable
temporary differences, taxes paid in the carryback period, tax planning
strategies, and future expectations of taxable income.
As of December 31, 1995 and 1994, the Company had approximately $8,688 and
$10,208 respectively, of net operating loss carryforwards relating to
Independence Life's operations prior to the acquisition by the Company. These
operating loss carryforwards are limited to use against future taxable
profits of Independence Life and expire through 2006.
Income taxes paid were $44,694, $28,811, and $17,722 for the years ended
December 31, 1995, 1994 and 1993, respectively.
(9) Statutory Information and Dividend Restrictions
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. In
converting to GAAP, adjustments to the Company's statutory amounts include:
the deferral and amortization of the costs of acquiring new policies, such as
commissions and other issue costs; the deferral of federal income taxes; the
recognition as revenues of premiums for investment-type products for
statutory purposes but as deposits to policyholders' accounts under GAAP. In
addition, different assumptions are used in calculating policyholder
liabilities, different methods are used for calculating
48
<PAGE>
valuation allowances for statutory and GAAP purposes, and the Company's
realized gains and losses on fixed income investments due to interest rate
changes are not deferred for GAAP. Statutory surplus and statutory net income
are presented below:
Year Ended December 31,
-----------------------------------
1995 1994 1993
----------- ----------- -----------
Statutory surplus $535,179 $546,440 $517,181
Statutory net income 25,689 24,871 65,315
The maximum amount of dividends which can be paid by the Company without
prior approval of the Insurance Commissioner of the State of Rhode Island is
subject to restrictions related to statutory surplus and statutory net gains
from operations. As of December 31, 1995, such restriction would limit
dividends to approximately $34,604. The Company has not paid dividends since
the acquisition by Liberty Mutual.
(10) Transactions with Affiliated Companies
As of December 31, 1995 and 1994, the Company had $39,500 and $87,000,
respectively, of commercial real estate loans of affiliated investment
partnerships. These mortgages are unconditionally guaranteed by Liberty
Mutual.
The Company reimbursed Liberty Financial and certain affiliates for expenses
incurred on its behalf for the years ended December 31, 1995, 1994 and 1993.
These reimbursements included corporate general and administrative expenses,
corporate overhead, such as executive and legal support, and investment
management services. The total amounts reimbursed were $7,626, $7,345 and
$7,444 for the years ended December 31, 1995, 1994 and 1993, respectively.
During 1993 the Company received a $75,000 capital contribution from Liberty
Financial.
(11) Commitments and Contingencies
The Company leases data processing equipment, furniture and certain office
facilities from others under operating leases expiring in various years
through 2001. Rental expense amounted to $3,221, $3,011 and $3,042 for the
years ended December 31, 1995, 1994 and 1993, respectively. For each of the
next five years, and in the aggregate, as of December 31, 1995, the following
are the minimum future rental payments under noncancelable operating leases
having remaining terms in excess of one year:
1996 $ 3,211
1997 2,641
1998 2,491
1999 2,347
2000 2,310
Thereafter 2,308
---------
Total minimum future rental payments $15,308
=========
Under existing guaranty fund laws in all states, insurers licensed to do
business in those states can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. The actual amount of such
assessments will depend upon the final outcome of rehabilitation proceedings
and will be paid over several years. In 1995, 1994 and 1993, the Company was
assessed $8,143, $7,674 and $7,314, respectively. During 1995, 1994 and 1993,
the Company recorded $2,000, $7,200, and $3,714, respectively, of provisions
for state guaranty fund association expenses.
Based on information recently provided by the industry association with
respect to aggregate assessments related to known insolvencies, the range of
future assessments with respect to known insolvencies is estimated by the
Company to be between $16,500 and $25,500, taking into account the industry
association information as well as the Company's own estimate of its
potential share of such aggregate assessments. At December 31, 1995 and 1994,
the reserve for such assessments was $21,940 and $24,688, respectively.
The Company is contingently liable for certain structured settlements written
by a subsidiary of Liberty Mutual and assigned to Keyport Life. The Company
guarantees to the policyholder payment in the event of nonperformance. The
loss contingency related to the structured settlements is approximately
$160,000. In the opinion of management, the likelihood of loss is remote.
The Company is involved, from time to time, in litigation incidental to its
business. In the opinion of management, the resolution of such litigation is
not expected to have a material adverse effect on the Company's financial
condition.
49
<PAGE>
APPENDIX A
TERM INTEREST ILLUSTRATIONS
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
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 (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.
On the first Account Anniversary of any term, substitute D for B in the above
formulas.
50
<PAGE>
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
<TABLE>
<CAPTION>
Illustration No. 1
- ----------------------
Cumulative Indexed
Year-End Change Account
Year Index Value in Index Value of B Value of C Part 1 Part 2 Value
- ------- -------------- ------------ ------------- ------------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Illustration No. 2
- ----------------------
Cumulative Indexed
Year-End Change Account
Year Index Value in Index Value of B Value of C Part 1 Part 2 Value
- ------- -------------- ------------ ------------- ------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Illustration No. 3
- ----------------------
Cumulative Indexed
Year-End Change Account
Year Index Value in Index Value of B Value of C Part 1 Part 2 Value
- ------- -------------- ------------ ------------- ------------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 500 $100,000.00
1 450 -10% 500 500 $ -- $ -- $100,000.00
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
</TABLE>
51
<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 amount is being
taken, times the applicable Scaling Factor from the Certificate Schedule for
the Term of the Account from which the amount is being taken, if the Account
is an Indexed Account. 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.
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
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
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
a = the Treasury Rate for the Term of the Account from which the surrender
amount is being taken. Here, a = 7%.
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 amount is being taken. Here, b =
4.5%
n = the number of complete Account Months remaining before the expiration of
the Term for the Account from which the surrender amount is being taken,
times the applicable Scaling Factor from the Certificate Schedule for the
Term of the Account from which the amount is being 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
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Therefore,
C = (A - 1,236) x B
= ($11,236 - 1,236) x 0735
= $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
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
= Negative $139.00 is the Market Value Adjustment, which would be
subtracted from the Account Value in determining the Certificate
Withdrawal Value.
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.
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
= Negative $125.00 is the Market Value Adjustment, which would be
subtracted from the Account Value in determining the Certificate
Withdrawal Value.
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.
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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
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[THIS PAGE INTENTIONALLY BLANK.]
<PAGE>
[THIS PAGE INTENTIONALLY BLANK.]
<PAGE>
KEYPORT KEYSELECT
PROSPECTUS
November 15, 1996
<PAGE>
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
[Keyport logo]
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
Service Hotline 800-367-3653 Keyline 800-367-3654
Keyport Logo is a registered service mark of Keyport Life Insurance Company.
KSMVAP 11/96
